Outcome: Successfully withdrawn following company commitment to establish explicit Board Committee responsibility for oversight of product safety and quality. This oversight responsibility will be added to the Charter of the existing Research, Innovation and Technology Committee of the Board. This existing standing Committee will be re-named to incorporate the word “Quality”. The Board also agreed to prioritize product safety and quality and to bolster public disclosures related to product safety and quality in its forthcoming Annual Report on Form 10-K and Proxy Statement.
According to Zimmer Biomet’s Code of Business Conduct and Ethics, “Zimmer Biomet is committed to protecting the health and safety of its Customers, Team Members, the public and the environment” and “we have adopted and implemented regulatory compliant systems and processes to ensure the highest standards of quality and safety.”
Product safety and quality issues present an area of high risk for Zimmer Biomet. Because its business is focused on orthopedic, prosthetic, and surgical appliances and supplies, and high production volumes, Zimmer Biomet is particularly exposed to regulatory, reputational, and recall related financial risks.
Most companies in the medical device manufacturing industry report that their operations are certified against ISO 9001 or equivalent widely accepted product safety/quality standard. Zimmer Biomet does not, and it does not appear that it has systematic and comprehensive supplier training for quality assurance. Finally, it has not shown that it has plans or policies to address situations where its suppliers or internal manufacturing systems unexpectedly fail and harm patients.
In July, the US Food and Drug Administration issued Zimmer Biomet a warning letter over nine quality system issues uncovered at its facility in Montreal. In 2015 the company had 29 recalls including the NextGen Complete Knee Solution.
Given that the U.S. FDA and its international counterparts are increasingly prioritizing that drug manufacturers produce higher quality and more consistent outcomes in their manufacturing lots, we believe Zimmer Biomet’s management needs stronger oversight from its Board to ensure long term, adequate oversight in this key operating area which is facing increasing regulatory scrutiny, competition and U.S. payer pushback.
An October 2016 PWC survey reported that 85% of board members in the pharma/life sciences industry feel that regulatory compliance risks pose the greatest oversight challenges to their boards.
CVS Health and Johnson & Johnson are two examples of companies in this sector that are addressing this challenge by creating board committees with product safety and quality issues being a top priority of the committee mandates. JNJ’s board committee was created after it confronted more than 7,500 lawsuits for its recalled hip implants and paid billions in settlements. We believe an equally important concern is board member expertise in product safety and quality.
Resolved: shareholders request that the Board issue a report (at reasonable cost, in a reasonable time and excluding confidential information) evaluating the merits of Zimmer Biomet (1) updating existing board committee responsibilities to make explicit reference to product quality and safety in committee charter(s); (2) creating a board committee dedicated to product quality and safety; (3) strengthening Board expertise in pharmaceutical manufacturing and product quality and safety; and (4) adopting any other related governance improvements that the Board wishes to consider. The report should include sufficient information for investors to assess the quality of the evaluation and should provide the Board’s recommendations.