Commentary by David F. Larcker, James Irvin Miller Professor of Accounting & Director, Stanford GSB Corporate Governance Research Program; and Brian Tayan, Stanford GSB Case Writer, MBA ’03.
This weekend, the New York Times reported that Merck & Co reached a settlement in a derivative lawsuit brought by shareholders in 2004. In the lawsuit, shareholders alleged that company directors breached their fiduciary duties by not sufficiently overseeing the marketing of prescription anti-pain medication Vioxx, causing shareholders to lose billions in equity value. As you recall, Merck voluntarily withdrew Vioxx from the market in 2004, when it was revealed that use of the drug was correlated with an elevated risk of a heart attack. There was some question as to how long Merck officials knew of this risk and whether they were covering it up in order to maintain product sales. Merck stock plunged on the news, and ultimately the company reached a $4.85 billion settlement with patients.
The settlement with shareholders, however, resulted in much less.
The company agreed to implement a series of corporate governance reforms that the New York Times article described as “innovative.” Merck would hire a chief medical officer to monitor product marketing and safety. The board would convene two new committees—a product safety committee and a general corporate risk committee—to help in this endeavor. In addition, the company agreed to reimburse plaintiff lawyers $12.15 million in legal fees.
We fail to see what is innovative about any of this. As a matter of course, the company should be monitoring product safety. How this process is structured (independent chief medical officer or not, risk committee or not) is much less important than that the appointed individuals take their responsibility seriously and actually carry out the duties they are expected to perform. If they do not, the structure of oversight won’t matter at all.
As such, the Merck shareholders who brought this lawsuit have to ask themselves what they got for their efforts. Will these changes produce more in shareholder value than the $12.15 million the company spent reimbursing plaintiff’s lawyers?
Source: Natasha Singer, “Does Merck Agreement Pave a Road Toward Change?” The New York Times, April 2, 2010.