That prompts a second allegation: that the deal is “designed to ensure that the sale is on terms preferential to RB’s and Mead Johnson’s officers and directors”. That’s because the long-term incentive plan (LTIP) of RB’s top 400 executives relies on this same EPS measure for its performance condition. If RB achieves compound annual growth of 10 per cent, the whole of their awards will pay out - and analysts estimate that the blockbuster acquisition could put this in the bag.
A windfall gain, then? Or should the performance condition be adjusted? Common sense suggests that it should be. RB’s remuneration committee has the power to do this. On the other hand, it could be argued that as architects of the transformational deal, the senior team deserves some reward for making it happen.
Offensive marketing
RB makes a virtue of having a simple remuneration philosophy. It avoids cluttering its bonus and LTIP with the messy assessments of behaviour or personal performance goals - such as quality of leadership - that other companies adopt to focus executives on their core values and reputation. Instead, RB has a distinctive, performance-driven culture, where variable pay depends purely on financial results.
RB prides itself as consisting of 37,000 entrepreneurs, all inspired by a vision of creating a world where people are healthier and live better. It claims that it achieves organic growth through understanding consumer “needs” including (amazing as it might sound) “needs that consumers are not yet aware of”. It backs this up with innovation and marketing (or “Brand Equity Investment” in RB-speak) and focuses on 16 “powermarkets” and the 19 “powerbrands” that generate 80 per cent of its revenue. The pay of its top 400 executives hinges on profit growth; this in turn is driven by how much they peg back costs, crank up margins and increase sales.
Every so often, executives overstep the mark. How can you improve the sales of Nurofen, a well-established ibuprofen painkiller? Tweak its manufacture so that it is absorbed faster and market it for specific ailments at higher prices - so that one product targets migraines, an apparently different one back pain, another tension headaches, and so on, each apparently tailored to a specific consumer need. Result: a boost to sales and higher profits; a “Shonky award” from consumer group Choice for “peddling deceptive and misleading claims”; and a $6m fine by the Australian regulator in December 2016. This month, Which? raised similar criticisms about the marketing of Nurofen in the UK and there are other concerns here. The College of Physicians fears that air fresheners, such as Airwick, another of RB’s powerbrands, could be associated with long-term health hazards.
Nurofen echoes the tactics used for Suboxone, a drug used to fight addiction to prescription painkillers and heroin in the US. In 2009, the seven-year “orphan drug” status of Suboxone tablets expired. This had effectively been a monopoly that enabled RB to recoup its development costs. As with Nurofen, RB then managed to come up with a different version. It patented a Suboxone film that dissolves under the tongue and claimed this was safer than the tablets. It was then accused of “product hopping” on the grounds that pushing the film and deriding the tablets artificially pushed up prices. In 2012, the Federal Trade commission launched an investigation and a couple of years later RB de-merged Indivior, its Suboxone subsidiary, the subject now of a class action by 35 US states.
Chief executive Rakesh Kapoor was awarded the maximum bonus in 2015, plus 80 per cent of his maturing LTIP
RB has form on this. In the UK, it came up with Gaviscon Advance, a stronger version of Gaviscon, which is used to soothe indigestion. Gaviscon’s patent expired and it was delisted before a generic version became available; NHS search engines could only pick up the more expensive Gaviscon Advance. Result: higher costs for the NHS and more profits for RB. For hoodwinking doctors, RB was fined £10m in 2010 by the Office of Fair Trading.
The common thread of these examples is the promotion of a slight variation of an existing product as something dramatically different. But RB’s ethics have been questioned in other ways. It has an environmental policy that is “committed to running its business in a responsible, environmentally sound and sustainable manner”. Why then, did it try to block California from requiring users of d-CON rat poisons to be licensed in 2014? The state, and also the US Environmental Protection Agency, wanted to stop the accidental poisoning wildlife and pets. RB lost that one and was forced to replace the poisons with safer products in 2015.
