The Opioid Crisis, CEO Pay, and Shareholder Activism

BRIAN KENNY: Corporate governance is the system of rules, practices, and processes by which a company is directed and controlled. It identifies who has power and accountability and who makes decisions, but boards don’t operate in a vacuum. Their decisions are guided by regulations and legislation, and they’re part of a larger system of checks and balances that can include unions, professional organizations, oversight groups, and federal agencies. When one part of the system fails, the others provide a backstop. But when every part of the system fails, it can be catastrophic. Today on Cold Call, we’ve invited Professor Suraj Srinivasan to discuss his case titled, The Opioid Settlement and Controversy Over CEO Pay at Amerisource. I’m your host, Brian Kenny, and you’re listening to Cold Call on the HBR Podcast Network. Suraj Srinivasan examines the institutions of corporate governance in the US and internationally, and he is a repeat guest on Cold Call. It’s been many years since we’ve had you on the show, Suraj. Thanks for coming back.

SURAJ SRINIVASAN: My pleasure.

BRIAN KENNY: Where have you been?

SURAJ SRINIVASAN: Just around, you haven’t found me.

BRIAN KENNY: I think many people are familiar with the Sackler family and Purdue Pharma, but there are many, many other players involved in this whole thing, and still are to this day. And I think this case does a great job of highlighting perhaps sort of an unseen part of this whole problem. So thanks for writing it and thanks for being here to talk about it.

SURAJ SRINIVASAN: I love this case because of what it stands for and what I hope we will discuss, and what I discuss in class. Whenever I discuss in class, one of the first things I ask before starting out, and I do this mostly with executives and in our alumni groups and so on, I ask people, “How many of you know or have been personally affected with a relative or a close friend because of the opioid problem?” And I’m just stunned every time at how many people are affected because of close friends, relatives being affected by opioids. The opioid issue isn’t attributable, in my limited understanding of this, to one company, or one person, or one agency, or so on. It’s a huge sort of social crisis that has been created because of so many reasons. Some of them, well-meaning ones. For instance, in the early two thousands, late 1990s, a huge reassessment of how pain is managed in the US and globally. And for good reason, medical professionals and medical associations and organizations advocated greater use of controlled substances like opioids for pain relief. And many people would track the current crisis back to some of the very sound medical reasons for making opioids more available and more accessible. At some point that crossed over from being medically appropriate usage of opioids to addiction and diversion of opioid for addictive purposes. So there’s a lot going on in this area.

BRIAN KENNY: Maybe you can start just by telling our listeners what the central issue is in the case and what your cold call is when you start the discussion in class.

SURAJ SRINIVASAN: The central issue on the face of it is as you read in the title of the case, so Amerisource paid along with the two other big distributors, pharmaceutical distributors, there are three of them who cover the vast majority of the market even though it’s a fairly distributed marketplace. So the three of them, along with Johnson and Johnson, initially paid a big fine to settle hundreds and thousands of lawsuits that were all consolidated. And the charge was that because of lax policies and controls, they had facilitated illegal distribution of opioids. They paid about 6 billion dollars in settlement charges, and some more is coming. So the immediate question in the case is, should the CEO’s pay be reduced, or the bonus not be paid, to reflect the fact that this huge settlement has been paid? And so that’s the opening cold call. If you are on the board of this company, will you agree with the shareholders, half of whom are saying, “Cut the CEO’s pay,” the other half are saying, “No, no, actually the company’s doing well, this is an old issue,” and actually settlement is a way of getting past these issues. This is like saying if we punish somebody for paying the settlement, then they are not incentivized to settle, which means the problem festers for even longer, maybe causing the company even greater harm.

BRIAN KENNY: Yeah.

SURAJ SRINIVASAN: Why would you punish someone for actually getting the company past its problem? So that’s the opening question in the case, do you reduce the CEO’s pay? And as it turns out, literally half the investors, worded one way or the other, have voted the other way, showing how complicated this can be.

BRIAN KENNY: Yeah. Your scholarship is all about corporate governance. We’ve talked about cases in the past that were centered on that topic. How did you hear about this one? What sparked your interest in writing this particular case?

