Cardinal Health’s shareholders — or at least some of them — want the pharmaceutical distributor’s executives to be held accountable for legal and compliance risks.

Through a shareholder proposal, which was taken up for a vote earlier this month, investors faced the question of whether they should adopt a policy that would “not exclude legal and compliance costs for purposes of determining executive compensation” in the payments, which ranged from around $3 million to $13 million last year.

The vote failed, with roughly 17% of shareholders in favor of the measure. However, shareholder advocacy nonprofit As You Sow’s program manager, Rosanna Landis Weaver, points out, “this is a reasonably good showing for a first-time proposal.”

The proposal is opening up questions about how executives should be incentivized — and held accountable when the company comes under fire.

“The only way to effect change in a major corporation is to affect their bottom line,” International Brotherhood of Teamsters general secretary Ken Hall tells Agenda. The proposal was co-filed by the union and Rhode Island state treasurer Seth Magaziner on behalf of the state employees’ retirement system.

“Why should the shareholders of the company bear the brunt of the losses? Why do the leaders of the company suffer no loss? If their top officers understand their pay is going to be affected, they’re going to do something about it,” says Hall.

Hall points to pharmaceutical wholesaler McKesson as another example of where executive pay should be linked to risks taken on by the company. In 2017, McKesson settled with the Drug Enforcement Agency for $150 million after failing to report suspicious orders; it had been fined $13.5 million for similar reasons a decade earlier.

The Teamsters’ Hall continues, “Why should all the money being spent be excluded from the calculation of what a CEO and other top officers are paid? If this was another industry where the company shows losses for whatever reason, they would [dock pay] — but not at these big drug companies.”

Cardinal Board Responds

In Cardinal’s annual proxy statement, the board urged shareholders to vote against the proposal, arguing that it did not account for whether the company prevailed in litigation and went on to say “this type of broad and indiscriminate restriction reflects an inappropriate standard that could apply far beyond its stated objective of preventing senior executives from being ‘insulated from legal risks.’”

Cardinal Health’s board of directors doesn’t find the proposal to be “an appropriate response to the opioid crisis facing our country,” the proxy states.

“Our Board and the entire Cardinal Health team care deeply about the devastation opioid abuse is inflicting on our families and communities. We are working to help solve this complex national public health crisis. We understand and take seriously our responsibility to maintain a rigorous anti-diversion program, while ensuring that medications are available for patients who need them.”

In the proxy, the board points to its formation of an ad hoc committee of independent directors earlier this year for the purpose of assisting the board in its oversight of opioid issues. The committee is tasked with “engaging with executives and management regarding our response to the nationwide problem of prescription opioid abuse, and provide advice, regular reports and recommendations to the Board in connection with those issues.”

McKesson’s Trimmings

Despite the loss, the Teamsters say they are proud of the progress the union has made so far, with Carin Zelenko, director of its capital strategies department, recalling a conversation at Cardinal Health’s November shareholders meeting. “I know from talking to the chairman and CEO at the meeting this is an issue they’re discussing at the board level,” she says. “At this point they’re not prepared to adopt it, but I think they know they have a problem here.”

A spokesperson for Cardinal declined to comment for this article.

Last year, at distributor McKesson, the union felt it scored some victories, although the effects were not immediate. After the Teamsters asked the pharma giant to separate the CEO and chairman roles, longtime CEO John Hammergren ended up announcing his retirement in 2019, a win for shareholders, according to Hall. When he was replaced, the roles were split. In 2018, McKesson states in its proxy how it has reinforced and codified its policy to include legal and compliance costs as a factor in executive comp, and cut Hammergren’s long-term incentive plan payment this year by nearly $2 million.

…As You Sow’s Landis Weaver says that now there is often an overreliance on performance pay. In fact, she thinks that comp committees at big pharma companies should rethink how they reward performance.

“You need to be really careful about what metrics are chosen and how metrics are used. Was their pay structured so that they were encouraged to turn a blind eye to the larger social costs of what they were doing? They were focused on a short-term push,” she says, comparing the incentivized executive pay to “almost like a high.”

The more profits the company sees from drug sales, the more leadership is paid.

“You get a short-term high but then you get addicted,” she says. “It’s not the way to run a business.”

This article by Stephanie Forshee originally appeared in the Financial Times’ Agenda on Nov. 26, 2018. The full article appears by subscription, here.  

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