Corporate Governance Principles and Sustainability

Abstract

With 21st century U.S. frauds destroying well over one trillion of market capitalization and now with Valeant’s 2016 market cap destruction of $86 billion, the question must again be asked: where were the gatekeepers (boards of directors, regulators, sell-side financial analysts, and auditors) to protect investors? Many of these frauds were caught only by short sellers, such as Jim Chanos (shorting Enron in 2000 and Valeant in 2014), Andrew Left (shorting Valeant in 2015), and buy-side financial analysts. Sir David Tweedy, the former chair of the International Accounting Standards Board, has commented: “The scandals that we have seen in recent years are often attributed to accounting although, in fact, I think the U.S. cases are corporate governance scandals involving fraud” (Tweedy, 2007). This paper is a case study using the Valeant $86 billion market cap destruction in 2016 to emphasize the timeless nature of such corporate governance scandals. This scandal was even larger than the infamous $78 billion market cap destruction scandal of Enron which occurred 15 years earlier in 2001. These scandals appear here to stay as the new normal so these gatekeepers should be doing everything they can to analyze the ongoing fraud problems. Accordingly, as a case study, this paper develops lessons learned from this $86 billion Valeant scandal to emphasize the importance of sustainable corporate governance principles as a pathway to avoid malpractices in the future.