MGMT 3000: Principles of Management Midterm Exam Type your answers and do NOT type your name ANY on the individual pages including the front page (so that I can grade your answers blindly). Please provide the cover page that has your signature and the honor code. Whenever possible, please use the formats below (e.g. table and bullet points). 1. To answer this question, you need to read the article “Prescription for Disaster.” (This article is available in the Lemieux Library Business Source Complete database. Citation: Vardi, N., Gara, A., & Herper, M. (2016). Prescription for Disaster. Forbes, 197(6), 98-106.). (Worth 11 points total) a. In the beginning, Valeant was considered a pioneering and innovative company – especially because of it’s incentive program. Discuss: i. Was the Pearson (the CEO) motivated? To what ends? Using the definition of motivation, discuss evidence for motivation found in the article or other reputable sources. (5 points) 1. Example: Pearson was (was not) motivated to attain…Motivation is defined as…In the article, I saw the following evidence of motivation… ii. What assumption(s) appear to undergird the incentive program (Theory X vs. Theory Y)? How did these assumptions influence the outcomes at Valeant? 1. Example: Theory X (Theory Y) seem to be at the heart of the incentive program. Theory X (Y) is defined as…The article states that the incentive program was defined to…which seems in line with Theory X(Y) thinking. Theory X(Y) assumptions influenced the outcomes at Valeant in the following ways… b. You have learned about pharmaceutical pricing issues from a number of sources (Epipen, Valeant, Shkreli and more). Use three of the six factors that influence ethical intensity to assess the degree to which you are concerned about pharmaceutical pricing as an ethical issue. Your final statement for this answer should reflect your assessment of ethical intensity (e.g., I believe this situation has low (high) ethical intensity for me because…). (6 points) 2. To answer this question, you need to read the articles “How Dick's Gun-Owning CEO Became the Corporate Face of Gun Control” and “Here's what Dick's Sporting Goods CEO Ed Stack wrote about his company's actions (https://www.usatoday.com/story/money/retail/2018/02/28/heres-what-dickssporting-goods-ceo-ed-stack-wrote-his-companys-actions/381452002/).” (The WSJ article is available in the Lemieux Library Business Source Complete database. Citation: Germano, S. (2018, April 7). How Dick’s Gun-Owning CEO Became the Corporate Face of Gun Control. Wall Street Journal - Online Edition. p. 1). a. Compare at least three of the managerial roles played by Dick’s Sporting Good CEO Ed Stack. Evaluate the role being played as beneficial or detrimental for the company and society at large. You must take a stance and support it using course material. (Worth 21 points total) Role name and definition (in your own words) (1 point) Example: Stack is playing the resource allocator role which is defined as…[citation] Explanation of your choice - introducing evidence from the article and information from our texts (2 points each) Example: The key evidence for the resource allocator role is…according to the article [title or citation] Your evaluation of the stance taken by Stake (importance or how it is problematic) (4 points each) Example: I believe Stack stance is beneficial (detrimental) for the company because it displays [course concept]…[citation] b. In our UMC text (p. 13-18), the authors title a section “Managers: amoral functionaries or responsive moral beings.” As you reflect on Stack’s decision, I’d like for you respond to the implied question: What does Stack owe and to whom? Develop your arguments using both the critical and classical management texts (Understanding Management Critically and MGMT 10). What would you do if faced with a similar decision? Why? (Worth 10 points total) Type of social responsibility owed and definition (2 points) Key stakeholder (2 points) What would you do if faced with a similar decision? Why? (6 points) Example: Managers have the responsibility to determine if they are profiting from misery (UMC, p. 13)… Example: Although customers are key stakeholders, [put a stakeholder group here] are also important stakeholders because… Example: Because I subscribe to shareholder model of social responsibility [could be another idea derived from either text], I would do [x], [y], and [z]. Shareholder states…and this philosophy is beneficial because…[evidence from course material or other reputable sources]. 