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What Can Investors Do About the Opioid Crisis?

 

In the U.S. alone, it is estimated that more than 130 people die each day from overdosing on opioids and millions more abuse prescription pain relievers every year. With the aggregate litigation costs for companies involved reaching nearly $50 billion, investors have also had to bear the cost of the pharma industry’s mistakes.* How did the use of opioids as a painkiller spiral into the addiction crisis it is today? And how can changes be made in the future to mitigate this crisis?

Enter the Investors for Opioid and Pharmaceutical Accountability (IOPA). The group, which had 67 members with over $4 trillion in assets under management as of July 2020, uses investor engagement to make changes within the entire supply chain to hold companies accountable for their actions.

Meredith MillerChief Corporate Governance Officer for the UAW Retiree Medical Benefits Trust, joins Catherine McCabe to discuss how IOPA was formed, how it engages with three main subgroups of the opioid supply chain, and their initiatives around corporate governance through 2021 and beyond.

*SOURCE: https://www.opioidsettlementtracker.com/globalsettlementtracker/#currentglobal


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Meredith Miller:

As we began sort of peeling the onion on the opioid crisis, we really began to see that this supply chain, meaning the manufacturers and distributors and retail pharmacy folks, that they really had a line of sight that we felt was direct enough. And one where accountability came into play. Whether it was a line of sight of suspicious activity, a line of sight of orders or impact. And I think that that was one of the most compelling arguments for us to sort of circle around those companies.

Michael Torrance:

Welcome to sustainability leaders. I'm Michael Torrance, chief sustainability officer with BMO Financial Group. On this show, we will talk with leading sustainability practitioners from the corporate, investor, academic, and NGO communities to explore how this rapidly evolving field of sustainability is impacting global investment business practices and our world.

Disclosure:

The views expressed here are those of the participants and not those of Bank of Montreal, its affiliates, or subsidiaries.

Catherine McCabe:

Hello everybody. Welcome to the BMO Sustainability Leaders podcast. My name is Catherine McCabe, and I've been a member of the responsible investment team at BMO GAM based in London since 2018. I cover the responsible funds, the screening for our specialists, ESG strategies. And I also cover public health issues. And I'm delighted today to introduce Meredith Miller. Meredith is the chief corporate governance officer for the UAW Retiree Medical Benefits Trust, which is the largest non-governmental purchaser of retiree health care in the U.S. covering more than 850,000 members. Meredith, great to have you on the podcast today.

Meredith Miller:

Oh, thank you. Thanks Catherine and BMO for inviting me.

Catherine McCabe:

Absolutely. So just to give you a bit of context. So BMO GAM actually decided to join the Investors for Opioid & Pharmaceutical Accountability back in November, 2019. In this podcast, I'll refer to this organisation as the IOPA as well as the I. O. P. A., they are both the same thing. I myself have found it's so interesting to join the conversations with the IOPA to really learn more about the impact of the opioid crisis. And how as well companies can be held accountable for that actions.

Catherine McCabe:

Just to set the scene a bit really because the opioid crisis has had such devastating impact in the U.S. But I do recognize that in other countries although they have been affected, the impact has been more limited. And in the UK for example where I'm sitting, I think most are familiar with the dangers of heroin abuse for example. Heroin is in fact an opioid. But because prescription opioids are prescribed far less frequently and they're far less spoken about than in the U.S., the risks associated with them are not widely understood.

Catherine McCabe:

So I just briefly wanted to explain what actually is an opioid. So opioids are a broad group of pain-relieving drugs that act on the nervous system. And there's a difference between opioids and opiates. So we have morphine and codeine as opiates. These are actually naturally occurring chemicals found in the opium plant. And then we have semi-synthetic opioids like oxycodone and hydrocodone. These are manmade chemicals derived from naturally occurring opiates. And then we have the synthetic opioids. Though these drugs have been created, they're manmade, and they mimic the effects of opiates, but they're not actually derived from the opium plant. And examples of synthetic opioids include methadone and fentanyl. So what is the opioid crisis? I just want to set the scene and explain why the IOPA really was formed in the first place.

