Friday, 29 October 2010

Glaxo SmithKline and Corporate Governance

Because I am researching for my forthcoming book "FT Business Briefings: Corporate Governance" I was intrigued by this news story.

In 2002 Glaxo Smithkline, one of the biggest drug companies in the world, sent Cheryl Eckard, one of their global quality assurance managers, to their Puerto Rican plant at Cidra to fix manufacturing violations cited by the US Federal Drug Administration. She found problems that went far beyond these violations. They included defective, misidentified, below strength and over-strength drugs and those not manufactured in accordance with FDA approved processes. Her concerns were so serious that she tried to get the plant shut for two weeks in order to sort out the problems. She tried to raise her concerns with superiors, including making a full report to GSK’s Compliance Department. Court papers show that Eckard made numerous attempts to get her superiors to take action before GSK fired  her in May 2003. Even subsequent to this Eckard claims she tried to call the, then, UK chief executive who would not take her call. As a result of her failure to get her reports investigated properly she reported the matter to the FDA and subsequently filed suit against GSK on behalf of the US government under the US False Claims Act, which allows individuals to sue suppliers to the US government on its behalf and to receive a share of any recovery. Amongst other things her suit alleged that there was an attempt at a cover-up. 

In 2009 the plant was closed and in 2010, after nearly seven years, GSK settled this claim for $750m. The company “declined to say whether further lawsuits from patients may be expected”.

I am guessing that companies don't agree such huge settlements in cases where allegations are completely without foundation.

My angle on this is to ask where GSK's corporate governance was in all this mess? Its annual report and accounts contains a report on its corporate governance that would seem to be a model of good practice and compliance; and yet what is described above is a gross failure of governance. The answer is that it is not regulations, rules and systems that matter but behaviours. It is not sufficient to have committees and organisation charts if there is a culture of cover-up's going uninvestigated and unpunished and if there are no effective internal processes to investigate and support reports from whistleblowers. It is up to the Board of Directors to supervise such arrangements and make sure they actually work.  I think a settlement for $750m represents a significant business risk and therefore ask why the reasons behind it are not included in the, superficially impressive, list of business risks that form part of that report and accounts? The directors report should not be a box ticking exercise but a genuine effort to explain and communicate. Shareholders would like to know what has been done to try to ensure that such a massive failure is unlikely to recur.

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