3. To answer this question, you need to refer to “Thriving in the Gig Economy” and “Gigs Are No Longer Just For Musicians: How The Gig Economy Is Creating A Society Of Starving Artists (https://www.forbes.com/sites/georgehoward/2018/03/26/gigs-are-nolonger-just-for-musicians-how-the-gig-economy-is-creating-a-society-of-starvingartists/#33f5fa8b4ad0). The HBR article is available in the Lemieux Library Business Source Complete database. Citation: Petriglieri, G., Ashford, S., & Wrzesniewski, A. (2018). Thriving in the gig economy. (cover story). Harvard Business Review, 96(2), 140-143. a. Each of the management paradigms introduces different perspectives on management and assumptions about the purpose of business, nature of human beings, etc. Summarize each view point and provide evidence that supports your summary. Finally, discuss how/if organizations employing gig employees might “manage” them to be efficient, effective, and just. (36 points). Scientific Management Perspective on management and key assumptions – at least 4-6 sentences. Provide evidence from text, notes, etc. (6 points). Name one tactic that the organization using the management paradigm might employ to “manage” gig workers. Why did you pick this tactic and what outcome would it produce? (6 points) Example: There are three key aspects of scientific management. The first is [x] which is defined as…The second is [y]…Two key assumptions on which scientific management is based are….and…. Example: A key tactic that might be used based in scientific management is [x] pioneered by [y] to produce [z]. I would use this tactic because… Human Relations Administrative/Bureaucratic Management b. Our UMC text (Chapter 4 and 5) encourages us to think critically about power and the emancipating power of work. On the one hand, the article by Petriglieri and his colleagues suggest that the gig economy can be experienced as liberating. On the other, Howard paints a grimmer picture of gigs. In a short essay, discuss the following questions: i. Is gig work emancipating and empowering? Why or why not? For whom? Who benefits from gig work? (6 points) 1. Example: I believe that gig work is (is not) emancipating based on the article by Petriglieri et al (2018). Emancipation is defined as…and gig work seems to meet (not meet) that standard by…Ultimately [x] benefits from gig work by… ii. Who is ultimately in charge of gig work? Is gig work a way of “creating docile bodies?” Why do you take this stance? (5 points) 1. Example: I believe individuals (organizations) are in charge of gig work. That is, work reduces [increases] opportunities for resistance to conditions that are dehumanizing…Based on these arguments, I believe gig work is (is not) a way of creating “docile bodies” which UMC describes as… Extra Credit Question! Below is an extra credit question which is worth 3% of the total midterm grade – enough to make the difference between a B- and a B or an A- and an A. Name a business news story that you have found intriguing in the last five years (please include a link to the story with your exam). Describe why you found this interesting and link the issue to one concept covered in our course. State why the concept is relevant and how it is influencing your understanding of management. An example is provided below (from an actual student in a previous quarter of MGMT 3000). Link to news story: https://medium.californiasun.co/in-n-out-store-managers-earn-160000wages-b08fe6f1706f Managerial Issue Relevant course concept The article is about In- Organizational Culture N-Out sharing that they pay their store managers on average $160,000 a year. They are paying their store managers well over the industry average. The salary is well above what most employees would make at any company. Why course concept is relevant Quality service is one of their core beliefs that the company set when it was founded. By paying their employees well, InN-Out is able to maintain their quality of service. Their employees will want to stay with the company, providing In-N-Out with experienced employees in their stores. By staying true to their beliefs and In-N-Out has created a culture that values its employees and treats them well. What this managerial issues tells you about management The article shows that treating your employees well is possible and profitable. In-N-Out is showing their managers that they value them, by compensating them with a well above industry standard pay. By treating their employees well, they are able retain their employees which helps increase productivity of their stores. In-N-Out is staying true to their value of quality service by taking care of their employees. Having happy employees will help In-N-Out be a successful company. Embattled Valeant Chief Executive J. Michael Pearson. 