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Preventing the Next Martin Shkreli

December 22, 2016, 3:32 PM UTC

An eternal vexation for most business leaders is that, time and again, the worst leaders prompt regulators to create new rules that govern all of them. Latest example: the new Senate report on prescription drug prices. It was of course sparked by the actions of the loathsome Martin Shkreli, former CEO of Turing Pharmaceutical, and former Valeant Pharmaceuticals CEO Michael Pearson. They, and Rodelis Therapeutics on a smaller scale, all used the same business model, buying rights to off-patent drugs that were single-source lifesavers for victims of rare diseases, then raising prices by hundreds or thousands of percent.

It was legal but stupid. As social media turbocharged the outrage, the CEOs got fired, the price increases had to be rescinded, and the companies’ reputations were trashed. Now comes the inevitable next step: government’s response. The new Senate report is bipartisan and narrowly focused, so it isn’t nearly as bad as it could have been. It does not propose price controls but instead calls for measures to increase competition so companies pursuing the Turing and Valeant model couldn’t price like monopolies. Nonetheless, the case poses a couple of clear challenges for business leaders:

-How can good business leaders prevent bad ones from poisoning the business environment? The only answer that seems to have worked is the formation of strong industry associations that police themselves in order to ward off heavy-handed government regulation. For example, the SEC does not directly regulate accounting standards for publicly traded companies. That’s because the accounting profession and public companies run the Financial Accounting Standards Board, knowing that if they do a poor job, the SEC or other regulators could land on them like a ton of bricks. And even that strategy isn’t foolproof; after the accounting scandals at Enron and WorldCom, Washington imposed a new layer of regulation, the Public Company Accounting Oversight Board.

-What are the next universal rights that government will feel it must guarantee? The pharma scandal got white-hot because the public broadly agreed that if a lifesaving drug for some patients exists, then those patients have a right to get it at an affordable price; it wasn’t ever thus. There’s similarly broad acceptance that food and housing are basic universal rights. What’s next? A 2012 survey by the Internet Society found that 83% of respondents believe Internet connectivity is a basic human right. Vigorous price competition already disciplines pricing for connectivity in the U.S. and many other countries, but you can’t help wondering what new rules await broadband providers as the human-right view of connectivity becomes mainstream.

Risks posed by unscrupulous or unwise competitors will never go away and will usually feel non-urgent. But the best business leaders will make time to prepare for them.

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