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.

“Our compensation committee undertook a robust process to review the company’s executive compensation structure, taking into account feedback from our shareholders gathered during an extensive outreach effort,” Ed Mueller, McKesson’s lead independent director, told Bloomberg in June.

John Gomes Saia, former corporate secretary for McKesson, worked closely with the board, particularly the comp committee, for several years, including during the 2017 proxy season, when shareholders outraged with executive pay gave only 26.6% voter support on the plans, including Hammergren’s $20 million paycheck last year. Gomes Saia has since moved on to work as general counsel for AcelRx Pharmaceuticals but recalls how McKesson’s board of directors initially had similar concerns as Cardinal.

He says that McKesson always had the discretion to hold out on payments to executives, taking into consideration legal and compliance risks, without which, he notes, “it’s virtually impossible to run a health care company.”

“Do you penalize the current management team for what they inherited? Or penalize them for settling and getting past it? What activity are you incentivizing?” he asks, explaining that this could result in management's going “to full war on a defense,” essentially kicking those legal costs down the road for future years and possibly different people in the executive roles.

Gomes Saia adds, “It is the board and the compensation committee’s responsibility to assess that. If you elect these directors, why are you going to tie their hands?”

Lawsuits Adding Up

The number of lawsuits filed against companies involved in the opioid epidemic continues to grow. In mid-November, Florida attorney general Pam Bondi announced she would take on two more companies in the fight over the crisis. In an amended complaint filed against Purdue and other pharmaceutical companies, Bondi’s office added drug store chains Walgreen’s and CVS Health to the list of defendants, claiming they “violated their duties under state law” as distributors and dispensing pharmacies whose actions “caused an unconscionable quantity of opioids to flow into Florida.”

“Pharmacists serve as the last line of defense between dangerous opioids and the public,” the suit alleges.

In a Nov. 16 press release, Bondi said, “We will continue to pursue those companies that played a role in creating the opioid crisis.”

The number of lawsuits against Cardinal Health went from dozens to upward of a thousand cases in a one-year period, according to Teamsters.

The pharmaceutical companies are also pouring money into litigation filed against the New York state health department, since it imposed a tax on opioid sales this year, retroactively collecting funds from 2017. The Wall Street Journal reported this month that the state has assessed taxes on 75 companies under the Opioid Stewardship Act. Cardinal Health will pay approximately $29 million to New York, according to the article, and Purdue owes about $7 million. Meanwhile, McKesson executives on a recent earnings call claim they will pay about $100 million between the tax and litigation, with the majority of the expenditures directed at the legal costs.

With the massive number of legal challenges, many have been quick to compare the opioid crisis to the countless lawsuits involving the tobacco industry. At least some analysts, though, aren’t convinced that total settlement costs for opioid companies would be more than the $206 billion over 25 years agreed to by tobacco companies in the 1998 master settlement agreement.

Fitch Ratings’ Patrick Finnegan and Melody Gao have been researching this topic for the credit rating agency and say it’s tricky to predict an outcome because in the drug industry, opiates are substances approved by federal health regulators and are a smaller portion of sales for drugmakers compared with products sold by the tobacco companies. In a recent article, the two authors acknowledge that “given uncertainty regarding the size and timing of potential settlements such event risks are not incorporated into ratings,” noting that “rating pressure could emerge if financial implications ... push credit metrics beyond Fitch expectations or rating sensitivities.”

It’s complicated to answer, “Did they violate the law?” Finnegan tells Agenda. “It’s difficult to prove liability, but at the same time, as every month goes by, the lawsuits aren’t going away. There are more than there were a year ago, and two years from now, they could be equally as high.”

Still, although it’s hard to predict what the legal costs will amount to, it’s likely to surpass previous litigation in which the pharmaceutical companies have been involved, experts predict.

One major difference between the opioid epidemic and the tobacco public health crisis is that the big tobacco companies such as Philip Morris, Altria Group and Reynolds American did not explicitly ding their execs for any legal costs. For example, Altria’s former general counsel Denise Keane was the highest-paid in-house legal chief in the U.S. in 2016; she was awarded about $9 million, largely for her role in resolving litigation for the tobacco giant and the company didn't disclose any reduction her pay due to legal expenses.

Richard Daynard, a law professor at Northeastern University who leads the Tobacco Products Liability Project, which he started in 1984, says at that time, most people didn’t think plaintiffs could make an impact through litigation against the big tobacco companies.

“When these things get settled, it’s going to be in the multibillions of dollars,” Daynard says of the opioid crisis. On the other hand, he says, “the tobacco companies have certainly been hit with the master settlement agreement … and the companies are doing just fine.”

As You Sow’s Landis Weaver says the reason tobacco executives’ pay packages didn’t directly suffer from any legal or compliance costs is because “when that was happening, the idea of pay for performance with focused metrics was less common.”

However troublesome people might find that to be, she 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.”

Should Pharma Execs Pay for the Opioid Crisis?

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