Monday, August 01, 2011

10 Years of Pfizer Leadership - "A Saga of Ambition, Intrigue, Backstabbing, and Betrayal"

A remarkable story about mismanagement of health care has appeared in the mainstream media, and most remarkable is that this article in Fortune chronicled 10 years of poor leadership by three CEOs at Pfizer Inc, the world's biggest drug company

The CEO Who Would Not Leave

In 2001, William C Steere Jr retired as CEO, but did not really leave, muddying the chain of command:
In January 2001, Steere, by then 64 and a company legend, retired as CEO. He handed the job to his handpicked No. 2, Hank McKinnell. Steere stepped aside -- but not out. He received a consulting contract, with an office and secretary at Pfizer headquarters. Most important, Steere was granted the title of chairman emeritus and retained his seat on the Pfizer board. Governance experts widely regard such lingering as a recipe for trouble. Steere would remain a potent influence for another decade, outlasting his two successors.

Waffling About How to Support the Pipeline

The next CEO was Henry "Hank" McKinnell Jr, who was faced with a declining pipeline of new drugs. His response was to go from one extreme to another:
Pfizer's pipeline simply couldn't support the growth the company had promised investors. Three of its blockbusters were about to lose patent protection and face generic competition, meaning their profits would plummet. The biggest issue, of course, was Lipitor -- by 2005, it was bringing in a staggering $12 billion a year, more than a quarter of Pfizer's revenues. The company wouldn't lose its exclusive rights to Lipitor until late 2011, but already Wall Street was wondering how Pfizer could possibly replace it.

McKinnell kept boosting R&D budgets, maintaining Pfizer's 'shots on goal' approach -- the more compounds you explored, in theory, the more drugs you'd generate. But drugs can take a full decade to be developed and approved, and nothing big would be ready for years.

So McKinnell fell back on the refuge of the desperate pharma CEO: In July 2002 he announced the acquisition of Pharmacia, the industry's seventh-largest company, for $60 billion in stock.

A Power Vacuum and the Infighting Begins

When that did not work, McKinnell made himself scarce, leading to infighting among the next level of executives:
But even as Pfizer struggled to digest this latest meal, McKinnell seemed to spend less and less time at headquarters, becoming head of industry trade groups, funding an institute in Africa to combat AIDS, even writing a book about reforming health care.

That left a power vacuum, and Bill Steere, the former CEO, seemed more than willing to fill it. He was a familiar figure at Pfizer's New York headquarters, where he worked out in the basement fitness center and ate lunch in the cafeteria. Steere was always happy to lend an ear and share his views. His retired status and public reserve concealed tremendous influence. 'He says almost nothing,' says a person familiar with Pfizer's board. 'But people look to him to see how he nods and how he moves, because he knows the company better than anyone.'

With Pfizer no longer soaring, internal squabbling intensified. Vexed by what he viewed as Steere's meddling, McKinnell even tried to terminate his consulting contract. Steere fended off that move.

Furthermore, McKinnell's ideas about succession planning led to further infighting:
By 2005, McKinnell was already making plans for his succession. He promoted three executives to vice chairman, setting off what would become a long and increasingly bitter contest to choose the next CEO.

More Waffling Over Acquisitions Versus Spin-Offs

As Pfizer's stock price continued to fall, the board pushed McKinnell into rretirement in 2006, and replaced him with Jeffrey Kindler. However, Kindler also could not make up his mind whether to grow or shrink the company:
Suddenly desperate to shrink the company -- which had just completed two giant mergers -- Kindler announced plans for brutal layoffs that included axing 20% of the vaunted U.S. sales force.

Yet even as he was making massive cuts, Kindler was also pondering acquisitions, toying with alternative strategies. The first was a 'string of pearls' approach -- a handful of smaller purchases, each aimed at filling a single strategic gap, such as biotech. The second strategy was yet another megadeal -- namely, buying Wyeth. That company had $23 billion in sales, strength in vaccines and biotech, a large over-the-counter products division, and several blockbusters of its own, including Prevnar, an antibacterial vaccine for children.

But after more than a year of on-and-off debate, Kindler just couldn't make up his mind.

Inconsistent Leadership for Research and Development

the process of overhauling R&D was a messy one. Kindler shuffled through three research chiefs during his 4 1/2 years as CEO. He closed six R&D sites, then halted research in 10 disease areas even while setting a new goal of launching four new internally developed drugs a year by 2010. He split the research operation in two -- setting up a separate unit for biologic drugs (and launching an expensive new facility in San Francisco) -- only to reverse the decision 30 months later after taking on Wyeth's big biotech operation.