Catherine McCabe:

So prescription opioids, they can be prescribed for moderate to severe pain after surgery or injury. And also, they can be used to treat pain from health conditions like cancer. And they definitely have legitimate medical uses. However, they can be addictive. And due to a combination of different factors, opioid abuse has spiraled in the U.S. since the 1990s, when pharmaceutical companies began to introduce new opioid based products. Very much emphasizing that safety, efficacy, and low potential for addiction. And in short, the heavy promotion of these products led to widespread use. So we find ourselves in a situation where more than 130 people in the U.S. die every day after overdosing from opioids, and millions abuse prescription pain relievers every single year.

Catherine McCabe:

Really the scale of the opioid crisis is extraordinary. It's a real tragedy. And in addition to the public health impacts, including obviously the premature death toll, the economic burden is very significant. And there are myriad costs to society. Including healthcare costs, criminal justice costs, education costs, the list goes on and on.

Catherine McCabe:

So the Investors for Opioid & Pharmaceutical Accountability was really created to try to address the underlying issue. So which companies are actually responsible for the opioid crisis? And how can we try to address those issues through looking at their governance practices? So without further ado, Meredith, I think it would be very helpful to hear in your own words why the IOPA as I'll refer to the investor group from now onwards as was started in the first place. And what's your personal view on this crisis as somebody based in the U.S. with more of a fast hand view?

Meredith Miller:

Thank you, Catherine. That was a really great comprehensive round up on the problems that we faced with the opioid crisis and the evolution of the crisis. And I think it was important that you said that there is inappropriate balance and use of opioids as a painkiller. And we recognize that. And we also recognize the importance of all of the drug companies in the supply chain for opioids in terms of their role for our healthcare markets.

Meredith Miller:

But the investors joined together actually sort of, it was almost like a combustion. It was a meeting of several groups at the same time in 2017. We had faith-based groups coming together with mainstream investors. It was a pretty unusual joining all out of the keen concern about the impact that the opioid crisis had on the economy. And not just on the companies in which we invested in of course, in the impacts on shareholder value. But as you said, the way that the opioid crisis was affecting the healthcare markets in general, our individuals and participants in our plans and in our communities.

Meredith Miller:

And when we look back at what we were looking at in 2017, you can almost see it as a systemic risk. It became the kind of problem that many people liken to the tobacco industry and the recognition of the addiction of tobacco. So investors really began to take a look at the supply chain companies that one would consider within the opioid business, and what were the risks in those supply chain. And when we speak about opioid supply chain companies, we're really referring to the manufacturers, distributors, and the retail pharmacies. So I would say that it really came together out of the recognition of the keen business risks, economic risks, and health risks that all came together at that time.

Catherine McCabe:

Yeah, absolutely. And I think one thing I find so valuable about joining the IOPA meetings is that there are lots of different viewpoints, because the members are so diverse. I've been really struck by the fact you have faith-based, sustainability, public, and labor funds. And different perspectives obviously add to the conversation. And I think what's extraordinary about the group is really its membership growth has been so rapid, very much drawing attention really to the seriousness of the problem. Why do you think that this issue has captured so many investors since the founding of the IOPA in 2017?

Meredith Miller:

I think you hit it right on the head. We have such a diverse membership. And some of the members in the IOPA started their work right before 2017 when we came together. When we look back in 2017, we had 30 members. That represented 1.3 trillion in assets under management. And as of July, 2020, the coalition has grown to 67 members with over 4 trillion in assets under management.

Meredith Miller:

And I think that this cross-section of faith-based, and labor, and public sector funds, we have comptrollers and treasurers, and sustainable investors, and health funds like the UAW Trust. We came together to both meet the needs that we felt of the plan participants as well as our investments. But in large part, we had some catalysts within the group, within this diverse membership. At the time in 2017, the teamsters had, and the state treasures also in consultation with Segal Marco advisors had started engaging early on with the opioid distributors. And they had some success with McKesson in particular. They were able to get one of the first board risk assessment reports.

