3 Candidates for Worst CEO of 2016
Image source: Getty Images.
It's been a volatile year for the stock market, but at the end of the day the scoreboard still reads green on a year-to-date basis. Long-term investors who stuck with their game plans are probably doing just fine.
But the same can't be said of all investments. A number of previously strong-performing companies have underperformed badly in 2016. Some have run into cyclical troubles, while others are simply facing stiff competition. However, for a few companies the onus of poor performance can be placed squarely on the shoulders of their CEOs (or maybe I say now-former CEOs, in some instances).
The Worst CEO of 2016: who has your vote?
There may still be two and a half months to go before the end of the year, but these leaders have clearly separated themselves as possibly the worst CEOs of 2016.
J. Michael Pearson -- now-former CEO of Valeant Pharmaceuticals
J. Michael Pearson may no longer be the CEO of embattled pharmaceutical company Valeant Pharmaceuticals (NYSE: VRX), but he left a lasting impression on its share price, and not in a good way. Valeant shares have lost 78% year to date, and they're down about 91% from their all-time highs set last summer.
Valeant's woes can be traced to two sources: drug-pricing concerns and debt.
Pearson oversaw one of Valeant's core strategies of acquiring niche therapies and raising their price post-acquisition. Two of the most notable being the purchase of cardiovascular drugs Nitropress and Isuprel in Feb. 2015 from Marathon Pharmaceuticals. Valeant wound up increasing the price of these drugs by 525% and 212%, respectively, but it didn't alter the formulation or manufacturing process for either drug. This raised eyebrows among hospitals paying for these therapies, and it caught the attention of some very unhappy regulators. While testifying in front of a Senate committee, Pearson noted that his company had made "mistakes" in its pricing strategy. Today, Valeant's pricing strategy is being monitored very closely.
Image source: Getty Images.
Furthermore, Pearson spearheaded Valeant's aggressive M&A growth. Over just a couple of years Valeant acquired Bausch & Lomb for $8.7 billion and Salix Pharmaceuticals for $11 billion. A common tactic Pearson used to grow Valeant was debt-financing for these deals. Lenders were more than willing to lend Valeant the money since new EBITDA creation more than covered the interest Valeant was paying annually on its debt. Furthermore, low interest rates created the perfect opportunity to borrow.
However, when Valeant's pricing strategy went out the window, and following the disclosure of $58 million in improper revenue recognition from now-former drug distributor Philidor Rx Services, Valeant's M&A engine ground to a halt. This year alone Valeant has reworked its lending covenants twice, leading to fees and higher interest rates. The company was buried under $30.77 billion in debt as of the end of the second quarter, largely in part to J. Michael Pearson's oversight, and it's being coerced to sell billions of dollars in non-core assets just to reduce the financial noose around neck.
It's not often you can point the finger at a CEO for wiping out $80 billion in market value in just over a year, but that looks to be the case with J. Michael Pearson.
John Stumpf -- now-former CEO of Wells Fargo
Before you go and anoint Pearson the best of the worst in 2016, take into account the actions that led up to the recent resignation of Wells Fargo's (NYSE: WFC) now-former CEO, John Stumpf.
Money-center giant Wells Fargo isn't a name that's often brought up as a point of ridicule. It survived the financial crisis in better shape than most of its peers, and it's traditionally thrived by avoiding riskier investments, such as derivatives, by focusing its efforts on loan and deposit growth, as well as the cross-selling of products and services within its branches. It's been the model of banking consistency for as long as I can recall, and it's also one of Warren Buffett's largest portfolio holdings.
Image source: Getty Images.
But a little more than a month ago, Wall Street and investors learned that Wells Fargo would be paying the largest fine ever doled out by the Consumer Financial Protection Bureau of $185 million. This fine was due to some 5,300 now-fired employees who opened up roughly 2 million fraudulent accounts without customers' consent. Wells Fargo counts on cross-selling within its branches to drive its margins, and it appears that managers and employees were taking things too far.
Yet as my Foolish colleague and banking analyst John Maxfield pointed out, it wasn't always the fault of the employees. Some of Wells Fargo's former employees who didn't go along with the fraudulent plan were fired for failing to perform their job duties, which essentially makes it impossible for them to get a job within the banking industry. Stumpf, as CEO, is directly accountable for this fraudulent activity that occurred over the five-year period in question.
However, when Stumpf was given his chance to testify in front of lawmakers, he failed to take responsibility for his company's actions. Now, with Stumpf resigning and a new CEO stepping into a minefield, Wells Fargo will have to make amends with its remaining customers and work to build consumers' trust once more. Stumpf has managed to drag down arguably one of America's finest institutions.
Stumpf won't receive any severance package, but he won't be hurting, either, after walking away with more than $100 million in vested stock, along with a 401(k) and pension worth more than $24 million.
Shigehisa Takada -- CEO of Takata Corporation
Last, but far from least, we have Shigehisa Takada, the current CEO of car-parts supplier Takata Corporation (NASDAQOTH: TKTDY), who announced his upcoming resignation in June. As soon as a successor is found, Takada plans to step aside.
Takata was once a profitable mainstay for auto investors. Its airbags set the industry standard of safety, or so it seemed. Over the past two years, 14 automakers have been affected by airbag problems that involve having the airbag inflators explode with so much force that they send shrapnel into the vehicle's cabin. All told, Takata's airbags have been linked to 14 deaths, more than 100 injuries, and the recall of more than 60 million vehicles in the United States. Not to mention, there are tens of millions of vehicles outside the U.S. that are facing similar recalls.
Image source: Pixabay.
The bigger concern for Takata is that there's no telling what its financial liability could wind up being. In 2015, Takata lost about $120 million, and it ended the first quarter with just $516 million in cash reserves. Early estimates project that Takata's financial liability could hit nearly 1 trillion yen, or about $9.6 billion. Takata may not even have the financial capacity to survive this scandal, but it's going to largely depend on whether the onus of recalls costs falls on the consumer, dealers, or Takata itself.
What makes CEO Takada such a perfect scapegoat for this recall, other than the fact that he's the CEO and his family has owned the company for more than 80 years, is that he's mostly hidden in the background, allowing its subordinates to answer concerns about the company's financials and airbag safety. One of the few exceptions where Takada was forced to confront his company's airbag issues head-on was Takata's annual shareholder meeting. Aside from apologizing to families affected by his airbags, he stuck to his belief that his company's airbags are safe.
Takada's lack of involvement hasn't helped his company's public image one iota, and there's simply no guarantee that Takata survives at this point.
Which CEO do you think has been 2016's worst?
The $15,834 Social Security bonus most retirees completely overlook If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $15,834 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after.Simply click here to discover how to learn more about these strategies.
Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.
The Motley Fool owns shares of and recommends Valeant Pharmaceuticals and Wells Fargo. It also has the following options: short October 2016 $50 calls on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.