In an interesting attempt to wax philosophical, former Merck ceo Ray Gilmartin has begun contributing to a blog for the Harvard Business Review, since he is now an adjunct professor at the Harvard Business School, and his latest item is about what he sees as a "flawed set of beliefs" that have been increasingly embraced by the chieftains of major corporations over the past 25 years.
In his view, they have placed "way too much emphasis on maximizing shareholder value and not enough on generating value for society." He notes that execs and boards are motivated by such things as the short-term outlook on Wall street and stock-based incentive compensation, but these have led managers and boards to take actions that have had "unintended, destructive consequences."
In particular, he notes that "it seems as though CEOs are recognized and rewarded handsomely for downsizing and outsourcing, acquiring or merging, and making the quarter - all justified by the responsibility to maximize shareholder value...Any of these actions can be necessary in certain circumstances; most of us have taken one or another. My concern is that these actions have become the standard by which CEOs are expected to manage."
And so Ray then lists an alternative set of guiding beliefs that he hopes can right the world. These include the notion that "the market favorably receives projects with long-term payoffs, particularly those in research and development." Specifically, he cites cuts in research that would undermine efforts to create new drugs. However, he fails to note that his successor, the recently retired Richard Clark, took this same step last year.
To wit, Merck announced plans in July 2010 to save up to $3.5 billion by closing eight research sites and eight manufacturing plants by next year (read here). This left Merck with just seven therapeutic categories: cardiovascular, diabetes and obesity; infectious disease; oncology; neuroscience and ophthalmology; respiratory and immunology; and endocrine and women’s health.
The move, you may recall, came as part of a huge cost-cutting effort that followed the $41 billion acquisition of Schering-Plough. So perhaps one could argue that the decision to reduce research was a necessary step toward finding 'synergies' in the wake of a big acquisition. In fact, Merck execs have been struggling to cut costs and eliminate jobs ever since (see here). Was this an example, though, in which such a move was necessary? Gilmartin is coy and avoids mentioning the episode. Nonetheless, it could be interpreted as a rebuke of his former employer and colleagues.
Curiously, he is silent altogether on the propensity among some execs and boards to pursue mergers as strategic salves, which is what led to the ongoing bloodletting at Merck. There have, of course, been competing theories about the extent to which this is a useful notion. Some, such as Pfizer, have repeatedly embraced the concept and others, such as GlaxoSmithKline, downplay its utility. Unfortunately, Ray chose not to mention this in the context of research cuts (here is his blog).
As for the ceo who is "recognized and rewarded" for downsizing and outsourcing, Gilmartin glosses over his own attempts to calibrate shareholder value. In late 2003, he was mistakenly clinging to the belief that Merck could generate a sufficient supply of big-selling drugs from its own labs. Wall Street, however, was beginning to clamor for his head as sales, profits and share price were all declining (read here). His response was to eliminate 4,400 jobs. The move didn't help bolster confidence in his reign and his total 2004 compensation fell slightly, according to Forbes. Perhaps he has grown wiser during the intervening years?
17 Comments
There goes that ol' pot shouting at that ol' kettle.
Ed: Very interesting post.
Here's an excerpt I think worth sharing:
"Any of these actions can be necessary in certain circumstances; most of us have taken one or another. My concern is that these actions have become the standard by which CEOs are expected to manage."
So his answer to the question - "Is that all there is?' would be 'No' .... more to come. or as Ed has said: "Perhaps he has grown wiser during the intervening years?"
Ah, the man with the tan. I had the honor (?) of serving under him for several years before Mr. New Year's Rocking Eve took over.
I would like this board to consider the motivation of why a CEO would take all those enumerated actions to maximize shareholder value, including but not limited to shareholder derivative suits and shareholder say-on-pay, for example. Until we change incentives - i suspect we will see more of the same.
Ed, what's the point of this post? Are you implying that CEOs should not maximize shareholder value, but maximize an employee's value? I would agree with that if the company is employee-owned. Otherwise this post appears to suggest that the shareholder's livelihood (their invested capital) is not as important as the employee's livelihood (their capital - continued receipt of a paycheck).
I would like to see more discussion on this. I, personally don't think both are necessarily exclusive of one another. I wonder if you disagree?
Old Ray gets the 2011 Harvard Business School award for Master of the Obvious. He should now be first in line for The Harvard Lampoon Person of the Year Award in the category of Greatest Ironies, when you juxtapose his recent comments with the way he jumped the shark when he was with Merck. He would follow on the heels of the most recent illustrious winner, Paris Hilton.
