Yesterday we noted how a corporation is a single legal “person” made up of many people – in many respects not all that different from a single person entity. However, there is a substantial difference that should be addressed regarding corporations and their potential for abuses and wrongdoings. By it’s very nature a large corporation has more power than a small company simply due to the number of individuals – its mass if you will (we could complicate the matter further by looking at types of products dealt with, market position, etc. but let’s keep it simple for purposes of this discussion). As a result a corporation has the power to have a much greater impact than any one individual – for better or for worse. The larger the corporation, the greater the potential all else being equal.
There exists a second layer to this equation as well. By nature of the organization structure, a corporation’s CEO (and maybe the board of directors) wields much of the organization’s power directly and therefore, that person can have far more impact than could someone further down the organizational tier. Effectively, one individual is able to control the decisions of the many in a very direct manner. For some, this concentration of power is cause for concern.
However, there is a very real constraint on this concentration of power. That constraint is the market. If you or I commit a crime we are put on trial and either convicted or acquitted. Once this has occurred we cannot be tried for the same crime a second time (double jeopardy). A corporation faces a slightly more complicated scenario. Broadly speaking, corporations are subject to the same types of laws as you and I are (along with certain corporate law issues) and they can be sued, fined, etc. but they also face very real punishments from the markets – and in some instances congressional and/or governmental interventions.
Take the recent example of Mylan Pharmaceuticals – the maker of EpiPen. When news broke of yet another price hike for the EpiPen a firestorm ensued. Sales of the EpiPen were around $1 billion per year but in the ensuing scandal Mylan lost $3 billion of its market value in five days. Let’s state that again, Mylan lost over $3 billion of its market value in five days. To make matters more interesting, Mylan actually broke no laws. The FDA has, for unknown reasons, not permitted other companies to get approval on a generic product to compete with Mylan so the company has enjoyed what amounts to a federally protected monopoly. Thus the yearly price hikes leading to a six-fold increase in the price of an EpiPen since ’07 (it’s actually slightly more complicated due to convoluted insurance regulations but essentially that’s what happened).
The company’s reach exceeded society’s ethical boundaries and the market punished the company for doing so. Congress got involved as well. Some state the company had no choice but to raise prices as there is a fiduciary duty to shareholders but that is at least partly false. Profits should be maximized – but not in a manner which breaks laws or damages the company valuation. Indeed, some analysts had been warning about the potential for harm from unchecked price increases but the CEO chose not to heed that advice. I am certain she, and the company’s shareholders now wish she had.
Post this event there were many cries for more regulation. I would argue strongly for less (or none). If Mylan’s competitors were allowed to produce a generic substitute, none of this would have occurred. Consumers would have ready access and choice at far lower prices and Mylan would have avoided this mess. The FDA and governmental regulations are the true culprits here but that’s a story for another day.
Postcript to this story. Shares of Mylan’s stock closed at their lowest level of the year today but were up sharply (8%) in after-hours trading as the company disclosed a $465 million settlement with the government.
A loss in market value well in excess of $3 billion. More negative press than imaginable, and a $465 million fine. That’s some punishment…
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