Tuesday, January 12, 2010

Limiting Stock For Docs On Boards Could Crimp Pharma

Earlier this month, the owner of two prominent teaching hospitals in Boston decided to impose new rules concerning outside compensation and other activities for its most senior officials, who may also sit on the boards of drug makers and biotechs. The initiative comes amid controversy over the extent to which the pharmaceutical industry may influence medical treatment and prescribing habits, an issue that has prompted congressional inquiries into conflicts of interest and has ensnared several drug makers.

And so Partners HealthCare, which owns Massachusetts General Hospital and Brigham and Women’s Hospital, decided not to allow its top people to accept gifts, participate in speaker bureaus or engage in ghostwriting. There are some other restrictions involving institutional purchasing and institutional royalties. But one stipulation is very interesting – senior officials can serve on a board, but are not permitted to receive more than $5,000 a day for board-related work, or accept any stock. And this last prohibition may make life difficult for drug makers.

Why? Corporate governance experts have been arguing for years that board members should hold stock. The reason is simple – in this way, a board member is more likely to feel the pain or gain as much as other shareholders. You know, their interests will be aligned with investors. Under Partners’ rules, a doctor would have to purchase shares on the open market, rather than take stock as compensation, in order to become aligned with shareholders. As a result, drug makers who solicit doctors from these two widely respected teaching hospitals may find themselves running afoul of shareholder activists.

“A director who doesn’t own stock has no business being on a board,” says Charles Elson, who chairs the John Weinberg Center for Corporate Governance at the University of Delaware. “They’re supposed to take cash compensation to buy the stock. And they’re supposed to represent shareholders, so no longer being able to accept stock would be problematic. I think it’s ridiculous. If they feel there’s a conflict, they shouldn’t be on a board. I think they have to choose – either be a director or work for the hospital.”

One doctor – Dennis Ausiello, chief of medicine at MassGen and Partners’ chief scientific officer - apparently made his choice. He told The New York Times that he’ll continue to serve on Pfizer’s board, even if it means forsaking compensation that amounted to $220,000 last year. “I’m very proud of my board work,” he told the paper. “I’m not there to make money. I certainly think I should be compensated fairly and symmetrically with my fellow board members, but if my institution rules otherwise, as they have, I will continue to serve on the board.”

Of course, he can continue to hold previously purchased Pfizer stock, since the new Partners rules don’t require him to sell existing holdings. And Ausiello may have the means to purchase shares on the open market. Presumably, other doctors could afford to do so as well. But it’s not hard to imagine that some doctors may not relish the prospect of being appointed to a board, but receiving limited compensation and being forced to use their own money to purchase stock.

This may sound like a trifling matter. After all, just two hospitals are affected by this policy. But it could become a trend. That’s because the Association of American Medical Colleges has recommended tighter restrictions on potential conflicts of interest. Ann Bonham, the AAMC’s chief scientific officer, tells us that limits on stock holdings will likely be decided on a case-by-case basis by each institution. “Some institutions could decide to limit the salary cap or stock options or something in between,” she tells us. “Some are considering this.”

And if more academic medical centers do institute such rules, this could become a dilemma for drug makers and biotechs, who actively court physicians to join their boards. After all, the pharmaceutical industry wants and needs physicians who have certain expertise and a unique perspective on research and patient treatment. But if it becomes harder to attract physicians, the industry will lose potentially valuable input.
image from flickr user charles fred used under a creative commons license.


Roy M. Poses MD said...


I don't think that making it more difficult for academic medical leaders to sit on pharmaceutical (or biotech, device, health care IT, or health insurance) company boards will be bad for these corporations.

Board members are supposed to primarily represent stockholders. Actually, they have a fiduciary duty to represent stockholders and uphold their financial interests. What would make an academic physician who held few or no shares of stock prior to his/her board appointment particularly good at representing stockholders and upholding their financial interests?

In fact, corporate boards are being increasingly criticized for being deferential to, if not being cronies of hired management.

"The cronyism of major corporate boards, especially those in the finance area, has become legendary. Rubber-stamp directors who rarely buck the chairman or challenge the CEO are unfortunately all too common. These boards did not serve either their companies or shareholders well."

[per Ritholtz B. Bailout Nation. Hoboken, NJ: John Wiley & Sons, 2009. pp. 198-199.]

An academic physician with no prior ownership interest in the company, chosen by management supposedly for medical expertise would seem to be particularly likely to put deference to management ahead of fiduciary duty to stockholders.

Thus, IMHO, it would be good for stockholders (but maybe not for management) to restrict the participation of academic medical leaders on such corporate boards, at least in the absence of prior ownership interest in the companies in question.

(I have also written quite a bit why it would be good for academic medicine not to have its leaders face with the conflict of being board members of health care corporations. See this post on Health Care Renewal: But I maintain that the conflict is bad both for the academic physicians' institutions and for the corporations' stockholders.

If the board feels it needs more medical expertise, it could add practicing or retired physicians (who also were already substantial stockholders) as members. It could also secure physicians in advisory or consultant capacities.

Ed Silverman said...

Hi Roy,

Nice to hear from you. And I don't think it will be bad for the companies, but it might make it more difficult to find physicians with whatever expertise is desired. Might.

Perhaps a board should seek a physician who already holds a certain amount of shares, although whether this can be easily accomplished, I have no idea.

In any event, I wasn't suggesting the restriction proposed by Partners HealthCare is a bad thing. It just suggests, to me, that there is this unintended consequence, which rubs up against what many consider to be good corporate governance.


Anonymous said...

The two of you speak as though "a physician is a physician is a physician." Of course, we all know that is not the case. Boards of Directors need some level of diversity of opinion, experience and expertise. While a garden variety practicing or retired physician may provide an interesting perspective, they typically don't have the breadth of expertise to add significant value and gravitas (yes, that is important as well).

Like all board members, they represent shareholders. However, the reason they have been nominated and elected is to provide a unique perspective that can be leveraged in critical strategic decisions. For pharma (and other technology driven industries), discovery and development are the biggest investments the company makes. Having one or more board members who can view this investment with an understanding of the ins and outs of of the research world can be invaluable. Arguably, while this is important for big pharma, it is probably more important for start-ups that rely on stock compensation rather cash.

Roy M. Poses MD said...

What makes you think that practicing or retired physicians have no gravitas? (And of course, some retired physicians were academic physicians.) I think quite a few of them would be insulted by your remarks (which is perhaps why you are anonymous?)

As I said before, why would shareholders expect that an academic physician with no previous major ownership in the company will suddenly develop a great loyalty towards and understanding of shareholders?

It may be a lot easier to buy research or clinical expertise from an adviser or consultant than to buy loyalty to stockholders from someone who did not start out as one of them.

Flint Einstein said...

quite interesting and informative. keep it up.