Monday, February 25, 2013

Reason for Hope? - Novartis Rescinds Vasella's Golden Parachute

Enormous compensation of hired health care executives, out of all proportion, if related at all to whether their work had any positive effect on patients' or the public's health, has long been a concern on Health Care Renewal.  For example, back in 2006, we posted repeatedly (look here for links) about the billion dollar plus fortune amassed by the then CEO of UnitedHealthcare which vividly contrasted with the company's avowal to "make health care more affordable."

We have posted many such stories.  Yet maybe there is a whiff of change in the air.  For the first time that I can recall, a gigantic pay package to a top health care executives has been rescinded after public protest.

Novartis' Golden Parachute for Vasella

This is how the New York Times described the huge golden parachute that was initially proposed:

A plan by Novartis, one of Switzerland’s biggest drug makers, to pay its departing chairman $78 million to keep him from sharing his knowledge with competitors has added fuel to an already heated debate about executive pay.

The announcement of the payment to the chairman, Daniel Vasella, was made last Friday, just two weeks before a Swiss referendum to give shareholders more power to determine executive compensation. Mr. Vasella, who had previously said that he would step down as chairman at Novartis’s annual shareholder meeting on Friday, is to receive the sum, 72 million Swiss francs, over six years. 

In a statement, Mr. Vasella said that 'it has been very important to Novartis that I refrain from making my knowledge and know-how available to competitors and to take advantage of my experience with the company.'

Unprecedented Resistance by Shareholders, Politicians and the Public

The plan to provide this "golden parachute" met stunning resistance from Swiss citizens and company shareholders.  As the Times reported,

Swiss lawmakers and shareholder activists criticized the company over the weekend for not making the amount public earlier. They also contended that the planned payment was just the latest of several bad decisions by Novartis on executive pay.

Ethos, a Swiss group of investors, on Monday called on Novartis to immediately cancel the contract with Mr. Vasella and take back any money already paid.

Christophe Darbellay, president of the Christian Democratic People’s Party, told a Swiss newspaper, SonntagsZeitung, that Mr. Vasella’s compensation was 'beyond evil.' Simonetta Sommaruga, the Swiss federal justice minister, told another newspaper, SonntagsBlick, that the payment was an 'enormous blow for the social cohesion of our country' and that such 'help-yourself mentality' was damaging confidence in the economy. 

Even Swiss identified as pro-business or right-wing joined in the criticism.  As reported by the Swiss Broadcasting Company, 

Philipp Müller, president of the centre-right Radical Party which traditionally has close links with the business community, is quoted as saying Vasella was 'taking liberal Switzerland to the henchman'.

Other politicians described the latest figure as 'disgusting' and denounced the recklessness of top managers.

The director of the Swiss Business Federation, which has been leading the fight against the initiative, said he was surprised by the 'dimension of the payment' to Vasella.

A Golden Parachute Despite a Past Record of Misadventures

Maybe there would have been even more outrage if those in Switzerland had known about Novartis' track record of misadventures, at least in the US, while Vasella had been leading it.  In particular,
-  In 2011, as we noted here, a company subsidiary paid $150 million to settle charges by several US states that it had misrepresented pricing information
-  In 2010, as we noted here, the company settled US federal civil and criminal charges in connection with its marketing of multiple drugs for $422.5 million.  The charges included giving kickbacks to physicians disguised as speakers' honorariums and fees for serving on advisory boards.  
-  In 2010, as we noted here, the company settled separate US charges that it made false claims to support off-label marketing of its drug tobramycin for cystic fibrosis for $72.5 million. 
- In 2008, as we noted here, the company settled charges in the US state of Alabama that it defrauded Medicaid for $33.7 million.

However, these legal escapades were not mentioned in the recent media coverage of the proffered and then withdrawn parachute. 

The Company Backs Down.

Nonetheless, what was really surprising was that the outrage made the company back down.  Per the Wall Street Journal, 

Novartis AG on Tuesday abandoned a 72-million-Swiss-franc ($78 million) exit package for its chairman, bowing to pressure from shareholders and Swiss politicians after four days of increasing criticism.

The Swiss drug maker said its board and Chairman Daniel Vasella agreed to cancel a six-year noncompete and related-compensation agreement designed to prevent him from joining or advising rivals and which would have paid him 12 million francs a year.

The agreement was scheduled to take effect on Friday, when Dr. Vasella, 59 years old, is planning to leave the Basel-based company at its annual shareholder meeting


In the Novartis statement on Tuesday, Dr. Vasella acknowledged that his offer hadn't soothed public opinion: 'I have understood that many people in Switzerland find the amount of the compensation linked to the noncompete agreement unreasonably high,' he said. 

In addition, as Reuters noted, Vasella actually admitted he made "mistakes,"

'The fierce reaction and reproaches that were made as a consequence of the many-sided discussions about my compensation did leave its mark on me,' 59-year-old Vasella said in his opening address to 2,688 shareholders gathered at Novartis's annual general meeting in Basel.

'I made two avoidable mistakes: the first was to even negotiate this contract. And the second to believe that giving up this individual payment to charities would be considered as something positive by society.'

Of course, it is hard to believe that Novartis had previously paid him as lavishly as it did  - the New York Times had reported that his pay just prior to resignation was 12.4 million francs, "about $13.4 million a year" -  without securing an agreement to protect trade secrets.  Many businesses routinely add confidentiality clauses, trade secret protection, and non-compete clauses to contracts of many employees.  Thus adding a $78 million golden parachute ostensibly just to protect trade secrets and defection to the competition seems like impossibly gilding the lily.  Furthermore, if Novartis really thought that Vasella was likely to run to another firm at the drop of a hat, it would have made no sense to entrust someone thought to be at risk of such disloyalty with top leadership positions.

Reason for Hope

At least Chairman Vasella admitted "mistakes," and at least the ridiculous pay package was rescinded. This incident does show that it is possible for public and shareholder outrage over gargantuan payments to executives to have some effect.  That seems like real progress, and a reason to hope. 

Of course, executives of public for-profit corporations are supposed to be working for shareholders.  Thus their general impunity from shareholders' control up to now remains inexplicable.  Furthermore, executives of pharmaceutical companies and other health care corporations seemingly should be responsible for putting patients' and the public's health ahead of their own enrichment.  Thus their ability up to now to ignore public concern about their companies' actions, and to avoid personal responsibility for their companies' bad actions also remains inexplicable.

But progress may now be possible.  In and outside of Switzerland, shareholders of publicly-held for-profit health care corporations should demand accountability from the executives who are supposed to be working for them.  In and outside of Switzerland, health care professionals, policymakers, and the public at large should demand accountability from leaders of health care organizations for the effects of their organizations on patients' and the public's health. 

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