Meredith Miller:

And then that happened, sort of at this very same time, there was this significant call to action from the members of the Interfaith Center for Corporate Responsibility, which we always refer to as ICCR. That's a broad based investor group, investor-focused, faith-based, and sustainability fund coalition. And ICCR has had probably over two decades, if not three decades of successful engagements with pharmaceutical companies on a whole range of governance issues, corporate governance issues. So this sort of catalyst of success and identification sort of came together. And while we started, and just to explain the pharmaceutical accountability piece. What we call the IOA in 2017 was the Investors for Opioid Accountability. One of the reasons we also grew was because in 2019, we expanded the focus of the coalition to include companies that were not opioid companies, but actually came under similar allegations or claims. And I'm talking about regulatory and legal claims for anti-competitive practices, which may include price collusion, or off-label promotions, or various other kinds of market practices which may for example, keep biosimilars or generics off the market.

Meredith Miller:

So in some ways, the IOPA kind of drew together and began coalescing around what were the governance, compliance, and compensation issues that we could begin to examine at the board level and board oversight, and really begin to take a look at the kinds of corporate governance reforms for us to feel confident that were in place so that this opioid crisis wouldn't happen again. But also, that we were able to take a look back during the years where it was really beginning to grow and become a problem.

Catherine McCabe:

Yeah, no absolutely. And I think what's really added weight to the dialogue with companies is the fact that obviously now, the IOPA represents over 4 trillion in AUM. And that means obviously if we have dialogue with companies by letters or via meetings by calls, for example, that really adds weight to the conversation and makes sure that companies pay attention. Obviously it has to be said, not all of the companies involved in the opioid supply chain are household names, but they are often very large companies which have historically been I would say a bit more resistant to engagement. So it's really critical that different investors can come together and act effectively as one group.

Catherine McCabe:

Just to touch on what you said earlier about engagement with manufacturers, distributors, and retail pharmacies, obviously there are lots of different pieces in the puzzle when it comes to trying to address the underlying issues causing the opioid crisis. And I think it would be helpful if you could explain why it's so important to engage companies across the opioid supply chain.

Meredith Miller:

Yeah. Thank you. I think that's a really important point. First, I want to hit on something that you said which was sort of which groups make up the opioid supply chain, the manufacturers, the distributors, and the retail pharmacies. And some folks in your audience may be saying, "Well, why didn't they go after providers? Or why aren't they interested in engaging with other entities that may be involved in opioid prescriptions, physicians, others?"

Meredith Miller:

And first, it's probably sort of a sensible approach that we invest in these companies. So first of all, we need to be equity holders or bond holders in these companies. But also, as we began sort of peeling the onion on the opioid crisis, we really began to see that this supply chain, meaning the manufacturers, and distributors, and the retail pharmacy folks, that they really had a line of sight that we felt was direct enough, and one where accountability into play. Whether it was a line of sight of suspicious activity, a line of sight of orders, or impact. And I think that that was one of the most compelling arguments for us to sort of circle around those companies.

Meredith Miller:

One of the other reasons why we picked those three sort of subgroups within the supply chain is that they presented distinctly different but complimentary business risks. So when we look at the manufacturers, there were allegations. And I guess I should've said this at the start that the companies you and I are talking about and the topic that we're discussing today is that these opioid companies are facing massive litigation. There are over 10,000 cases that have been filed by counties, and cities, and states across the United States. And some of them have been consolidated in multi-district litigation, and some of them are being pursued by the attorney generals. And there's other related litigation. We just saw other litigation coming out from regulatory agencies as well.

Meredith Miller:

So when we looked at what was it that was opposing the source of these claims and allegations, there were claims that manufacturers had downplayed the highly addictive role that the opioids could play. And they may have oversold the ability of the opioids in terms of dealing with pain. Or they may have promoted off-label promotion of the use of the drugs. So the manufacturers had their own set of risks that went along with their production in the supply chain.

