20.1 Introduction
The unaffordability of prescription medications remains an issue of moral and practical importance. To address this issue, scholars, politicians, and activists dominantly focus on “external” regulation – that is, the public law tools of legislative and regulatory reform, such as the Inflation Reduction Act’s (IRA) Medicare provisions.Footnote 1 “Internal” governance dynamics of drug manufacturers and associated opportunities for private ordering, however, are underexamined aspects of access to medications (A2M) discussions.Footnote 2
A standard narrative blames high drug prices on shareholders and corporate fiduciary obligations to “maximize profits.”Footnote 3 Yet, for nearly half a century, shareholders of large drug manufacturers have put forward shareholder resolutions, or proposals, raising concerns about drug manufacturers’ pricing practices. Resolutions are submitted in accordance with regulations under the Securities Exchange ActFootnote 4 and are a tool uniquely available to shareholders. Resolutions have demanded pricing restraint, transparency and reporting about how drug prices are set, and justifications for a range of activities.
These shareholder efforts may not unseat the standard narrative but do add complexity. Not all shareholders accept the serious externalities imposed by drug manufacturers’ pricing practices. Moreover, shareholder proposals raise existential questions about corporate purpose and faithful agency. Discordance may exist between what drug manufacturers say and what they do when it comes to being patient centric. Further, drug manufacturers often seek to exclude resolutions or issue statements in opposition.
This chapter asks: can shareholder efforts achieve public-spirited reform? What are shareholder resolutions’ relative strengths and weaknesses as compared with public law efforts? Are shareholder proposals uniquely well-suited to certain aspects of A2M problems?
Ultimately, shareholder proposals can be an important part of a multi-prong approach that complements “external” legislative efforts. They may also have purchase for overlapping governance matters perhaps better suited to private ordering. Yet, as this chapter shows, shareholder resolutions confront several limitations, and the pursuit of A2M resolutions may be more an opportunity of necessity than choice.Footnote 5
This essay proceeds as follows. Section 20.2 provides background on shareholder resolutions and applicable law. Section 20.3 turns to drug-pricing and A2M proposals, tracing their evolution and then focusing on three kinds of proposals: executive compensation, mission misalignment with political spending, and patenting practices. Section 20.4 reflects on and analyzes themes from these shareholder efforts to address the main questions identified above. Section 20.5 concludes.
20.2 Shareholder Resolutions in a Nutshell
A corporation’s board is endowed with the power to manage the corporation’s business and affairs.Footnote 6 Historically, with the separation of ownership and control, shareholders though nominal owners have enjoyed limited control rights.Footnote 7 Shareholder voting is one important vehicle for participation in corporate governance. Under state law, shareholders typically have rights to vote on director elections and major transactions. They can also make “proposals on a variety of issues, including general corporate governance and social interest matters.”Footnote 8 Shareholder proposals have been analogized to state constitutional ballot initiatives.Footnote 9 Shareholder proposals, however, are typically advisory. They are opportunities for shareholders to communicate their preferences.Footnote 10
For public companies, shareholder proposals are subject to federal securities law, which regulates their default inclusion on the corporation’s proxy materials at the corporation’s expense.Footnote 11 As one might imagine, however, not every shareholder proposal must be included. The U.S. Securities and Exchange Commission (SEC) makes case-by-case exclusion determinations,Footnote 12 and proposals must clear multiple hurdles. For instance, among other eligibility and procedural requirements, proposals have a word limit and only shareholders holding securities for specified continuous lengths of time and value can submit a proposal.Footnote 13
Regulations further permit a company to exclude a proposal if it qualifies under one of the enumerated substantive exclusions. The ordinary business exclusion – exclusion based on a proposal “deal[ing] with a matter relating to the company’s ordinary business operations”Footnote 14 – is among the most popular and contentious. This exclusion’s rationale is to embed and be deferential to “the bedrock state corporate law principle” that a firm’s ordinary business operations is the proper purview of directors and officers and not shareholders.Footnote 15
