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4 Lessons for Board Members from Valeant’s Sad Saga

The saga of Valeant Pharmaceuticals provides high theater for observers, something zesty to chew on for opportunistic investors, a potential upside for new CEO Joseph Papa—and the continuation of a self-created headache for Valeant board members.

The board recently ousted the company’s long-time CEO and architect of its business model, Michael Pearson, and removed its former CFO, Howard Schiller, after Valeant lost 90% of its share value in about nine months. Because his compensation was very tightly tied to the value of Valeant’s stock, Pearson’s personal fortune plummeted, as well.

Congressional investigators questioned the company’s drug-pricing practices, including its modus operandi of charging high prices for old drugs, even while critics targeted Pearson’s huge compensation package; then Pearson got sick for a couple of months.

“When times are good and when complacency is tempting, board members “must keep asking the tough questions and challenging management.”

The company also found accounting irregularities after an internal review showed it had effectively double-counted at least part of $58 million in revenue—and that contributing to such shenanigans were “the tone at the top of the organization and the performance-based environment at the company, where challenging targets were set and achieving those targets was a key performance expectation.”

By the time the Valeant board moved to stabilize things by easing out Pearson, directors also had handed a board seat to activist investor William Ackman, whose hedge fund had been crushed by its 9% ownership of Valeant.

“Overall, boards must have a greater understanding of how the firm is operating,” said Dennis Zeleny, a leading consultant to boards and corporations on human-capital strategy and execution. “This is especially true when times are good and stock performance is riding high.”

WWhere did Valeant’s board go wrong, and what can other directors learn from it? Zeleny and other experts weighed in for Chief Executive.

1. Remember that values drive behavior. And behavior drives outcomes, noted Susan Divers, senior leader at advisory company LRN. “Valeant long distinguished itself and impressed Wall Street as a company that shunned drug research as too costly and risky, and instead sought to acquire drugs and drug makers, then slash costs and raise prices,” she said. “A major consequence of this opportunistic business strategy has been regulatory scrutiny, political backlash and consumer outcry at its steep prices for common drugs.”

2. Heed the zeitgeist. Directors must understand “current political and social prevailing winds,” advised Zeleny, who has headed HR for CVS Caremark, Sunoco Oil and other companies. “Few things are as front and center and visible to lawmakers these days as health care and health-care costs. It’s difficult to believe that the board didn’t discuss Valeant’s strategy” in that light.

3. Recognize fire where there’s smoke. When an issue is raised such as accounting irregularities, directors “should take prompt and appropriate action to assess the accuracy of the reports both in the context of the specific concern that was expressed … and impact to policies and procedures,” said Richard Morris, corporate partner at the law firm Herrick Feinstein.

4. Keep challenging management. When times are good and when complacency is tempting, board members “must keep asking the tough questions and challenging management,” Zeleny said. Don’t assume that the stock price is the only and best indicator of corporate performance and prospects. “Board members must continually work to establish productive relationships with their peers and establish a level of trust and credibility not to create conformity, but rather so they’re viewed positively when they ask provocative or tough questions of management.”

Will Valeant be able to recover? It’s up to some of these same board members and to Papa, the new CEO whom they recruited from the CEO job at Perrigo.




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