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Pay-or-Play Capitalism

Too many corporate executives have forgotten the principle of enlightened self-interest. But rather than wait around for CEOs to see that healthy societies are essential to their firms' own long-term success, policymakers should start imposing costs on companies that free-ride on public and social goods.

LONDON – When I led the British government’s Review on Antimicrobial Resistance (AMR) from 2014 to 2016, we suggested various ways to fund a market-entry reward for drug makers that develop new antibiotics and vaccines. To that end, one of our most controversial proposals was what we called “pay or play”: a $12 billion pot would be financed by a surcharge levied on the overall sales of pharmaceutical companies that were not developing new drugs.

I came to embrace this idea when I learned that many leading pharmaceutical companies often manage their price-to-earnings performance by buying back their own shares, thereby reducing the number of outstanding shares in the market. And while many in the industry would say that there is little difference between this and issuing a dividend payment, I beg to differ.

A dividend payment benefits all shareholders directly, whereas share buybacks directly benefit only the firm’s senior executives. Yes, in theory, if buybacks help to boost the price-to-earnings ratio, that might help shareholders generally, all else being equal. But if pharmaceutical companies are using buybacks to boost executive compensation while avoiding investments that could lead to far-reaching societal benefits, then something is wrong.

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