Drug manufacturers are consistently resistant to drug-pricing proposals,Footnote 16 and the ordinary business exclusion is a commonly sought refuge.Footnote 17 That said, though some proposals have been ensnared by this exclusion, the SEC has determined that many drug-pricing and A2M proposals cannot be excluded from proxy materials on this basis because they transcend such matters.Footnote 18 This is an important exception to an otherwise excludable proposal: Even if a proposal relates to a company’s ordinary business, the proposal may not be excluded if it focuses on “sufficiently significant social policy issues.”Footnote 19 Proposals that raise such issues “transcend the day-to-day business matters” and are “appropriate for a shareholder vote.”Footnote 20
The ordinary business exclusion is highly relevant to drug-pricing proposals, but it is one among many exclusions comprising an intricate system. Thus, there are two big-picture points to highlight among these preliminaries. First, as a practical matter, when it comes to A2M proposals, as with any proposal, proponents must navigate these regulations with skill and strategy. Misjudgment of support or missteps in one proxy season can impact not just an individual proposal but the inclusion of future proposals as well.Footnote 21
Second, federal proxy rules have empowered shareholders to take a more active role in overseeing corporate conduct through “shareholder democracy.”Footnote 22 Contested shareholder proposals involve different factions of the corporate ecosystem vying for power with a federal agency inserting itself as arbiter over whether a proposal is sufficiently meritorious to be put to a shareholder vote.Footnote 23 However, so long as an investor meets regulatory criteria, investors of all kinds – from the individual “gadfly” to large institutional investors – have the opportunity for their voices to be heard.Footnote 24
20.3 Drug-Pricing and A2M Proposals
Since at least the 1970s, shareholders have sought proxy access to raise concerns regarding drug-pricing and A2M. Over the years, shareholders have run the gamut from small retail investors to large institutional shareholders.Footnote 25 Proponents have included individuals,Footnote 26 health systems,Footnote 27 asset managers,Footnote 28 social justice organizations,Footnote 29 and pension plans.Footnote 30 During the 2023 proxy season, for example, lead filers have included Friends Fiduciary Corporation, Mercy Investment Services, Trinity Health, Oxfam, the Service Employees International Union, and the Boston Common ESG Impact US Equity Fund.Footnote 31
A2M resolutions commonly express twin themes of concern. First, proposals register concern for how a drug manufacturer’s pricing and related decisions impact shareholders’ investments, given their invitation for regulatory response.Footnote 32 Second, they note concern for potential negative externalities imposed upon patients and society.Footnote 33
Historically, resolutions have sought price-setting information and requested pricing “restraint.”Footnote 34 A pre-Hatch-Waxman Act 1976 proposal, for instance, expressed concerns over disparities between US and foreign pricing and generics access. This proposal requested that shareholders receive “[a] breakdown of prices of and corporate profits from antibiotics sold in five representative countries …”Footnote 35 It also sought information about the corporation’s anti-substitution law lobbying.Footnote 36
Likewise, in the early 1990s, citing an environment with “little market pressure on manufacturers to set fair and reasonable prices,” the imposition upon patients of “cruel choice[s],” and skepticism of management’s claims that research costs were causing increasing prices, shareholders of Eli Lilly and Company requested that the Board “seek input on pricing policy from consumer groups, and adopt a policy of price restraint …”Footnote 37 According to shareholders, Eli Lilly’s excessive pricing was “bringing us to the brink of federal action to control drug prices.”Footnote 38 Other proposals sought price-setting transparency through a report on “overall pricing policy.”Footnote 39 Shareholders articulated that Eli Lilly should act with “the highest standards of responsibility and fairness to the consumers who rely on our products.”Footnote 40 Given enduring opacity, proposals from the 2010s continued to seek transparency about numerous price-setting factors.Footnote 41 Recently, with COVID-19 vaccines, shareholders have inquired about the role of federal funding.Footnote 42
Recent proxy seasons include a multitude of proposals pursuing new directions. Some raise questions about management’s incentives. Others, arguably, raise existential questions about drug manufacturers’ underlying corporate purpose and guiding norms. Three approaches are briefly discussed below. These proposals regard (1) the links between drug-pricing and executive compensation incentives; (2) the potential misalignment between corporate mission, values, and political spending; and (3) reporting on patenting procedures.