SURAJ SRINIVASAN: On the face of it it’s an executive compensation case, the board has to grapple with this issue. Shareholders are coming together, a large number of them, and saying, “Reduce the CEO pay.” It’s a classic board-investor relationship question on an issue of governance interest, which is CEO compensation. There’s a shareholder resolution with a large number of investors on one side and equal number on the other side. And I got curious, whenever there’s an even split like that, half the people say one thing, other half say something, there’s something interesting going on. But when you dig into this, it’s a very deep important governance question. As the opioid issue is becoming bigger and bigger, how should senior management and how should boards of companies be thinking about the social responsibility of the company, about the risk that the company’s undertaking as they’re doing this? Even before this particular compensation issue came up, large groups of investors had gotten together under the banner of investors for opioid accountability, and they were pushing companies, not just Amerisource, but so many others on managing that risk and taking a more serious responsibility to that. So investors coming together, trying to hold companies and boards accountable for what they’re doing is a key governance question that I’ve explored in so many contexts. This was such an important context for the country that this merited a deeper exploration.

BRIAN KENNY: Let’s talk about their board a little bit. Who sits on Amerisource’s board at the time of the case?

SURAJ SRINIVASAN: The general composition, our senior business leaders, senior healthcare leaders, in fact, a former FDA official, senior business leaders, other CEOs. Very accomplished board, both in terms of business leadership and in terms of healthcare leadership.

BRIAN KENNY: And what about their shareholders? What does the composition of the shareholders look like?

SURAJ SRINIVASAN: Again, fairly typical. Except in this case, a large proportion of shares at some point was held by Walgreens, which is, as you know, one of the largest chain of pharmacies in the US. So they have one large shareholder, but other than that, large number of institutional investors, large number of BlackRock, Vanguard, State Street, all the usual suspects in terms of the large investors, as would be there in any large American company.

BRIAN KENNY: The Walgreen piece factors in as well, as we’ll discuss a little bit further on in the conversation. What’s the regulatory environment look like in this space?

SURAJ SRINIVASAN: Oh, it’s a highly regulated space, as you might imagine given they’re distributing pharmaceutical products. With respect to the controlled substances, the opioids, there are very specific laws in place for distributing controlled substances. Highly regulated companies like Amerisource have to file frequent regulatory reports. For instance, with the drug enforcement agency, the DEA, plays an important role in terms of monitoring how these controlled substances are distributed. But beyond even controlled substances, some parts of it are fairly regulated because of the nature of products that they distribute.

BRIAN KENNY: And there are pretty specific requirements that they have of the distributors. And the case kind of alludes to Amerisource finding ways to work around some of those requirements, to blunt some of those efforts, it seemed.

SURAJ SRINIVASAN: Very often you find that in large companies, the pressures that come through regulation, or the challenges in running a vast distribution system in this case, you have thousands if not tens of thousands of employees at various levels. So I wouldn’t go so far as to say the company was trying to skirt rules or regulations, but certainly in the lawsuits that were filed and in prior enforcement actions by the DEA, they had found, and sometimes repeatedly, that there were corners cut in the process of the distribution. So what could legitimately raise the concern that a company like this, especially dealing with controlled substances, should have zero tolerance and very high bar on their kind of internal control systems. Again, the litigation proceedings as well as prior regulatory actions showed that those were as strict as could have been. But again, I would only caution pointing fingers here because it’s such a massive company and it’s quite likely that there are failures in different parts of the company.

BRIAN KENNY: And the firm did point out some of the inconsistencies in the regulations, and basically it sounded like some of the regulations were probably not enforceable to the extent that the DEA wanted them to be. And they also pointed out that in some ways it would potentially put them in conflict with their customers because they’re supposed to identify people who could be problematic and they’re supposed to cut those people off the list and take them off the distribution chain, and they were sued, in fact.

SURAJ SRINIVASAN: That’s absolutely right. In fact, the CEO wrote a LinkedIn post about this, which is also featured on the case. The business of the company is to fulfill orders that pharmacies place with them. They’re not filling prescriptions themselves, they are not supplying medicines to you and I when we go to a pharmacy, that’s not their job. Their job is to fill legitimate orders that come from licensed pharmacies.

BRIAN KENNY: They’re suppliers, right?