Meredith Miller:

The distributors faced allegations of failure to report suspicious orders to the DEA. And that is the Drug Enforcement Agency in the United States. And that is a key compliance obligation and raising red flags. Those were the claims that suspicious orders were not run up the flag pole in a timely fashion. We had a number of reports. And you could look at the distribution in Pennsylvania, and West Virginia, and Ohio. And there are stark numbers and incredible reporting in the Washington Post about the number of opioids that were distributed in towns where they way, way and tripled the number of citizens that could have been there. So it was concern that there were drop-offs at places that were using them obviously in ways that were not being able to track. They may not meet compliance standards.

Meredith Miller:

The concern also is that in the United States, the three distributors. AmerisourceBergen, Cardinal Health, and McKesson control over 85% of the market. So it's not as if we have the sort of inability to look at arc, which is the data that the DEA uses in order to try to assess distribution patterns. At least this is what we read from the legal cases.

Meredith Miller:

Now the retail pharmacies fac similar claims for their role. Some of the legal allegations describe them as both a distributor and a dispenser of opioids. Coming both under the DEA rules, as well as being a dispenser themselves to their own immediate customers. So all three groups have also come under legislative scrutiny as well in terms of oversight hearings. So this is really an important way in which they could potentially be seen as working together and having different types of compliance obligations.

Catherine McCabe:

Yes. Absolutely. That makes sense. And they all have contributed in different ways to the crisis. And I just wanted to dig in really to the business risk aspect of the opioid crisis. Obviously the public health impact of opioids have been much discussed, much publicized. But in terms of the business risk as you said Meredith, the legal ramifications of the opioid crisis have been absolutely extraordinary. And so many companies have faced multimillion dollar fines. And what this really boils down to I think is difficulties with business conduct, particularly when it comes to the oversight of opioid manufacturing, opioid distribution, opioid retailing. And because opioids prove to be so profitable, it seems that in certain cases, companies were willing to turn a blind eye to really what was going on behind the scenes. And as you mentioned, sometimes one dispensary would be giving out a huge number of opioids comparatively speaking. But that was not picked up. And nobody thought to really crack down on cases. So thinking about how we can try to really address the issues on the ground, why is corporate governance and the oversight of the underlying issue so fundamental to really tackling the underlying issues?

Meredith Miller:

That's a great question. I think in terms of being an institutional investor, our best leverage, and we rely on the directors to represent our interests along with of course the interest of the company. We're sort of one in the same. So when we were thinking about strategies, and corporate governance, and opioids in the opioid crisis, we really were looking to the directors for the level of oversight that they had performed in terms of the practices. And also, how effective that oversight was. So we kind of looked at it in three tranches. We looked at the board level governance, what committees were responsible. Not only what committees were responsible, but what information was coming up to the board, who was providing that information. And then how was the board going to continue going forward in terms of monitoring the controls and also providing ample opportunity for employees through whistleblower and other protections to be able to voice concerns?

Meredith Miller:

The other area that we looked at was compliance. And in this situation again, we were very interested in understanding what kind of controls were in place. What kind of reporting was coming up through the management system. Whether it was decentralized or centralized. What kind of, I guess also sort of disincentives were in place for compliance violations. And then again at the board level, what committees were responsible for compliance and regulatory oversight.

Meredith Miller:

And then finally, we looked at compensation. You know from your own experience and expertise that investors often see compensation as one of the clearest and best windows into the integrity of corporate board decisions. And in this case, we were really trying to understand how executives and people with risk responsibility and risk decision-making were being compensated. And then in the situation of opioids, it's more than just executive level and management level compensation. It's really looking through the entire organization down to the sales and marketing workforce. And what kind of incentives are in place that may have put undue pressure or may have created perverse incentives in terms of marketing of opioids.