20.3.1 Executive Compensation
The size and setting of executive compensation is a contentious topic that has not escaped Congressional notice or the public’s attention. Moderna, for instance, generated headlines when its CEO made US$398 million in 2022.Footnote 43
Large salaries juxtaposed with A2M challenges generate a slew of questions, and generally, accross sectors, there has been “growing demand for executive compensation metrics linked to stakeholder welfare.”Footnote 44 Linking executive compensation in this manner is thought to benefit various non-shareholder stakeholders (such as patients) and address the critique of stakeholderism that managers lack incentives to act in the interests of these non-shareholder groups.Footnote 45
Recent drug-pricing proposals reflect these broader trends. Some proposals express concern about A2M and how these issues intersect with executive compensation.Footnote 46 Consequently, proposals have sought greater information about how drug-pricing strategies (and associated risks) figure into the pay incentives for senior executives to be provided through a shareholder report. A proposal submitted to Pfizer, Inc., is illustrative:
RESOLVED, that shareholders of Pfizer, Inc. (“Pfizer”) urge the Compensation Committee … to report annually to shareholders on the extent to which risks related to public concern over drug pricing strategies are integrated into Pfizer’s incentive compensation policies, plans and programs (“arrangements”) for senior executives. The report should include, but need not be limited to, discussion of whether (i) incentive compensation arrangements reward, or not penalize, senior executives for adopting pricing strategies, or making and honoring commitments about pricing, that incorporate public concern regarding prescription drug prices; and (ii) such concern is considered when setting financial targets for incentive compensation arrangements.Footnote 47
The supporting statement identified concerns about the association between drug-pricing practices such as chronic price increases (a “key risk”) and short-term financial performance as undermining long-term value creation.Footnote 48 Shareholders noted that the Trump administration singled out Pfizer for these increases, writing “[i]n our view, excessive dependence on drug price increases is a risky and unsustainable strategy, especially when price hikes appear to drive large senior executive payouts.”Footnote 49 The disclosures sought would permit shareholders to “better assess the extent to which compensation arrangements encourage senior executives to responsibly manage risks relating to drug-pricing and contribute to long-term value creation.”Footnote 50
Pfizer sought to omit this proposal from its proxy materials under the ordinary business exclusion but was unsuccessful.Footnote 51 According to the SEC, disclosure of how drug-pricing risks “are integrated into senior executive compensation decisions[] transcends ordinary business matters” as drug-pricing strategy is a significant issue, and the proposal further failed to micromanage the company.Footnote 52 Though this proposal garnered a significant response (40.2 percent approved), it did not pass.Footnote 53
20.3.2 Purpose and Politics
Another area of recent focus is the congruency of political spending with purported corporate purpose. Drug manufacturers often have lofty, public-spirited, patient-centric mission statements.Footnote 54 AbbVie’s website, for instance, says: “our life’s work is to improve lives.”Footnote 55 Likewise, Pfizer states: “[o]ur purpose ensures that patients remain at the center of all we do.”Footnote 56
However, in 2022, pharmaceutical and health products companies spent a record US$372 million on federal lobbying, with most aimed at undermining the IRA’s efforts to lower drug prices.Footnote 57 After PhRMA (a trade association), which spent US$29.2 million, Pfizer was the second-largest individual spender at US$14.9 million.Footnote 58 Pfizer’s spending exceeded previous years and occurred when the COVID-19 vaccine maker planned to quadruple the vaccine’s price.Footnote 59
Thus, reconciling what drug manufacturers say and how they act has been the subject of a series of proposals. A proposal filed with Gilead, for instance, provided:
