Valeant Pharmaceuticals International chief executive Joseph Papa speaks during the company's annual general meeting in Laval, Quebec, on June 14, 2016.CHRISTINNE MUSCHI/Reuters
Shareholders of Valeant Pharmaceuticals International Inc. who choose to look over the documents in advance of this week’s annual meeting will find an inspiring tale of corporate responsibility. After listening to shareholder feedback, the company says, it has decided to rejig its chief executive pay plan, scrapping a long-held, aggressive pay approach and, amazingly, cancel a huge stock award it made to Joseph Papa two years ago.
There is, however, another side to this story. It is one that suggests that the changes Valeant has made are as much a multimillion-dollar do-over for Mr. Papa as they are a new shareholder-friendly approach to the company’s compensation plans.
Let’s first recall the circumstances of Mr. Papa’s arrival in the top job in 2016. Valeant had been a stock-market success story, delivering billions of dollars in shareholder value and briefly becoming the most valuable company in Canada – until things totally unravelled. Under former CEO Michael Pearson, investors quickly turned on the company’s debt-heavy, growth-through-acquisition model, accompanied by a range of aggressive accounting choices, questionable ethics and a bizarre related-party deal with a drug distributor called Philidor.
Mr. Pearson found himself excused from further service, and the company’s board, infused with new directors, turned to Mr. Papa, the CEO of drug maker Perrigo Co. PLC. The challenge was great and, to lure Mr. Papa, Valeant provided a hefty compensation package similar to one once given Mr. Pearson. Had Valeant’s shares risen to US$270, just a few dollars more than their 2015 all-time high, Mr. Papa’s package would have been worth a gob-smacking US$773-million.
Shareholders were underwhelmed, to say the least, and gave Valeant just 68-per-cent approval in its 2017 “say on pay” vote, essentially a failing grade when most such votes come in above 90 per cent. The company says it took that vote to heart. Valeant says members of the board of directors “directly engaged” in April, 2017, with 11 investors holding 30 per cent of the company’s shares, and one thing that came up was the “need for alignment between shareholder interests and [executive] compensation.”
Mr. Papa’s huge grant of “performance shares” was the problem, the company learned. Shareholders expressed “concerns” over the plan’s high share-price goals, namely whether they appropriately balanced incentives versus risk and “provided enough retention incentive,” the company says. (More on this in a moment.)
As a result of these conversations with investors, Valeant’s board determined it needed a stock plan for its CEO that was similar to the one used for all its other lower-level executives. Rather than relying solely on share-price appreciation, it needed to use performance metrics, such as return on capital. Share awards should be more frequent, instead of in huge chunks designed to cover multiple years of performance. And the awards should take a “portfolio approach” – using performance shares, stock options and restricted stock that vests (i.e., becomes saleable) on the passage of time.
So, Valeant says, Mr. Papa will now get a US$10-million stock award for 2018. And the company says it has cancelled the 933,416 performance-share units it gave Mr. Papa two years ago. “Valeant Nixes CEO’s $29.8 Million Stock Award in Pay Overhaul,” Bloomberg headlined a story, which ran on The Globe and Mail website earlier this month.
It all sounds so good. But did Mr. Papa really hand over nearly $30-million of stock? Not so fast. Valeant placed a US$29.8-million value on the award when it was made, the result of calculating the probabilities of possible outcomes, because there were many. The plan made it possible for Mr. Papa to receive none of the shares, if Valeant’s stock price was too low, and for Mr. Papa to receive twice as many shares if the stock hit that US$270 mark.
That framework worked out well for Mr. Pearson, for a while, but it’s been a dud for Mr. Papa. A quick look at the ticker shows that Valeant’s New York Stock Exchange shares closed at about US$18 on Friday, a bit more than half the US$32.65 on the day of the 2016 award. That means Valeant requires a 240-per-cent return over the next two years for any of Mr. Papa’s shares to vest.
There’s a pretty good chance that the award he so generously gave up was going to be worth nothing.
Therefore, we have the proxy’s code words, “the shareholder concerns,” of whether Mr. Papa’s previous award “provided enough retention incentive.” Not, of course, because the award wasn’t generous enough at the time; the lack of incentive comes from the 50-per-cent decline in the share price under Mr. Papa that has made the award worth a lot, lot less than it could have been.
Valeant spokeswoman Lainie Keller says that the new package, in addition to responding to shareholder concerns, “serves as an affirmation of Mr. Papa’s leadership and the significant contributions he has made to the company’s turnaround.” So far, though, the market isn't sold on the turnaround plan, given the share price has generally trended down, not up, in recent months.
Mr. Papa has another chance, now, to make millions from a rebound. Longer-term Valeant investors won’t see a return to riches so quickly.