It’s simple. There is only one question that MPs needed to ask Pfizer’s Ian Read, or any other CEO pursuing a takeover of national size and scope: to what or to whom is your primary obligation as CEO?
Read would have probably said something like ‘building shareholder value by delivering innovative and life-improving therapies’. In its 2013 annual review, Pfizer states its mission as ‘to be the premier innovative biopharmaceutical company’, its four strategic imperatives being to ‘innovate and lead’, ‘maximise value,’ ‘earn greater respect’, and ‘own its own culture’.
The honest answer, however, is ‘maximising value for shareholders’. That is what most directors (including AZ’s) believe and governance codes suggest. And it’s certainly the story that Pfizer’s figures tell. In his letter to investors, Read boasts of handing them nearly $23bn in share buybacks and dividends in 2013, bringing their total cash returns over the last three years to $53bn. Not worth a mention is that that was more than double Pfizer’s R&D budget of $22.8bn and comfortably exceeded its entire net profit for the period – an omission that is as eloquent about the company’s priorities as the numbers.
If shareholders rule, by definition commitments managers give to anyone else aren’t worth a packet of aspirin. But this is just one of the toxic consequences of shareholder primacy that the Pfizer episode points up. Shareholder primacy combined with a fierce market for corporate control, another essential element in Anglo-US governance, results in ‘institutionalised short-termism’, as John Plender put it in the FT, which favours buying and selling over the harder work of boosting shareholder returns through organic growth. ‘Big pharma is no longer in the innovation business, using its own resources to fund the high-risk ideas,’ says Sussex University’s Mariana Mazzucato. It prefers to concentrate on near-term development and rely on small biotech labs and publicly-funded academic research to do the front-edge work. Cutting research overheads and taking advantage of the UK’s lenient tax rates to benefit shareholders (executives prominent among them) is transparently what the AstraZeneca deal was about. This is tantamount to socialising risk and privatising reward, Mazzucato argues – nor much different from the banks.
There are three mighty ironies here. In the aggregate, investors in whose name executives claim to act do not benefit from a shareholder-first regime. Former dean of Toronto’s Rotman School of Management Roger Martin has calculated that shareholder returns from 1977, the beginning of the shareholder value era, to 2010 were lower than in the period from 1933 to 1976 when managers were supposedly empire-building to feather their own nests. The only ones who do consistently gain are short-term opportunistic shareholders like hedge funds – and top executives. Here again, Pfizer is an exemplar.
Its current market capitalisation of $185bn is considerably less than the $240bn it has spent in the last 15 years on three large acquisitions. So it has destroyed shareholder value. But it's not executives who pay the bill. In 2013 the six top managers listed in Pfizer’s proxy statement to the SEC took home $52m between them, more than half in stock. Their average salary of $8.6m is 112 times the Pfizer average and 309 times that of the company’s lowest-paid workers. This is another consequence of shareholder first: the perverse management incentives it generates are the engine of inequality, the wedge pushing top salaries ever up and wages at the bottom ever down. Here is a perfect illustration of the rise of the Thomas Piketty’s corporate ‘super-managers’, at the direct expense of their underlings’ pay and pensions.
The second irony in shareholder primacy is that as well as not working very well it is factually wrong: a fraud based on a myth. ‘Corporate law does not, and never has, required directors of public corporations to maximise shareholder value,’ writes Lynn Stout, distinguished professor of corporate law at Cornell University, in her critique, The Myth of Shareholder Value. ‘Second, closer inspection of the economic structure of public corporations reveals that shareholders are neither owners, nor principals, nor residual claimants. Third, the empirical evidence does not provide clear support for the proposition that shareholder primacy rules produce superior results. Indeed, once we shift our focus from the performance of individual firms to the performance of the corporate sector as a whole, it suggests the opposite’.
In explanation, Stout notes that the theory came out of business schools and economics departments in the 1970s which had little regard for legal niceties; she attributes its enthusiastic uptake to its undoubted appeal to the two powerful interest groups that have monopolised the benefits, corporate managers and short-term shareholders, as well as to free-market ideologues. It has now congealed into an article of faith as impervious to questioning or doubt as any tenet of fundamentalist religion.
The third irony, of course, is that AZ uses exactly the same unreconstructed shareholder discourse as Pfizer, which is why it was vulnerable in the first place.
The implications for any such monstrous tie-up should be clear. A shareholder-value-driven entity of this size of Pfizer and AZ is too big and powerful not to have huge public-interest implications – and the public interest would be to ban it on those grounds alone. It would be too big to fail, and have every incentive to exploit that moral hazard for its shareholders. As the FT’s Martin Wolf decisively noted, the fate of such mergers should not be decided by shareholders, many of whom (as in the Cadbury-Kraft case) have no long-term interest in the company, but by the board in the interests of the company as a whole. Never trust a manager who is driven by shareholder value.