Wednesday, March 23, 2011

Despite Poor Financial Results, Diminishing Pipeline, Multiple Settlements of Legal Cases, Outgoing Pfizer CEO Got Over $24 Million

It is the season for share-holders' meetings of big US publicly held corporations, and as the proxy statements prepared for these meetings, prepare for more eye-popping, jaw-dropping examples of executive compensation. 

Pfizer's 2010 CEO Compensation
The AP (via the Wall Street Journal) just noted the compensation given to Jeffrey Kindler, the outgoing (in 2010) CEO of Pfizer, Inc, the world's largest pharmaceutical company:

Former Pfizer Inc. Chairman and CEO Jeffrey B. Kindler may have left the world's largest drugmaker abruptly last December, but he didn't leave empty-handed thanks to a compensation package valued almost $22 million.

Kindler received a 60 percent increase last year over his 2009 compensation, according to an Associated Press analysis of a Pfizer regulatory filing Tuesday.

The New York-based drugmaker gave Kindler a salary and performance-related bonus totaling $4.9 million, a $4.5 million severance payment and more than $12 million in stock and option awards. The company also will continue his health coverage for 12 months 'at active employee rates,' the filing said.

In fact, perusal of the new 2011 Pfizer proxy statement shows that Kindler, who stepped down on 5 December, 2010, made even more based on Pfizer's own calculations, $24,688, 849. Curiously, Ian Read, the CEO after 5 December, and previously Group President, Worldwide Pharmaceutical Business, received $17,396,112, despite only being CEO for 26 days.

Pay for What Kind of Performance?

These opulent pay packages stand in contrast to Pfizer's performance under Kindler and its financial results in 2010:
Kindler was ousted by Pfizer's board unexpectedly Dec. 6 after four years of languishing share prices and several failures of promising drugs in late testing, including a successor to cholesterol fighter Lipitor, the world's top-selling drug. Pfizer will lose U.S. patent protection in November for Lipitor.

Pfizer's 2010 net income fell 4 percent to $8.26 billion, or $1.02 per share. Revenue totaled $67.81 billion, up 36 percent, thanks to $18.1 billion from sales of Wyeth products.

Its stock price slipped 4 percent to close 2010 at $17.31, while the Standard & Poor's 500 index climbed 12.8 percent.

Furthermore, the compensation given the former and current CEO also stood in sharp contrast to Pfizer's amazing track record of recent unethical behavior.   Pfizer paid a $2.3 billion settlement in 2009 of civil and criminal allegations and a Pfizer subsidiary entered a guilty plea to charges it violated federal law regarding its marketing of Bextra (see post here).  Pfizer was involved in three other major cases from then to early 2010, including two involving settlements of fraud charges, and one in which a jury found the company guilty of violating the RICO (racketeer-influenced corrupt organization) statute (see post here).  The company was listed as one of the pharmaceutical "big four" companies in terms of defrauding the government (see post here).  Pfizer's Pharmacia subsidiary settled allegations that it inflated drugs costs paid by New York in early 2011 (see post here).   Just yesterday a settlement was announced in a long-running class action case which involved allegations that another Pfizer subsidiary had exposed many people to asbestos (see this story in Bloomberg).

Despite Pfizer's recent dismal financial performance, clotted drug pipeline, and unfortunate ethical/ legal track record, the company's board compensation committee reported thus:
The Committee believes that Pfizer’s executive compensation program implements and achieves the goals of our executive compensation philosophy. Pfizer’s executive compensation philosophy, which is set by the Committee, is to align each executive’s compensation with Pfizer’s short-term and long-term performance and to provide the compensation and incentives needed to attract, motivate and retain key executives who are crucial to Pfizer’s long-term success.
Who Provided "Stewardship" of Pfizer?
So I had to ask: who were these people who thought that compensation of over $24 million was somehow "aligned" with declining profits, declining revenues, little output of new drugs, and multiple legal settlements of charges like fraud and violating the RICO act?

Here is a list of Pfizer's board of directors in 2010, and some relevant affiliations, taken from Pfizer's web-site, and where indicated, elsewhere (color coding to be explained below)

- Dennis A. Ausiello, M.D. -
Jackson Professor of Clinical Medicine at Harvard Medical School and Chief of Medicine at Massachusetts General Hospital since 1996.
Member of the Institute of Medicine....
Director of TARIS BioMedical, Inc.
(per Research!America bio) advisor to drug delivery and biosensing start-up companies Entra, BIND Biosciences, and Seventh Sense Biosystems, Inc., to drug-discovery startup companies Promedior and Pulmatrix, to Proventys, an evidence-based medicine delivery system, and to Ore Pharmaceuticals and Polaris, investment and venture capital companies working in the biotech and device area.

- Michael S. Brown, M.D. -
Distinguished Chair in Biomedical Sciences since 1989 and Regental Professor since 1985 at the University of Texas Southwestern Medical Center at Dallas.
Member of ... the Institute of Medicine,....
Director of Regeneron Pharmaceuticals, Inc.

- M. Anthony Burns -
Chairman Emeritus since 2002, Chairman of the Board from 1985 to 2002, Chief Executive Officer from 1983 to 2000, and President from 1979 to 1999 of Ryder System, Inc., a provider of transportation and logistics services.
Life Trustee of the University of Miami.

