Tuesday, September 27, 2011

After The Turmoil: Former Merck CEO Says Execs Need New Beliefs - By Ed Silverman in Forbes

In an attempt to wax philosophical, former Merck ceo Ray Gilmartin has begun contributing to a blog for the Harvard Business Review and his new post is about what he sees as a “flawed set of beliefs” that have been increasingly embraced by chieftains of major corporations over the past 25 years. This, of course, coincides with his tenure not only at Merck, but also Becton-Dickinson. 

In his view, they have placed “way too much emphasis on maximizing shareholder value and not enough on generating value for society.” He notes, not surprisingly, that execs and boards are motivated by such things as the short-term outlook on Wall Street and stock-based incentive compensation. But he frets that these have led managers and their boards to take actions that have had “unintended, destructive consequences.”

In particular, he writes 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 Gilmartin 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. Hmm… Could this have been oversight?

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 pharma 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. Let’s go back to late 2003, for instance, when he was mistakenly clinging to the belief that Merck labs could generate a sufficient supply of big-selling drugs. Wall Street, however, was beginning to clamor for his head as sales, profits and share price were all declining. His response ? 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?

Posted via email from Jack's posterous

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