Dealpolitik: Time for Governance Reform at Mylan

It’s time for Mylan NV to look at bringing itself into the mainstream of corporate governance.

Mylan’s outsize executive pay, as highlighted in Wednesday’s page-one story in The Wall Street Journal, the controversy swirling around pricing of its EpiPen product and its takeover wars from last year all effectively shine a bright light on the company’s unusual governance structure.

Last year, Perrigo Co. successfully fended off a hostile takeover from Mylan in part by warning its shareholders that they faced entering a “corporate governance prison” if they accepted the offer. Mylan has repeatedly defended its governance. “Our structure has been disclosed in our public filings and approved by a vote of 98% of our shareholders,” a Mylan spokeswoman said Wednesday.

But here are some unusual elements of Mylan’s governance that I think merit a new look:

· Shareholders don’t get to choose directors. Directors are nominated by the board and are deemed elected unless holders of two-thirds of shares voting reject them; even then, the board, not the shareholders, names replacements. If shareholders throw out the entire board, they still don’t get to name new directors; the former chairman, just deposed, gets that privilege.

· Since becoming a Dutch company in the inversion, Mylan has takeover defenses that can be stronger than the “poison pill” U.S.-incorporated firms can deploy. The board can issue stock with half the company’s voting power to a foundation known as a “stichting.” The foundation has an independent board that can block a takeover if it sees it as not in the interest of various “stakeholders” — including employees, patients, communities and suppliers.

· In making its business decisions, the Mylan board can consider the interests of the same stakeholders. Essentially, directors don’t need to make shareholder interests paramount. Indeed, in its fight against an unsolicited takeover proposal by Teva Pharmaceutical Industries Ltd. last year, Mylan management asserted that it wasn’t working primarily for its shareholders.

The latter point is particularly ironic in the context of the EpiPen affair. Mylan’s CEO has attributed its huge EpiPen price increases in part to Mylan being a for-profit enterprise. It seems to me that patients and communities don’t figure as much into those pricing decisions as they did when Mylan was chasing away Teva’s takeover bid last year. Mylan’s stock recently has traded at around half what Teva was offering.

As Mylan instead tried to convince Perrigo shareholders to sell last November, it promised to “submit changes to corporate governance” at this year’s annual meeting should it succeed. After Perrigo shareholders rejected the deal, no corporate-governance reform proposals were presented to the shareholders at the June annual meeting. What seemed appropriate to induce Perrigo shareholders to take Mylan shares apparently wasn’t important enough to pursue solely for the benefit of Mylan’s own shareholders.

But now seems to be a good time for Mylan to reexamine its governance, to make directors more formally answerable to shareholders. With executive pay for its top five managers totaling nearly $300 million over the last five years and outpacing packages at much larger firms, if shareholders are unhappy they ought to be able to vote out directors and name their replacements by a majority vote (even though shareholders did approve executive compensation on an advisory basis and effectively reelected the company’s entire board at the June annual meeting). That is how it works at most public companies.

At the same time, the board shouldn’t be able to give veto power over a takeover bid to that stichting, which also isn’t answerable to Mylan shareholders. Although courts permit U.S. entities to adopt a poison pill, they do not allow boards to divest themselves of the ability to make the final decision on whether to take down barriers and accept a takeover. Nor can management interfere with the right of shareholders to change the directors, which is the ultimate escape valve from a traditional poison pill.

Finally, directors of most companies generally are required to consider the interests of shareholders first. It is true that under the law in Pennsylvania, where Mylan was incorporated before the inversion, boards can consider other constituencies. But at the very least, Mylan should be clear on where the interests of shareholders rank.

Mylan shareholders lost the Teva premium, their company is embroiled in a pricing controversy and their executives are highly compensated. The company strongly defends the actions it has taken, and there may be good reasons for all three. But a lack of accountability of directors to shareholders should not be one of them.

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