Why the trouble at Valeant starts with its board

Valeant Pharmaceuticals is beset with problems—a collapsing share price, mounting debt, unreliable financial statements—and it’s now jettisoning its CEO and pinning blame for shoddy accounting on a former CFO. But the role of the company’s board of directors has thus far escaped criticism, and a closer look reveals the board’s structure was less than ideal, and may have contributed to Valeant’s current woes. Despite changes to the board, Valeant still has work to do, critics say.

Two flaws were having both outgoing CEO Michael Pearson and former CFO Howard Schiller on the board in the first place. It’s not unheard of to have executive leaders also sit as directors, but it’s not considered to be a best practice. “They certainly weren’t reaching for the stars in terms of achieving real independence,” says Chris MacDonald, who teaches business ethics at the Ted Rogers School of Management.

Read: Valeant shares drop 47%

Boards need to be completely independent to function properly, and an executive’s presence can exert “undue influence,” says Richard Leblanc, a professor at York University. “When there’s a very strong dominant CEO and CFO, we see directors not speaking up. And when I ask them why they don’t speak up they say, ‘I’m intimidated.’ These are directors you wouldn’t expect to be intimidated,” he says.

Schiller’s presence on the board while also serving as CFO was particularly odd, according to Leblanc. “It’s highly anomalous to have a CFO sit on the board of a publicly traded company,” he says. “Every time the audit chair committee reports to the board about audited financial statements, transactions and financial risks, the CFO is sitting there as part of the board. There’s an inherent conflict.”

The problems surrounding the composition of Valeant’s board don’t stop there. Four of their twelve board members hail from hedge funds: two from ValueAct Capital and two from Pershing Square Capital. Leblanc says hedge fund executives tend to be more focused on short-term results. Recruiting so many board members from the same industry (even if they’re from different firms) doesn’t mean they’re necessarily independent of each other, as they tend to vote as a block.

Read the full story at Canadian Business.

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