VRX Bausch Health Cos

Ronald Barusch 

The latest musical chairs at two big drug companies long identified with their chief executives is a stark reminder for directors of how lonely their jobs can quickly and unexpectedly become.

Valeant Pharmaceuticals International Inc. Monday tapped Perrigo Co. CEO Joseph Papa as its new leader, confirming a report in The Wall Street Journal last week. He will succeed Michael Pearson, who has overseen Valeant during a period of rapid growth -- and then an accounting scandal.

Both companies have in fact experienced upheavals of late, going through grueling hostile takeover battles that gave their respective CEOs an air of indispensability. In the case of Perrigo, last year it convinced its shareholders to turn down a bid from Mylan NV. Mr. Papa personalized the fight in September when he said on a conference call that the proposed deal was "insulting."

Perrigo's board unanimously supported management's resistance. Undoubtedly, the directors expected Mr. Papa to lead Perrigo to performance that would prove shareholders were making the right decision. So it is likely that they were surprised when they recently learned Mr. Papa was planning to quit to run Valeant.

It has been only a few months since Perrigo shareholders turned Mylan down, but so far Perrigo's stock price hasn't vindicated Mr. Papa. On Monday, after the announcement of his resignation and revised earnings guidance, Perrigo closed at $99.40, down more than 50% from the stock's 52-week high. Mylan, which was offering cash and stock, was down as well. But its best and final offer would be worth about $179 a share based on Mylan's closing price Monday. That is a lot of ground for Perrigo to make up without its now-former CEO's leadership.

The directors probably never even gave much thought to the possibility of losing Mr. Papa. As recently as November, they improved the terms of his employment contract, including by extending the term for two years past any change of control.

Perrigo's story shouldn't be far from the mind of any director asked by management to reject a hostile bid and to rely on its ability to expand the company's value beyond any premium being offered.

Valeant's decapitation, although to some extent self-inflicted, is likely no less jarring for that company's board. Valeant was a highflier less than a year ago, and its shares have declined more than 85% from their 52-week high. The board decided last month to seek a new CEO following the accounting issues. The company determined "that the tone at the top of the organization and the performance-based environment at the company...may have been contributing factors resulting in the company's improper revenue recognition." Mr. Pearson could be forgiven for being a bit amused by that statement. You don't need to be an expert in corporate governance to know that the top of a corporation isn't just the CEO -- it is the board, too.

And Valeant's board likely supported the company's performance targets because they expected to have Mr. Pearson around to implement them and deal with any side effects. The tone wasn't any secret. The old Allergan, as it was defending itself against a hostile takeover bid from Valeant, attacked Valeant's business model as unsustainable and accused its suitor of "opaque financial disclosures."

As much confidence as a board may have in a CEO, the executive's circumstances can change in an instant. (Mr. Pearson took an extended medical leave in the middle of the accounting crisis.)

The board, not the CEO, is ultimately responsible for managing a company, including setting the "tone at the top." It should have a succession plan in the event that the CEO becomes unavailable (which Perrigo says its quick naming of a successor to Mr. Papa shows it had). If a board forgets that, no matter how talented and hard-charging its CEO may be, the wealth of the shareholders will be at risk.

--Mr. Barusch is a retired M&A lawyer who writes about deal making for The Wall Street Journal.

(END) Dow Jones Newswires

April 26, 2016 02:47 ET (06:47 GMT)

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