How to Run a Company: Lessons from Top Leaders of the CEO Academy

Book by Carey Dennis Von Weichs MarieCaroline

Assessing a Company As an Outsider Coming In
Raymond V. Gilmartin, chairman and CEO of Merck & Co.

Raymond V. Gilmartin has worked in the healthcare industry for more than twenty-five years. He has been chief executive of both the medical device manufacturer Becton Dickinson and, since 1994, the drug giant Merck. During his tenure, the industry has faced dramatic changes and challenges, including the introduction of managed care, budget constraints, and remarkable innovation. These developments have presented several different strategic options for drug companies, and pharmaceutical executives have had to set clear direction for their companies.

Gilmartin has had the advantage of watching these industry changes from two key but very different leadership experiences. At Becton Dickinson, he was an insider who rose through the ranks to become CEO. At Merck, he was recruited from the outside and arrived at the job with a stellar record as an industry CEO. Unlike some corporate leaders who parachute into a position, Gilmartin did not launch wholesale changes among Merck's senior management team. Instead, he established a very flat and open organization structure and helped reassert the company's reputation as a leader in breakthrough research. In recent years, Merck has been included on Fortune's list of the most admired global companies and the 100 best companies to work for.
WHEN A FORMER Harvard Business School professor learned that I was leaving the CEO job at Becton Dickinson to become CEO of Merck, he told me I now had a second chance to do it right. His forecast was accurate. I had an advantage my second time around--the advantage of being an outsider.

As it happened, I had a rewarding and successful career at Becton Dickinson. I had joined the company in 1976 as vice president of strategic planning. Over time, I moved up through various line positions until I became president and CEO thirteen years later. During my tenure the company grew, our stock price did well against the S&P 500, and, having groomed a successor, I felt comfortable moving to a new company.

But my experience at Becton had been strictly that of the insider. One of the most important things I learned at Merck is how valuable it is to approach corporate issues from an outside perspective. In fact, that makes sense even for a CEO who has been promoted from within the company. Becoming CEO is an opportunity to step back and take a good look at the company, even if you think you know it well.

Nineteen ninety-four, the year I arrived at Merck, turned out to be a pivotal year for the pharmaceutical industry. In many respects, the industry was in turmoil. President Clinton had proposed a far-reaching health-care plan that many observers believed would lead to government-imposed price controls on prescription drugs. Stock prices across the industry were depressed. Managed care had also emerged in the early nineties, and it was clear that, one way or another, it would have an impact on the drug business.

Merck, too, was going through a period of uncertainty. The company had developed only a few new drugs in the early 1990s, and some questioned the company's commitment to research. The year before I arrived, Merck had acquired Medco, the pharmacy benefit manager, which suggested a change in direction for the company. Many at Merck wondered what the future held.

A new CEO is expected to make changes, often dramatic changes. Given the industry environment, I suspect that's what many expected from me at Merck. But I believe that before any changes can be introduced, a new CEO has to take a close look at three constituencies within the first six months on the job: the management team, the board, and the previous CEO. Identifying your key constituencies and addressing them quickly is critical for anyone who takes on a new management responsibility.

The fact is that when you come in from the outside, the management team you inherit is someone else's management team. It was put in place by your predecessor. At the CEO level, it is very likely that one or two people on that team expected to get the top job and experiences lingering disappointment. Similarly, the board is not the new CEO's. Its members were appointed by the CEO's predecessor, perhaps even by prior CEOs. And more often than not, the former CEO is still involved, either as a director or possibly continuing as chairman; in some instances he may have an office down the hall.

CEOs who have not paid attention to these different constituencies whose companies are in the midst of some very dramatic change have gotten into a lot of trouble, and many have lost their positions.
Building Support in the Company

Dealing with your constituencies and carrying out corporate change is possible only with support throughout the company. Determining what changes need to be made requires tapping into the knowledge that is available throughout the corporate ranks. Ironically, that requires being able to look at a company from the outside. The knowledge you need--in terms of the kind of change that is required and where to enlist support for those changes--already exists in the organization.

I started my career as a consultant with Arthur D. Little. I worked on an assignment for an executive I respected very much. The company was about to embark on a major restructuring of its sales and marketing division. Although he was supportive of the plan, he was not directly involved with it. On his behalf, I gathered information from within the organization about employee attitudes toward the restructuring, which I then presented to him. What I shared with him was that there was considerable anxiety among employees about the restructuring. Many thought it was taking the company in exactly the wrong direction. Indeed, the restructuring seemed to have very little support below the senior levels of management. After I presented this situation to the CEO, he said to me: "What you found out is very important, it's very critical, but it's also very sensitive. I think one of the things we should talk about is how we're going to maintain the confidentiality of what you found out." And I said to him, "With all due respect, your organization knows all these things. What they are worried about is that you do not know them." To his credit, he reacted the right way and did not go through with the planned restructuring.

