Bill Ackman, one of the world’s largest hedge fund managers, is naming names.
His Pershing Capital has lost nearly $2 billion in value, and he’s blaming much of that loss on corporate communications.
When Valeant Pharmaceuticals, the firm’s largest holding, lost more than 50% of its value this fall, he didn’t hold his analysts responsible. "Investor relations and government relations are not areas the company has meaningfully invested in," Ackman said. "Investors are willing to accept complexity as long as there is transparency."
He even went so far as to call out the communications firm at the core of the crisis, saying, "Sard [Verbinnen] has done a…horrible job representing Valeant."
Granted, such losses could drive anyone to hyperbole. Yet Bill Ackman has a very large bully pulpit, and he didn’t hesitate to use it. He started with a conference call for an influential group of nearly 1,000 interested parties. Then he spent nearly three hours opining on the management team’s utter failure to communicate. By the end of the call, the verdict was clear: with one conference call, a shareholder – and outsider with fewer than 6% of the company’s shares – became the definitive voice on the crisis at the core of the firm’s plummeting stock price.
Meanwhile, in the midst of the storm, Mike Pearson, Valeant’s normally outspoken CEO was oddly silent. In the months since the crisis began, Pearson has suggested that his team had reason to stay mum. A leaked email to Ackman from a Valeant board member defended the actions as being aligned with the company’s fiduciary responsibilities during a period of regulatory investigation.
Clearly, Ackman disagrees. Pearson’s team let him down, and there are a few very important lessons to draw from the firm’s recent crisis:
The initial communications set the tone for how stakeholders believe the crisis will be managed. When the news of the potential impact of Valeant’s financial ties with embattled distributor Philidore emerged, the company could have addressed it in a call with investors. Instead, it opted to put out a clinical and factual statement until it had more information. It failed to address the potential financial ramifications, and the real underlying concern: that the regulatory scrutiny would be costly and cause an overhang on the stock and corporate reputation for years to come. It also drew in short sellers, buoyed by rumors that the lack of transparency meant there was, "more bad news to come."
Corporate affairs and financial communications are inextricably linked. The majority of investors who fled Valeant’s stock en masse after this announcement were simply running scared. They had little understanding of what the announcement might mean to regulatory authorities. Matt Stewart, a Seeking Alpha contributor formerly of RBC Dominion, confirmed this, writing, "Candidly, I just don't understand the world of drugs and medicines the same way I understand the world of hamburgers." Valeant should have been more candid in early communications, perhaps giving investors more confidence in Valeant’s team, its expertise, relationships, and ability to actively manage both the regulatory costs and any future repercussions.
The CEO needs to lead the response. Ackman, for his part, was very direct. "If Mike [Pearson] hides ... he can't be CEO." It took five days after the news on Philidor broke for Pearson to confirm there was "no evidence whatsoever" of illegal activity on the part of Valeant. This is probably the action of a prudent CEO and board. It might have been irresponsible, prudence argues, for the CEO of a company in the midst of a potentially significant legal and regulatory crisis to make preliminary public comments until more was know. Even Ackman concedes that Valeant’s board may have had valid reasons for keeping mum.
But, for a CEO with an outsized personality – and an outsized impact on stock price – a sudden and dramatic silence spoke volumes, making it seem as if the company had something to hide. There is a long distance between stony silence and legal liability, and Pearson’s team simply got it wrong. With a simple statement – "We simply don’t know, we are in an active investigation, and we will update you as we are able" – Pearson could have confirmed that he remained fully in control. Instead, Valeant allowed Ackman to try the entire management team in absentia.
Swift action on the communications front – even without good financial news – can help rehabilitate reputation and stock price. Since the first week the news broke, Pearson has put out, on average, one statement per week and maintained a schedule of investor meetings and sell-side conferences similar to prior years. The company is even holding an investor day in December and promises to provide more information on the investigation and more insight into 2016 financial guidance. The company has also taken the unprecedented stance of publishing on its website a "portal of rebuttals" to correct misstatements by short seller Citron Research and others in the investment community and media. It has also continued to update guidance and financial explanations online in an interactive investor center available to the public on the company’s website.
Because Valeant is no longer sitting on the sidelines, the company’s share price has regained about half the ground it lost since the crisis began. (Valeant said late last month that Pearson was going on medical leave and that a group of executives would run the company until he returns).
Now that the company is finally taking control of the message, Ackman is more muted. He is, in recent weeks, widely viewed as supportive of Valeant and its management team. With his fund down nearly 26% for the year, he may well have turned his attention to heightened communications with unhappy shareholders, leaving Pearson and his team to get their house in order. For now.
Elizabeth Saunders is founder of Commodore Intelligence.