RESOLVED: Shareholders request that the Board of Directors commission and publish a third party review within the next year … of whether Gilead Sciences, Inc. lobbying activities (direct and through trade associations) align with its Vision statement, “To create a healthier world for all people” and in particular its Policy Position Statement that “the price of medicines should never be a barrier to access, and we work domestically and globally to ensure that patients who need our products are able to obtain them.” The Board of Directors should report on how it addresses the risks presented by any misaligned lobbying and the company’s plans, if any, to mitigate these risks.Footnote 60
The supporting statement noted Gilead’s contributions to PhRMA, and that its CEO sat on PhRMA’s board.Footnote 61 According to these shareholders, however, PhRMA has “systematically opposed” any attempt to improve A2M through drug-pricing reforms.Footnote 62 In a similar proposal filed with Eli Lilly,Footnote 63 shareholders observed that given the company’s “extensive direct and indirect lobbying against measures that would make drugs more affordable, investors need to better understand the balance Lilly is striking between its commitments to innovation, on the one hand, and access and affordability, on the other.”Footnote 64 The proposals at Gilead and Eli Lilly each failed to pass but received 49.8 percent and 22.4 percent of votes, respectively.Footnote 65
20.3.3 Patenting Practices
A2M resolutions periodically raise questions about intellectual property policies. Recent proposals have focused on intellectual property and the related issue of anticompetitive conduct.Footnote 66 While proposals regarding tech transfer in the context of COVID-19 vaccines are noted later, this section highlights proposals focusing on secondary and tertiary patenting.
Secondary patents – those patents pertaining to a product other than its original active ingredient – and tertiary patents – those pertaining to drug delivery devices – have increasingly caught the attention of academics and policymakers.Footnote 67 Not only do these patents extend a drug manufacturer’s market power by delaying generic competition, but such patents can also be weaker, meaning they are more frequently invalidated.Footnote 68 Concerns about drug manufacturers’ utilization of these practices to stymie competition motivated President Biden to direct the U.S. Food and Drug Administration and the Patent and Trademark Office to collaborate on addressing these issues.Footnote 69
Concurrent to these regulatory efforts, shareholders requested that drug manufacturers report on their patenting practices and how concern for A2M is incorporated. A proposal filed with AbbVie is illustrative:
RESOLVED, that shareholders of AbbVie Inc. (“AbbVie”) ask the Board of Directors to establish and report on a process by which the impact of extended patent exclusivities on product access would be considered in deciding whether to apply for secondary and tertiary patents The report on the process should be prepared at reasonable cost, omitting confidential and proprietary information, and published on AbbVie’s website.Footnote 70
The resolution’s supporting statement noted that one of AbbVie’s products, Humira, had undergone 27 price increases and is protected by 130 patents.Footnote 71 The requested report, in the proponents’ view, “would ensure that AbbVie considers not only whether it can apply for” these patents “but also whether it should,” given the perception of “abusive patenting practices.”Footnote 72 A significant minority – 28.9 percent – of AbbVie shareholders supported this proposal.Footnote 73
20.4 Reflecting on These Efforts
Submission of shareholder proposals has increased over time, as has the weight they hold among management and boards.Footnote 74 Shareholder proposals today are considered a “powerful tool” for influencing corporate governance and conduct.Footnote 75 Yet, what makes a shareholder proposal “successful”? For A2M advocates, what are its relative strengths and weaknesses as a reform tool? Are there aspects of these issues that shareholders are uniquely positioned to address through proposals?
20.4.1 What Counts as Success?
If “success” means getting onto the proxy and getting a majority vote, then drug-pricing and A2M shareholder proposals appear a fruitless exercise. No such proposals put to a vote at the 2023 annual meetings, for instance, appear to have passed.Footnote 76 A majority vote, however, is a sufficient but not necessary condition for success.