That's an important lesson for the CEO. People in the organization know its strengths and weaknesses. It is the CEO who has to get to know them and tap into the organization's institutional knowledge.

On the day my appointment was announced, I introduced myself to senior management. After a short hiatus between jobs, I started working right away. I brought considerable experience in how an organization works--how it operates across functions and locations. But I didn't want to impose anything. The first thing I wanted to do was get people's views as to where things stood. So in the first couple of weeks on the job, I undertook a series of interviews with about sixty people at all levels of the organization.

The interviewing process was easy. I was asking people to share their ideas and knowledge. As the incoming CEO, I was giving them an opportunity to talk about what was important to Merck. I asked only two questions:

*What do you think are the major issues that we face?

*If you had my job, where would you spend your time and attention?

These two questions formed the basis for candid conversations, because people care a lot about the future of their company and how to resolve some of the frustrations they must deal with. I gathered a great deal of candid information about what was wrong in terms of how the company worked, and what issues people were really concerned about. At the same time, I obtained considerable insight into the senior levels of management and middle management down through several layers. It was a valuable exercise—and would have been just as valuable if I had been moving up within the organization.

What I heard was not entirely surprising. People wanted to know what the future of the company would be. They were concerned about whether Merck was still committed to research. Some expressed concerns about the competitive environment within the company that led different functions to act as rivals. Marketing and research, for example, might have different views about how a drug should be developed or how clinical trials should be conducted. Their competitive approach to tackling issues affected the company environment. But beyond these issues, what was most important was that I was giving people a chance to speak their mind. I wasn't asking them to respond to my agenda.

It was clear from these conversations that I needed to focus on the future of drug research at Merck. With the senior leadership, I spent a few days together at an offsite meeting, specifically talking about where we were taking the company. From my point of view, it was critical that any commitment to the future needed to be a collective one. We concluded that breakthrough research remained crucial to Merck. In the age of managed care, it might prove even more important. As a result, we got out of a generic-drug business we had started in the early 1990s. At the time, it perhaps made sense. But now our goal was to re-commit to research and make sure the company was focused on that.

My thinking on these subjects was greatly influenced by the initial conversations I had with top people at Merck after I arrived. Those conversations helped clarify what the leadership of the company needed to do, and it let the company leaders genuinely contribute to my transition process. I recognized how important clarity of purpose is to a company in the midst of a changing business environment. We needed to be clear about the future direction of the company and our commitment to research. We needed to establish firmly how work would get done--that meant more collaboration and less competition among functions. And above all, we needed to communicate heavily to the organization: Employees had to know about our priorities.

This process of listening to the top people in the company tell me what was on their minds was extremely helpful to me in understanding what Merck needed most. The experience was so positive that we have institutionalized it. To do this, we relied on Harvard Business School professor Michael Beer, who helped us establish a process he termed "organization fitness profiling." In fact, we have broadened the exercise to incorporate more people. We choose a task force of eight highly regarded managers with potential from across the company to conduct interviews with fellow managers about how the company is doing, what is working, and what needs to be changed. Once the data are organized, the task-force members take part in a roundtable session with a facilitator, with the management team listening to the discussion, in what's often called a "fishbowl exercise." What organization fitness profiling does for us, more than anything else, is give all of us in senior management a good look at how closely our operations are aligned with the company's goals. It gives us a chance to listen to others raise a problem and to how the task-force members talk about it. There's a big difference between hearing things from an outside consultant and hearing them from your own people. It lets you understand how problems are perceived and understood internally.

After these sessions, Merck executives discuss the problems they've heard and come up with proposals on how to address them. We then reassemble the group with the task force. Once again, we let the task force hear our proposals but then develop their own ideas about how to address the same issues they raised earlier.

The topics covered aren't necessarily lofty questions of vision and long-term planning. More often, they are nuts-and-bolts issues that weigh heavily on the minds of managers and employees. I recall one session in which we discussed whether our reward system was really aligned with the goals of the company. What came out of that meeting was a change in our incentive structure so that individuals were recognized for performance that was closely tied to achieving company goals.