Notice of Exempt Solicitation. Definitive Material. (px14a6g)
July 02 2018 - 10:07AM
Edgar (US Regulatory)
July 2018
RE: Please
Vote AGAINST Marie Knowles, 14-year Chair of the Board’s Audit Committee at
McKesson Corp., (NYSE:MCK) annual shareholders meeting
on July 25
th
Dear Fellow McKesson Shareholder
:
Following last year’s Say-on-Pay defeat – a vote driven chiefly by
concerns over the company’s role in the opioid crisis and the failure to adjust
CEO John Hammergren’s compensation as a result -- McKesson’s board has taken
steps to soothe investor concerns over executive compensation. These changes alone,
however, fail to address the increasingly evident failures in the Audit
Committee’s oversight of the actual opioid anti-diversion practices that led to
last year’s costly settlement with the Drug Enforcement Administration (DEA).
1
Significantly,
based on recently disclosed books and records information of board meetings,
the Audit Committee appears to have paid scant attention to the functioning of
the company’s Controlled Substances Monitoring Program (CSMP) in the aftermath
of the original 2008 settlement with the DEA over opioid distribution.
As Audit Committee chair since 2004, and a member since 2003, we
believe Marie Knowles bears considerable responsibility for this failure.
2
Accordingly,
we urge investors to
VOTE AGAINST Knowles’ re-election to the board at
McKesson’s annual shareholder meeting on July 25
th
.
We note that the risks facing McKesson have only intensified in
the 12 months since last year’s vote – the second largest ‘no vote’ on pay of
any S&P500 company last year. McKesson now faces 394 lawsuits related to
its opioid distribution practices, many consolidated in the closely watched
multi-district litigation in Ohio, where bellwether trials begin next year. Dozens
of state
attorneys general have also issued document
requests from the company in preparation for possible litigation, with industry
watchers drawing parallels to the big tobacco settlements of two decades ago.
Most recently, in May, CEO Hammergren appeared before the U.S. House Energy and
Commerce Committee to answer questions about the company’s conduct in West
Virginia, including how McKesson came to supply 5.6 million doses of
prescription opioids to a single pharmacy in the town of Kermit--a population of
400--in just two years.
This is not a
solicitation of authority to vote your proxy. Please
DO NOT
send us your proxy card as it will not be accepted.
1
1
In January 2017,
McKesson paid a record $150 million civil penalty for alleged violations of the
Controlled Substances Act between 2008 and 2013; agreed to suspend sales of
controlled substances from four facilities; and to enhance compliance,
including more rigorous staffing, periodic auditing and an independent monitor
to assess compliance. Critically, the DEA statement announcing the penalty
found that “even after designing a compliance program after the 2008
settlement, McKesson did not fully implement or adhere to its own program.”
2
Knowles is the
only incumbent member of the Audit Committee to have served on the Committee
during the critical period of 2008 to 2013.
Amid these challenges, investors must insist on an Audit
Committee Chair that will ensure more rigorous
oversight than provided under the leadership of Marie Knowles.
For investors, we believe the key considerations regarding a vote
against Knowles’ re-election include:
·
The Audit Committee’s Failed Opioid Oversight:
Despite
McKesson’s commitments to strengthen the company’s regulatory compliance and
anti-diversion practices in the 2008 settlement with the DEA, the Audit
Committee failed to review the corporate-wide functioning of the CSMP for more
than four years. When it finally did in January 2013-- just two months before
McKesson’s distribution center in Aurora, Colorado, was raided by the DEA for
having reported almost no suspicious orders for more than four and a half years
—it was too late to act. The Aurora raid eventually broadened into the nation-wide
investigation
3
that led to the second settlement
with the DEA in 2017.
