(CN) - A derivative action says William Weldon, the CEO of Johnson & Johnson who earned a combined $175 million from 2006 to present, is "grossly" overpaid given the "highly publicized compliance failures, recalls and misconduct" that have occurred on his watch for which he took full responsibility at a Congressional hearing.
The George Leon Family Trust filed suit over "Defendants' failure to follow J&J's executive compensation philosophy, and J&J's guiding principles for executive compensation. In failing to follow J&J's executive compensation policies and procedures, Defendants have breached their duty of loyalty and candor, thus grossly over-compensating Weldon, whose total compensation now exceeds $175 million for the period 2006 to present," the complaint states. "For purposes of J&J's executive compensation, evaluation of executive 'performance' includes use of financial metrics, leadership measures, long-term growth measures, and the progress of J&J's reputation. In these areas, J&J has stagnated or suffered under Weldon's leadership. For example, from January 3, 2007 through January 3, 2012, the price of J&J common shares declined 2.69 percent. Since 2007, net sales were flat; operating cash flows were flat; research and development declined; total liabilities increased and liabilities as a percentage of assets increased."
J&J has issued a number of expensive recalls that have hurt the company's reputation in the last few years, according to the complaint. In 2010, J&J tried to cover-up a recall of 200 million of bottles of bacteria-tainted Motrin. In 2011 and 2012, it again had to recall millions of bottles of Motrin and children's Tylenol. It also recalled "two types of artificial hips, after 93,000 of those artificial hips had been implanted in patients worldwide," the complaint says (emphasis in original).
In addition, "J&J's unlawful marketing and sales of Risperdal alone will cost the company multiple billions of dollars in settlements and/or fines," the suit states. In April, an Arkansas judge ordered J&J to pay $1.1 billion for fraudulently marketing Risperdal, an anti-psychotic drug.
"Yet, during the same extraordinary six-year period that J&J has experienced stagnant performance and unprecedented reputational harm, Weldon has seen his annual compensation double, from $14.3 million in 2005 to $28.7 million in 2010 to $26.8 million in 2011," according to the complaint.
"Defendants have long been aware that J&J has experienced an unprecedented level of highly publicized compliance failures, recalls and misconduct that resulted in violations of J&J's Credo - all throughout Weldon's leadership. ... The misconduct, and related violations of the J&J Credo, that has taken place under Weldon's watch has resulted in scathing findings that call into question the Board's commitment to the Credo and J&J's very core governing principals and compliance culture," the complaint statse..
The complaint cites Weldon's testimony before the Congressional Committee on Oversight and Government Reform during its investigation of the Motrin recall, when he stated that the company's "first responsibility is to the people who use our products. I stated and I would state again that we have let them down. There is absolutely no doubt we let them down. This was not one of our best moments." (Emphasis in original.)
According to the complaint, "Defendants allowed Weldon's compensation to be lavish and extreme by any measure. For example, in 2010 Weldon was the highest paid executive of 86 pharmaceutical companies tracked by the AFL-CIO. Of these 86 companies, J&J was by far the company that suffered the most damaging compliance and reputational failures throughout 2010.
"Weldon's compensation has also approximated (and sometimes exceeded) the total combined compensation of the next four most-highly-paid J&J executives. For the period 2006 through 2010, Weldon was compensated over $147 million and the combined compensation of the next four most-highly-paid J&J executives was $154 million," it continues.
"In sum, the Board's decisions to depart from J&J's executive compensation philosophies and guiding principles, by repeatedly awarding Weldon such lavish compensation regardless of performance, while leading J&J to extraordinary reputational harm, were not valid exercises of business judgment, but were unreasonable and disloyal acts which lacked good faith," the Trust claims.
The Trust is represented by James Notis, Mark Gardy, Jennifer Sarnelli and Charles Germershausen of Englewood Cliffs, New Jersey, Blake Harper of Hulett Harper Stewart in San Diego, Andrew Hutton and Austin Evans of the Hutton Law Group in San Diego, and Richard Maniskas of Ryan & Maniskas in Wayne, Pennsylvania.