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CVS: Having The Guts To Go First

Doing the right thing first is seldom easy.

CVS Caremark announced Wednesday that it would become the first national pharmacy chain to stop selling cigarettes and other tobacco products altogether. The company’s chief executive, Larry J. Merlo, said “We came to the decision that cigarettes and providing health care just don’t go together in the same setting,” according to The New York Times.

It is a gutsy, principled and potentially expensive move. It’s especially gutsy, and controversial, for a publicly traded company.

The initial estimates are that the decision will cost CVS about $2 billion in sales, or about 17 cents per share of stock, annually. I suspect these estimates are probably low. CVS may only sell $2 billion in tobacco products, but not many customers just buy a pack of cigarettes when they go to the drugstore. Once they are there, they probably pick up other items too. Maybe milk. Maybe candy. Maybe the prescriptions they need to counter the many ill effects of smoking.

CVS is increasingly moving toward providing more health services at their stores. The pharmacy chain has the second largest number of retail locations in the country, 800 of which include “Minute Clinics” that provide basic care for common ailments and preventive measures like flu shots. Merlo has said CVS wants to add 700 more such clinics by 2017. The clear narrative CVS hopes to convey to the public is that it is a company less about selling assorted retail products and more about meeting health care needs that do not require a visit to the doctor.

I have no doubt that, as CVS says, companies focused on protecting health have no business in the tobacco business. Some will probably argue that they have no business in, say, the candy business either. I don’t buy that logic, though. Candy does not inexorably poison us as tobacco does.

If CVS were a privately held company, the analysis could stop there. Private business owners can do whatever they want with their companies. They can choose to forego profit for principle.

A call like this one is tougher for the directors and managers of a publicly traded enterprise like CVS. They have a fiduciary duty to shareholders, and that duty generally takes the form of maximizing the long-run value of the property - that is, the company - entrusted to them. CVS may argue that its long-run value is enhanced by standing on principle this way. It seems clear that this argument will, in large part, concern positioning the company to take a larger share of the health care dollar going forward. The company’s leadership may also argue that standing on principle is likely to draw some customers to them, even as they lose others.

Maybe that logic is sound, but it is not going to be easy to prove. I am sure someone will file a lawsuit obliging CVS to prove it, too. Unfortunately for CVS’ directors and management team, the likely effect on revenue and customer traffic is far more easily quantified than the projected and intangible benefits they presumably hope this decision will create.

In the meantime, CVS is doubling down on its position. Not only will it stop selling tobacco products completely by October, but it will launch a “robust national smoking cessation program” this spring, the Los Angeles Times reported.

While some shareholders may be hard to win over, CVS’ decision is drawing praise from health care professionals and antismoking groups. Kathleen Sebelius, secretary of Health and Human Services, said in a statement, “Today’s CVS/Caremark announcement helps bring our country closer to achieving a tobacco-free generation.” Dr. Risa Lavizzo-Mourey, president and chief executive officer of the Robert Wood Johnson Foundation, said of the decision, “CVS is clearly establishing a leadership position in making the country healthier and in building a culture of health.” Such public endorsements are likely to help CVS justify its choice, though they may not be enough alone to appease shareholders right away.

I don’t think CVS is doing wrong by doing the right thing. Even a public firm can lead by example, and the example of a company in the health care business making its customers’ health its chief business focus is a powerful one. Time will show if CVS’ shareholders will reap the rewards of being patient with this change. In any case, I think the position of CVS management - besides being ethically strong - has sufficient business justification that courts should refrain from second-guessing it. If shareholders are unhappy, they can elect a new board to pick new managers, or they can just sell their shares.

Congratulations to CVS on having the guts to go first. This nonsmoker, at least, is willing to walk an extra block or two to show my appreciation through my purchases. The walking will be good for me, too.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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