Friday, August 11, 2006

Executive Chicanery

An analyst colleague recently brought to my attention the fact that Chief Executive Officer of Bristol Myers Squibb Co. (BMY: NYSE), Peter Dolan, is involved in an investigation by Federal Authorities for the second time in three years. I typically take interest in the trials and tribulations of large-cap companies only when it has some relevance for a company in my coverage universe or the issue has some implication for the small-cap sector.

Indeed, there may be some lessons for the small-cap investor in the Dolan Saga.

Two years ago Bristol Myers settled with the SEC on securities fraud charges and just recently entered into a deferred prosecution agreement with the U.S. Attorney’s Office in New Jersey for the same transgressions. Dolan and his team were accused of purposefully inflating sales by offering incentives to wholesalers, including warnings that it planned to raise prices. The end game was to meet 2002 revenue projections and support the BMS stock price.

Bristol Myers is getting a temporary pass from New Jersey because the company has already begun a number of reforms and remedial actions to improve its corporate behavior. That remedial action involved replacing the former CFO and Controller and hiring a new Compliance Officer. Bristol Myers was also required to establish an executive training program to teach best practices in corporate governance.

Maybe the lessons did not take, because the Dolan team is in the frying pan again. This time the FBI is concerned that earlier this year Bristol Myers may have struck an illegal deal with the private generic drug company, Apotex. Apotex developed a generic version of the blood-thinning drug PLAVIX, which is Bristol Myers best selling branded drug. The Feds think Bristol Myers was out of line in forging an agreement with Apotex to delay the launch of the generic product. Two weeks ago the
FBI stormed Dolan’s Manhattan office with a search warrant to look for evidence.

To settle the securities violations Bristol Myers paid a $100 million fine to the SEC, an even bigger fine of $185 million to the State of New Jersey, and $839 million in compensation to shareholders. The securities matter also spawned a separate class action lawsuit by shareholders. After writing those checks, a rational person would try to keep himself and his colleagues on the straight and narrow for at least a couple years.

Unfortunately, Bristol Myer’s corporate rationality may be off balance with weight of money. Bristol Myers has plenty: $5.4 billion in cash and equivalents were on the balance sheet at the end of June 2006. The hefty paycheck going into Dolan’s pocket may have shifted his ethical compass. Dolan’s salary and cash bonus was $3.7 million in 2005 and his stock award that year was valued at $3.0 million. In addition, he was also awarded $1.1 million in long-term incentives. It is likely that some portion of that pay is connected to the BMS stock price and/or profitability.

Dolan tries to strike a cogent tone through
a letter to the Bristol Myers employees on the PLAVIX situation. It is too late to put a spin on the securities violations so Dolan lets his lawyers do the talking about that matter. A copy of the Settlement Agreement with the New Jersey States Attorney must remain posted on the corporate website.

Executive chicanery thrives no matter the size of the company. Unfortunately, small-cap companies rarely have a mattress stuffed with cash to soften the landing when executives engage in questionable business tactics. My concern is that small-cap investors may be getting a false sense of security from the corporate codes of conduct that all companies have adopted in the wake of Sarbanes-Oxley. Even special “remedial training” apparently did not work at Bristol Myers.


To keep some balance of your own, I recommend viewing a slideshow of corporate governance cartoons at The Corporate Library.

1 comment:

10Q Detective said...

Peter Dolan is not out the door just yet--he will be kept around as a 'consultant' [paid] to help with the transition in finding a permanent successor. If he did such as dismal job--why would the Board want to consult with him in the hunt for the next CEO? Maybe if he gives them positive input on a potential replacement, the Board will run the other way?