Meredith Miller:

So compensation, both in terms of the way that pay is structured, but also in ways in which there's this nexus between compliance and compensation so that they're built in tools that can encourage the highest ethical standard. And I can go into that in more detail. But that really was part of the strategy to try to get at how we could both understand the board's oversight and effective management of these three areas. But at the same time, engage with boards to try to bring to fore best practices that we had learned from our own experiences with other industries to bring them to the table. And to say that we thought implementing some of them would make the board and the system not only more accountable, but also transparent as we go through the next phase. We're sort of facing a different phase now in the opioid litigation and with the opioid companies. We're really heading into the near term settlement phase. And that presents another set of governance issues which I'm happy to talk about as well.

Catherine McCabe:

I think there's so much that could be covered on corporate governance. And I think just to pick up on what you said, I think it's a very relevant point that good corporate governance practices when it comes to trying to address opioid related risks are very much applicable when it comes to looking at other business misconduct issues. And absolutely when it comes to good compensation practices for example. To try to discourage misconduct, we can apply the same principles really across the board. And that's been a very positive avenue really to try and obviously spread best practices and try to see positive results all across industry basis.

Catherine McCabe:

And just to pick up on reporting. I mean obviously in recent years, we've seen such a huge rise in ESG reporting. Absolutely across all issues, across all industries. And when it comes to the companies involved in with exposure to opioids, we've seen that as well. And one key angle which the IOPA has been focusing on is a publication of a board risk reports. And it would be helpful Meredith if you could just explain what that is and what you see as the benefits to that report.

Meredith Miller:

Sure. We've been very, very fortunate. Should have said this at the beginning, but the IOPA is co-led by Mercy Investments. So it's jointly led by the UAW Trust and Mercy. And Donna Meyer is my peer, my co-leader. Donna has worked mightily with the Illinois State Treasurer's office and together in sort of creating this board risk report ask. And then evaluating the reports once they come in.

Meredith Miller:

So the goal of the board risk report was here you have an incident, and you're trying to encourage a board risk assessment to look back at the compensation compliance and governance practices. We ask boards to go back to 2002. We looked at it, we customized it for each company based on the timing. But for the most part, we were asking companies, the boards to go back in time and look at how any of those three strategies, governance provisions may have affected the allegations that they're under right now. And then what were they going to do to change going forward?

Meredith Miller:

Now it was an assessment of not only that, but also political lobbying and contributions for certain trade associations and professional organizations that may have worked to undermine DEA legislation. So that's really where some of the political expenditure piece fit in. And the board risk report on top of sort of asking for the look back and look forward was also one where the two more sort of important points about it. One was we asked for each of the companies to have a preamble at the beginning where they would explain what their markets were and what they actually made. There were a number of companies that had discontinued like Endo, discontinued Opana. And some companies had also either sold off or merged. But then we were trying to trace as you said in your introduction, we were also pressing companies to talk about whether they had global sales and whether they were continuing to sell under a different name or with a partnership, business partnership in another country. So that we could track because of the increased scrutiny in the United States by the regulatory agencies and the courts.

Meredith Miller:

So part of it was really understanding the market exposure and the sales and distribution of opioids. And then the second was really understanding the board governance structure where it was lodged, where it had been. And then really getting into a little bit more on the compliance and the reporting up structure, and the compensation where we were at the same time. And I know we'll talk about this in a bit, but we had a number of resolutions pending during these board risk reports that questioned and sort of proposed some compensation strategies that we were hoping companies could take, including clawbacks and other strategies that would really deter misconduct down the line.

Meredith Miller:

Now out of the board risk reports, there were a number of interesting developments. I mean first, we had asked that these reports not be buried in some sub part of a website. We're really interested in them also not being tucked into as much as we love and honor sustainability reports, we really wanted this to be a board product. So we wanted it to be on the website under the corporate governance section. And to really have the voice of the board that this was really a board product. And many of the companies, if not all of the 14 companies where we have reports, put them on their website that could be visible.

Meredith Miller:

The reason I mentioned the Illinois State Treasurer, who is a member of the IOPA, is that they took it upon themselves to create a matrix and an evaluation of the report. So with every report that came out, we met with the company and made recommended changes. And part of the changes had to do oftentimes with a clarification on the market coverage. But also, metrics. What were the measures of success for the company in terms of meeting their goals and opioid distribution supply? And how were they changing things going forward?