Funny that there seems to be no mention of ethics. Pharma is nothing if not ethics deficient, as we know of its propensity to hide lethal side effects, promote bogus diagnoses in its marketing schemes, and make outrageous claims for its products. Until the government starts sending individuals to the slammer, this behavior will continue.
Too bad Harvard doesn't hire someone as an adjunct who has lost a family member to a drug. Then the students might actually learn a thing or two.
Harvard Business School, Harvard's Kennedy School of Government, Harvard School of Law. Hotbeds of elitist Idiot-Savants saturated with the Cambridge hubris and conceit required ruin businesses, trash economies and wreck societies. E.g., See Nitwit-in-Chief Barack Obama.
A Harvard pedigree and a buck-fifty gets you a cushy job being tragically wrong and a cup of coffee.
Steve, actually a NYC Metrocard was $2.50 but a Harvard degree devalues that to about a buck and change.
Over a 25 year period I hired one person from an Ivy League school after 10 years. On his second day he essentially tried to rewrite my job description to suit his needs. He left after six months because he didn't agree with company policy that raises and promotions only occur on the anniversery of your start date. I did keep him around long enough to get some good tips on where to buy the best clothes, but that was the sum total of his value to me.
The other value I suppose is that if you hire one of these guys you won't have to read "The Preppie Handbook".
True story about Ray Gilmartin.
Two weeks afte the Vioxx withdrawal, he gave a talk about my university about "business ethics." This had been scheduled long before Vioxx became a significant issue.
I asked what I thought was a softball question. Specifically, now that Vioxx had been withdrawn, and it appeared that a signicant number of people had been injured by the drug, and after all the lawsuits were settled, would Merck undertake an investigation about what the company or FDA might have done differently that might have mitigated what happened.
Gilmartin's answer (to my amazement) was, "No." There was nothing to learn from Vioxx. It was, in his phrase, a "stochastic event," from which there was nothing generalizable that could be learned.
Of course, eventually Merck did conduct an investigation of sorts, which cleared the company of any wrong-doing.
That was not what I asked, as I made it clear. Independent of the question of wrongdoing, could anything be learned when a significant number of people are killed or injured by a blockbuster drug?
Once again, Gilmartin's answer was a definitive, "No."
Is this the beginning of his repentance? Doubtful. Fred Hassan should read it and weep as his actions have been much worse.
Novel idea that medicine should serve the society (patient) versus the shareholder? (Not!) Just a little disingenuous coming from the former CEO of Merck? (Yes, after he's made his fortune doing the things he speaks against, while blogging for the Harvard Business Review as an employee of Harvard.)
History repeating itself. I believe the origins of the JNJ Credo provides an interesting perspective. Larry Foster wrote a book on Robert Wood Johnson which documents the historical context and the "General's" thinking.
Given that he presided over the Vioxx scandal, and got tens of millions in compensation the year after the drug was withdrawn, and the stock price dropped by 30%, Mr Gilmartin seems to lack insight into how his actions appeared to contrast with the principles he said he upheld. Maybe this sort of lack of insight explains why pharma and other health care corporations fall into one ethical morass after another.
See our take on Health Care Renewal: http://hcrenewal.blogspot.com/2011/09/do-health-care-leaders-realize-they-do.html
I ran the Merck Research Labs scientific library 2000-2003, and was one of those 4400.
Gilmartin presided over a situation where IT controlled the budgets for library resources, including literature databases and search tools such as CAS SciFinder. The tools were critical for drug discovery. Instead of increasing the budgets for these tools, the budgets were reduced.
That did not seem a good strategy for revitalizing a drug pipeline.
I worked at the SEIU 20 years ago or so when Gilmartin was the CEO at BD. We begged and pleaded for them to manufacture safer needles so that workers would not get needle sticks that might lead to contracting diseases like HIV, hepatitis C, and hepatitis B.
Nope. They refused for years to help us meet that goal. Meanwhile there were thousands of needle sticks that led to scores of infections.
It was only after relentless pressure, publicity and lobbying that BD finally started manufacturing safer needles.
So much for the espoused principle:
"Actions to address societal issues should be an integral part of strategy, and operations and should not be isolated as a separate activity under the heading of corporate social responsibility".
For a CEO who almost single-handedly destroyed billions of dollars of market capital of one of the (previously) best drug companies in the world, I find anything Gilmartin has to say highly suspect in value. By pulling Vioxx instead of re-labeling it, as MDs wanted, he triggered a massive backlash by the FDA against the entire industry. Now, it's virtually impossible to get anything approved, and the entire industry's market cap will probably cut in half in 15 years. The 13,000 layoffs Merck recently announced are just the tip of the iceberg.
Is this the beginning of his repentance? Doubtful. Fred Hassan should read it and weep as his actions have been much worse.