SURAJ SRINIVASAN: They’re suppliers. And so, the question one could raise is if a pharmacy in someplace makes an order for a controlled substance, should you supply or not? If you feel there’s something fishy in the sense that this particular pharmacy is ordering so much that how can it be? When a pharmacy orders so much, shouldn’t? And again, I should emphasize that even though the case is about Amerisource, similar concerns can be expressed about so many others in the pharmaceutical supply chain, including their two immediate big competitors. Even though we are talking about this particular company, we should keep in mind that this is a more generic problem. So a legitimate question can be asked if a pharmacy is ordering so much, shouldn’t you as a distributor put a pause on it? Actually, they did that in a case in Alaska, and the pharmacy went to court and the court ruled that the pharmacy is within its rights to order, and Amerisource should supply. What would a company like this do? And the CEO raised this question in his blog post asking, “Our job should not be to decide which doctor should prescribe or not, that’s not our role. Our role is to run a very efficient distribution system.” On the other hand, you could ask the question, but you have all the data. You have all the data on how much who is ordering. And if you don’t take account of all this data that you have and know there’s a problem and try to do something to mitigate the problem, aren’t you missing a part of your responsibility?

BRIAN KENNY: In the case sites, you mentioned the examples. There were counties in rural areas where the population was far smaller than the number of pills that were ordered for that particular area.

SURAJ SRINIVASAN: Not just smaller. A small county in South Carolina is ordering more opioids than the entire Manhattan.

BRIAN KENNY: Yeah.

SURAJ SRINIVASAN: How’s that possible? Now the question is, what’s the pharmaceutical distributor’s responsibility in that supply chain? Or is it that particular pharmacy, or is that particular doctor who’s prescribing there? This is, Brian, the most interesting aspect of this whole problem. We have huge societal problems, we have climate change that we are trying to solve. Here’s an issue that there is no red or blue differences in the country. Everyone realizes that there is no political divide. We all understand that this is a big problem, this meaning opioid crisis is a big problem. And still, we have a situation in which billions and billions of dollars of settlements are being paid by the most leading corporations, in this case, Amerisource, but also so many others. How are we going to solve large global problems? Is the question that animates me a lot and animates me in this issue. Here’s the problem in which we can see the plight of people suffering and a plight of our society right in front of our eyes. And it is unraveled in such a short period of time, in the last 10 years or so, and now we are calling into account all these large companies and they are settling for billions and tens of billions of dollars. What went wrong? There’s a massive collective action problems, and we are trying to solve all these collective action challenges like climate change again, and we are relying on large and small companies to play their part in doing this. And again, here is an example, the question that you asked just now, if pharmaceutical distributors say, “Look, I’m only supplying a legitimate order from a pharmacy.” The pharmacy says, “I’m only filling a legitimate prescription from a doctor,” and on and on. And the DEA says, “Look, we have these limited tools at our disposal,” and the FDA says this, and somebody else. And then we just keep pointing fingers at each other. And that’s why this is a good governance case. So what’s the role of the board and the leadership of the company? What’s the role of regulators here? At the end of the day, each entity involved in this whole problem can look at the other one and say, “Look, I did my part. Somebody else didn’t.”

BRIAN KENNY: Yeah.

SURAJ SRINIVASAN: That never ends.

BRIAN KENNY: How did the company explain the settlement to their shareholders? What was the sort of rationale behind it?

SURAJ SRINIVASAN: I don’t think they really explained it much other than the fact, look, I mean, it’s a settlement. So which means they’re not accepting or denying anything, as all these settlements go. The argument often is that we need to get on with business, and these lawsuits are massive distractions for us. So settling is better than continuing.

BRIAN KENNY: And the numbers for the firm were pretty good. If you take the settlement out of it, they were doing pretty well.

SURAJ SRINIVASAN: If you take the settlement out of it, they were doing brilliantly. So that’s another interesting question, Brian, that comes out of this. In fact, that’s a question I ask in class. As we keep debating this question about what is the accountability for the business here? I ask the question, “How’s the company performing?” And people immediately open their stock price chart or their financial performance chart leaving this year out, and they’ll say, “Oh, look, the profitability is fantastic, stock price is doing really well, and the company is executing so well,” till somebody raises their hand and says, “but we have this massive social problem.” They might not have caused it, but they’re part of this ecosystem that has facilitated it. Are they doing enough?

