David Tepper’s Appaloosa LP hedge fund just put out a harsh call for change at the $50 billion drugmaker Allergan, and it’s also a strongly worded critique of the company’s leader, Brent Saunders.
Appaloosa specifically wants Allergan’s board of directors to separate the roles of chairman and CEO, which are both held by Saunders. In a letter Tuesday, the hedge fund called it a “first step” to turning things around at Allergan. But the letter also makes clear that Appaloosa is condemning Saunders’ leadership.
Allergan’s stock has declined about 38% since Saunders became chairman in late October 2016. The Standard & Poor’s 500 Index has jumped 27% over the same time period.
When Appaloosa began asking for the change last April, “we believed that the introduction of a seasoned independent Chairman with extensive pharmaceutical experience could exert a favorable influence on executive decision-making, the record for which has been fraught with ill-considered initiatives and self-inflicted wounds for several years now,” the Appaloosa letter said. “AGN’s moribund corporate performance and flagging stock price since our letters only deepens our conviction on this point.”
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Appaloosa also noted that it had made the request four times in less than a year, including Tuesday’s letter. It said the board’s inaction bordered “on blind obedience and raises serious fiduciary concerns.”
In a statement, Allergan told Business Insider that it had received Appaloosa’s proposal and was “committed to continuing to engage with them, as we do any shareholder who has input and constructive ideas.”
“The company has been executing its strategy to drive growth and value for shareholders as it transforms into a global biopharmaceutical leader,” the statement said. “Allergan has a strong long-term outlook across its four key therapeutics areas and a highly promising R&D pipeline.”
Read more: David Tepper has gone full activist on the healthcare giant Allergan
Appaloosa isn’t the only one with frustrations about the pharma company, which Saunders has led for the past four years. Allergan is best known for its profitable Botox product, but an imaginative 2017 effort to extend patent protection on another best-selling product turned into a high-profile stumble.
The company acknowledged investors’ frustrations last year and announced a strategic review.
But when Allergan reported its financial results in late January, the RBC Capital Markets analyst Randall Stanicky downgraded it, saying the company hadn’t delivered growth for three years and calling its 2019 guidance “disappointing.”
This question about board leadership structure has long been controversial. Having a CEO who also serves as chairman is a common practice and has been in past years.
The two roles have distinct purposes, which is why critics say it’s a conflict for one person to do both. The CEO heads up the company’s daily operations, while a chairman leads a board that makes key company decisions on behalf of shareholders.
“By separating the positions, a company clearly differentiates between the roles of the board and management, and gives one director clear authority to speak on behalf of the board and to run board meetings,” two professors at the Stanford Graduate School of Business wrote in a 2016 case study on the subject. “Separation eliminates conflicts in the areas of performance evaluation, executive compensation, succession planning, and the recruitment of new directors.”
Read more: Chairman and CEO together or separate? Citigroup has to decide
But there’s not much evidence that having one chairman and CEO on average affects a company’s future performance or governance quality, the two Stanford professors, David F. Larcker and Brian Tayan, found.
“Why do activists advocate that corporations—especially large corporations—strictly separate the chairman and CEO roles?” they asked. “How much of this activism is publicity-seeking rather than an attempt to improve corporate governance?”
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