When executive compensation is tied solely to short term profits, and not balanced against company payouts for wrongdoing, there’s an increased incentive for executive fraud.
Recently Wells Fargo bank made headlines when bank employees opened million of fake accounts in customer’s names to meet quotas. Wells Fargo CEO testified before congress and passed the blame on to low level employees who were fired. Unsurprisingly, no executives were terminated, a fact that Massachusetts Senator Elizabeth Warren took issue with.
“You haven’t resigned, you haven’t returned a single nickel of personal earnings, you haven’t fired a single senior executive. Your definition of accountable is to push the blame to your low level employees… it’s gutless leadership.” – Senator Elizabeth Warren (D) Massachusetts
Alex Gorsky was vice president of marketing for Janssen, a subsidiary of Johnson & Johnson, from 1998 – 2003 when the Department of Justice accused J&J of fraud regarding marketing and a kickback scheme of the company’s antipsychotic drug Risperdal. Despite the scandal in which the government’s motion claimed Gorsky “was actively involved in matters at issue in this case” and “has firsthand knowledge of the alleged fraud,” Gorsky was promoted to chief executive officer in 2012.
Several Plaintiffs, boys who grew female-like breasts after taking Risperdal at a young age, have been successful in their suits against J&J, including a $70 million verdict and an $8 billion punitive damage award currently under appeal. Risperdal litigation is still working its way through the courts, with over 6,000 pending cases in Philadelphia courts alone.
You can read the complete story of the Risperdal scandal on Huffington Posts’s digital docuserial American’s Most Admired Lawbreaker.
However, the opioid crisis my very well be the best example of CEOs cashing in despite massive corporate fraud that resulted in the death of an estimated 500,000 Americans and cost the tax payers over $1 trillion.
NPR reports Steve Collis, CEO of AmerisourceBergen, was set to receive $14.3 million, a 26% raise, for his work in 2020. The same year the corporation tentatively settled with state and local governments for $6.6 billion, an amount said to “wipe out nearly a decade’s worth of company profits.”
Shawn Wooten, Connecticut’s state treasurer, argues that Collin’s pay should have included factors such as “repetitional harm and societal harm.”
AmerisourceBergen, like all other defendants in the opioid lawsuit, admits no wrongdoing despite agreeing to a hefty settlement. The corporation maintains that Collis pay is appropriate based on “pay-for-performance principle that executives should be rewarded when they deliver targeted financial results.”
Herein lies the problem. 1. Corporations are not held accountable for fraud because they are too big to fail. 2. Executives are rarely help accountable by the government because of the complicated nature of indicting executives within the statute of limitations. 3. The corporation’s board members do not hold the executives accountable because doing so may be seen as admitting to wrongdoing. The end result is a corporate culture which incentivizes fraud.
Charles Elson, University of Delaware’s expert on corporate governance and ethics, noted this is common behavior for American corporations. These losses, like the billions in settlements for opioids, will not be born by the executives, but instead will typically be passed on to the shareholders.
“The shareholders are not simply a group of people on Wall Street, the shareholders are in fact all of us who were damaged as well. I think that’s why it’s galling to see [executives] rewarded.” – Charles Elson, University of Delaware
As U.S. Corporations Face Reckoning Over Prescription Opioids, CEOs Keep Cashing In, NPR, March 28, 2021
Novartis CEO’s take-home pay jumps 59%. But there’s one miss—ethics, Fierce Pharma, March 6, 2020