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The US healthcare giant’s transformation from governance pariah to beacon of best practice

Home / EOS Case Studies / McKesson

McKesson is a Fortune 500 health services and information technology company. As the oldest and largest health care company in the US, McKesson serves more than half of the country’s hospitals, 20% of its physicians, 96% of its top 25 health plans and delivers one third of all medications used daily in North America.

Although profits were up and growth was strong, in the early parts of this decade McKesson became the subject of intense investor scrutiny – due to its corporate governance.

What began as rumblings over ballooning CEO benefits spiralled into a public condemnation of many of the company’s governance practices, including a high profile failed say-on pay-vote in 2013. Several shareholder proposals calling for improvements to the board’s structure and pay and a series of high-profile vote-no campaigns were launched against the company’s directors.

What we did
We initiated engagement with McKesson in 2012 to raise concerns about several governance related issues, including executive pay and the structure of the board. The combined roles of chair and CEO and the number of longstanding board members perceived to be lacking in responsiveness to shareholder concerns were both key challenges. A weak clawback policy and lack of clarity over the performance conditions attached to executive awards was also an issue. Additionally, the enormous, contractually guaranteed pension pot of the company’s chair/CEO, which had ballooned to $159 million, far outstripped the average of $11.5 million for an S&P 500 CEO and had become a serious reputational issue for McKesson. The views of investors were reflected in the company’s 2013 say-on-pay vote when 78% of shareholders opposed the remuneration policies of the company.

Over the years that followed, we continued to expand our engagement with McKesson on these topics, as it sought to improve its corporate governance and pay structures. More recently, we also counselled the company with regard to its adoption of proxy access and general governance disclosures.

McKesson listened to the issues we raised in our dialogue and to the concerns of other shareholders. Since the start of our engagement, the company has made sweeping efforts to improve its corporate governance standards and engage its investor base. As a result, it is today recognised as a best practice leader within the US and by many around the world.

The company vastly improved in relation to board structure and composition, executive pay, proxy access and shareholder dialogue.

Highlights include:

Board structure:

  • Creation and subsequent strengthening of the lead independent director position with a robust and clear set of powers in addition to several other structural changes to the board’s leadership structure and committee membership.
  • The current lead independent director is now serving in his second two-year term and has received strong support from shareholders in this important role.

Board refreshment and diversity:

  • The McKesson board has undergone significant refreshment, with three new independent directors added during the past two years.
  • McKesson was recognised in March 2016 by the 2020 Women on Boards campaign for having more than a fifth of board seats held by women.

Significant improvements to executive compensation:

  • The board negotiated a $45 million reduction in the chair/CEO’s pension package.
  • Introduction of longer-term incentive plans for executives with a much clearer link to company performance.
  • Meanwhile, the company’s clawback policy has evolved into an example of industry best practice.
  • Remuneration policy is now well supported by investors. In sharp contrast to the 2013 failed say-on-pay result, in 2014 and 2015, 95% of shareholders approved the company’s remuneration policies. This was followed by 80% approval in 2016.

Leading on proxy access

  • In 2015, the board proposed giving significant long-term investors the right to nominate board members through a proxy access by-law, a move approved by shareholders at the subsequent AGM and implemented in July of the same year.
  • The by-laws amendment provide for a 3% and three-year holding requirement and that eligible investors may nominate director candidates in McKesson’s proxy materials for up to 20% of the available board seats

Shareholder dialogue and board responsiveness:

  • McKesson’s management and board have vastly expanded their investor engagement efforts to work more closely with shareholders.
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Darren Brady Darren Brady is sector lead for technology and focuses on governance and engagement activities in the Americas. Before joining Hermes EOS, Darren was based in New York as a product manager with New York Life Investment Management where he was responsible for the positioning and management of the firm’s equity products. Prior to New York Life, Darren held similar roles with Oppenheimer Funds and also previously worked for ING and Haidar Capital Management. He holds a degree in Economics and International Studies from Wake Forest University and the CFA Institute’s Investment Management Certificate.
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Anglo American

Engagement objectives

Governance: Board structure

Governance: Executive remuneration

Governance: Independent board leadership

Governance: Proxy access

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