Last fall, when Valeant Pharmaceuticals International Inc. was under fire from politicians and short sellers, company director and former chief financial officer Howard Schiller called CEO Mike Pearson, offering to help. "When you're family's attacked, you go home," Mr. Schiller told The Globe and Mail in December. "The reality on the ground at the company and the perceptions in the media and the stock market couldn't be more different."
The company's united front has disintegrated into an ugly family feud. Not only is Mr. Pearson leaving, but the board has asked Mr. Schiller for a divorce, and he has refused.
On Monday, Valeant accused Mr. Schiller and a former controller in regulatory filings of "improper conduct" by providing incorrect information to the board and auditors while he was CFO, contributing to misstated results.
The board asked Mr. Schiller to resign as a director, but he declined, rejecting the company's allegations. Instead, he pointed the finger back to the controller and outside auditors. This comes just weeks after Mr. Schiller stepped down as interim CEO following Mr. Pearson's hospitalization for pneumonia. "This is the last thing they needed," said Rick Powers, national academic director with the Directors Education Program at the University of Toronto's Rotman School of Management.
Removing Mr. Schiller is something only shareholders can do at an annual meeting, if there are more candidates than director positions and Mr. Schiller doesn't get enough votes for one of the 14 posts. "They're in a pickle," said Richard Leblanc, associate professor of law, governance and ethics at York University. "The CFO should never have been put on the board. It's an inherent conflict of interest."
Mr. Schiller, 54, joined the board in September, 2012, nine months after he became CFO. A board job for a company's CFO is not unprecedented, but it's uncommon, Mr. Powers said.
During his four years as Valeant CFO, the low-profile Mr. Schiller was seen as a key reason for Valeant's success as it completed more than 100 acquisitions.
Mr. Pearson was a former McKinsey partner and architect of Valeant's strategy, transforming it from an underperforming pharma firm into a lean, mean consolidator that slashed staff and research and development budgets at acquired firms and paid little in corporate taxes. Mr. Schiller was the former chief operating officer of Goldman Sachs' investment-banking division whose experience meant Valeant could move rapidly on acquisitions. Mr. Pearson once boasted that Valeant spent little time on due diligence and didn't need outside financial advisers because of his consulting experience and Mr. Schiller's investment banking know-how.
Management, including Mr. Schiller, faced criticism for Valeant's confusing disclosure and for focusing on customized non-GAAP metrics to show how the company was faring amid a cavalcade of deals and restructuring efforts.
That fazed investors as they drove Valeant stock upward. The board cheered along, championing compensation plans for top management that heavily rewarded them for delivering high stock market returns.
But last fall's barrage of criticism, questions around Valeant's specialty pharmacy business, aggressive price hikes and a steep stock market tumble has forced the board, its credibility under attack, to take a hard second look at Valeant's past practices.
Valeant's storyline now is that it had "material weaknesses … in its internal controls over financial reporting" while Mr. Schiller was CFO, it said Monday. Furthermore the "tone at the top" and the firm's "performance-based environment" – where challenging targets had to be met – "may have been contributing factors resulting in the company's improper revenue recognition," Valeant said. How much of the blame Mr. Schiller ultimately wears has yet to be determined. Under U.S. securities legislation, CEOs and CFOs are required to sign off on all audited statements.
Three months ago, Mr. Schiller told The Globe he had retired as CFO because he wanted "something that was more on my own as opposed to working at a big company." He now finds himself fighting one.