ISS report calls for ousting of incumbent directors
By April Hall
Investment advisors and shareholders are crying foul over executive pay at an embattled pharmaceutical company.
Mylan – the drug company that made headlines for jacking up the price of its leading product, the EpiPen, 500% in less than a decade to $600 – is now under fire from an influential shareholder advisory firm and a group of institutional investors over exorbitant executive compensation.
“The continued identification of problematic pay practices and pay-for-performance misalignment, coupled with sustained low support for the say-on-pay proposal, indicate poor stewardship of executive compensation programs by the compensation committee,” said advisory firm Institutional Shareholders Services (ISS), in a report about Mylan.
Robert Coury, Mylan’s non-executive board chairman, received a $98 million paycheck, according to the company compensation summary. But a group of shareholders that control 4.3 million shares of the company said the Mylan former CEO gets other compensation totaling $160 million. (The shareholder group includes representatives of the New York City Comptroller, the California State Teachers’ Retirement System, and a Dutch pension management company, PGGM.)
“Mylan’s board reached new lows in corporate stewardship in 2016,” the group wrote in a letter filed with the Securities and Exchange Commission.
David Nour, CEO of the leadership advisory firm The Nour Group, agrees with the reports on Mylan's compensation structure.
"Many excutive comp plans as they are currently structured, do not work; rather than incentivizing substantial and consistent strategic growth, compensation plans increase disproportionately by every measure," Nour says. "When compensation plans encourage big, blockbuster bets with huge potential upside payoff and limited (for individual execs) downside, the behaviors shareholder will get are the ones they'll tolerate."
ISS also put the blame squarely on the board of directors. ISS wrote in a report that: “Mylan's EpiPen controversy, which has seemingly still not run its full course, has laid bare a record of poor stewardship and responsiveness by the incumbent directors. The board's failure of risk oversight in reigning in or mitigating the risks of an aggressive and therefore inherently risky drug pricing strategy has now resulted in mounting costs – legal, regulatory, reputational, and opportunity – for shareholders.”
The shareholder group has launched a “vote no” campaign against re-electing any of the current board members and the say-on-pay proposal coming up at the company’s shareholder meeting June 22.
Mylan’s EpiPen scandal led the company’s CEO Heather Bresch being called in front of the U.S. Senate’s Oversight Committee to justify the price hike. In response to the backlash, Mylan released a generic version of the EpiPen at half the cost and sent $300 coupons to patients for the name brand of the life-saving medication given to victims of anaphylaxis shock.
The Department of Justice also came after the company for misclassification of the EpiPen that shorted the Medicaid Drug Rebate Program more than $1 billion over 10 years, according to a letter from the Department of Health and Human Services. The company settled the allegation for $465 million.
As a result Mylan has a bumpy financial road. Indeed, the company lost about 4.7 billion in market value in 10 months and shareholder return dropped more than 29%.
“CEO Heather Bresch and President Rajiv Malik felt no comparable financial pain. Both NEOs (Named Executive Officers) still received annual bonuses, which – while lower than in 2015 – exceeded their base salaries,” according to the shareholder group. “In addition, their 2016 stock and option awards increased in value on a grant-date basis over their 2015 awards.” Bresch was compensated $14.1 million and Malik received $8.9 million.
Shareholders are justified in their anger, Nour says.
"When the CEO's actions (along with the Board's stewardship or lack thereof) spur congressional, DOJ, and other government agency investigations into Medicaid overcharging, investors should revolt. $43.6 million equity award for service as non-executive chairman through 2021 for Coury, not to mention his 2016 comp package of $98 million are insulting to shareholders, as it is a gross representation of pay for misperformance!"
However, there may be little accomplished even if the advocates succeed in their campaign to influence shareholder voting. Mylan, which will hold its meeting in the Netherlands where the company is incorporated, has adopted the Dutch rule that requires two-thirds of votes cast to overrule a board nomination and if the nomination is overruled, it’s likely the same candidate would be brought up at a subsequential meeting, ISS wrote.
And as for the say-on-pay, that vote is non-binding.