·
The Independent Board Committee’s Exoneration of Directors Does
not Withstand Close Scrutiny:
Initiated at the
request of the Teamsters and made public in April 2018 through a summary
report,
4
the Special Committee’s investigation
suffers from critical weaknesses that undermine the validity and utility of its
conclusions to investors. Among other things, it arrives at its conclusions having
excluded from its examination the company’s actual opioid sales records; this
makes it impossible for the report to actually assess what went wrong and does
little to alleviate concerns regarding the Audit Committee’s effectiveness.
·
The Long History of Costly Compliance Failures throughout Knowles’
Tenure:
During Knowles’ membership of the Audit Committee, McKesson has
incurred nearly a billion dollars in fines stemming from compliance failures. Besides
the ongoing opioid litigation, the company also faces potentially costly
allegations that it mishandled cancer medication – practices that cost competitor
AmerisourceBergen nearly $900 million in civil and criminal fines last
year.
The Teamsters and its affiliated pension and benefit funds have more
than $100 billion invested in the capital markets and have substantial holdings
in McKesson.
This is not a
solicitation of authority to vote your proxy. Please
DO NOT
send us your proxy card as it will not be accepted.
2
3
Ultimately, the
DEA determined 12 of the company’s 28 distribution centers were failing in
their opioid-related compliance.
4
Available at: http://www.mckesson.com/about-mckesson/fighting-opioid-abuse/board-response/. The Special
Committee was comprised of Donald Knauss (Chair), Anthony Coles and Susan
Salka. The Teamsters met with the Committee’s outside counsel in June 2017,
with Committee members joining by telephone.
The Audit Committee’s Failed Opioid Oversight
There can be no question that overseeing the implementation and
functioning of the company’s anti-diversion controls, or controlled substance
monitoring program, ought to have been a top priority for the Audit Committee. Not
only is compliance with the Controlled Substances Act, which requires that drug
distributors maintain an anti-diversion program to identify, report and to cease
filling suspicious orders, perhaps the industry’s most critical compliance
challenge, but the Audit Committee had effectively been put on notice by the
2008 settlement with the DEA.
Stemming from the failure to report suspicious orders of
prescription opioids from internet pharmacies, the 2008 agreement, among other
things, specifically required the company to implement a revised controlled
substance monitoring program. The DEA, in no uncertain terms, spelled out the implications
of McKesson’s action in May 2008, when it said that, “by failing to report
suspicious orders for controlled substances that it received from rogue
Internet pharmacies, the McKesson Corporation fueled the explosive prescription
drug abuse problem we have in this country.” Shortly before the agreement was
finalized, CEO Hammergren also assured investors that “nothing is more
important…than the safety of our drug supply chain.”
And yet, the Audit Committee, under Knowles’ leadership, appears to
have paid insufficient attention to the implementation and functioning of the
revamped CSMP. It also failed to spot numerous red-flags that would have
alerted it to weaknesses in the CSMP – deficiencies that were eventually
revealed when the company’s Aurora facility was raided by the DEA in March
2013.
5
According
to excerpts from and analysis of the company’s books and record -- as set out
in two derivative lawsuits pending against McKesson
6
-- we note
that the Audit Committee, after obtaining an initial assessment of the new CSMP
in October 2008, did not receive another full audit of the company’s
anti-diversion program until January 2013 -- nearly four and a half years
later!
7
This was despite the fact that the initial assessment found that improvements
were “need[ed].”
Critically,
over the intervening period, there
were growing signs
that the CSMP was not effectively being implemented – indications that even a
cursory questioning of management ought to have alerted the Audit Committee. In
2011, for instance, the DEA raised concerns at the lack of suspicious order
reporting at the company’s Ohio and Maryland distribution
facilities.
The Maryland
facility, along with the Aurora, Colorado center, had been a focus of the 2008
settlement and thus ought to have been on the Audit Committee’s radar.
8
This is not a
solicitation of authority to vote your proxy. Please
DO NOT
send us your proxy card as it will not be accepted.