Among the shuttered Pfizer sites was one at Ann Arbor, the birthplace of Lipitor. Says Bruce Roth, the scientist known as 'the father of Lipitor,' who lost his job when the Ann Arbor site closed and now works for Genentech: 'When every 18 months you throw the organization up in the air and are shifting therapeutic areas or closing sites, you have this period of turmoil when everybody in the organization is paralyzed. You need some continuity to do science.'

Kindler was struggling for answers in a complex industry where his own experience was limited. In an effort to bring in fresh thinking, Kindler spun his leadership team like a top. Company veterans Shedlarz, chief medical officer Dr. Joseph Feczko, and CFO Alan Levin departed. Frank D'Amelio, Kindler's new CFO, arrived from Lucent. Sally Susman, his new communications chief, had worked at Estée Lauder (EL). His new general counsel, Allen Waxman, resigned abruptly for "personal reasons" after just one year; replacing him was Amy Schulman, a high-profile litigator at DLA Piper.

In Thrall to a Questionable Subordinate

The Fortune article devoted considerable space to document Mr Kindler's trust in a questionable subordinate.
Perhaps the only thing as destructive to Kindler as his inability to trust his colleagues was the one Pfizer executive in whom he did place his trust: Mary McLeod. The head of human resources under Kindler, McLeod would leverage her relationship to the CEO to become both his emissary and a power in her own right. Kindler's loyalty to her would undercut him at a crucial moment.

Kindler did not seem to realize why she had lost her former position:
Her tenure at Schwab had ended disastrously, though there's no sign Kindler knew that when he brought McLeod in. As Schwab's head of HR and chief of staff to CEO David Pottruck in the early 2000s, McLeod had proved toxic, according to six members of Pottruck's executive team. They say she isolated him from other points of view and went to extraordinary lengths to remove rivals. Meanwhile she criticized him behind his back and bragged that she had the CEO under her thumb.

After an internal investigation, Pottruck fired McLeod in 2004, he confirms. In an e-mail sent to McLeod the day of her termination, read aloud to Fortune, Pottruck wrote: 'The issues are about the perceptions others have of you around character, integrity and divisiveness … There is a perception that you do not tell the truth.'

Ms McLeod's ascendancy seemed to create toxicity:
McLeod seemed uninterested in the details of how the streamlined department would actually function. Even top deputies say she was virtually unapproachable, preferring to communicate by e-mail and quarterly videocast.

McLeod's primary focus was the care and feeding of the CEO. She became Kindler's protector and surrogate, whispering in his ear, controlling access to him, delivering his blunt messages. Kindler admiringly called her 'Neutron Mary,' after his hero, Jack Welch. McLeod seemed to encourage his harshest nature, telling him, according to a person who was present, that one senior executive was 'a B player,' another too ambitious, someone else a 'crybaby.'

McLeod also publicly denigrated her employees, announcing at one town hall meeting in 2008 that two big positions would have to be filled from outside because no one inside Pfizer was capable of doing the job.

Yet Mr Kindler seemed to make sure Ms McLeod's compensation reflected his good relationship with her, not her relationship with the rest of the company:
McLeod's emoluments were so lavish they might make her one of the company's five most compensated employees, which would require Pfizer to disclose the details in its annual proxy statement. In early 2008 company governance chief Peggy Foran investigated the issue and tallied nearly $1 million in payments to McLeod, including those relating to her various houses, the helicopter use, and a large bonus to buy her out of a consulting partnership. Then there was McLeod's salary and regular bonus of $900,000 and restricted stock and options.

As Mr Kindler continued to flounder, his excess faith in Ms McLead undercut his support among other executives:
loyalty to the CEO among members of his 'executive leadership team,' or ELT, was growing tenuous. One catalyst for the disaffection was Mary McLeod. With the CEO's support, she had become feared inside Pfizer. Kindler seemed blind to her shortcomings, opening up a divide within the ELT. Says one executive: 'There was Mary and Jeff, and then there was the rest of us.'

When the board finally realized how much dysfunction Mr Kindler's trust in Ms McLead was causing, it was the beginning of the end of his CEO-ship. Her increasingly bizarre behavior lead to an inquiry:
The two-week investigation was conducted by Bart Friedman, an attorney with Cahill Gordon & Reindel who specializes in corporate governance work. After interviewing all of McLeod's direct reports, Friedman found nothing illegal. He did, however, conclude that HR was thoroughly dysfunctional, and riven by inept management. In his view, this was a simple case of incompetence.

On Wednesday, Dec. 1, Pfizer's executive team gathered for a day of meetings with the CEO. Mary McLeod was missing. After hearing Friedman's report, Kindler had finally parted ways with his controversial HR chief -- though not without a generous severance package.

