Earlier this month, the owner of two prominent teaching hospitals in Boston decided to impose new rules concerning outside compensation and other activities for its most senior officials, who may also sit on the boards of drug makers and biotechs. The initiative comes amid controversy over the extent to which the pharmaceutical industry may influence medical treatment and prescribing habits, an issue that has prompted congressional inquiries into conflicts of interest and has ensnared several drug makers.
And so Partners HealthCare, which owns Massachusetts General Hospital and Brigham and Women’s Hospital, decided not to allow its top people to accept gifts, participate in speaker bureaus or engage in ghostwriting. There are some other restrictions involving institutional purchasing and institutional royalties. But one stipulation is very interesting – senior officials can serve on a board, but are not permitted to receive more than $5,000 a day for board-related work, or accept any stock. And this last prohibition may make life difficult for drug makers.
Why? Corporate governance experts have been arguing for years that board members should hold stock. The reason is simple – in this way, a board member is more likely to feel the pain or gain as much as other shareholders. You know, their interests will be aligned with investors. Under Partners’ rules, a doctor would have to purchase shares on the open market, rather than take stock as compensation, in order to become aligned with shareholders. As a result, drug makers who solicit doctors from these two widely respected teaching hospitals may find themselves running afoul of shareholder activists.
“A director who doesn’t own stock has no business being on a board,” says Charles Elson, who chairs the John Weinberg Center for Corporate Governance at the University of Delaware. “They’re supposed to take cash compensation to buy the stock. And they’re supposed to represent shareholders, so no longer being able to accept stock would be problematic. I think it’s ridiculous. If they feel there’s a conflict, they shouldn’t be on a board. I think they have to choose – either be a director or work for the hospital.”
One doctor – Dennis Ausiello, chief of medicine at MassGen and Partners’ chief scientific officer - apparently made his choice. He told The New York Times that he’ll continue to serve on Pfizer’s board, even if it means forsaking compensation that amounted to $220,000 last year. “I’m very proud of my board work,” he told the paper. “I’m not there to make money. I certainly think I should be compensated fairly and symmetrically with my fellow board members, but if my institution rules otherwise, as they have, I will continue to serve on the board.”
And so Partners HealthCare, which owns Massachusetts General Hospital and Brigham and Women’s Hospital, decided not to allow its top people to accept gifts, participate in speaker bureaus or engage in ghostwriting. There are some other restrictions involving institutional purchasing and institutional royalties. But one stipulation is very interesting – senior officials can serve on a board, but are not permitted to receive more than $5,000 a day for board-related work, or accept any stock. And this last prohibition may make life difficult for drug makers.
Why? Corporate governance experts have been arguing for years that board members should hold stock. The reason is simple – in this way, a board member is more likely to feel the pain or gain as much as other shareholders. You know, their interests will be aligned with investors. Under Partners’ rules, a doctor would have to purchase shares on the open market, rather than take stock as compensation, in order to become aligned with shareholders. As a result, drug makers who solicit doctors from these two widely respected teaching hospitals may find themselves running afoul of shareholder activists.
“A director who doesn’t own stock has no business being on a board,” says Charles Elson, who chairs the John Weinberg Center for Corporate Governance at the University of Delaware. “They’re supposed to take cash compensation to buy the stock. And they’re supposed to represent shareholders, so no longer being able to accept stock would be problematic. I think it’s ridiculous. If they feel there’s a conflict, they shouldn’t be on a board. I think they have to choose – either be a director or work for the hospital.”
One doctor – Dennis Ausiello, chief of medicine at MassGen and Partners’ chief scientific officer - apparently made his choice. He told The New York Times that he’ll continue to serve on Pfizer’s board, even if it means forsaking compensation that amounted to $220,000 last year. “I’m very proud of my board work,” he told the paper. “I’m not there to make money. I certainly think I should be compensated fairly and symmetrically with my fellow board members, but if my institution rules otherwise, as they have, I will continue to serve on the board.”
Of course, he can continue to hold previously purchased Pfizer stock, since the new Partners rules don’t require him to sell existing holdings. And Ausiello may have the means to purchase shares on the open market. Presumably, other doctors could afford to do so as well. But it’s not hard to imagine that some doctors may not relish the prospect of being appointed to a board, but receiving limited compensation and being forced to use their own money to purchase stock.
This may sound like a trifling matter. After all, just two hospitals are affected by this policy. But it could become a trend. That’s because the Association of American Medical Colleges has recommended tighter restrictions on potential conflicts of interest. Ann Bonham, the AAMC’s chief scientific officer, tells us that limits on stock holdings will likely be decided on a case-by-case basis by each institution. “Some institutions could decide to limit the salary cap or stock options or something in between,” she tells us. “Some are considering this.”
And if more academic medical centers do institute such rules, this could become a dilemma for drug makers and biotechs, who actively court physicians to join their boards. After all, the pharmaceutical industry wants and needs physicians who have certain expertise and a unique perspective on research and patient treatment. But if it becomes harder to attract physicians, the industry will lose potentially valuable input.
image from flickr user charles fred used under a creative commons license.