Meredith Miller:

The first report, board risk report that came out, which is really one of the most comprehensive reports is McKesson actually. They did a walk back. And then they have something like 11 to 13 recommended changes, including reporting structures from management up to the board. I would commend this report to readers who are interested, or who have other business crises or certain controversies on this scale that they're looking at how to do a board risk report.

Meredith Miller:

The other thing that came out of it that we had very good engagements with many of the chair of the boards of several companies. We were very, very pleased with their ability to get directly to the board on this. In the case of Cardinal, we did meet with the chair I believe once or twice. And Cardinal and Ascension created special committees of the board on opioid risks. And on the Cardinal website, you can see actually the mandate of the committee, the issues that they're taking up. And as well, they have embedded in that part of the website previous requests to the board that were outside of the IOPA purview. This is pre-IOPA where there were individuals who had asked the board to investigate DEA and other opioid related conduct. And they have full reports that wouldn't have come to light had we not had that good engagement with them, as well as their willingness to be transparent. So the board risk reports are live documents. They're living documents I should say, not live documents. And we continue, Donna Meyer in particular continues to work with companies and making sure that they're updated. And that as the companies even change, and whether they merge or change in any way that we're able to, like [inaudible 00:31:38] being bought or Mylan turning into Viatris, really working to make sure that these board reports continue.

Catherine McCabe:

Absolutely really interesting. Thanks Meredith. Obviously these board risk reports are very comprehensive. And I think the transparency that they offer really helps to shed light on how companies are trying to address the risks associated with opioids. And I think it's really shocking how little transparency there was really until relatively recently. And as you said, it was quite difficult to get a handle on which companies were actually exposed to opioids and how. And there was so little clarity on how boards were trying to oversee the risks associated with them. But I think we are in 2021 in a better space. But obviously we've got to see these reports continue to be published, and for companies to continue to raise the bar.

Catherine McCabe:

In terms of, obviously we haven't seen positive progress on all fronts. And one way we can try to make sure that we do see positive change if companies are not necessarily receptive to suggestions is to use shareholder resolutions. And I think it's amazing what the IOPA has been able to achieve via different shareholder resolutions which have been put forward. And it will be interesting to hear from you which positive outcomes really stand out in your mind.

Meredith Miller:

Oh, great. Yes. I should say that part of the strategy of the IOPA was to try to get out of the block quickly in 2017. We had about maybe 20 companies as focus companies. And we looked at a number of governance reforms that we thought were directly related to these compliance issues and transparency. So many of the companies as I mentioned, were really willing to engage. And of course we were a large coalition as well, but I do want to commend the companies for their level of engagement. And in the U.S., it's not uncommon to file in order to bring companies to the table. It's just our way of engagement. And I would like to talk about one of the pieces of IOPA that did not involve filing, which was our incentive deferral working group.

Meredith Miller:

But we did at the very beginning sort of conduct an analysis on the companies. So we filed simultaneously several different issues of governance across the board. And the ones that really rose to the top was, of course the board risk report was one of the key resolutions, which is why we have 14 of those. The other that we've been working on, and I believe Catherine this year will be the watershed year, the sort of turning year for independent chair. We were able to get independent chairs through a lot of the great work of the Teamsters at Cardinal and McKesson. But there were a number of companies, including the non-opioid companies that I mentioned were in our world that we are trying to work on that resolution. We got in the very high forties last year. And I think that that will be, we are filing at six companies this year. And I really think that we may be able to sort of lead with the principle that we really, especially for companies that are under significant legal allegations, that it's important for us to have a separate chair and CEO.

Meredith Miller:

The other areas that we worked on that I think were really incredible sort of sector wide application that did somewhat predate the IOA was in the area of misconduct clawbacks. And the UAW trust and several of the pharmas that participated, that were part of our IOPA engagement had worked in 2012 to develop a framework for a misconduct clawback. And really what that is is unlike the Dodd-Frank in the United States clawback, which really kicks in only if there's a financial error and financial reporting, so that executives need their pay clawback because it would be paid out due to ill-gotten gains.

