(April 4, 2012) — The New York Comptroller and five of the city’s public sector pension funds have called on a major pharmaceutical company to stop insulating its executives bonuses from fines levied for improper business practices.
John Liu and the funds, which are all shareholders in Abbott Laboratories, have submitted a shareholder resolution to be proposed at the annual general meeting later this month.
The resolution was co-filed by a further four institutional shareholders, including European fund manager F&C Asset Management and cited several recent instances of large fines being paid, yet company directors’ being unaffected.
Liu said: “Rewarding top executives with lucrative bonuses when the company pays massive fines for allegedly breaking the law, cheating Medicaid, or potentially putting patients with dementia and autism at risk is just indefensible.”
The group proposing the resolution said that most recently, the company recorded a $1.5 billion charge to cover an expected settlement with the Department of Justice for the illegal off-label marketing of its anti-seizure drug Depakote. The settlement, if reached, would be the third largest in history for the improper marketing of a pharmaceutical.
Lui continued: “By effectively paying for failure, Abbott’s board creates a perverse incentive for management to perpetuate improper practices that harm the company and its long-term shareowners.”
In recent weeks, investors all over the world have been uniting to show their support for better corporate governance, with a definite slant on aligning pay with performance.
Last month, the International Corporate Governance Network launched a model for asset managers to engage with their clients on corporate governance issues. This was followed by stock exchanges around the world agreeing that they should do more to promote better governance, and citing regulators as those who could allow them to do so.
The funds calling for changes at Abbott Laboratories said in their supporting statement: “As long-term Abbott shareholders, we favor compensation arrangements that reward senior executives for generating sustainable value. To that end, we recognize that it may be appropriate to adjust financial metrics for incentive compensation awards to exclude the impact of events that are extraordinary or unrelated to management of the core business. We do not, however, believe it is appropriate to adjust metrics to exclude the financial impact of matters that are central to the company’s business.”
The five New York City pension funds were: New York City Employees’ Retirement System, Teachers’ Retirement System, New York City Police Pension Fund, New York City Fire Department Pension Fund, and the Board of Education Retirement System.
A spokesman for Abbott Laboratories said: “This proposal and the press release by the NY City Comptroller falsely characterize the manner in which Abbott executive compensation is determined. The Compensation Committee of Abbott’s Board of Directors already takes compliance issues into account for the purposes of executive compensation. The proposal specifically focuses on incentive compensation performance goals and inflexible rules requiring inclusion of compliance costs without regard to the facts and circumstances of a particular situation. It is often in the best interests of shareholders to decide to settle a particular legal or compliance matter, such as uncertain outcomes or when the cost of defense outweighs benefits of extended litigation or investigations.”