98 | FORBES may 10, 2016 Prescription for Disaster In less than a year, Valeant PharmaceutIcals has lost 87% of Its Value—some $80 bIllIon—amId accusatIons of mIsmanagement and fInancIal shenanIgans. the InsIde story reVeals a Pressure cooker that was buIlt to exPlode. By NathaN Vardi aNd aNtoiNe Gara Benjamin Lowy/Contour By Getty imaGes may 10, 2016 FORBES | 99 VAleAnt shareholder value has vanished. The company has come under intense congressional scrutiny for its drug-pricing policies, lumping it in with the firestorm surrounding the hen you are speeding toward new poster boy for corporate greed, Martin Shkreli. Next billionaire status, nothing were revelations about an undisclosed mail-order pharmacy says “I’ve arrived” more called Philidor Rx that Valeant essentially controlled, which loudly than a big donawas accused of using controversial methods to get patients, tion to one’s alma mater. In doctors and insurers to use expensive Valeant drugs instead June 2014 Duke University of cheaper alternatives. announced that J. Michael In March Valeant slashed its earnings and revenue proPearson, the CEO of Valeant Pharmaceuticals, one of the jections and said its continuing inability to file its annual fastest-growing companies in America, and his wife, Chrisfinancial report could lead it to default on its $30 billion tine, would be making a $30 million gift to its engineering of debt because of covenants it has with its lenders. The school, on top of $23 million in earlier gifts that had resulted company also announced that Pearson would leave Valeant in renaming Duke’s nursing school building after her. as soon as a replacement CEO is chosen. (Pearson did not “We’re grateful the Pearsons share our vision,” Laurie respond to numerous interview requests from FORBES.) Patton, former dean of Duke’s Trinity College of Arts & It would be easy to blame Valeant’s Icarus-like plumSciences, said in a release that recognized the husband and met on a CEO whose life is seemingly falling apart. Or wife as some of the school’s most prominent alums, as well on an unsustainable business model that was destined to as the fourth-largest contributors to its capital campaign. catch up with itself. Or on the kind of financial-statement Less than two years later it’s hard to view this announce- gymnastics—and an accompanying announcement from the ment as anything more than a mirage. The Pearsons, it turns company that blamed these ills on the “tone at the top of the out, weren’t actually a couple—New Jersey court records organization”—that bear too much resemblance to those of show that Christine had sued her husband for divorce in Enron, Tyco and WorldCom for comfort. 2013. In fact, a Florida magazine had featured him and anAnd there’s some truth to all of those things. But the other woman several years before as “a couple” who were ultimate culprit here is something for which until recently in the midst of decorating their three-bedroom apartment— Valeant was lauded far and wide as a role model for other which documents show they purchased together—in a luxu- corporations: its executive compensation plan. ry high-rise in Miami Beach. Valeant’s plan was praised for years by They also didn’t actually have the cash everyone from activist hedge fund billionaire the debtavailable to make the donation. Bill Ackman to top executive-pay experts at On paper, Michael Pearson, now 56, was the University of Chicago and Harvard Law fueled a billionaire, but his wealth was locked up School for its unique incentive model. Pearin Valeant stock, earned by meeting seemacquisition son and other top executives would receive ingly impossible shareholder-return goals. relatively little in the way of cash compensastrategy He was barred from selling his shares for tion but massive amounts of incentive stock years and even prohibited from borrowing and options. And that stock would be tied up created against them. for extremely long periods (an extended vestValeant’s board waived its policy in order rich fees for ing period—then for Pearson another three to allow Pearson to borrow $100 million years). In short, Pearson and his team would bankers, gutted be paid handsomely if they could create longfrom Goldman Sachs against his stock to fund the Duke contributions, build a comterm value, in lockstep with their shareholdR&D, fired munity swimming pool and finance his own ers. There would be no easy cash-out. tax obligations. But even this well-intended employees, On paper it worked brilliantly, and Pearson gesture turned south—by this past Novemwent on a tear that created tens of billions in boosted ber, the aggressive moves that Pearson had value and continued for several years. Ackman, used to juice Valeant’s stock were backfirwho invested $4 billion in the company, comdrug