The scandal in Korea was different again. For years, people struggled to understand their lack of energy. They tired too quickly. Then a mild fever started. Then they struggled to breathe. In 2011, the year that Rakesh Kapoor succeeded Bart Becht as chief executive, the Korean Centre for Disease Control tracked down the cause to products that prevented bacterial growth in indoor humidifiers. RB swiftly took their market-leading Oxy product off the market, but for the next five years, it disputed the findings and resisted paying compensation to the 400 victims and distressed relatives of the 96 people who ended up dying. When pressed sufficiently, RB settled some cases out-of-court but refused to admit guilt. Eventually, in May last year, Mr Kapoor apologised for RB both causing the illness and for dragging its feet for so long. RB made a £300m provision to cover compensation claims of those disabled by the product or doomed to rely on support devices for the rest of their lives. Last January, Shin Hyun-woo, RB’s former boss in Korea was sentenced to seven years in prison.
RB’s Board must have been aware of these ethical issues (and probably others that never hit the headlines) yet so far, top pay appears to be unscathed. It was only in 2015 that the remuneration committee enabled future share awards to be scaled or clawed back, and then just for gross misconduct or a material misstatement of finances. When an executive leaves RB, they now have to hang on to their shares for two years but this is clearly not long enough, given the tail of some of these claims. Mr Kapoor has carried the can for Korea, but the scandal erupted on his predecessor’s watch. There is now talk about cutting Mr Kapoor’s 2016 bonus. Mr Becht’s pay was never docked. Famously, he received a record £91.5m in 2009.
Board fossils
Judy Sprieser has chaired the remuneration committee since 2004. She had intended to step down last year, but she was persuaded to stay on. Adrian Bellamy is one of the other three members. He has been RB’s Chairman since 2003. At the AGM last year, he said that “our remuneration policy has produced substantial results, not just last year… remuneration is not just one size fits all. We are very diligent about considering [other] options and we believe that Judy Sprieser has managed this exceedingly well”. Yet its critics attribute RB’s operational scandals to its gung-ho culture, epitomised by its pay policy, and a flawed corporate governance that fails to challenge it. The problem with such long serving directors is that they become entrenched in groupthink and the longer they serve, the less they are truly independent – independence of mind is a core requirement for non-executive directors.
Ms Sprieser is glued to the bottom line. She told the AGM last year that the success of the RB’s pay policy was down to “simplicity, consistency and transparency”. That’s true. In the last annual report, she confines her comments to financial outcomes. That’s simplicity. As in previous years, she makes no reference to the reputational issues. That’s consistency. Mr Kapoor was awarded the maximum possible bonus in 2015 plus 80 per cent of his maturing LTIP. He received £23m gross, lifting the total he has received since becoming chief executive to £56m, with plenty more in the pipeline of unvested share awards. As transparency goes, that is transparently excessive – and a red rag for the May government and its promised corporate governance reform. Despite the issues, he was awarded an LTIP in 2015 worth a potential £15m. With the subsequent rise in share price and the Mead Johnson, it is now worth a whacking £20m.
You could argue that litigation and consumer protection concerns are par for the course for multinationals. That the reason that Mr Kapoor deserves high pay is because RB’s market cap has more than doubled since he became chief executive. Its shareholder value has increased by about £30 billion. But you could say the same about Unilever, another consumer defensive, also selling personal and household products. In fact in currency terms, Unilever’s shareholder value has gone up far more. Okay, it’s a much larger company, but then you’d expect its challenges to be greater, so its pay to be higher. But – and this is the point - it seems to have fewer operational aberrations, its pay is less highly geared to performance and its chief executive is paid significantly less than RB’s. That suggests that RB’s pay structure needs recalibrating.
When he was director general of the Institute of Directors, Simon Walker described chairs of remuneration committees as “needing guts – you need to be able to stand up to executives and use your common sense”. If RB’s directors are not prepared to do that, it is time for them to go.
