"Ethics is knowing the difference between what you have a right to do and what is right to do." -- Justice Potter Stewart
Welcome to the inaugural post for the Ethical Capitalist, a non- partisan blog that will comment on current events focusing on business, politics and human behavior.
About 15 months ago, I was asked at a cocktail party about my position on the next presidential election. At the same time, Donald Trump was bilking and litigating in relative obscurity, and Colonel Sanders had a Q rating well above his older brother Bernie. To the casually political like myself, it appeared that the race was going to be between America’s post-Kennedy royal families - Clinton v. Bush. I responded with a terse, “wake me when it’s over”.
Not even one month later, Trump announced his candidacy and along with Melania, he pulled the whole country down in that escalator ride. Since that moment, I have been transfixed with the presidential race. I am addicted to Real Clear Politics, relentlessly pouring through articles and commentary ranging from Breitbart/Fox to the New York Times. Who needs grad school when you can get a “Masters in Humanity”, with the race tying together political science, psychology, sociology, history, foreign affairs, anthropology, ethics, journalism and communications. I find it thrilling to connect the dots and come to some conclusion only to read the same conclusion days later in the Wall Street Journal editorial page (a cheap thrill indeed). Unfortunately, some of the conclusions that I have reached are disturbing, and test my faith in mankind. But I take some solace in the fact that sometimes you need to break something before you replace it with something better (did you hear that Republican Party?).
There will be ample opportunity to discuss politics going forward, but this comment is about the drug maker Mylan and its marquis product, the EpiPen. As most now know, the EpiPen provides a life saving dose of adrenaline to people who are experiencing a severe allergic reaction. Mylan acquired the EpiPen in 2007 and since then has raised the price from $100 to over $600 for a two-pack (note: the adrenaline that comes in the EpiPen costs $1/dose). It was able to make this increase because the EpiPen enjoys a virtual monopoly.
Apparently, pricing a $6 life saving product at $600 is upsetting to many people, especially parents of school aged children with allergies who needed a pack or two or EpiPens for back to school. When Mylan CEO Heather Bresch was asked about that on CNBC she replied, “nobody is more frustrated than me.” While I doubt that is true, what is indeed true is her next statement to the New York Times. “I am running a business,” she said. ”I am a for-profit business. I am not hiding from that.” But don’t drug cartels run for profit? So what is the difference? Well, for starters, raising prices for the EpiPen is not illegal. So if it’s not illegal, and it’s a for profit business, then there shouldn’t be a problem. Capitalists and shareholders rejoice!
But wait, there’s more. Would you think it’s a problem if Ms. Bresch was awarded an MBA by West Virginia University which was then run by a former Mylan lobbyist, despite the fact that she did not finish her coursework? Would you think it’s a problem if her pay also increased by 600%, to a staggering $19mm in 2015? Would you think it’s a problem if that pay package was approved by the lead independent director, and that the Mylan HQ sits on a piece of land that Mylan purchased from that director without disclosing it? Or that the company rejected a takeover bid at twice the stock price (perhaps to keep its management and board and its hefty compensation packages in place)?
In fact, none of the facts listed above change the conclusion that Mylan was well within its prerogative as a for profit business in raising the price of the EpiPen. While the media and legislators raise all of the above-listed factors in criticizing the price increase, none of them are relevant. While the price increase is uncomfortable to many, and may be a poor long term choice for the business, it is well within capitalism. That the EpiPen is a life saving drug does not change the calculation. And while getting paid $19mm feels excessive, it is not unethical.
But the EpiPen price increase has shined a light on other unseemly behaviors at the company and what certainly appears to be a violation of the board’s fiduciary duty to the shareholders (which has been masked by a healthy price increase of the shares). Ms. Bresch has committed resume fraud and the board should have asked for her resignation. Second, the lead outside director, who was enriched by the company, approved Ms. Bresch’s pay package which is an obvious conflict of interest. Third, the board rejected a takeover bid at twice the share price, something clearly more in its and management’s interest rather than the shareholders.
My conclusion is that it is unethical is to run a company where the board and the management’s primary goal is to sustain and increase their compensation levels (over $300mm in the last 5 years for senior management), and are willing to overlook false resumes, conflicts of interests and big shareholder paydays to do so.
Let me be clear. Capitalism is a system. It has no ethics to it. It is best system on earth for enlarging the economic pie of a country. But with that enlarged pie comes the challenging part of dividing it
up. That division is not up to capitalism itself, but to the capitalists. And a word of warning to the capitalists at the top of the pyramid, if you don’t do a better job sharing it with your shareholders, employees and customers, you will be rich, but spending a lot of that excess cash on “pitchfork protection”.