Monday, April 24, 2006

"An Imbalance of Power Between Company Owners and Managers": The Case of Pfizer Inc.

The New York Times published two stories about the battle over the management of Pfizer Inc. , the world's largest drug company. (Pfizer and the Proxy Adviser, and Investors vs. Pfizer: Guess Who Has the Guns?)

The background is that a coalition of Pfizer investors is upset over the lavish compensation of Pfizer CEO Hank McKinnell, who the Times reported has received $65 million in pay since he was hired in 2001, and is scheduled to collect on a $83 million pension. Over the time McKinnell has been in power, Pfizer has suffered a 46% decline in market value. So the angry investors are waging a campaign to dethrone those who sit on the Pfizer Board of Directors' compensation committee, which sets McKinnell's pay. (See this link for its membership.)

Per the Times (Investors vs. Pfizer), "The Pfizer battle, experts say, illustrates an imbalance of power between company owners and managers that is prevalent today. 'The management has these unlimited resources to fight back, and the shareholders are pretty much powerless,' said John C. Bogle, founder of the Vanguard Group. 'The thing has gotten so out of hand that words almost fail me. The shareholders should not tolerate it.'"

There are several illustrations of this imbalance of power.

The Relationship Between Pfizer and Proxy Governance Inc.

The Times' first article discusses the complex relationships between Pfizer and a firm called Proxy Governance Inc. This is the newest of three firms which provides advice to institutional shareholders, banks, mutual fund companies, and the like, about how to vote their proxies (which in many cases they vote on behalf of individual shareholders). Proxy Governance is the only one of the three major such companies to support the current members of the Pfizer Compensation Committee. The Times reported that Pfizer CEO McKinnell wrote a memo in 2004 "urging corporations to buy and promote Proxy Governance's services just as the firm was opening for business, raising questions about whether the advisory firm's Pfizer recommendation reflects an unbiased point of view or a relationship with the company and its top executive." McKinnell also serves as Chairman of the Business Roundtable, and wrote the memo in that capacity. The founder of Proxy Governance said that the memo had no bearing on the firm's opinions about Pfizer. The Times also noted that "William C Steere Jr., Pfizer's chairman emeritus and one of its directors, is a member of Proxy Governance's policy council. The firm said that he did not participate in any matters involving Pfizer." "In addition, the Business Roundtable, headed by Mr McKinnell, was Proxy Governance's first subscriber, buying about 160 subscriptions to its service for its members." Finally, "James P. Melican, Proxy Governance's chairman until recently, represented the Business Roundtable in a private meeting with Cynthia A. Glassman, an S.E.C. commissioner, in October 2003, as the firm was being created." The Times report thus raises questions whether Pfizer secured support for its incumbent directors through conflicts of interest affecting Proxy Governance and its leadership.

The Relationship Between Pfizer and Institutional Shareholders

The Times also reported that Pfizer has complex relationships with its institutional shareholders. Recall that these companies hold considerable number of Pfizer shares on behalf of individual stock holders, or pension owners. The Times quoted Mr. Bogle again, "ownership of American corporations ... has moved from a diffuse group of individual shareholders into a handful of powerful financial institutions such as mutual funds and banks." He said it "is a clear conflict of interest they face in managing the retirement plan assets of the very corporations whose shares they own and collectively control."

So, per the Times, "conflicts of interest are not always evident, of course, but the potential for them arises at five investment firms among the top 10 holders of Pfizer chares. These are companies that earn money from Pfizer by managing some part of its pension plan, retirement savings plans or employee 401(k) accounts. And Pfizer directors serve on the boards of three investment firms that hold enough of Pfizer stock for their customers to be among the company's top 20 shareholders."

  • "Pfizer's top shareholder is Barclays Global Investors, holding 4.54 percent of the stock outstanding. It also manages three funds offered to Pfizer employees in various 401(k) plans and provides investment management services to Pfizer's pension, from which it generated $2.65 million in 2004...."
  • "Fidelity Management and Research, which holds 1.62 percent of Pfizer's shares for its customers, also manages several funds offered in Pfizer 401(k) and savings plans."
  • "Dodge & Cox, holder of almost 1.3 percent of Pfizer's shares, manages a stock fund offered to Pfizer employees in various 401(k) plans and provides investment management services to Pfizer's pension, for which it uearned $1.06 million in 2004."
  • "Northern Trust, holder of 1.35 percent of Pfizer's shares, made approximately $2 million as trustee of the company's pension and savings plan. It also manages an index fund for Pfizer employees in Puerto Rico."
  • "J.P. Morgan Chase, holder of 1.26 percent of Pfizer shares, generated $750,000 in fees from the drug company's pension plan."
  • "TIAA-CREF, the money management firm that counts [Pfizer director Stanley O.] Ikenberry as president of its board of overseers, also voted alongside Pfizer's board last year."
  • "Other Pfizer directors also serve on boards of financial service firms, such as Goldman Sachs, a holder of 0.82 percent of the company's shares; J. P. Morgan Chase; and trust units of Deutsche Bank, which holds 1.36 percent."
The Times articles suggest that conflicts of interest may affect the management and governance of Pfizer, and may help to support the lavish compensation of Pfizer's CEO while the financial performance of the company lags. None of these articles dealt with Pfizer's main business, selling pharmaceuticals, the quality of its products, how it markets them, or the research it performs. But these articles do raise questions, once again, about the priorities of the leadership of large health care organizations, and whether the interests of the top (hired) managers are put before those of others, including share-holders on one hand, and patients and physicians on the other. In a time when health care is decreasingly affordable and accessible, while the leaders of health care organizations become increasingly wealthy, such questions need to be raised.

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