Shareholder proposals are attractive for their ability to facilitate direct corporate engagement. Indeed, the filing of resolutions often occurs when initial dialogues break down.Footnote 77 Withdrawn proposals and proposals that secure a significant, albeit non-majority vote can also signal success as shareholder proposals offer important leverage with management and the board.Footnote 78 The value of shareholder resolutions thus may most reside not in any “‘short-term voting results,’” but in their “long-term ability” to foster dialogue that generates reassessment and reform.Footnote 79
Regarding withdrawn proposals, parties negotiate after resolution filing. Through these negotiations, shareholders might be able to procure satisfactory concessions. As one shareholder explains, resolution withdrawal “typically means” dialogue “about moving the company into a better position; the company has agreed to further discussions; or the company has made changes in response to the shareholder request.”Footnote 80
Likewise, if a proposal attracts significant minority support, corporations often view this as an important signal.Footnote 81 With “say-on-pay” votes, for example, if 20 to 30 percent of shareholders object, companies will “reconsider and revise their compensation packages.”Footnote 82 Many drug-pricing and A2M proposals have attracted substantial minority votes, including those discussed in this essay. For these reasons, drug-pricing resolutions appear to enjoy some degree of success.
20.4.2 Strengths and Weaknesses
As a tool for improving A2M, shareholder proposals have comparative and intrinsic strengths and weaknesses. Comparatively, legislation is often the reform tool of choice. Yet, legislative reform frequently proceeds at a glacial pace, stymied by gridlock and special interests.Footnote 83
Shareholder proposals, by contrast, may be nimbler, permitting relatively fast and direct engagement with drug manufacturers. Corporations pay attention to their shareholders, and so long as a proposal does not qualify for an exclusion, the issue must go on the proxy. Following an annual cadence, shareholder proposals are generally filed in the fall.Footnote 84 If there is friction with the company, SEC no-action letters are sought in winter.Footnote 85 The season concludes with voting on proposals at annual general meetings in the spring.Footnote 86 Rather than waiting decades for legislative reform, change could occur within a year.
Legislative reform and shareholder proposals can be complementary strategies. Shareholder proposals can, for instance, mirror legislative agendas. Consider California’s passage of SB 17 in 2017. State legislative agendas at the time included drug price transparency laws, and SB 17 mandates notice and the collection of information pertaining to certain prescription drug price increases.Footnote 87 Concurrent to this legislative activity, shareholder resolutions were advanced at numerous drug manufacturers seeking corporate reporting on “product price increases, their rationale, and associated risks.”Footnote 88 As another example, shareholder proposals focusing on potential anticompetitive activity and corporate patenting practices reflect similar themes of present interest to legislators and regulators.
Further, shareholder proposals – even when they mirror topics of external regulatory interest – are not merely redundant. They are symbolically important as the messenger’s identity matters. An intrinsic strength of A2M shareholder proposals is that their critique of drug manufacturers’ conduct is bound up with corporate self-determination. It matters that at least some shareholders are concerned about these corporations’ conduct. Even if the public-minded end goal is the same as would-be legislation, the questions posed by shareholders versus non-shareholders concerned about A2M have an inherently different orientation. Shareholders can ask themselves and those who serve the corporation: who do we want to be as a company? What norms, values, and codes of conduct ought we to comply with? Even if, for instance, the law permits secondary patenting, should we participate? These questions are distinct from those of the regulator charged with determining which constraints best serve the public.
