Thursday, March 15, 2012

Despite Recalls, Legal Settlements and Guilty Pleas - A $143.5 Million (or Perhaps $197 Million) Golden Parachute for the Former Drug Representative Who Is Now CEO of Johnson and Johnson

After 30 separate product recalls since 2009, and multiple legal settlements and guilty pleas, we noted that the former pharmaceutical representative who is now the CEO of Johnson and Johnson will be retiring. 

The $143.5 Million (or Perhaps $197 Million) Golden Parachute

The Wall Street Journal just reported his retirement will come with an immense golden parachute:
Johnson & Johnson Chairman and Chief Executive William Weldon stands to collect pension benefits and deferred compensation currently valued at $143.5 million after his retirement, according to new details released by the health-care conglomerate.

The details were:
Mr. Weldon, who will be succeeded as CEO by Vice Chairman Alex Gorsky, stands to collect benefits from two main sources. The present value of his accumulated pension benefits is $48.4 million, portions of which are paid out as a monthly annuity for life, according to Wednesday's filing with the Securities and Exchange Commission.

His pension's value places Mr. Weldon well into the top 10% of CEOs of Standard & Poor's 500 companies, said Paul Hodgson, chief communications officer and senior research associate at GMI Ratings, which tracks corporate-governance information.

Mr. Weldon also has amassed $95.1 million in nonqualified deferred-compensation plans. This represents parts of his salary and bonus that had been deferred in prior years, as well as company contributions to savings plans. Portions of Mr. Weldon's deferred compensation have been recorded each year as part of his total annual pay.

Of the $95.1 million, more than $70 million represents Mr. Weldon's accumulated balance from a legacy cash-incentive plan that J&J has discontinued and replaced with a new executive-compensation plan. This sum would be paid to Mr. Weldon at retirement, J&J said. All deferred compensation is subject to taxes.

Actually, an argument that the $143.5 million figure is an major under-estimate appeared in the Shearlings Got Plowed blog:
The MSM reports calculate only the cash values for soon to be Ex-CEO Weldon, not the present value of his stock options, at today's NYSE closing price for J&J of $65.08. So, that -- plus the vesting of his February 2012 JNJ RSUs and Stock Option awards [see page 45 of the link (but such amounts are ommitted from the year end 2011 proxy, on which the WSJ relied)] -- add about $53.47 million to the Weldon walkaway haul.

Thus, Mr Weldon's golden parachute may be as big as $197 million.

The Board's Justification for the Riches

Of course, the Johnson and Johnson board justified the latest additions to Mr Weldon's wealth, as reported by the WSJ:
In a regulatory filing Wednesday, the board said Mr. Weldon 'successfully managed our company through a challenging economic environment in 2011,' with solid financial results and advances in J&J's pharmaceutical pipeline.

The board added that while J&J made progress in addressing manufacturing-quality issues in 2011, 'continued focus is needed to address critical product supply and quality issues that impact our responsibility of being able to deliver products to patients and customers who need them.'

Johnson and Johnson's Recent Record

The board's upbeat assessment sharply contrasts with Johnson and Johnson's actual recent record.

As we discussed recently, Johnson and Johnson seems to have lost the ability to manufacture high quality products. It has had to make 30 separate product recalls since 2009. The latest was Liquid Infant Tylenol. (The current WSJ Health Blog list of recalls can be found here.)  This seems to be more than a "rough patch," which is how the WSJ article described the manufacturing problems.

In addition, the WSJ article failed to mention that Johnson and Johnson also has an amazing recent record of ethical lapses and guilty pleas, including:
- Convictions in two different states in 2010 for misleading marketing of Risperdal
- A guilty plea for misbranding Topamax in 2010
- Guilty pleas to bribery in Europe in 2011 by J+J's DePuy subsidiary
- A guilty plea for marketing Risperdal for unapproved uses in 2011 (see this link for all of the above)
- Accusations that the company, which makes smoking cessation products, participated along with tobacco companies in efforts to lobby state legislators (see post here)
- A guilty plea to misbranding Natrecor by J+J subsidiary Scios (see post here)
- More recently, in 2012, testimony in a trial of allegations of unethical marketing of the drug Risperdal (risperidone) by the Janssen subsidiary revealed a systemic, deceptive stealth marketing campaign that fostered suppression of research whose results were unfavorable to the company, ghostwriting, the use of key opinion leaders as marketers in the guise of academics and professionals, and intimidation of whistleblowers. After these revelations, the company abruptly settled the case (see post here).
-  Most recently, there are reports that the company is in negotiation with the US Department of Justice to settle other lawsuits about the marketing of Risperdal, perhaps for as much as $1.8 billion (see this BusinessWeek story.)

