Question

The ceos of valeant pharmaceuticals and Turing Pharmaceuticals took the view that they could jack up the price of their drugs by huge percentages because they could, and they failed to consider seriously enough whether they should. Whose fault was this? In a well functioning corporate goverance system, what measures should be in place to control such actions?

Answer 1

The CEOs of Valeant and Turing pharmaceuticals had gotten away with the strategy of buying fully developed drugs for which alternatives didn’t exist and jacking up their prices to sky-high levels and this would have continued except for the public outcry and political scrutiny that arose.The Boards of Directors of each company actively encouraged this business model, probably believing that maximization of profit was OK at any cost.

The Board of Directors are at fault as they were of the belief that profit maximisation is fine at any cost even if at the cost of non-ethical conduct and poor corporate governance.

The following measures must be taken to control such actions:

Good governance is not just about compliance

Boards need to balance conformance (i.e. compliance with legislation, regulation and codes of practice) with performance aspects of the board’s work (i.e. improving the performance of the organisation through strategy formulation and policy making). A board needs to elaborate its position and understanding of the major functions it performs as opposed to those performed by management. Knowing the role of the board and who does what in relation to governance goes a long way towards maintaining a good relationship between the board and management.

Clarify the board’s role in strategy

The board has a significant role to play in the formulation and adoption of the organisation’s strategic direction. The extent of the board’s contribution to strategy will range from approval at one end to development at the other. Each board must determine what role is appropriate for it to undertake and clarify this understanding with management.

Recognise that the governance of risk is a board responsibility

Establishing a sound system of risk oversight and management and internal control is another fundamental role of the board. Effective risk management supports better decision making because it develops a deeper insight into the risk-reward trade-offs that all organisations face.

Build and maintain an effective governance infrastructure

Since the board is ultimately responsible for all the actions and decisions of an organisation, it will need to have in place specific policies to guide organisational behaviour. To ensure that the line of responsibility between board and management is clearly defined it is particularly important for the board to develop policies in relation to delegations. Poor internal processes and procedures can lead to inadequate access to information, poor communication and uninformed decision making, resulting in a high level of dissatisfaction among directors.

Monitor organisational performance

Monitoring organisational performance is an essential board function and ensuring legal compliance is a major aspect of the board’s monitoring role. It ensures that corporate decision making is consistent with the strategy of the organisation and with owners’ expectations. This is best done by identifying the organisation’s key performance drivers and establishing appropriate measures for determining success.