Fixing a Sour Corporate Culture: Valeant Pharmaceuticals Faces an Uphill Challenge
Like the Greek mythology character Sisyphus, Valeant Pharmaceutical is attempting to atone for its sins and turn its corporate culture around. I am not usually a cynic but when I see these transparent attempts to reverse a company’s culture, I have a degree of suspicion.
In recent weeks, Valeant took the following steps:
- Hired a new CEO Joseph Papa
- Removed five directors from its board
- Filed its long-delayed annual report
- Created a committee to review its pricing of its drugs
The new CEO Joseph Papa, commenting on the new drug pricing committee stated, “We are committed to ensuring those mistakes are not repeated.”
Valeant’s recent proxy statement noted “Our Board has accelerated the refreshment process in light of recent events.” From this I guess it is not clear whether board members were replaced or whether they attended a cocktail party.
Valeant faces a laundry list of accusations and investigations. Its stock price has fallen over 70 percent. Some are even raising questions as to the integrity of Valeant’s primary accounting model for acquisitions. Former CEO Michael Pearson will remain on the hot seat during these investigations.
Valeant’s recent 10-K said it all in a stinging paragraph about its “material weaknesses” in its financial reporting:
These material weaknesses relate to the tone at the top of the organization and the accounting and disclosure for non-standard revenue transactions particularly at or near quarter ends. The improper conduct of the Company’s former Chief Financial Officer and former Corporate Controller, which resulted in the provision of incorrect information to the ARC and the Company’s independent registered public accounting firm, contributed to the misstatement of financial results. In addition, as part of this assessment of internal control over financial reporting, the Company has determined that the tone at the top of the organization, with its performance-based environment, in which challenging targets were set and achieving those targets was a key performance expectation, may have been a contributing factor resulting in the Company’s improper revenue recognition and the conduct described above.
The challenge for the new CEO and the entire company is how to reverse or replace a culture that permeated every aspect of the company’s operation? Or to put it another way, how can you create a positive culture from a company that has so little positive culture at its core?
Warren Buffet recently explained why he never invested in Valeant and rejected repeated requests from Valeant leaders to do so. According to Buffet, he saw a number of red flags flapping in the wind at Valeant. At bottom, Buffet rejected Valeant because of its slavish devotion to short term gains. Also, Buffet noted, that whenever a company pursues a course of action that puts it on the front page (e.g. astronomical price increases in drug products), “that will eventually get you into trouble.”
Buffet’s partner, Charlie Munger, was a little more direct – “Valeant, of course, was a sewer,” and noted that the directors deserve “all the opprobrium they are getting.”
While some may offer optimistic predictions for Valeant’s future, I find it hard to accept that a company that will be the subject of multiple federal and state investigations, along with aggressive shareholder litigation, can come out of this tailspin in the next few years. Valeant is the perfect example of abuse that flows from slavish devotion to quarterly earnings at the expense of long-time sustainable growth. To replace the short-term model with a mature, long-term incremental growth model requires major changes in Valeant’s focus, starting with traditional research and development of drug products and avoidance of short-term acquisition strategy built on huge debt and large price increases for acquired drugs.