Source: When a Company Is Making Money From the Opioid Crisis|The Atlantic
Originally published September 6, 2017
Some shareholders of a major drug distributor are arguing that the company’s goals should be more in line with society’s.
JOHN MOORE / GETTY
“We were texting when he OD’ed” and died, an Ohio acquaintance of mine told me in a May catch-up phone conversation about a young man we both knew. “He’s, like, the third one in the last 10 days,” she said. She’d had a relapse, too, while she’d been pregnant. Her baby, like her other children, was removed from her care, becoming one more in a wave of children flooding child-services agencies.
The crisis can be attributed to many parties—drug manufacturers, drug distributors, unscrupulous doctors, and, of course, drug dealers, smugglers, and users—some of whom are profiting from it. Last month, a group of shareholders of one distributor strove to bring the company’s goals more in line with society’s.
The shareholder vote, which isn’t binding—McKesson says it’s still reviewing its current compensation plan—may seem like a minor slap over an esoteric bit of corporate governance, but it was a notable exception among public companies. According to the consulting firm Compensation Advisory Partners, of 447 say-on-pay votes among S&P 500 companies this year before early August, only five, including McKesson, suffered rejection. The Teamsters view the outcome as a success, especially at a time when unions’ power has waned. “Unions have been pushing for years for standard good-governance practices” in companies, says Michael Pryce-Jones, the union’s senior governance analyst. “This has importance across political divides.”
During the Progressive era, Americans concluded that companies could not be counted on to prioritize the greater good. So they passed laws like the Pure Food and Drug Act. Over the decades, the country kept developing new ways to keep business in line, with agencies like the Federal Trade Commission, the Securities and Exchange Commission, the Environmental Protection Agency, and, more recently, the Consumer Financial Protection Bureau. All along, the animating idea has been that, without oversight, corporations can do significant social damage.
But starting around 1980, the gospel of “shareholder value,” the assertion promoted most famously by the economist Milton Friedman that a company’s only responsibility is to its investors’ financial return, became ingrained in corporate thinking. The dogma lent a simplistic, and welcome, cover to executives. They found their decision-making ruled by a binary choice: It was either good for shareholder value, or bad.
The Friedman doctrine further took hold as it was adopted by business schools training future leaders. “They did a great job of claiming business ethics is different from ethics,” the journalist Duff McDonald, the author of The Golden Passport: Harvard Business School, the Limits of Capitalism, and the Moral Failure of the MBA Elite, says of business schools like Harvard’s. “Like it’s such a complicated thing to be CEO of a company?” he says sarcastically. “Like some [CEO] decisions are harder than the rest of ours?”
Nelson, the McKesson spokesperson, insists the company feels no tension between its bottom line and social responsibility. Its very purpose, she says, is to deliver better health. She cited an acronymic corporate motto: “I CARE,” which stands for “Integrity,” “Customer first,” “Accountability,” “Respect,” and “Excellence”—the implication being that the company’s practices embody these values.
John Paul Rollert, who teaches ethics at the University of Chicago’s Booth School of Business (and who writes frequently for The Atlantic), agrees with McDonald that there isn’t—or shouldn’t be—any real difference in standards between “business ethics” and human ethics. “If you pass someone, and they are drowning in a shallow pool of water, and you will not be in danger from saving them, must you save them?” Rollert asks, posing a classic ethical hypothetical. He says the law’s answer is no, but morally, he argues, the answer is yes. And he says that’s as true of companies as it is of people, even if that cuts against the material interests of shareholders. “To me, that’s easy. It’s a shame we would see it as any more complex than that,” he says.
But shareholder-value reasoning has led many companies, and the people who run them, astray. Cases of corporate malfeasance and outright lawbreaking are numerous and ongoing. As McDonald notes in his book, citing research quoted in a 1989 article in Time, between 1975 and 1985, two-thirds of Fortune 500 companies were convicted of serious crimes. Time after time, corporate executives have proven that they’re willing to lie to protect revenues. In 1994, tobacco executives testified under oath before a congressional panel that nicotine in cigarettes was not addictive, though plenty of research showed it was. The turn of the century was plagued with scandals—most famously at Enron, WorldCom, and ImClone. More recently, Wells Fargo revealed that its employees had opened 1.4 million more unauthorized accounts than had been previously estimated (making the latest estimate roughly 3.5 million in total), and Volkswagen continues to reel from the emissions-cheating scandal first revealed in 2015.