BRIAN KENNY: Yeah.

SURAJ SRINIVASAN: What is performance? Becomes an important question.

BRIAN KENNY: And this comes up a lot in the cases that we discuss on the show. Accountability is everywhere these days, and it’s difficult for any firm to hide for very long if they’re doing something that looks like it’s flying in the face of the public good.

SURAJ SRINIVASAN: This is a great example of a company, or the entire distribution system, that rose to the occasion in 2020 during Covid. These are the folks that actually helped us with PPEs and medicines and everything else. So there is two sides to this.

BRIAN KENNY: Let’s talk about the coalition of investors then that got together, that was the investors for opioid and pharmaceutical accountability. What were some of the things that they were asking for in their resolution to the firm?

SURAJ SRINIVASAN: That’s an excellent question, Brian. In fact, if you see a lot of these big social problems, so including climate issues, it’s the largest investors who are getting together and urging companies, pushing them in some cases, to focus beyond immediate short term profitability to tackle the big societal challenges. And in this case, it actually started out with the teamsters because of where they operate and the nature of their union membership, they started seeing the havoc that the opioid issue is causing among their members. They started sort of bringing it to their investment portfolio people and across to other investors. And over time, a group of investors who wanted to put this issue high up on their agenda in terms of the social problems it was causing, started filing shareholder resolutions with companies asking to start paying more attention to the problem of being part of the opioid supply chain. Not saying these companies are causing the problem, but you could be part of the solution. And how is your risk management? How is your governance? What can you be doing to improve the situation or to help with the situation? They tried for a few years, there were some sort of minor successes, but not a whole lot. They tried things like separate the CEO’s position from the chairman’s position, trying to push more, better governance that way. And they tried to ask for risk reports on how controlled substances are being handled to the company. Minor success, not great outcomes there. But over time, this coalition grew to a pretty substantive percentage of shareholder ownership in all these companies, the state and municipal pension farms, the treasurers of governments, all the several big investors, and really started pushing for companies to manage the risk better. And that’s another important reason why I got interested in this, because I study and look at shareholder activism quite a bit. This was a very interesting case of how investors understood a big social problem and tried to collectively address it by going and urging a lot of different companies to do better.

BRIAN KENNY: They had kind of mixed results there.

SURAJ SRINIVASAN: I would say they actually had very weak results. What was this resolution about? The actual point of the case, and this is an interesting twist that comes very, and in the first 20 or 30 minutes of discussing the case, or in fact sometimes sooner, we started this problem, should the CEO’s pay be cut because of this? And the cut that they had asked for was two or three million dollars out of a 14, 15 million dollar pay. And people are very vigorously debating it. Some are saying, “Yes, the CEO should be held accountable for this.” Others are saying, “No, the company’s actually done well. This is a settlement, there’s no guilt here.” Going back and forth on that till somebody raised their hand and they’ll say, “Are we really talking about the thing that actually matters here? Is it like two million dollars, is the real question?” So in a way, my opening question is kind of a straw man for the following reason. Obviously, the problem of opioids and six billion settlement and the largest societal problems, opioid is much bigger than docking pay way of two million. So somebody says, “If this is how bad things have been, shouldn’t you be firing the CEO? Shouldn’t this person be replaced from the job? Shouldn’t this company’s board sit back and ask, what was our role in this big, big, big problem? What could we have done better when we are such an important player in the supply chain?” And that’s when the case really gets elevated to the key question of the social responsibility of this company. We start asking questions like, “When would you realize you needed to do something?” Is it when the lawsuits start getting filed, which is a little too late, by the way? Shouldn’t it be in 2010 or 2011? How would you know if you’re on the board of this company that this is going to be such a big thing? The opioid controlled substances is actually a very tiny part of the business of this company. It’s a multi, multi-billion dollar company. Controlled substances or opioids are 2% of the total sales volume of the company.

BRIAN KENNY: Wow.

SURAJ SRINIVASAN: It’s nothing.

BRIAN KENNY: Yeah.