Consequently, shareholder proposals may be uniquely positioned to address those aspects of A2M challenges overlapping more squarely with internal governance questions.Footnote 89 Some view shareholder proposals as an economic accountability mechanism and agency-cost corrective.Footnote 90 Similar accountability issues, however, arguably could be at play for nonfinancial (or, not purely financial) considerations as well. If shareholder proposals are conceived as a tool to discipline the relationship between principals and agents, then they would appear to be particularly well targeted to those places where A2M challenges intersect with matters seemingly more appropriate for private ordering. There may be no “pure” such examples. Executive compensation proposals, however, might serve as candidates for further consideration. Given firm specificity, providing individualized incentives to executives to improve A2M may be more appropriately the dominion of shareholders for some degree of oversight rather than regulators.Footnote 91
The distinct orientation of these considerations intersects with three weaknesses of shareholder proposals as a mechanism for drug-pricing reform.Footnote 92 First, to be included in the proxy, shareholder resolutions must navigate a complex regulatory scheme sensitive to the division of labor between boards and shareholders. Thus, proposals frequently take the form of requesting increased transparency through a report. While increased transparency and information gathering are crucial, those seeking immediate bold reforms might view such constraints as tepid, rendering this tool substantively weaker. Second, in contrast to external regulation, this vehicle is only available to shareholders and reform takes place company by company. While there appear to be coordinated efforts, shareholder proposals are not an efficient tool for systemic, industry-wide regulation. There are differences in how corporations react to such proposals and distinct shareholder voting patterns on nearly identical proposals.Footnote 93 On proposals for reporting on political spending, for example, the proposal at Gilead received 49.8 percent of votes and Eli Lilly received 22.4 percent. Regarding individualized responses, with secondary patenting proposals filed with AbbVie and Amgen, both companies initially sought SEC no-action letters. The AbbVie resolution went to a vote, but the Amgen resolution was “[w]ithdrawn due to agreement with company.”Footnote 94
The third weakness of shareholder proposals as a reform tool is that to the extent the goal is societal drug price reform in the public interest, shareholder proposals offer an awkward fit. Although pragmatists might think, “well, whatever gets the job done,” there are significant underlying questions of allegiance, authority, and expertise. Shareholders of drug companies are generally private actors with divided interests; they are not elected officials charged with protecting and promoting the public good. That the lives, health, and fate of so many should depend upon a shareholder vote is unsettling, if not inappropriate.
The example of COVID-19 vaccine equity highlights this point. Given that many throughout the world have lacked access to COVID-19 vaccines, Oxfam submitted proposals to Moderna and Pfizer requesting feasibility studies of transferring pertinent intellectual property.Footnote 95 Such knowledge transfers would ideally expand worldwide manufacturing capacity and save lives.Footnote 96 In an “unprecedented” move, the WHO Director-General even backed the Moderna resolution and spoke on its behalf at the annual meeting.Footnote 97 Though a significant contingency (24 percent and 27 percent of shareholders at Moderna and Pfizer, respectively) supported the proposals, the resolutions failed.Footnote 98
Though these losses seemed like a public health failure, they put pressure on the tool itself.Footnote 99 As Els Torreele notes, despite there being well-meaning investors, “the key issue is that pharmaceutical companies and their investors should not … hav[e] the power to decide about public health issues … It painfully shows, once again, how financial interests pursued by private companies, investors, asset managers, and speculators eclipse decision-making informed by public health experts, even during the biggest global health crisis of our lifetime.”Footnote 100 In other words, relying on shareholder proposals to pursue A2M reform emerges from a context of failed public institutions and failed framing. If public institutions charged with protecting and promoting the interests of each of us to equitable A2M were successful, there would be no need for private actor intervention. Patients would not look toward the private “largess” of some shareholders to be drug-pricing reformers and rely on their talents to convince the majority of shareholders who are not.
20.5 Conclusion
Matters of important public policy should not be vulnerable to the whims of shareholders. While this background critique looms large, the foregrounded question is what shareholder resolutions offer by way of drug-pricing and A2M reform. Despite indications of some general shareholder population ambivalence about A2M, given voting outcomes and the limitations discussed above, shareholder proposals have many comparative and intrinsic strengths. They add important voices seeking improved A2M and may be particularly well suited to address certain corners of these issues. At the very least, these shareholder efforts complement external reforms, and the existence of such proposals signals a more complicated narrative of shareholders’ relationship to drug-pricing challenges.
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