A $1 Million CEO for a $27 Million Corporation

From the Seattle Times comes a story of how top executives in biotechnology may be paid for lack of performance,

Even in a disastrous year on Wall Street, Cell Therapeutics stood out in 2008. Its stock price dropped 99.25 percent.

But the cash-strapped Seattle biotech's top five executives had reason to celebrate Dec. 31: That day they were awarded year-end bonuses totaling more than $1 million.

Chief Executive James Bianco, who has run the company since founding it in 1992, was awarded a $487,500 bonus to supplement his $650,000 salary and other perks.

Cell Therapeutics' eight board members, who include Bianco, chose to pay 75 percent of the bonuses in cash, and will decide March 1 whether 'the company is sufficiently liquid to pay the remaining amount.' In other words, the board wasn't certain Cell Therapeutics would be able to spare the $250,000 to complete its New Year's gift to top management.

Here's another way to put the bonuses in context: Cell Therapeutics' market capitalization is about $27 million, according to Bloomberg. If Starbucks (which had a difficult 2008 but only lost half its stock value) gave its top five officers a bonus equal to one-twentyseventh of its market cap, the execs would walk off with about $270 million.

Cell Therapeutics is Seattle's oldest surviving public biotech and has the longest-reigning CEO. The company has lost a remarkable $1.3 billion over the past 16 years, with no sign of stopping. Its board chairman since 2006 is longtime director Philip Nudelman, the former president and CEO of Group Health Cooperative.
Company spokesman Dan Eramian, one of the five New Year's Eve awardees, says that 'in this market environment, stock prices are not valid measures of company performance.' He defends the bonus awards, saying executives at the 110-employee company have not had a raise in their base salary since 2005.

During that period, however, Cell Therapeutics has been an even bigger loser than Washington Mutual, as shares went from a split-adjusted $310 on Jan. 1, 2005, to the current penny-stock level, 11 cents on Friday.

And, Bianco had the highest base salary of all the local biotech leaders, including companies with 30 times the market value of Cell Therapeutics.

You just can't make this stuff up. This is an illustration of how the main beneficiaries of the our dysfunctional health care system are the top leaders of health care organizations. It seems that no matter how badly their organization performs, the top leaders always do very, very well. In this case, bonuses equal to about 4% of the corporation's entire market value went to top executives at a time when the board thought the company was in danger of completely running out of cash.

So who was responsible for giving more than $1 million to the CEO of a company whose market capitalization was $27 million? Looking over the company's board members, we see two familiar names.

The first such Cell Therapeutics board member is Vartan Gregorian, currently President of the Carnegie Corporation. Mr Gregorian was President of Brown University (in the spirit of full disclosure, my alma mater, and where I currently hold a voluntary faculty appointment) at the time Dr David Kern was forced off the Brown faculty. As we discussed briefly here, and Dr Aubrey Blumsohn discussed in more detail here, Dr Kern lost his position as head of occupational medicine, and ultimately his faculty position after he insisted on presenting an abstract about a new occupational disease over objections by officials at the company whose workers were afflicted with it. The company threatened a lawsuit over what it claimed was Kern's breach of a trade-secrets agreement. Brown officials blamed Kern for signing the agreement, even though the agreement was unrelated to the research Kern did on the disease, and his research did not obviously reveal any trade secrets. Gregorian refused appeals from Kern (see here), and at one time asserted that the occupational medicine program Kern lead did not exist (see here), despite obvious evidence to the contrary.

The second such Cell Therapeutics board member is Mary Mundinger. Ms Mundinger was on the board of directors of UnitedHealth, and in that position served as a cheerleader for Dr William McGuire, former CEO of the company who retired abruptly after allegations that he received more than $1 billion in back-dated stock options. A 2006 Pulitzer Prize winning article in the Wall Street Journal quoted her thus, "We're so lucky to have Bill. He's brilliant." Dr Mundinger's support of McGuire lead Institutional Shareholder Services (ISS) Inc. and Proxy Governance Inc, to suggest that institutional investors withhold votes for her in the 2006 board election (see post here.) We most recently summarized these leadership issues at UnitedHealth here.

So it often seems that not only do health care organizations often have bad leaders, but also that there is a web of bad leadership in health care. Questionable leaders often cross-link across organizations. The boards of directors of for-profit corporations, and the boards of trustees of not-for-profit organizations often are packed with the cronies of the organizations' hired executives. These board members are often current or former executives and managers. So these boards often seem more sympathetic to the financial fortunes of the CEOs they are supposedly supervising than to the mission of their organizations or its other constituencies, whether they be stock-holders, employees, health care professionals, patients, or the general public.

To improve health care, we thus need major changes in the governance of health care organizations, making it more representative of important constituencies, devoted to the mission, accountable, transparent and subject to ethical rules. Doing so would require ensuring that the boards of directors and trustees of health care organizations put the mission of the organizations ahead of the enrichment of its hired executives.