- Robert N. Burt -
Retired Chairman and Chief Executive Officer of FMC Corporation, a chemicals manufacturer, and FMC Technologies Inc., a machinery manufacturer....
Life Trustee of the Rehabilitation Institute of Chicago

- W. Don Cornwell -
Chairman of the Board and Chief Executive Officer of Granite Broadcasting Corporation from 1988 until his retirement in August 2009 and Vice Chairman until December 2009.
(per Wallace Foundation web-site) He previously served as vice president, investment banking division, of Goldman Sachs.

- Frances D. Fergusson, Ph.D. -
President Emeritus of Vassar College since 2006 and President from 1986 to 2006. Served on the Mayo Clinic Board for 14 years, the last four years as its Chairman, and as President of the Board of Overseers of Harvard University from 2007 through 2008.

- William H. Gray III -
Co-Chairman of GrayLoeffler, LLC (formerly the Amani Group), a business advisory and consulting firm. Chairman of the Amani Group from 2004 through September 2009.
Currently Director of ... J. P. Morgan Chase & Co.

- Constance J. Horner -
Guest Scholar from 1993 until 2005 at The Brookings Institution....

- James M. Kilts -
Founding Partner, Centerview Partners Management, LLC, a private equity firm, since 2006.
(Per Centerview Partners web-site) Centerview Partners' investment banking advisory business serves some of the largest companies globally in a broad range of industries, with particular expertise in Food & Consumer Products, Financial Institutions, General Industrials, Healthcare, Media & Entertainment ....
The firm has executed many significant transactions in recent years, including:
Altria's $113 billion spin-off of Philip Morris International, its $62 billion spin-off of Kraft and its $11.7 billion acquisition of UST...
Facet Biotech's $722 million sale to Abbott Labs;
OSI Pharmaceuticals' $4.0 billion sale to Astellas Pharma;

- George A. Lorch -
Chairman Emeritus of Armstrong Holdings, Inc., a global manufacturer of flooring and ceiling materials,....

- John P. Mascotte -
Retired President and Chief Executive Officer of Blue Cross and Blue Shield of Kansas City, Inc.,...

- Suzanne Nora Johnson -
Retired Vice Chairman, Goldman Sachs Group, Inc.,...
Director of American International Group, Inc., .... Board member of the American Red Cross, The Brookings Institution, ... and the University of Southern California.
(per Milken Institute web-site) on the board of numerous not-for-profit organizations, including ... RAND Health ....
She is on the Advisory Board of Councilors of Harvard Medical School

- Ian C. Read -
President and Chief Executive Officer since December 2010.

- Stephen W. Sanger -
Chairman of General Mills, Inc.
Currently Director of ... Wells Fargo & Company.

- William C. Steere, Jr. -
Chairman Emeritus of Pfizer Inc. since 2001.
Currently Director of Health Management Associates, Inc.
Director of the New York University Medical Center ...; and Member of the Board of Overseers of Memorial Sloan-Kettering Cancer Center.

Of Pfizer's 14 directors (excluding its CEO), seven have or had leadership positions at teaching hospitals, academic medical centers, medical schools or their parent universities. Three have or had leadership positions at other influential non-profit health care organizations. 

Two had leadership positions at potentially competing pharmaceutical or biotechnology companies.

Two had leadership positions at companies that finance pharmaceutical, biotechnology and other health related companies.

One had a leadership position at a health insurance company.

One had a leadership position at a for-profit hospital operating company.

Four had leadership positions in financial services corporations, including some that were implicated in the global financial collapse, and/or required massive federal bail-outs to avoid collapse.

It seems that every time we look at the boards of directors or trustees who are supposed to provide stewardship to a troubled health care organization, we see a similar pattern.  Just as we recently said about the Johnson and Johnson board, ....
So here we have the latest striking case that indicates the confluence of forces that can lead to health care dysfunction. Not only has the compensation given to health care leaders got so large that it is per se a cause of increased health spending, but also, and more importantly, such compensation often provides perverse incentives that perpetuate mismanagement, raising costs and lowering quality. This situation appears to be enabled by governance (or "stewardship") by individuals who are often fellow members of the CEOs' club, and hence who may feel more sympathy with the executives they are supposed to supervise than the stockholders whose financial interests they are supposed to protect, or the public whom the companies' products and services are supposed to benefit. Moreover, these individuals often have conflicts of interest which may mitigate against objective scrutiny of the executives they are supposed to oversee. Finally, these individuals often may come from corporate cultures which do not espouse the values that we in health care are supposed to uphold. (See this post and its links for other examples of the sorts of people who are supposed to provide stewardship to health care organizations.)

So to repeat once more-

I strongly believe that there needs to be much more investigation, academic, journalistic, and perhaps legal, of the identity, nature, and culture of the leaders of health care, and their relationships. A few bloggers cannot do it all. Obviously, the anechoic effect mitigates against medical and health care academics looking into their own leaders. However, failing to understand who is leading our march to the brink of health care failure ought not to be something such academics would want on their conscience.

Finally, and obviously, health care organizations need leaders that uphold the core values of health care, and focus on and are accountable for the mission, not on secondary responsibilities that conflict with these values and their mission, and not on self-enrichment. Leaders ought to be rewarded reasonably, but not lavishly, for doing what ultimately improves patient care, or when applicable, good education and good research.

If we do not fix the severe problems affecting the leadership and governance of health care, and do not increase accountability, integrity and transparency of health care leadership and governance, we will be as much to blame as the leaders when the system collapses.

ADDENDUM (23 March, 2011) - See also comments by Merrill Goozner on the GoozNews blog.

1 comment:

Afraid said...

Nary an echo.