My first reaction to Gov. Tim Pawlenty’s plans to use the state’s pension board to retaliate against a drug company was that this is the most cynical act in the history of Minnesota politics.
Further reading demonstrated that my initial judgment was unduly harsh.
I had concluded erroneously that the governor wanted the Board of Investment to dump any stock it holds in Pfizer and other pharmaceutical companies. The rest of the article clarified that all Pawlenty wants at this point is a stockholder resolution “to urge more sustainable pricing at Pfizer.”
Pawlenty’s action came after Pfizer said it is cutting off supplies to Canadian pharmacies that export its drugs to U.S. citizens.
Ridding state retirement funds of a good performing stock in a fit of demagoguery would be reprehensible and a betrayal of century-old principles of the Republican Party. A symbolic stockholder resolution is merely harmless showboating one might expect in an election year.
Even if the plan is not terribly important, uncertainty remains. Is this political cynicism on the governor’s part? Or might this be evidence he is, to put it politely, “poorly informed” about corporate prices and profits? Or that the governor has achieved a breakthrough in finance theory that generic economists cannot understand?
The governor’s actions will give some clues. If, as he asserts, it is imprudent to hold stocks in companies with pricing practices that are “unsustainable in the long term and may have a negative impact on shareholder value,” we can expect a rash of similar resolutions.
Pfizer certainly is a profitable company. In 2002 it placed fifth among Fortune 500 firms in terms of profits over assets and 18th in profits over stockholders equity.
By the first measure, the governor also will draft resolutions admonishing another drug maker, Wyeth, together with that perennial price gouger, Microsoft. Both have higher returns to revenues than Pfizer. Admonitions will also go to Maytag, Colgate-Palmolive and Kellogg, all of which must be unsustainably abusing the public because their returns on stockholder equity beat Pfizer’s.
Readers may be heartened that apparently no Minnesota firm stoops to sleazy, unsustainable pricing practices that endanger their share prices. As finance students learn, however, there are several measures of profitability and hence, one assumes, of price gouging.
Examining 10-year total return to investors, it becomes clear that regional firms don’t exactly have clean hands. Best Buy had returns nearly 50 percent higher than Pfizer between 1992 and 2002, and more than twice as high as such other pharmaceutical firms as Merck and Wyeth. Medtronic, Ecolab and U.S. Bank similarly gouged their way to higher returns than these drug firms.
Nor should cheeseheads feel moral superiority. By shamelessly overpricing clothing, Wisconsin-based Kohl’s out-exploited all but four Fortune 500 corporations in the past decade.
No, if Pawlenty is serious about protecting state-managed investments, a warning to Pfizer won’t be the end of stockholder resolutions — not by a long shot.
© 2004 Edward Lotterman
Chanarambie Consulting, Inc.