prices ing, its price was tumbling and Goldman had pared him to Warren Buffett. But the plan also issued a margin call, resulting in the liquiand moved put an inordinate amount of pressure on Peardation of 1.3 million of the CEO’s shares, a son to sustain the growth, and the stock price, Valeant’s tax forced sale which spooked the market and by whatever means he could. Valeant was built sent the stock plummeting even more. to become a pressure cooker. And eventually address to All told, Valeant’s market cap has fallen the lid exploded, taking the chef out with it. 87% since August—some $80 billion in Canada. W 100 | FORBES may 10, 2016 VAleAnt F or most of his career Michael Pearson was a consultant, and a very successful one at that. During his 23 years at McKinsey & Co., he became one of the firm’s most talented and hardworking partners, running its pharma practice as consigliere to CEOs like Johnson & Johnson’s William Weldon and Schering-Plough’s Fred Hassan. Then he began to advise a moneylosing California drug company that had been around since 1960 and focused on neurology drugs and generics. When Valeant sought a new CEO in 2008, San Francisco’s ValueAct Capital, a hedge fund run by Jeffrey Ubben and Mason Morfit, recruited Pearson and designed his compensation plan. Pearson simultaneously brought outsider and insider credibility. “We think he is ideally suited to run a business that is at heart a value investor in pharmaceutical products,” wrote Robert Goldfarb and David Poppe early in Pearson’s tenure, explaining to investors why their Sequoia mutual fund was on its way to making Valeant its biggest position, replacing Berkshire Hathaway. He brought a mission: to prove that the “buy and cut” growth strategy he had long been preaching from McKinsey’s ivory tower was more than expensive hot air. In the first year of Pearson’s watch, Valeant, which then had revenues of about $800 million, made three acquisitions, including buying acne remedy specialist Dow Pharmaceutical Sciences for 102 | FORBES may 10, 2016 $285 million. And then he increased the pace: By last year he had swallowed more than 50 companies. This debt-fueled acquisition strategy created rich fees for investment banks and sold investors on a low-cost pharmaceutical company model that emphasized boosting drug prices, gutting research and development budgets, firing employees and lowering taxes through a merger that moved Valeant’s tax address to Canada. Instead of creating new drugs, Pearson bought and squeezed profits out of old remedies like Wellbutrin XL, an antidepressant; Isuprel, an off-patent heart drug; and Provenge, a prostate medicine whose maker had filed for bankruptcy. Pearson’s drug-price increases became legendary, and there were no U.S. laws on the books to stop him. For example, Valeant boosted the price of its diabetes drug Glumetza by about 800% in 2015, the year Valeant bought it. The company acquired Carac cream in 2011, and the price for the treatment of cancerous skin conditions rose by 1,700% in six years, mostly on Valeant’s watch. Pearson defended his prices, claiming that just about anyone who needed Valeant’s drugs would receive them because patients were protected by insurance and financial assistance programs. Pearson acquired some of the drugs and products in big deals for companies like Medicis (antiwrinkle medicines), Bausch & Lomb (contact lenses) and Salix (gastrointestinal Benjamin norman Valeant’s culture was hard-charging, and the distinctions between work and play became blurred. Pearson set the tone. VAleAnt the alphabet from the letter “D” to the letter “W.” After the officer had Pearson spit out his chewing tobacco, his breath test indicated that the chief executive had a blood alcohol treatment). Along the way more than 4,000 pharma employlevel of 0.13%. Pearson ultimately pleaded guilty to driving ees in the U.S. alone fell victim to Pearson’s axe—as much under the influence and lost his driver’s license for three as half of the workforces of companies he acquired. The months. result was a company, Valeant, headquartered in Canada and DUIs are commonplace, even in executive suites, but employing 18,000 but with executives in New Jersey, that Pearson’s 2009 drunken driving arrest fed concerns about spent 3% of its revenues on drug research and development Pearson’s behavior that were spread by both short-sellers while selling products in areas ranging from dermatology and targeting Valeant’s once lofty stock and employees in the coreye care to gastrointestinal neurology and over-the-counter ridors of the company’s offices. remedies. Like many top executives, Pearson was a workaholic. He Wall Street analysts, whose investment banking colleagues overate, and he traveled all the time. Even though Valeant thirsted for Valeant’s fees, issued bullish reports, and big was decentralized, with operating units run by their business hedge funds rushed into the stock. Valeant’s shares soared by leaders, Pearson micromanaged things he deemed important. 