SURAJ SRINIVASAN: I mean, 2% is big, but quite small of the total volume. Some people will say they should actually get out of controlled substances. They should not be distributing this at all because look, it’s such a tiny part. There’s not much revenue there, but there’s a huge amount of risk there. So you shouldn’t be in this business at all. So are you saying there should be no opioids sold in the US? They’ll say, “No, no, no. Opioids should be sold in the US.” So who will sell it? These are medications, so who will be responsible? “Then let somebody else do it.” So who is that somebody else?

BRIAN KENNY: Yeah.

SURAJ SRINIVASAN: “Oh, some smaller players.” So you’re saying the largest corporations cannot put the resources to do this properly, but smaller mom and pop distributors should be doing this and we actually think they’ll do a better job. So what’s the problem we are trying to solve? But it’s too much of a risk to take, but if Amerisource can’t manage that risk, who do we expect will better manage that risk and watch the role of the board in understanding and thinking about all these things?

BRIAN KENNY: Yeah, so these are huge questions with no simple answers. Obviously you don’t come to a decision at the end of the class, I’m sure as you’ve talked about this. And the board did decide that they would move forward. The shareholders voted, rather, on the pay package. This comes back into the composition of the shareholder body because the pay was approved.

SURAJ SRINIVASAN: The pay was approved. Like I said, it was 52, 48. 52 in favor. But if you took out this single large, big shareholder, Walgreens, it was a pretty significant vote against pay because the other single, large shareholder voted for it. Yes, the shareholder composition did end up mattering in terms of how that pay issue got resolved. But like I said, the pay issues is a entry point into this much larger question. How do we step back and understand the bigger responsibility of the business and society? How do you as a board understand, where can we actually move the needle? What could we have done and when could we have done it? Responding in 2021 with that cutting in pay seems to be a little too little, too late. If you had to really act and fulfill your responsibilities in this case, the right time to start paying attention, and frankly, as an outsider with the information we have in the case, we don’t know what was done inside. So to be fair, maybe there was a lot of discussion and interest in this internally, but that would be the question. When do you respond? How do you respond early enough that you can actually do something to help society?

BRIAN KENNY: Do you think that, maybe not this particular case, but others like it sort of indicate that we’re thinking differently about how we hold both board members and CEOs accountable for what happens in their business in ways that we maybe didn’t before?

SURAJ SRINIVASAN: Absolutely. I mean, again, that is the purpose of writing the case.

BRIAN KENNY: Yeah.

SURAJ SRINIVASAN: Bringing this discussion to the classroom, I must say this is one of the most vigorously discussed cases in all my recent teaching. I teach it with alumni. We teach it in our board programs and other executive programs, and also in our MBA programs. I certainly see an enormous willingness in every class that I’ve seen on engaging with the issue of what is accountability, and how do we hold companies, and executives in companies, to a higher standard than short term financial performance? What form should that take, is the question that we ask here, and how can we do this proactively? This meaning a greater awareness of how business creates value and doing it in a thoughtful, ethical, socially responsible fashion.

BRIAN KENNY: It’s complicated. As the case really clearly illustrates, this is a multifaceted and complicated topic. If there’s one thing you want our listeners to remember about the Amerisource case, what would that be?

SURAJ SRINIVASAN: If there was one big takeaway, as business leaders keep a big, big focus on the social context in which we operate, and whether you’re on boards, business leaders, or people doing jobs at various levels of the organization, keeping our eye on that will help our society get to a much better place, and businesses do much better in that social context.

BRIAN KENNY: Suraj, thanks for joining me.

SURAJ SRINIVASAN: My pleasure. My pleasure. Real pleasure discussing this.

BRIAN KENNY: If you enjoy Cold Call, you might like our other podcasts, After Hours, Climate Rising, Deep Purpose, IdeaCast, Managing the Future of Work, Skydeck, and Women at Work. Find them on Apple, Spotify, or wherever you listen, and if you could take a minute to rate and review us, we’d be grateful. If you have any suggestions or just want to say hello, we want to hear from you. Email us at coldcall@hbs.edu. Thanks again for joining us. I’m your host, Brian Kenny, and you’ve been listening to Cold Call, an official podcast of Harvard Business School and part of the HBR Podcast Network.