Power Sheet – April 12, 2016

-The board of Valeant Pharmaceuticals yesterday “requested” that CEO J. Michael Pearson cooperate with the U.S. Senate Committee on Aging, which has subpoenaed him for a deposition in advance of a scheduled April 27 hearing. But he didn’t show up for the deposition last week. This is all exceedingly strange in at least a couple of ways. First, since when do boards of directors “request” that the CEO, whom they hire and fire, cooperate with government investigators? And second, since when do boards put this request in writing and send it out to the world via PR Newswire?

The explanation, of course, is that Valeant is in desperate trouble, and that fact changes everything. Less than a year ago Valeant was flying high, its stock rocketing to new records seemingly every week. Even a few months ago, when the wheels were threatening to come off, the board staunchly supported Pearson. But now Valeant stands accused of jacking up prices of life-saving drugs, Shkreli-like; that’s what caught the Senate committee’s eye. It has admitted to cooking the books. The stock is down 84%. Pearson has agreed to leave as soon as the board can find a replacement. Activist investor Bill Ackman is inside the gates and on the board. So now it’s everyone for himself or herself. Leadership evaporates in that environment, and it’s hard to see how things get better anytime soon.

-Halfway around the world in a starkly different industry we see a similar phenomenon of frazzled cooperation. OPEC – remember them? – will meet in Doha, Qatar, this weekend to talk about freezing oil output in an effort to prevent prices falling from their current $40 or so back to the $27 level of a few months ago. Talking, and maybe yelling, is probably all they’ll do. OPEC is a cartel, which means its success depends entirely on the voluntary cooperation of members. But with oil prices down dramatically from less than a year ago, several members are feeling stressed and have already made clear that they’re in no mood to cooperate with anybody.

The problem is that when a cartel is operating, even in the best of times, every member faces a powerful incentive to cheat. The cartel works only if all members restrict production in order to force the price up; but each member realizes that if it can surreptitiously raise production, it can sell more at the propped-up price without producing so much that the market price falls. When the cartel works, members resist the urge to cheat. But cartels almost always fail eventually, and in this case it will apparently fail without even going through the charade of an agreement. Iran, which was only recently allowed back into the global oil market, and Libya, which is in chaos, need every dollar of oil revenue they can get; they won’t restrict output and trust the honesty of other OPEC members. Times are tough. It’s everyone for themselves. So it’s virtually certain no agreement will come out of Doha, or at least no meaningful one.

Sometimes the value of leadership is most apparent when structural factors prevent any leader from stepping up.

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