Valeant scandal result of focus on short term

A National Observer article suggests that a root cause of the Valeant scandal was a focus on what was happening to the price of shares in the short term. According to the article, the decision to cut R&D and borrow heavily to finance takeovers led to a revenue increase, which in turn caused a significant increase in share prices.

The increase in share prices was good news for senior executives — five senior executives earned $123 million in one year alone — but left the company with a $29.5 billion debt. As a result of this and other measures to push up revenues in the short term, Valeant is facing several different investigations and law suits for insider trading.

While the Valeant scandal is the most dramatic example, the problem of short-term gains trumping long-term needs is widespread. Data released by the Canadian Centre for Policy Alternatives in 2013 showed dividends skyrocketed after the 2008 recession hit, even though operating profits dropped. This approach boosts share prices and executive bonuses, but leaves businesses weaker.

Principles: