After Pershing Square and Valeant announced their vastly interesting and novel deal last week to bid on Botox maker Allergan, we nosed around their SEC filings a bit. We wondered what sort of BoD would approve this arrangement, in which a leading pharma partners with a feared activist investor to launch a hostile acquisition of a competitor.

When we first looked, we concluded Valeant has a superb BoD. Along with some classic governance flaws, the current BoD is chock full of the kind of investor-driven experience and expertise we shareholders love.

Note “current BoD”. Later last week, Valeant announced that three directors, and two of the best ones, will not return to the BoD at next month’s annual meeting. The company nominated two new candidates, leaving one vacancy for now. While the two new nominees lack the investor-oriented credentials of the two departing ones, we still like the overall talent on the BoD.

A Financial, Pharma, Investor BoD

The BoD currently has eleven members. One, Mason Morfit, is a partner with ValueAct, one of the largest Valeant shareholders, and of course a prominent activist investor.

Four other directors currently work in private equity, a challenging path after a corporate career. Two of these (Hassan and Ingram) retired as pharma execs, while a third (Farmer) retired from McKinsey. The fourth, Lloyd Segal, was a pharma exec and a McKinsey partner.

Two other directors are corporate finance executives, one retired and now a professional director (Stevenson), and one active as a tech company CFO (Melas-Kyriazi). Two more are typical professional directors, on multiple BoDs. One was a management consultant in health care (Provencio), the other is a retired pharma exec (Power).

The two remaining directors are the CEO, Mike Pearson, and the CFO, Howard Schiller. Pearson was a long-time McKinsey partner, while Schiller was an investment banker at Goldman Sachs, and is also an attorney.

The tally, then:

1. ❖Five hedge or PE fund investors
   

2. ❖Four management consultants, three from McKinsey
   

3. ❖Four senior pharma execs
   

4. ❖Three professional directors
   

5. ❖Two corp fin execs
   

6. ❖One investment banker/lawyer.
   

Even with some of its corp gov flaws (below), the current BoD has serious talent in finance, capital allocation, strategy, and the pharma industry. This matters in figuring out how much to pay for Allergan, how to squeeze synergies from the deal, and how to work with as sharp and aggressive a partner as Bill Ackman.

Comings and Goings

The company announced last week that three directors will not stand for election next month: Morfit, Segal, and Hassan. Investors will really miss Morfit and Segal, who brought substantial financial credibility to the BoD. Morfit mostly likely put together the Allergan deal, too.

The BoD nominated two pharma execs (Lonner and Goggins) to replace Segal and Hassan. Valeant will keep Morfit’s seat warm, and has indicated they will happily replace him with another ValueAct partner.

The two new directors don’t appear to have the same investor chops as the directors they replace. Both are retired pharma execs, and serve mostly as professional directors, bringing the professional director tally to five, which seems like a lot.

No One Is Perfect

And, neither is the new Valeant BoD:

1. ❖CEO is BoD chair
   

2. ❖Two executives on the BoD
   

3. ❖Five professional directors, on multiple BoDs.
   

And, given that three of eleven directors worked at McKinsey (two after the coming annual meeting), we worry, a bit, about independence.

GMI Ratings currently gives the BoD a “D”, a below-average grade. They base their assessment on the items noted here, and concerns about how Pearson’s brother-in-law works for the company. Conversely, last year ISS advised its clients support all directors, and rated corp gov a “3”, above average.

Still, this BoD also doesn’t have the typical cadre of incumbent CEOs, politicians, academics, physicians, or other corporate celebrities. Directors all own a lot of stock, and (except for the lead independent director) receive relatively modest cash fees. All eleven directors, including the two new ones, appear financially literate, and savvy about business and pharma.

Sure, we’d love to see more directors like Morfit, and would welcome PMs from other Valeant shareholders. We want fewer professional directors that make their living on BoDs. Yet, this group of directors seems to know their stuff. It makes sense that they would work eagerly with Bill Ackman and Pershing Square.