2,450% in seven years, affording it a market His dedication to drive Valeant and its stock cap of nearly $90 billion by 2015. Investment forward was fierce. PEarson’s wild ridE banks like Goldman Sachs and Deutsche Bank EVEryonE got riCh until thE Pearson led grueling weekly calls with made $750 million in fees. ValueAct realized PrEssurE CookEr BlEw. dozens of Valeant’s top business manag$1.15 billion in gains—and still retained a 4.4% 2000 ers and made it clear they had to deliver stake in the company. Everybody got rich—at their numbers on a weekly basis—or else. VALEANT PHARMACEUTICALS least on paper—board members, executives Though Valeant was ostensibly a science 1000 and, most of all, Pearson. company, scientists were seen as unnecesPearson’s original employment agreement 600 sary costs to be cut, unless the product they 500 400 with Valeant, struck in February 2008, put were working on looked almost certain to 300 him on track to become one of the richest succeed. And as Pearson made acquisitions, 200 executives in the pharmaceutical industry those cuts came quickly: The company once S&P 500 INDEX (02/01/08=100) within three years, based on large amounts handed out envelopes to Valeant’s new 100 of stock and option awards. But the lockups employees—if you got a black envelope, it were long, and the awards came with both meant you were fired, the Wall Street Jour60 hurdles (he needed to deliver a minimum 15% 50 nal reported. 40 return annually) and incentives (his allotment Management turnover was high—more 02/01/08 12/30/11 04/11/16 source: Factset. tripled if the company produced a 45% anthan half of Valeant’s top 15 executives have nual return). In 2011 he renewed his employment contract— left the company since 2011—and those who stayed took extending both the lockup (2017) and the bonus potential their lead from the CEO. The culture was hard-charging, (maximum-return hurdles at 60%). His most recent deal, everyone kept late hours, and the distinctions between work struck when Valeant’s stock changed hands for $141, included and play became blurred. One former executive says Pearson up to 2.25 million in performance share grants if Valeant’s was a heavy drinker who favored double bourbons and that stock hit $1,068 by 2020. he sometimes saw Pearson gulp down six to eight drinks Yes, Pearson was incentivized. Perhaps fatally so. “They before business dinners. Another former executive saw would cloak it in shareholder equity, as if there’s a bunch Pearson get inebriated at an important function during the of widows and orphans [invested]—but it was just all about negotiation of a major business acquisition. money,” says a former Valeant executive. “That was all that Others who worked with Pearson told FORBES that his mattered.” alcohol consumption never impeded his working ability. But at least one sizeable investor in Valeant’s stock was worried n early warning sign for Valeant came late on Sept. enough to raise an alarm to a board member, who shared 30, 2009, as Pearson returned from his Madison, N.J. the information with another board member. (Valeant’s reoffice to his New Vernon estate. Without signaling, sponse: “The company is not going to discuss or comment on Pearson made a fast right in his gray BMW and was almost topics related to Mr. Pearson’s personal life or family. Valeant immediately apprehended by Madison police. When Pearson announced on March 21 that it has initiated a search for a lowered his window, the patrolman noticed a waft of alcohol new CEO and that Mike Pearson will be leaving the company coming from the vehicle. upon the appointment of his successor.”) Police records show that Pearson slurred his speech and Senior management, for its part, was filled with Pearson was unable to touch the tips of his fingers together or recite diehards. He liked to hire cronies like his former McKinsey A 104 | FORBES may 10, 2016 VAleAnt that Pearson had been hospitalized after contracting a severe case of pneumonia and would be going on medical leave. The news further rattled investors. Press reports at the time indicated Pearson had been working around the clock to get the Walgreens deal done. After about two months of convalescing, Pearson finally returned to the helm of Valeant at the end of February. Pearson told employees he was learning to walk again and that he had lost 30 pounds, Bloomberg reported. Within a month, he was on