Truth & Consequences
How to Avoid Costly Mistakes in your Family Business
THE SITUATION
Sackler Family & Opiods
The pitfalls of poor family business governance:
Loss of $4.5 billion
(34% of net worth)
Reputation and long term legacy which took multiple generations to build.
Scrutiny of gifts by charities, education, and research organizations. Reduced impact.
Government scrutiny
into non-related organizations owned/controlled
by the family.
People’s lives broken or ended as result of the business’s pursuit of profits.
The Full Story
WHAT HAPPENED?
In 2017, the Sackler family had a collective net worth of $13B and was world renowned for its lavish gifts to the arts, universities, and medical research. The family consisted of the descendants of three physician brothers - Arthur, Mortimer, and Raymond Sackler - who pioneered early psychiatric practices that ended the common use of lobotomies in psychiatric patients.
In 1952, they purchased Purdue Frederick Company, and Raymond and Mortimer ran the company. Arthur pioneered medical advertising, creating campaigns to encourage physicians to prescribe Pharma products; specifically, the invention of OxyContin, an opioid that helps mitigate excruciating pain and contains strong addictive properties. In pursuit of aggressive profits, Purdue Pharma funded research and paid doctors to make the case that these addiction concerns were over-exaggerated. The company soon launched a multifaceted campaign that knowingly misinformed the medical community about the risks and convinced doctors that OxyContin could safely be prescribed for a variety of medical conditions. [1]
THE REPERCUSSIONS
In 2007, Purdue Pharma pleaded guilty to a felony charge that it had fraudulently claimed to doctors and patients that OxyContin would cause less abuse and addiction than competing short-acting narcotics like Percocet and Vicodin - contrary to the proven research in the field. It paid $600M in fines — one of the largest pharmaceutical settlements in US history — and Purdue Pharma's president, top lawyer, and former chief medical officer each pleaded guilty to misleading the public about Oxycontin's risk of addiction. It was a misbranding charge and a criminal violation. These individuals were all fined and sentenced to 3 years’ probation and community service in drug treatment programs.
From 2015-2019, several states sued Purdue Pharma and its owners for “misleading doctors and patients about the risks of Oxycontin”. In 2019, as part of its tentative settlement of a suit involving more than 2,000 municipalities, Purdue agreed to dissolve and pay several billion dollars by the company and the Sackler family, which still owns it. By 2020, 56,516 Americans had died from synthetic opioid overdose. [1]
In March of 2021, Purdue Pharma filed a restructuring plan to dissolve entirely. The emerging company was dedicated to programs designed to combat the opioid crisis. As part of the terms, a new company was to be formed in its place that would continue selling OxyContin and other medicines. All profits were to be used to pay plaintiffs in the lawsuit and support treatments for addiction. Yet, despite these remediation actions, almost 50% of the municipalities were still not satisfied with the terms and opposed this settlement. [2]
In a bankruptcy court filing on July 7, 2021, multiple states agreed to settle. Though Purdue admitted no wrongdoings, the Sacklers agreed never to produce opioids again and pay billions in damages toward a charitable fund to combat opioid addiction and education. Purdue Pharma was officially dissolved on September 1, 2021.
The Sackler family itself was obligated to pay an additional US$4.2 billion over nine years to resolve various civil claims in exchange for immunity from criminal prosecutions. Yet once again this "legal firewall" was opposed by 24 states and Washington DC. On December 16, 2021, U.S District Judge Colleen McMahon ruled that the Sacklers could not have immunity in civil liability cases in exchange for the $4.2B. [4] Ultimately, this unfortunate saga continues.
QUESTION
What role did governance play in the bankruptcy of Purdue Pharma, the destroyed reputation of the Sackler family, not to mention the impact on individual family member wealth?
Multiple conflicts of interest existed without clear checks and balances.
Shareholder ROI was the measure of success with probably minimal consideration of consequences.
Values of the board and family were likely not clearly articulated in a governing document.
Lack of transparency coupled with ambiguous guidelines likely led to detrimental decision making.
Focus on short-term gains permanently eliminated Purdue's ability for long-term growth.
The Ramifications of Poor Family Business Governance
While the Sackler’s situation is extreme, the business decisions and investments families make have potential irreversible ramifications – both positive and negative. So, what role did governance play in the bankruptcy of Purdue Pharma, the destroyed reputation of the Sackler family, and the impact on individual family member wealth?
Governance is the underlying system of rules, practices and processes used to direct and control a company. Governance balances the interests of stakeholders including shareholders, management, employees, suppliers, customers, financiers, government, and the community. It facilitates major decisions, advances strategic vision, and drives stakeholder value.
In the case of Purdue Pharma – at its most simplistic level – the demand for shareholder ROI took precedence and dramatically overshadowed the long-term interest of all stakeholders. The decision makers within this family business blatantly overlooked the research and knowingly neglected the documented risks of OxyContin use, not to mention the long-term health of their customers. If family members opposed the aggressive pursuit of revenue, despite the known consequences, their voices were ignored.
While I am not privy to the precise governance practices of Purdue Pharma or the Sackler Family, I do know that family businesses often lack transparency and have ambiguous guidelines with respect to to management and board decision making. Additionally, employee shareholders within the family unit may view risk very differently from non-employee family shareholders.
Family members who are employees typically want to reinvest and continue to grow the company. Non-employee family members typically want dividends. As successive generations become owners, the probability that some family members will want to sell grows over time. Family members wonder: “What is management’s priority – their individual wealth as managers and owners or the family’s total wealth?” A governing system of values and decision making agreed upon and used by management and the board of directors can help to minimize the potential for fraud, scandal, bankruptcy and severing of family ties.
In the next installment of Truth & Consequences, we’ll talk about what a Board of Directors does.
IN THE MEANTIME
Here are some questions to think about:
