Valeant Pharmaceutical Wants Us to Believe Bookkeeper Caused 90% Drop in Stock Value

Most people who follow financial news know about the mess that has befallen Valeant. A high flyer at one time, the stock hit a high of $263 in August 2015. Since then the stock has crashed to around $32. The stock slide has not been caused by general economic conditions, competition, or FDA pressures.  Rather, it fell on its own sword…. so to speak.

I have been following the Valeant fiasco from a distance, as I have no financial interest in the company. What does interest me is why corporate governance has broken down to this magnitude in this company and unfortunately continues to break down in other public companies. Valeant stock has lost nearly 90% of its value due to the following:

1. Questionable pricing strategies now being investigated by Congress;
2. A hidden relationship with Philidor Rx Services that ultimately resulted in a related accounting misstatement causing previously filed SEC Form 10Ks and 10Qs to be unreliable, and delaying the filing of current financial reports; and,
3. Abrupt changes to its guidance on 2016 revenue and EPS.

To make matters worse, the company and its executives are publicly playing the blame game with no one apparently responsible for all that is wrong. Here is the company’s official statement:

“The improper conduct of the company’s former chief financial officer and former corporate controller, which resulted in the provision of incorrect information to the (audit) committee and the company’s auditors, contributed to the misstatement of results. The company has determined that the tone at the top of the organization and the performance-based environment at the company, where challenging targets were set and achieving those targets was a key performance expectation, may have been contributing factors resulting in the company’s improper revenue recognition.”             

First, the company is suggesting all of its problems are related to the accounting issues. As if a business strategy of buying old drugs and gouging consumers and their third party payers with incredible price increases, and forgoing drug research and development, is sustainable. Once they isolate the issue to accounting, they conveniently blame the CFO and Controller. In response, the CFO has publicly blamed the Controller. Therefore, we are supposed to believe the Controller is solely responsible for the company’s 90% drop in value!

Based on my 30 plus years in business I find this highly unlikely. I believe the company would have been more accurate and succinct by saying “the tone at the top of the organization was the key contributing factor relating to the company’s improper revenue recognition.” Throwing the CFO and Controller under the bus is classic scapegoating. The company’s reluctance to get to the truth and look for scapegoats is proof, in my view, that the tone at the top is the problem. The blather about performance targets being aggressive can be said of any company.

The tone at the top, by definition, is not driven by the CFO and Controller but rather the board and CEO. The Controller may have been overly aggressive in recognizing revenue and may have broken the accounting rules. If so, the finance department was likely under intense pressure to meet the financial goals set forth by the CEO and board. Accountants are often the messengers that are shot when the business results do not meet expectations.

Management would rather believe the accountants are too conservative or wrong than fix the business. In the beginning, the accountants can find some legitimate room for judgment to synchronize the books up with expectations. However, at some point, a line is crossed and nobody even realizes it until it blows up.

It takes strong resolve for accountants to stick with their professional judgment when the pressure from the top pushes for increasingly liberal accounting estimates. However, an entire series of blogs could be written on the failure of the accounting and auditing profession related to Valeant and similar situations. It is always amazing how trained CPAs can perpetrate material accounting mishaps that go undetected by both internal and external auditors.

Valeant will eventually replace the CEO, CFO, and Controller and this is certainly warranted. The board will be shaken up with the addition of William Ackman, whose hedge fund owns about 9% of Valeant. However, it seems to me when a company goes this bad; it is time for a new board of directors.

In addition, I would assume the audit committee, CEO and CFO have liability under Sarbanes-Oxley to ensure that a proper system of internal control was in place. Although an investigation is not yet complete, the public announcements to date suggest one or more material weaknesses in internal control existed. To prevent similar cases to that of Valeant in the future, individuals should be held personally accountable per the law. Until the CEO, CFO and audit committee members are held personally accountable for what may be interpreted as material misconduct, these situations will continue no matter what laws are passed. Bad characters give business a bad name.

As a former CEO and financial officer of financial services companies, I understand the need to be aggressive in the market. But I also believe CEO's must play straight and look out for the welfare of long term shareholders. Sustained success can only be achieved by selling enough product at fair prices people are willing to pay that result in sufficient profits to attract capital. A disciplined focus on revenue and margin growth through innovation and execution are the keys to success. 

Our business at C-Level Partners is to help other businesses discover and execute on this formula. We would like to continue this dialogue and welcome any thoughts you have on Valeant, governance or how to achieve sustainable revenue and margin growth. Feel free to contact Dennis Drent at ddrent@clevelpartners.net or via phone at 714-290-3892.

The 5 C's of Clairvoyant Companies

No one is a psychic at TechCoastAngels.  Yet, we believe there are keys to success for start-ups.  For the past f weeks, myself and 6 other angel investors from TechCoastAngels of Orange County have screened more than 120 entrepreneurs in preparation for the “finals” of our fast pitch competition at TCA’s recent Celebration of Entrepreneurship event held on March 10.  We listened to these entrepreneurs’ 60 second pitches which would be provoking enough to take a meeting with them and listen to their pitch decks.    

In the past, I have looked at pitches of Unicorns and through my work and consulting practice reviewed or developed business plans, marketing plans, competitive analyses, positioning statements, branding architectures, and product road maps.  So, in this blog, I want to put it all together and share what I see are the common themes that came out of the pitches, pitch decks, business, and marketing plans- at least from my perspective.   

The following principles, which I call the 5 C's of Clairvoyant Companies are equally applicable to start-ups and on-going companies, large and small.

1.  Conveying the story.   The first “C” relates to conveying a story of what problem(s) the company is solving and telling a succinct story to entice the listener to ask for more information.   If it is a start-up, the entrepreneur has to put the listener in the shoes of the person having the problem and convey the solutions.  In the pitch deck, or the business plan, the CEO provides the details on how he or she will execute on the plan and drive financial results.  Conveying the story clearly applies to all companies, particularly if the company wants to attract new customers and brand itself in the market as something special.  Just think about the stories being conveyed by Nike and Under Armour or your favorite consumer or business product.

2.  Customer Clarity.   The second “C” relates to the target customers.  Who is the ideal customer?  Can you describe them and how do you find them?   If you think about Airbnb, the customers are both the person wanting to rent his property for a short period of time, to the other customer, a person wanting to rent a room or house.   The marketing and business plan should clearly indicate the problem the customer is facing and the solution offered.  Additionally, the company needs to present a cogent case for their marketing tactics to drive awareness, adoption and use.  Without clarity on the customer and how to find them and motivate them to action, financial success will not be achieved.

3. Competencies of the Company.   This third “C” relates to the existing or needed competencies within the organization that can drive the financial results.  It also relates to the intellectual property (IP), the culture of the company, and the way the employees think and execute the plans that are required to support the business or product.    How do you acquire and sustain the competencies that are needed for success?  Do you hire software developers on your team to build the product or can you outsource that skill?   What is critical based on your strategy and your competition?  

A competitive analysis and environmental scan may lead to the conclusion that skill sets that were once required are no longer required and new skills must be added.  That may lead the company to a training program, a partnership, or replacement of existing resources with new ones.  Some competencies such as Intel focus on technology as the prime competency and they develop the next generation of product even as they roll out the current generation.  Others, such as Zappos, focus on the uniqueness of the customer experience and the culture of the company, both of which are hard to duplicate.  Competencies help provide a “competitive moat” which brings up the next “C.”

4. Competition.   This fourth “C” is pretty evident.  No company operates in a vacuum.  Both start-ups and on-going companies need to be aware of the existing and potential competition that exists.   A competitor in the future may not be apparent today but may have the competencies, technology, leadership and resources to compete in a new and growing market.   Five years ago would GM or Lexus have considered that Tesla would be a competitor or that Google would enter the realm of cars with their automated car program?  A few short years ago, who would have thought that Red would be the camera of choice and used in three of the 2016 Academy Award nominees for best film? 

With technology and apps changing so quickly, competition can change just as fast.  Technology is the new enabler helping young entrepreneurs compete with established companies and with each other.  Recall what Andy Grove, former Chairman of Intel said:  Only the Paranoid Survive.  Whether you are a start-up or an established company, be paranoid and keep your eyes open.

5. CEO vision and passion.    We at TechCoastAngels say that we have to like the horse (the business concept) but must LOVE the CEO (the jockey and her team.)  As we screened the candidates for our upcoming event, we looked for a CEO with passion and vision and who can relate to us, the investor.  We wanted to find someone who had a history of success, was decisive, yet approachable and coachable.      

Think back to the great leaders of businesses or coaches and CEOs of sports teams.   Who is your model for a CEO with vision and passion?  I personally thought Lee Iaccoca was great when he resurrected Chrysler.  Jack Welch turned GE into a world class company with his vision to be #1 or #2 in his markets.   Steve Jobs showed the world a new vision for technology. And Alan Mullaly took Ford after the great recession to a new level of respect and performance.   

I trust that our C-Level Partner blogs and the ideas will help executives of start-ups and on-going companies be successful and also be used by executives to help them guide their companies to business success.   C-Level Partners has been established to be a beacon for value creation.  My partners and I would be glad to continue the dialog on what makes a successful company and help you optimize your business value and achieve your business goals.  Feel free to reach me at dfriedman@prodigy.net or call me on 949 439-4503.  And if you enjoyed this blog please like it, repost, and retweet it.

Can You Name The Campaign? Building the Brand in Politics and Business

This blog is not will not make a political statement or endorse any candidate for President. The blog looks at the race from a branding perspective to glean any lessons.

As the election grinds on the Republican field is down from 17 candidates to just a few. On the Democratic side, it is a two-person race versus the anticipated coronation of Hillary Clinton. No matter what your political leaning, 2016 will go down in history as one of the most unusual and interesting elections.

