The Teamsters’ Union is pressuring Cardinal Health to separate the CEO and board chairman roles at the company—and cites large bonus pay to Cardinal’s top compliance officer as one sign of misgovernance.
The Teamsters made their campaign public last week, with a letter to Cardinal investors urging them to support a shareholder proposal for an independent board chairman. That would strip the chairman’s role away from CEO George Barrett, who has run the drug distribution company since 2009.
Their chief accusation is that Cardinal has lax practices over its opioid business, sending oxycodone and hydrocodone to high-volume pharmacies that did nothing but fuel the nation’s opioid addiction crisis. Along the way, those practices led to a raft of regulatory probes and litigation, which Cardinal has spent more than $100 million to settle in recent years.
The latter part brings us to Cardinal’s chief legal and compliance officer, Craig Morford.
Morford spent decades as a federal prosecutor, capping his public service career as deputy attorney general in the twilight of the Bush Administration. (You may remember him as author of the Morford Memo, one of those policy pronouncements deputy AGs often make about corporate prosecutions.)
Morford joined Cardinal as chief compliance officer in 2008, and was named chief legal and compliance officer in 2009 after Barrett arrived. He has played crucial roles helping Cardinal to end the various regulatory probes that have dogged it since 2008. And from 2010 through 2016, Morford received annual performance bonuses “significantly above target,” the Teamsters letter says, even while the company had compliance probes all over the place.
The letter doesn’t fault Morford directly. Rather, it faults the board’s compensation committee for rewarding him (and presumably Barrett) to settle probes over Cardinal’s drug distribution practices, instead of giving Morford and Barrett more incentive to prevent abuses, probes, and settlements in the first place. Hence their desire to create a chairman’s role independent of CEO Barrett. Take a read:
“In every year from 2010 to 2016, the board’s compensation committee, working in conjunction with Mr. Barrett, saw fit to award Mr. Morford an annual incentive bonus that was significantly above target, even as the company was paying out tens of millions of dollars to settle DEA claims and even though Mr. Morford’s bonus is supposed to reflect in part the effectiveness of Cardinal Health’s regulatory and compliance program. It is difficult to fathom how the board and CEO Barrett could conclude that Mr. Morford was worthy of such lucrative bonus payments, given the failures in the company’s controlled substance anti-diversion programs that have become tragically apparent and costly for the company.”
Incentives to Do What, Exactly?
Make no mistake, Morford is well paid. As one of five named executive officers at Cardinal, a firm that makes more than $130 billion in revenue, he gets all the usual compensation goodies: large annual salary, stock awards, option awards, incentive bonuses, and generous contributions to his 401(k) retirement plan.
According to Cardinal’s proxy statement, over the last three years his salary has averaged $531,000, his total compensation nearly $2.6 million. (Disclosure: that’s more than I make.) Much of that compensation, however, is tied up in equity awards.
The bonuses are the sticking point. For example, in fiscal 2017, Cardinal failed to hit an earnings goal that would have netted Morford a performance bonus equal to 85 percent of his base salary. But “In recognition of our strategic and operational accomplishments during fiscal 2017,” the compensation committee gave Morford 25 percent of that target bonus anyway, equal to $117,300.
Fiscal 2014 probably stuck in the Teamsters’ craw even more. That year, Cardinal’s total revenue fell 9.9 percent to $91 billion. Meanwhile, Morford received $553,000 in incentive pay (145 percent of the original target) because of “his significant leadership role in continuing to develop our regulatory and compliance programs in a rapidly evolving regulatory landscape.”
Now, can a chief compliance officer get a raise for doing a good job, even while the company’s sales tank? Sure. The CCO isn’t responsible for sales. And in 2014 the company was bracing for a sales decline anyway, since a key contract with Walgreens was expiring.
That same year, however, Cardinal was already in talks with the Drug Enforcement Agency for new failure to report suspicious high-volume purchases of opioids, after the company had already settled earlier charges for the same offense. That second inquiry led to a $44 million settlement in 2016. At the same time, Cardinal was also under investigation by the state of West Virginia for shipping massive amounts of opioids there: 241 million pills over six years, to a state with only 1.8 million people.
Good Conduct, or Good Settlements?
So the compliance program Morford had been building since his arrival in 2008—was that working, or not?
You can’t fault the Teamsters for being unhappy. A member gets back strain on the job, seeks relief through prescribed painkillers, and becomes an addict because he visited a pill mill handing out opioids like they were candy.
Yes, the principal offender in this scenario is the “doctor” running the pill mill. But what responsibility does Cardinal have to acknowledge that it has no earthly business shipping millions of pills to tiny communities? And how much of that responsibility rests with Morford, the chief legal and compliance officer; versus CEO Barrett and the board directors?
Cardinal first settled claims of excessive opioid distribution in 2012. The board then formed a special committee in 2014 to explore whether the company had issues with its opioid distribution practices. It concluded that Cardinal didn’t. The latest lawsuits against the company, however, accuse it of shoddy distribution practices well into 2015.
The compliance program, which Morford runs, is supposed to ensure Cardinal’s distribution distribution practices comply with all federal and state law. The legal department, which Morford also runs, is supposed to reduce litigation exposure as much as possible—and Morford has skillfully done that, reaching settlements with regulators time and again.
Let’s remember, the Teamsters’ target here isn’t Morford. It’s Barrett and the board. They are responsible for setting tone at the top. So if the board keeps blessing Morford’s performance in the form of bonus pay, who’s not doing their job here? You tell me.
Investors, meanwhile, will tell Cardinal Health at its annual shareholder meeting on Nov. 8. Let’s see what they say.