his way out. partner Robert Rosiello, who is now Valeant’s chief financial officer. Pearson hired his brother-in-law, who was paid $299,000 a year as director of corporate procurement/real estate. Ryan Weldon, head of Valeant’s U.S. dermatology operation, had been a summer associate at McKinsey and was the son of former J&J CEO Bill Weldon. “Mike wanted to win at all costs and surrounded himself with people who would basically do whatever he told aleant has been trying to make former chief financial them to do,” said a former Valeant executive, who says he left officer Howard Schiller the fall guy for the combecause he was uncomfortable with positions that Pearson pany’s current accounting woes. In March, when asked him to take. Valeant admitted that $58 million in revenue should not have As for the board, which, like management, was paid genbeen recognized in 2014 when its drugs were delivered to erously in restricted shares, there was no incentive to quesPhilidor’s mail-order pharmacy, its statement used the phrase tion the Pearson money machine. Indeed, by the beginning “tone at the top,” implying that the “improper conduct” was of 2015, eight of Valeant’s independent directors held $108 driven by Schiller. million of equity between them. Their stock, like the CEO’s, The former CFO is accused of providing false information was also extremely restricted, incentivizing them to keep to the company’s auditor, PwC, in an effort to get it to sign Pearson’s streak going a bit longer. off on Valeant’s 2015 10-K, critical to avoiding debt covenant Ultimately, that proved impossible. “Their business default. Schiller, who refuses to leave the board despite being model was: Borrow money, buy companies and boost asked to, denies any wrongdoing. prices,” says Erik Gordon, who studies the pharmaceutiNot a single person FORBES spoke with who was facal industry at the University of Michigan’s Ross School miliar with Valeant believes that Schiller was the compaof Business. “That’s a lousy business model, and it’s a ny mastermind. It was always the Michael Pearson show business model which you know obviously comes to an at the Madison executive offices, which was converted abrupt end.” from a YMCA building and still has a basValeant’s golden run began to unravel ketball court, emblazoned with Duke’s Blue last September after it came under attack they would Devil insignia. for its drug-pricing policies and the tactics Class action lawsuits have been filed, the of its captive pharmacy, Philidor Rx. Philicloak it in SEC is investigating and the Senate Special dor denied the accusations, but that didn’t Committee on Aging threatened to begin constop a congressional subpoena and increased shareholder tempt proceedings against Pearson. Bill Ackscrutiny that placed into question Valeant’s equity, as man, who infamously compared Pearson to accounting and business model. Buffett, was forced to join Valeant’s board in Pearson wrote a letter to his employif there’s a an effort to shore up billions of dollars that his ees, saying it was nonsense to suggest that Pershing Square has so far lost on its investValeant’s business model was dependent on bunch of ment. Valeant is under attack by politicians drug-price increases or that there should widows and for its drug-price gouging, and it recently said be concerns around Valeant’s exposure to U.S. government drug-price reimburseorphans—but that it would need to restate previous financial results. ment. It assured investors that Valeant’s sales Effectively fired from the company he built to Philidor were recorded only when the it was just but still technically its chief executive, Pearson product was dispensed to patients and then all about has yet to fulfill his most important obligation, terminated its relationship with the pharmasigning Valeant’s long overdue 10-K annual cy, which had been linked to 7% of its sales. money, says report. Valeant has some valuable assets, like ValueAct’s Morfit rejoined the company’s Bausch & Lomb, but it’s also saddled with some board, which also hired a former U.S. deputy a former $30 billion in debt associated with Pearson’s attorney general to help on issues related to executive. acquisition strategy. Without new deals or Philidor. To help replace Philidor, Pearson the ability to raise prices, it’s unclear where struck a deal with Walgreens to distribute that was all Valeant’s growth will come from. F Valeant products. Then in December, Valeant announced that mattered. Additional reporting By Matthew Herper. V 106 | FORBES may 10, 2016 Copyright of Forbes is the property of Forbes Inc. and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.
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