GlaxoSmithKline had a terrific 2013 apart from one incident that has the potential to damage the company severely in its most important emerging market. The big issue, of course, is the allegation that the Chinese division was engaged in rampant bribery of local doctors.
Eight months after Chinese police raided GSK’s offices in the country, details of the alleged fraudulent behaviour are still in short supply. The Chinese authorities haven’t yet presented their allegations and GSK’s own investigation, commissioned from law firm Ropes and Gray, hasn’t yet reported.
So it’s hard to know if we’re looking at a tale of a few corrupt employees executing a sophisticated internal scam that could not possibly have been detected by head office; or whether the real scandal is lax oversight by GSK in the UK and poor audit systems, failings that could rightly be blamed on the top brass.
In the circumstances, GSK’s pay committee faced a tricky problem when determining boardroom bonuses for 2013. If the Chinese affair is a big scandal that should have been detected and will undermine GSK’s long-term ambitions in China, why pay any bonuses to executives? If it’s a more modest tale, then, yes, it would be hard to ignore GSK’s strong performance in drug-discovery, profits and cash generation last year.
The committee cannot be said to have risen to the challenge. The Chinese investigation was considered “at Sir Andrew’s request”, says the remuneration report, suggesting that pay chairman Tom de Swaan needed a prompt from chief executive Sir Andrew Witty himself.
The eventual conclusion was a fudge. Bonuses were reduced slightly – Witty’s bonus was cut by £243,000 but he still got £1.87m. This, shareholders are invited to think, shows GSK is “mindful of the impact this issue has had on the reputation of the company”.
But “reputation” is a woolly word in this context. Investors want to know if Witty and his senior colleagues, while clearly unaware of any Chinese shenanigans, should have known. If the answer is not yet clear, a common-sense remedy would be to defer bonuses until all the facts are in; alternatively, emphasise that payments will be clawed back if HQ is deemed at fault.
De Swaan’s stance looks confused. Given the seriousness of the allegations, that’s not a message GSK should be sending.