Meredith Miller:

In this case, we were really looking at ways in which companies could keep control over payouts that came up through a violation of the company's code of conduct. So that could include a whole range of activities. But most importantly, we wanted to include not only folks who may directly violate a law, or regulation, or the code of conduct. But also individuals who are responsible as a supervisor for overseeing such risks, whether they knew or did not know. So part of what the IOPA did was first sort of run through and make sure that we had clawbacks in place, misconduct clawbacks in place, and then go through and also ask for disclosure of the use of the clawback under certain circumstances. And all of this is with difference to the comp committee. The whole framework of clawbacks, our proposals never triggered a clawback. They basically created some criteria and made clear the authorization of the comp committee to have the ability to clawback.

Meredith Miller:

We really saw that as such an important best practice. It really creates an important tone at the top. That's the highest ethical standard, and also creates clear, tangible consequences to violations in the workplace. So that is one that we got 18 misconduct clawbacks in place. And we're very, very pleased with that. We also have been doing work on incentive deferrals as sort of the corollary to that. And finding out that as happy as we were that many of the clawbacks were implemented, that companies have not been using the clawbacks as frequently or in a decisive fashion when there are clearly significant legal charges and weakened corporate governance practices.

Meredith Miller:

And finally there was, I think some of the work that we're also very pleased about was some of the beginning work on really drawing attention to how companies when they calculate the executive and the CEO pay, that they actually back out and exclude the legal costs and projected settlement costs so that they're insulated from that during the year that they're receiving an award. And investors have to absorb that as do other stakeholders in the system. So there has been a really important elevation of the awareness that we all have to share in the accountability here as investors in the company and as leaders in the company.

Catherine McCabe:

Yes. I agree. I think accountability is absolutely key. And you've really shed light on so many different aspects of how misconduct can be tackled through different remuneration strategies.

Catherine McCabe:

So yes Meredith, you touched on the fact that obviously we've got lots of progress to be made really when it comes to different remuneration strategies to try to discourage poor practices. But also, you brought up the point about the separate CEO chair. But now this is something which is already fairly common in Europe, but less so but increasingly so in the United States. And we're really seeing increased support for proposals asking for a separate CEO/chair. And we expect to see further support this year.

Catherine McCabe:

Meredith, I know obviously the IOPA has so many different work streams going on. And clearly COVID-19 has not yet been resolved. And against this backdrop, which aspects of the IOPA's work are you most looking forward to in the coming months?

Meredith Miller:

Well, thank you. Yes. We have so much on our plate. There's a few work streams I'd like to point out. One as I did mention already, which was possibly the tipping over and greater expansion of the independent chair as we go into 2021. But the other is not a resolution-focused initiative, but one that we are moving forward with a number of companies that have distribution facilities or frontal facing public consumer-facing workers. And that is an initiative that is calling on the compensation committee and the audit committee to help us better understand how incentives may be in place or internal auditing may help us understand the application of OSHA, which are health and safety guidelines here in the United States during COVID in the workplace. So to understand really how health and safety for these pharmaceutical workers and distribution, and what kind of financial incentives may in place that protect against undue pressure for increased profitability and productivity that may jeopardize their health and safety.

Meredith Miller:

Two other initiatives. One is that as I mentioned, this is kind of a culminating year for the opioid litigation. And here in this year, we see very large charges coming, being booked in the financials for the companies. We've seen AmerisourceBergen is at 6 billion, J&J is above 6 billion. These are the charges that are being set aside in expectation of a settlement with all of those counties and cities and AGs that I mentioned around litigation costs. So one of the, we see it at AmerisourceBergen. One of the things that the IOPA is doing for the 2021 season is really looking at whether the companies continue to insulate the executives in calculating their pay from these costs, especially executives in very high positions, CEOs and NEOs named executive officers, where they may have been in key appointments and decisions during the run-up of those opioid years that we talked about earlier.

