Several months ago, we took a look at ethical pharmaceutical companies on the occasion of a publication by Ethisphere magazine that ranked the "most ethical companies." We now revisit those companies on the occasion of the formal announcement that Pfizer and a subsidiary have agreed to pay $2.3 billion to resolve criminal and civil claims stemming from the illegal promotion of certain pharmaceutical products (read, unethical behavior).
The Society is interested in the economic value of business processes that support intangible assets such as ethics, innovation, sustainability, etc that stakeholders percieve as reputation. Companies reputed to be more ethical, the Society suggests, will reward shareholders with above average returns.
In our 1 May MISSION:INTANGIBLE posting, we noted that the reputation ranking of Novartis (NYSE:NVS), as measured by the Steel City Re Corporate Reputation Index, was superior to Eli Lilly (NYSE:LLY), whose index ranking, in turn, was superior to Pfizer (NYSE:PFE). We noted, however, that Pfizer’s ranking appeared relatively stable while Lilly’s ranking was drifting down rather quickly.
In our experience, firms with superior reputation rankings as measured by the Steel City Re Reputation Index outperform their peers. Those with declining reputation indices tend to underperform their peers. We therefore expected that going forward, Novartis would outperform Pfizer, and that Pfizer would outperform Lilly. The stability of the reputation index data for Pfizer suggested that stakeholders had already factored the alleged ethical breaches into their respective assessments.
Yesterday’s announcement provided an excellent test of our expectations for economic behavior going forward from 17 April (4/17).
The data, summarized above from a Big Charts graph (pasted below), confirm the forecast we made based on the Reputation Index. From the period beginning 17 April (when we ran the index data for the 1 May blog note on these companies) through yesterday, Novartis rewarded its shareholders with a 29% return on equity. Pfizer rewarded its shareholders with an 18% ROE, and Lilly disappointed its shareholders with a ~0.5% gain.