3
5
At the time of the
raid, the Aurora, Colorado facility had reported to the DEA just 16 suspicious
orders out of more than 1.6 million controlled substances orders since June
2008, all of which pertained to one single pharmacy, with which McKesson was no
longer doing any business. Following the DEA visit, the distribution center
reported 2,447 suspicious orders over the ensuing six months, many backdated
months and years. According to DEA documents, reviewed by Fortune Magazine
(Erika Fry, “Following the Pills,” June 13, 2017), the government alleged,
among other things, the distribution center preemptively raised suspicious
order thresholds, set them so high that they would never trigger a review, or
simply ignored them.
6
See
McKesson Corporation
Derivative Litigation, 17-cv-01850, U.S. District Court, Northern District of
California (San Francisco), Steinberg v. Bryant, 2017-0736, Delaware Court of
Chancery.
7
Beginning in 2010,
the annual audit of a sampling of distribution centers included in its
assessment the respective site’s CSMP. This was not, however, a
corporate-wide, dedicated evaluation of the CSMP. Moreover, the 2010 report
found that the “Distribution Centers selected for testing consistently lacked
documented evidence to demonstrates controls are operating effectively.” Based
on the derivative suit disclosures, the full board, did not discuss the
functioning of CSMP, following the 2008 settlement, until May 2014; discussions
regarding the opioid crisis and DEA oversight were broached as a “Public Policy
Issue.”
While McKesson reports that the Audit Committee
will review the CSMP annually going forward, investors must insist on a
Committee Chair that will ensure more rigorous oversight than had been provided
in previous reviews.
The Independent Board Committee’s Exoneration of Directors Does
not Withstand Close Scrutiny
In April 2018, McKesson published the findings of the board’s
independent examination into the oversight of the company’s opioid distribution
practices and compliance programs, an investigation undertaken in response to
an October 2016 request from the Teamsters. While the report details some
important changes going forward, it falls far short of a robust examination of
how the company’s compliance programs went tragically awry under the oversight
of the Audit Committee and Knowles’ leadership.
Critically, rather than addressing how the Audit Committee
members, the Internal Audit and the external auditor collectively failed to
spot weaknesses in management’s implementation of the CSMP, the report seems to
focus on demonstrating that failure was not a product of “bad faith” or
“recklessness.” It also explicitly excluded, in arriving at this conclusion,
an examination of the company’s actual opioid sales.
9
This
suggests to us that the report was prepared with more of an eye towards defending
against legal suits than a thorough evaluation of the performance, competency
and accountability of specific individuals.
The investigation, for example, determined that a “critical piece
of evidence in its investigation” that the Audit Committee acted in good faith
was the “Green-Satisfactory” rating given to the CSMP by the Internal Audit at
the committee’s January 2013 meeting. Left unaddressed by the investigation,
however, is how just three months after the Internal Audit’s report, the CSMP
was demonstrated to be tragically failing at the Aurora facility for four and a
half years. Why the Internal Audit did not identify weaknesses in the
company’s CSMP and who was responsible for this failure– the performance of the
Internal Audit function being, we note, a key oversight responsibility of the
Audit Committee -- are critical blind spots in the investigation.
Similarly, the report assigns no responsibility to the discovery
in 2014 that the company was apparently failing to comply with a number of state
requirements related to suspicious order reporting. When grilled at a May 8,
2018, hearing of the House Energy and Commerce Committee by Representative
David McKinley (R-WV) as to why McKesson failed to report any
suspicious orders to the West Virginia State Board of
Pharmacy from 2001-2014, CEO Hammergren, like the Special Committee, evaded the
question of responsibility on this issue.
This is not a
solicitation of authority to vote your proxy. Please
DO NOT
send us your proxy card as it will not be accepted.
4
8
We note that Ohio
and Maryland facilities were also critical suppliers to West Virginia, commonly
referred to ‘ground zero’ of the nation’s opioid crisis.