Meredith Miller:

So we're looking at the exclusion of those costs, whether there's above target, bonus or longterm incentive pay awards. And at the same time, these very, very heavy charges. In many cases, they wipe out five to 10 years of profit for the company. So a number of the treasures have been leading, of the IOPA have been leading vote nos. And vote nos in the U.S. similar to the UK, a vote no would be a vote no against the pay package. We have a precatory, or what's called a voluntary say on pay annual, mostly annual vote. So that I think is going to be very important coming up.

Meredith Miller:

And then the third stream that I just wanted to say I'm excited about is the impending announcement of this past year. We've had a collaborative working group with 14 pharmaceutical companies where we've been able to work on looking at how we can facilitate the use of a clawback through basically delaying the award of bonuses or of their longterm incentive pay. Delay a bit, just a portion of it in order to keep control over those assets. So that if there's late arriving information about these opioid legal cases, that the comp committee, it can use its discretion in making appropriate adjustments, maybe even downward reductions. We're very, very pleased with the outcome. We were able to develop some principles with the pharmaceutical companies. Many of them are still working through their consideration of the work that we did collaboratively.

Meredith Miller:

But it was a great alternative to the shareholder filing strategy in the United States. And we were able to withdraw at all the companies during the year and say that if they were in the working group, that this would come to fore. We were very fortunate to have Charles Elson from the University of Delaware corporate governance center there. And Doug Chia, the former associate general for Johnson & Johnson who's now the CEO of Soundboard. They were our facilitators of this group. So it was very structured and a wonderful collaborative experience. And I really look forward to working with the companies on either this initiative or a similar initiative in the future.

Catherine McCabe:

Yes. I mean, there has been so much constructive progress as you say. I mean obviously, the different cases of litigation tend to attract a lot of headlines. And rightly so, this topic of the opioid crisis is very emotional for a lot of people given its tragic toll. But I think what we've tried to do during this podcast is to really convey the power of engagement, the power of dialogue with companies. And also, the real progress which has been made. But obviously, there's still a lot to do. And definitely 2021 will be a busy year for the IOPA. But definitely lots of bright spots on the horizon as we try to resolve this crisis together throughout the opioid supply chain. And just to conclude, obviously COVID-19 is very much a crisis in the headlines. But the opioid crisis has not gone anywhere. And we have to continue to hold companies accountable for their actions and work together to implement best practices. Which are absolutely applicable across sectors in many cases. So I'm really looking forward to continuing to be involved in the meetings and learning more. It's such an interesting topic from all sorts of different angles. So thank you very much indeed Meredith for your time today. I very much appreciate your insights.

Meredith Miller:

Thank you, Catherine. And I want to thank BMO for giving me this opportunity. I want to thank you for being in the coalition and for your leadership on this issue.

Michael Torrance:

Thanks for listening to Sustainability Leaders. This podcast is presented by BMO Financial Group. To access all the resources we discussed in today's episode, and to see our other podcasts, visit us at bmo.com/sustainabilityleaders. You can listen and subscribe free to our show on Apple Podcasts or your favorite podcast provider. And we'll greatly appreciate a rating and review, and any feedback that you might have. Our show and resources are produced with support from BMO's marketing team and Puddle Creative. Until next time, I'm Michael Torrance. Have a great week.

Disclosure:

The views expressed here are those of the participants and not those of Bank of Montreal, its affiliates, or subsidiaries. This is not intended to serve as a complete analysis of every material fact regarding any company, industry, strategy, or security. This presentation may contain forward looking statements. Investors are cautioned not to place undue reliance on such statements as actual results could vary. This presentation is for general information purposes only, and does not constitute investment, legal, or tax advice, and is not intended as an endorsement of any specific investment, product, or service. Individual investors should consult with an investment, tax, and/or legal professional about their personal situation. Past performance is not indicative of future results.

 

Catherine McCabe Senior Associate, Analyst, Responsible Investment

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