Meanwhile, an article from the Wharton Business School suggested that the problems at Johnson and Johnson stemmed directly from former drug representative Weldon's management approach, which put short term revenues, "making the numbers," ahead of everything else, apparently including good manufacturing practices, or ethical business practices:
[University of Michigan Ross School of Business Professor Erik] Gordon argues that CEO Weldon's relentless focus on the bottom line -- the company's website touts its record of 27 consecutive years of adjusted earnings increases and 49 consecutive years of dividend increases -- is the reason for the current woes. 'Bill Weldon sets the priorities and the culture for the company,' says Gordon. And the problems, from overly aggressive marketing to underinvestment in safety and quality systems, reflect 'people trying to get their bonuses, hit their numbers and keep their job.'

No doubt the global economic collapse in 2008 put renewed pressure on managers at multinationals like Johnson & Johnson. John Kimberly -- a Wharton management professor and executive director of the Wharton/INSEAD Alliance who has worked with J&J executives in Europe since the late 1990s -- says he detected a shift among those managers starting in 2008. 'I got the sense that there were some things happening at corporate, and that messages were being sent about the need to deliver profitability,' Kimberly notes. 'It seemed as though the people I was working with were feeling pressure from above to pay closer attention to the bottom line. It was a palpable, tangible change.'

Wharton's Donaldson gives J&J management credit for the aggressive steps the company is now taking to overhaul its manufacturing processes and plants. But he also notes that the balance between profits and patients is a tricky one. Managers at J&J, he says, 'are juggling a lot of balls. In the credo, they say they put patients first and stockholders further down the line. But there is a red ball that every manager knows about, [which is] profit -- and they don't let that red ball drop.' Figuring out how to serve patients well and still deliver for Wall Street is not easy. 'J&J believes they can do both those things,' Donaldson says. 'But if the weight of one side of that formula gets too heavy, the entire structure collapses.'


The ongoing news from the once proud Johnson and Johnson, whose credo famously states:
We believe our first responsibility is to doctors, nurses and patients, to mothers and fathers, and all others who use our products and services. In meeting their needs, everything we do must be of high quality.
suggests that instead, the company's first responsibility is now to the hired managers, to obey their dictates no matter how they undermine the credo, and most importantly, to pay them so much as to make them some of the most wealthy people in the world. Johnson and Johnson has become exemplary, not of putting patients or health care professionals first, but of how hired managers took over health care, and turned it to their own advantage.

So should we trust Johnson and Johnson to do better, now that another former pharmaceutical representative will be its new CEO?

The case of Johnson and Johnson indicates why we need a huge change in how health care organizations are lead.

Health care organizations need leaders that uphold the core values of health care, and focus on and are accountable for the mission, not on secondary responsibilities that conflict with these values and their mission, and not on self-enrichment. Leaders ought to be rewarded reasonably, but not lavishly, for doing what ultimately improves patient care, or when applicable, good education and good research. On the other hand, those who authorize, direct and implement bad behavior ought to suffer negative consequences sufficient to deter future bad behavior.

If we do not fix the severe problems affecting the leadership and governance of health care, and do not increase accountability, integrity and transparency of health care leadership and governance, we will be as much to blame as the leaders when the system collapses.


Steve Lucas said...

Two thoughts come to mind. First: Tress do not grow to heaven. There are limits to growth and revenue.

Second; There is a marketing myth that once everyone has your product you need to then sell them a second item.

Major companies now believe in never ending revenue increases driven by increasing sales pressures combined with our old friend cost cutting.

I was taught early on there were limits to markets and thus limits to revenue.

This simple concept seems to have been lost by these major corporations in their executives pursuit of personal wealth.

Steve Lucas

JPB said...

Another shocking example of corporate malfeasance - I still wonder HOW we stop this madness?