9
In a footnote, the
Special Committee cited cost as the reason why the committee chose not to
examine opioid sales records that could show where the problems had occurred,
why they were not properly reported and remedied, and who was responsible for
not correcting the problem or, at the board level, who was or was not digging
into the issue and insisting that the problem be addressed. In a June 2017, meeting
with the independent committee’s counsel, we stressed the importance that the
investigation examines the opioid sales data on a pharmacy-level basis.
Equally troubling is the report’s conclusion that “while the
investigation found that the Company designed and implemented its controlled
substance monitoring program in good faith, there were, with the benefit of
hindsight, areas where the Company’s program fell short,” such as “additional
staffing and more standardized processes.” Referring to “hindsight,” however,
only makes sense when talking about unexpected events, not risks to which the
Audit Committee should have been keenly aware, particularly after the 2008
settlement. Moreover, the company’s actions to subsequently bolster the
short-comings in the CSMP evidences the practice an attentive board would have
ensured were put into place following the 2008 settlement.
We believe the investigation’s conclusion that directors did not
act in bad faith cannot be read as an endorsement of the Audit Committee’s
performance. Directors are not elected simply on the basis that they will refrain
from acting in bad faith: they are appointed for their foresight, competency,
judgment and their ability to hold themselves accountable--qualities that the
investigation failed to assess. For the Audit Committee, the mission is to
independently oversee the audit function and its results - not to accept
uncritically what management reports and to assume that all is well
notwithstanding a number of warning flags.
The Long History of Costly Compliance Failures throughout Knowles’
Tenure
Since Knowles joined the Audit Committee in 2003, McKesson has
incurred more than a billion dollars in legal costs due to an array of legal
and regulatory compliance failures. Even without the opioid issue, this
unenviable record ought to warrant refreshed leadership of the Audit Committee.
During
Knowles’ tenure, McKesson became embroiled in a wide-scale price fixing scandal
in which the company was accused of conspiring to artificially inflate the
average wholesale price (AWP) of hundreds of drugs between 2001 and
2009—ripping off state Medicaid programs across the country, as well as third
party payers. McKesson ultimately paid around $840 million to settle
litigation and fraud claims.
More recently, in April, McKesson was accused by a private health
care company of illegally pooling leftover cancer medication from single-dose
vials and selling it on to public and private health-care providers, thus
violating FDA rules, and resulting in false claims being submitted to the
government for drugs between 2007 and 2010. The suit, said to be filed on
behalf of the United States and 31 States, follows a similar lawsuit against
AmerisourceBergen, which last year settled for nearly $900 million.
Given this history, not only would it be in the pragmatic
interests of shareholders to rotate Knowles off the committee, but also to
appoint fresh financial expertise to the committee. It is baffling then that,
amid a broader refreshing of committee memberships, the only change to the
Audit Committee has been the replacement of Susan Salka, a board member since
2014, with Christine Jacobs, a director with nearly two decades of tenure (and
who perhaps, more than any
other director bears
responsibility for the company’s executive pay problems, given her membership
of the Compensation Committee from 2000 to 2018).
This is not a
solicitation of authority to vote your proxy. Please
DO NOT
send us your proxy card as it will not be accepted.
5
New Audit Committee Leadership is Urgently Needed
Last year’s Say-on-Pay defeat should have alerted the board to
investor concerns not only over Hammergren’s compensation, but to the board’s broader
handling of the opioid crisis. Unfortunately, while developments and
disclosures since the 2017 shareholder meeting have only intensified this
concern, the board has inexplicably failed to address the troubling leadership
of the Audit chair.
Accordingly, we urge shareholders to Vote AGAINST
Knowles’ re-election to the board.
For more information, please contact Michael Pryce-Jones,
Teamsters Capital Strategies at (202) 624-8990 or by email at
mpryce-jones@teamster.org
.
Sincerely,
Ken Hall
General Secretary-Treasurer
KH/cz
This is not a
solicitation of authority to vote your proxy. Please
DO NOT
send us your proxy card as it will not be accepted.
6
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