Management missteps costly in ‘04
Rejecting bad news. Managing crises poorly. Failing to practice what they preach. These and other blunders caused customer and employee distress, investor discontent, boardroom angst and other turmoil over the past year. Here are my picks of some of the biggest management mistakes of 2004:
Merck’s top executives put customers at risk for years — and badly damaged the company’s reputation — by countering concerns raised by outside scientists about the potentially serious side effects of Vioxx, its big-selling painkiller. When CEO Raymond Gilmartin announced in September that Merck was pulling Vioxx off the market because of a study that tied the drug to heart-attack and stroke risks, he said that the findings were “unexpected” and that Merck was responding swiftly to the results.
But internal Merck e-mails suggest the company fought for more than four years to quash safety concerns raised by academics and other researchers about the cardiovascular risks of Vioxx.
Objecting to bad news doesn’t make it go away; it only causes spiraling problems. The drug maker now faces lawsuits from families of those who suffered heart attacks after taking Vioxx. The drug’s withdrawal has also cost Merck trust among investors, who have seen the value of their holdings plunge since September, and could force the company into a merger.
If that happens, top Merck executives are protected with so-called golden parachutes. Earlier this month, Merck’s board awarded more than 200 executives, including the senior management committee, rich severance packages in the event the company is sold. CEO Gilmartin and other top executives could receive as much as three times their annual base salary and target bonus. Merck has said its board began working on the packages long before the Vioxx recall. Asked for comment, a Merck spokeswoman said, “Merck acted responsibly and appropriately in its handling of Vioxx.”
Weak crisis management among directors prolonged an accounting scandal at Computer Associates. In October 2003, directors forced out Chief Financial Officer Ira Zar and two of his lieutenants over what appeared to be widespread fraud at the company. Zar pleaded guilty in April 2004 and told investigators that two other top executives were also involved. One of these was later revealed to be CEO Sanjay Kumar.
Rather than ask for Kumar’s resignation, directors asked him to take a lesser role as chief software architect. Two months later, in June, Kumar quit that job as well, saying his continued involvement was “not helping the company’s efforts to move forward.” In September he was charged in a 10-count indictment as a key participant in the accounting fraud and its cover-up. Directors at the Long Island, N.Y., software maker should have shortened the months of turmoil at the company by cutting their ties with Kumar more swiftly.
“Computer Associates’ board of directors acted quickly and decisively once it became aware of the misconduct of certain members of former management,” says Chairman Lewis S. Ranieri. “The board has now brought in a new management team and put the company in the best possible position to move forward.”
Organizations that don’t practice what they preach risk undermining their credibility with constituents. TIAA-CREF, the nation’s largest institutional investor and a leading corporate-governance activist, had egg on its face earlier this month when two of its trustees resigned over a business venture they formed last year with Ernst & Young, TIAA-CREF’s independent auditor. Outside auditors are prohibited from forming business ventures with audit clients, including their executives, board member or trustees, according to federal auditor-independence rules.
Herbert Allison, TIAA-CREF’s chairman and CEO, learned about the independence violation from Ernst & Young in August. He informed the trustees of TIAA and CREF and the head of the company’s powerful board of overseers but not the other overseers until a day before the matter was disclosed in an SEC filing. Although he wasn’t legally obligated to tell all of the overseers about the violation, disclosure of important business and ethical matters to boards is something TIAA-CREF has long encouraged corporate executives to do.
“The company’s independent trustees addressed the problem and took the right actions on behalf of its plan participants,” a spokesman says.
The SEC has agreed to let Ernst conclude this year’s audit, but TIAA-CREF is seeking to hire a new accounting firm for the future.
Governance and leadership problems also hit the California Public Employees’ Retirement System, the huge public pension fund that crusades for better corporate governance. Sean Harrigan, its president, wasn’t reappointed by the state personnel board after the fund was criticized for meddling in labor-union issues with little connection to improving shareholder return. Harrigan played a role in Calpers’ efforts to intercede on behalf of striking Safeway employees, who are members of a food-workers’ union where he is a top executive. He blamed his ouster on pressure by Gov. Arnold Schwarzenegger’s administration and corporate lobbying groups.