J. Michael Pearson, CEO of Valeant.
Photograph by Kevin Van Paassen — Bloomberg via Getty Images
By Stephen Gandel
November 6, 2015

Michael Pearson’s odd stock sale may make it harder for him to hang on as CEO of Valeant. It also raises fresh concerns about the board’s oversight of the troubled drug company.

On Friday morning, Valeant (VRX) revealed that Pearson was forced to sell 1.3 million shares of the company on Thursday. The sale was related to a margin loan. In April 2014, Pearson had pledged 2 million shares to Goldman Sachs as collateral for a $100 million loan. Back then, the stock was trading at around $206. Its shares are now around $80, after plunging for the past month-and-a-half. That meant Goldman’s collateral, Valeant’s shares, were worth a lot less than it used to be. So earlier this week Goldman called the loan, and then sold enough of the shares it held in Pearson’s name to pay off the debt.

Pearson stressed that the sale did not signal that he had lost confidence in Valeant and that this was the first time he has sold any of the company’s shares that he received as compensation. The sale represented what was 20% of Pearson’s total holding of Valeant shares. But that might not be enough to get him, or more importantly the board, off the hook with shareholders who have stuck with the company the last month or so only to see the value of their stake drop even more.

“It’s not good,” says Mark Borges, a compensation and SEC disclosure expert at Compensia. “Presumably, you don’t want to have an action by an executive that is personal in nature hurt the value of his company’s shares.”

Why didn’t Pearson do more to make sure his shares didn’t have to be sold? He may have been able to pay off a portion of the loan himself. Or he could have gone to Goldman and promised more shares. It is possible that Goldman didn’t want the risk of any loan tied to Valeant’s stock at this point, and coming up with $100 million in a few days isn’t easy, so Pearson may not have had a choice. But the fact that he wasn’t able to manage his own personal finances without hurting the company could shred whatever confidence shareholders have left in him.

Other executives have lost their jobs over margin loans. In 2012, Green Mountain chairman and founder Robert Stiller was forced to resign after he got a $123 million margin call and had to sell a good chunk of his shares. The good news for Pearson, unlike in Green Mountain’s situation, is that his margin loan was fully disclosed. Anyone could have read about it in the company’s proxy statement.

The other good news for Valeant is that the board seems to have eventually realized that the margin loan was a bad idea. Earlier this year, the board adopted a rule that disallowed future pledges of stock for margin loans. And allowed Pearson to sell stock in order to pay off his loan, but for whatever reason Pearson never did, that is until Goldman called the loan this week.

But the bigger problem is this: Why was the margin loan allowed in the first place? Many large companies forbid corporate executives, and board members, from taking out margin loans against company stock to avoid this type of situation. Corporate governance advisory firm Institutional Shareholder Services considers pledging company stock for margin loans a problematic practice, and the organization recommends that shareholders vote for resolutions that prohibit executives from holding shares in margin accounts.

Boards are supposed to be keep company management in check. Given what has come out about Valeant in the past month or so, it’s clear Valeant’s board was not doing a great job on this front. That happens with star CEOs, and Pearson, at least to Valeant investors, was one of those. The fact that Valeant’s board allowed Pearson to take out a $100 million margin loan, and then didn’t force him to pay off the loan when they realized it was a bad idea, is another sign that the board allowed him to do whatever he wanted. So while Pearson’s forced stock sale doesn’t really change much for the company, it should make investors even more nervous about what else Valeant may have been up to that has yet to surface.

Update: An earlier version of this story failed to mention that earlier this year Valeant’s board changed its policy and no longer allows the company’s executives to pledge company shares to obtain margin loans.

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