Distribution of opioids is supposed to be tightly regulated by the DEA, and companies are required to take steps to ensure that the pills are not diverted for illicit use or sale. But in 2007, the government charged McKesson with failing to report suspect opioid orders from some of its customers. In 2008, the company paid a $13.25 million penalty for its failures and entered into a memorandum of understanding with the government. It promised to develop a controlled-substance monitoring program, or CSMP, and to report any suspicious orders.
According to the government, McKesson did not keep its word. The Department of Justice charged that the company “failed to follow the procedures and policies set forth in the McKesson CSMP to detect and disclose suspicious orders of controlled substances”; it did not conduct due diligence of customers, did not keep adequate records, and did not follow requirements for reporting suspicious orders, the DOJ alleged. McKesson did acknowledge that “it did not identify or report to DEA certain orders placed by certain pharmacies which should have been detected by McKesson as suspicious.” Meanwhile, the company’s CEO and board chairman, John Hammergren, realized $692 million over the past nine years, thanks partly to the run-up in the company’s stock as its business thrived.
In January, McKesson paid a $150 million penalty and agreed to suspend distribution from some of its centers. In a statement, McKesson says that it acceded to the financial penalty “rather than engage in time consuming, contentious and expensive litigation.” Instead, it “chose to … devote our resources and focus towards expanding and enhancing our CSMP and sharing the details of our enhancements with the government, and brainstorming potential solutions for this nationwide epidemic that has many causes.” A company representative told me that McKesson has been working on diversion prevention for many years, that its role is merely to supply drugs to doctors, pharmacists, and hospitals, and that there was a misunderstanding within the industry’s supply chain—the links being drug makers, distributors, prescribing doctors and pharmacists—of how to define a suspicious order.
As it happened, the Teamsters owned stock in distributors of opioids, including McKesson, and the union was concerned with the $150 million penalty and the reputational damage to the company. The Teamsters also had heard from union members who’d been personally touched by the addiction epidemic, and figured they had a way to hold McKesson responsible. The union mounted its campaign against the compensation plan and on another issue, to separate the jobs of CEO and board chair. (That one failed, though the company subsequently announced it would split the jobs anyway, but only after Hammergren leaves.) Many reformers have tried to correlate good governance with improved returns, Pryce-Jones, of the Teamsters, says, “but I look at it another way. Jobs, society, communities suffer from bad governance. Boards were asleep at the wheel in this opioid crisis. Poor governance has collateral costs to many segments of society.”
Indeed, many economists, researchers, executives, and activists have over the years explored alternative frameworks for corporate decision-making. A paper released last month by the Booth School of Business suggests one way to weave human ethics into companies. In the paper, titled “Companies Should Maximize Shareholder Welfare Not Market Value” Oliver Hart, a Harvard economist, and Luigi Zingales of Booth, argue that benefiting shareholders should not necessarily be just about financial gains. Shareholder value is a narrow criterion, and investors, as is true of the Teamsters, also ought to have ethical and social concerns.
But, as Hart and Zingales point out, “proposals which deal with general political, social, or economic matters” do not accord with SEC regulations and court decisions on what’s suitable for shareholder voting, citing the example of New York’s Trinity Church, which attacked Walmart’s sales of guns with high-capacity magazines. When the church tried to force a shareholder vote on board oversight of products representing a threat to public safety, the SEC and the courts allowed Walmart to keep the proposal off the table. (Months later, Walmart later banned them, and assault rifles, anyway.) “Law and regulation,” Hart and Zingales write, “have not helped to prevent the amoral drift.” So they suggest allowing shareholders to vote on some such proposals, to accept responsibility for the actions of the companies they invest in. By doing so, shareholders may reveal that they’re willing to sacrifice a little profit in the name of their own, and society’s, greater welfare.