Presidential elections are great exercises in marketing. Campaign strategists must create crisp messages to meet the needs of targeted constituencies. Early on, campaigns need to attract donors and volunteers who will eventually motivate their followers to get out and vote.   Each candidate has a brand, and in fact, is a brand with a clear promise, themselves.

As with any brand, a successful campaign needs to have a clear message, a clear promise, and key points supporting the message. A slogan captures the spirit of the promise in a snappy and succinct way. The slogans of the key candidates are listed below in the column on the left. The column on the right lists the candidates in alphabetical order. Can you match the slogans to the candidates? (The answers are at the end of the blog.)

Campaign Slogan	Presidential Candidate
Reignite the Promise of America	Dr. Ben Carson
Kasich for US	Hillary Clinton
A New American Century	Ted Cruz
Hillary for America	John Kasich
A Future to Believe In	Marco Rubio
Make America Great Again	Bernie Sanders
Heal + Inspire + Revive	Donald Trump

 TaglineGuru surveyed 250 branding, marketing, and advertising executives to rank the slogans based on the following criteria:

Memorability – are they catchy and memorable?

Authenticity – do they capture the individual style of the candidate and spirit of the campaign?

Likability – do they tell a fun and inviting story?

Interestingly, Bernie Sanders’ original slogan of “A Political Revolution is Coming” was ranked the highest at the time. Sanders has since changed his slogan to “A Future We Can Believe In.” Sanders must not have seen the survey results, or felt that he is more believable and credible than the other candidates and therefore changed the promise.

Excluding the Sanders slogan, the TaglineGuru survey results ranked the slogans from best to least best:

1.      Reignite the Promise of America

2.      A New American Century

3.      Hillary for America

4.      Heal + Inspire + Revive

5.      Make America Great Again

6.      Kasich for US

You can decide if you agree with the experts.

Let’s briefly look at the slogans to see how they support the candidate’s message.

Hillary Clinton’s “Hillary for America” touts her deep experience for the job. “Kasich for US” supports his message of bringing the country together to get Washington working again. If you listen to the candidates talking points, you will hear these messages repeatedly.

Reignite the Promise of America, A New American Century, and Make America Great Again, all have the same premise of ensuring American “exceptionalism” after eight years of a Democratic administration. These candidates talk about how they believe the Obama administration has taken the U.S. in the wrong direction and they will oversee a course correction.

So far, the voters of the two parties are attracted to almost polar opposite brands. Democratic voters are overwhelmingly supporting Hillary Clinton and her message that she has the experience to be a stable and competent executive. Republican voters, on the other hand, are supportive of the Donald Trump promise of Making America Great Again through the skills he has acquired as a successful businessperson and having no ties to the “establishment.” Not surprisingly, the Republican voters are more energized around electing a fresh candidate versus the Democratic voters who are very familiar with Secretary Clinton.

What lessons are there for businesses in looking at these campaign slogans?

1. The message and promise are critical. Just as a candidate must be clear about the platform he or she in running on, a business must be clear about its purpose and what it delivers to their customer. While presidential candidates must be able to answer the question, “why do you want to be president,” every business must be able to answer the question, “what is your mission and in so doing what do you promise to deliver?”

   2. Presidential candidates repeat their messages. Moreover, they have to say it each time like it is the first time they are saying it. There are at least two reasons for this. (1) Every time a candidate speaks there are likely people that are hearing the message for the first time so the candidates must sound fresh. (2) People need to hear the same thing nearly a dozen times before they actually remember it and potentially accept it.  

    This is true for businesses as well. Whether talking with customers or employees business executives need to have a clear message that they hammer home repeatedly.  Do you recall “Pin Drop”- the message and promise of a quiet communications advocated by Sprint for many years? When done properly, the target audience will understand what makes the company different and why they should buy its products or services.

     3. Candidates must have a track record supporting their positions. People will want confirmation and validation of those messages. This is also true for companies and their executives. If part of a company’s message is great customer service, it had better have great customer service continually.   

In summary, both politicians and companies need a clear reason for being, a clear promise i.e. message to their target audience or constituency, communicate that promise repeatedly, and have a track record supporting their assertions.

C-Level Partners exists to help small to middle market companies improve their business performance. Our managing directors are owners of the firm and have long careers of helping companies envision and create the future. 

Our brand promise is to help you grow revenue and improve margins and we back it up with a “pay for what you believe is fair” guarantee.    More importantly, our Managing Directors can back up this promise with a history of accomplishments.   

If you have any thoughts you would like to share about this blog please leave a comment and feel free to forward it to your friends and colleagues. Also, if you would like to discuss any branding, strategy or business issues, please contact me at ddrent@clevelpartners.net or call me at 714-290-3892.

Answer to Quiz

Campaign Slogan	Presidential Candidate
Reignite the Promise of America	Ted Cruz
K for US	John Kasich
A New American Century	Marco Rubio
Hillary for America	Hillary Clinton
A Future to Believe In	Bernie Sanders
Make America Great Again	Donald Trump
Heal + Inspire + Revive	Dr. Ben Carson