Now it was Kindler whose job was threatened.

Summary: Per Fortune

Indeed, what has occurred at the company -- whose $68 billion in annual sales are built on blockbuster drugs such as Lipitor and Viagra -- is extraordinary. Once a Wall Street darling and corporate icon, Pfizer has tumbled into disarray. In the decade that ended with Kindler's departure, its stock price sagged from a high of $49 down to $17 and its drug pipeline dried up (problems the company continues to grapple with today). Pfizer lost its way, stumbling through a frantic series of zigzags in the hopes of finding new blockbusters to sustain its prodigious profits in the future.

Meanwhile, its managers descended into behavior that would do Shakespeare -- or Machiavelli -- proud. There was the ex-CEO who couldn't relinquish his power and quietly maneuvered to undercut two successors he had helped install. Then there was the human resources chief who divided the staff rather than uniting it. Most of all, there was Kindler himself, a bright man with some fresh ideas for reforming Pfizer but a person who agonized over decisions even as he second-guessed everybody else's actions. The story of Jeff Kindler's tumultuous tenure at Pfizer is a saga of ambition, intrigue, backstabbing, and betrayal -- all of it exacerbated by a board that allowed the problems to fester for years.

Health Care Dysfunction Made Visible

In "a cautionary tale: the dysfunction of American health care," published in 2003, I postulated causes of our country's health care malaise based on qualitative interviews with physicians and cases I found that instantiated their concerns. One major concern was about "ill-informed, incompetent, self-interested, or even corrupt leadership." Since then, on Health Care Renewal, we have discussed a large number of cases of such bad leadership. However, most cases have come from news reports which cover only a single incident or small slice of time. The Fortune article on Pfizer covered 10 years of leadership that at least appeared ill informed and of doubtful competence.

Given that Pfizer is the world's largest pharmaceutical company this long duration case narrative does underscore our concerns. That such an important health care organization could be so badly lead for so long suggests that our fears about the problems of leadership of large health care organizations were, if anything, understated. As the Fortune article's authors put it:
Pfizer is an enterprise with the noble calling of easing pain and curing disease. Yet its leaders spent much of their time in the tawdry business of turf wars and political scheming.

When these sorts of sentiments start appearing in business magazines, health care professionals and policy makers ought to realize how overdue are our serious efforts to improve leadership and governance in health care.


Afraid said...

Thank you Roy for the great (?) reading.

Consequences? Everyone mentioned got rich. This who may have righted the ship were undoubtedly deep sixed. I bet the bad actors all have new executive jobs soon, or worse yet, will run for office and win.

Governance needs liability to be effective.

There should be no D&O insurance, and stock holders then would hold them responsible. A simple stockholder vote would be required to eliminate D&O and clear out the boardroom of many takers.

Medical Supplies said...

what a mess..

InformaticsMD said...

The two-week investigation was conducted by Bart Friedman, an attorney with Cahill Gordon & Reindel who specializes in corporate governance work. After interviewing all of McLeod's direct reports, Friedman found nothing illegal. He did, however, conclude that HR was thoroughly dysfunctional, and riven by inept management. In his view, this was a simple case of incompetence.

This says it all about this entire tale and its actors.

It was not dissimilar at other pharmas my friends and I worked for, by the way.

Pharma execs need to be on the hypnotic and antipsychotic drugs their companies produce, or else be subject to public tar and feathering for their airheaded, school child bullying behavior.

-- SS

Anonymous said...

My experience is that the same executive behavior exists outside of pharma. Who but the money and power motivated megalomaniacal psychopathic types would want to work in such an unpleasant environment doing the dastardly stuff they do? "C-Level" could easily stand for "Crazy-Level".

If it werent for the damage they do to society, I'd leave them to their own self created hells.

InformaticsMD said...

Anonymous August 3, 2011 3:00:00 PM EDT said...

If it werent for the damage they do to society, I'd leave them to their own self created hells.

The ruined careers and ruined lives caused by these court jesters and buffoons, who for some idiotic reason think scientists can be creative even under the worst job stresses imaginable (e.g., job instability), are innumerable.

Compare these clowns to Nobel prize winner and drug inventor Sir James Black. I particularly like his recollections that:

Max Perutz, director of one of the most successful postwar science institutions, Cambridge University's Molecular Biology Laboratory, had compelling ideas on how best to nurture research, says Sir James: "No politics, no committees, no reports, no referees, no interviews - just highly motivated people picked by a few men of good judgment."

and his observation that:

There is no shortage of scientific talent, he says. "But [I am] much less optimistic about the managerial vision [of the pharmaceutical industry] to catalyse these talents to deliver the results we all want."

-- SS