Crisis in the boardroom: 2011’s most dramatic departures

pharmafile | January 11, 2012 | Feature | Business Services, Manufacturing and Production, Medical Communications, Research and Development, Sales and Marketing |  Actelion, KV pharmaceuticals, Kindler, Pfizer, management 

In December 2010, Jeffrey Kindler, the chief executive of Pfizer suddenly announced his departure from the company.

His abrupt exit made it obvious that there had been a serious internal dispute, but few knew just how serious the boardroom problems had become.

The full extent of the problems were revealed in all their lurid detail in June, when the US magazine Forbes published an in-depth report into Kindler’s fall from grace, complete with testimony with key players.

The article Inside Pfizer’s Palace Coup detailed how Kindler’s management style had become increasingly autocratic, and his decision-making muddled and contradictory, to the point where Pfizer’s board felt compelled to force him out after four and a half years in the top job.

2011 saw more than its fair share of chief executive departures, and provided ample examples of the many and varied ways in which things can go wrong at the top of an organisation.

Yahoo

Yahoo had been one of the brightest stars among the internet’s pioneering companies of the 90s, but by the beginning of this decade it was trailing in the wake of its rivals. On one side, the search engine market is now dominated by Google, while Facebook had eclipsed all others by being the default destination for millions of internet users.

Carol Bartz was appointed chief executive of Yahoo in January 2009, with the hope that she could help the company competitive once again.

Despite cutting costs and forging a major alliance with Microsoft, by September 2011 Yahoo’s board had decided Bartz was not the right person for the job, and had to leave the company forthwith. For reasons best known to them, they elected to fire her over the telephone.

The company’s chairman Roy Bostock is said to have broken the news to Bartz by reading out over the phone a letter prepared by the company’s legal department. Enraged, Bartz turned to her iPad, and promptly sent an email to all Yahoo employees, announcing the news.

Carol Bartz’s ill-advised email

To all,

I am very sad to tell you that I’ve just been fired over the phone by Yahoo’s chairman of the board. It has been my pleasure to work with all of you and I wish you only the best going forward. 

Carol

Sent from my iPad

Things got even worse for Bartz when she gave an expletive-laden interview to Fortune magazine shortly after her dismissal. Lambasting the board for its poor judgement, and calling them ‘doofuses’ she declared: “They f***ed me over.”

The outburst was not only undignified and career suicide, but is thought to have cost her $10 million, as her contract included a non-disparagement clause.

Olympus

Olympus, the Japanese camera and imaging technology giant has found itself mired in a scandal which has wrecked its reputation and threatens its future.

British national Michael Woodford was one of very few foreign chief executives of a Japanese company. An employee of the Olympus family of companies since 1981, Woodford worked his way up through the company, and was made chief executive of the firm on 1 October 2011.

But within days Woodford discovered that the company had transferred hundreds of millions of dollars to advisers and companies located in tax havens such as the Cayman Islands, and immediately suspected illegal behaviour. Seeking answers, Woodford confronted the board with his findings, and was promptly fired, just two weeks into the job.

The company’s board explained away his departure as a failure to adapt to Japanese culture and the company’s management style. Woodford took his evidence of wrongdoing to the Japanese police, and criminal investigations were launched in Japan, the UK and the US.

The Olympus board denied any wrongdoing at first, but soon admitted it had hidden investment losses for two decades and used some of the $1.3 billion in M&A payments to aid the cover-up.

Multi-million dollar payments made in relation to the acquisitions of British medical devices group Gyrus, involved an ‘advisory fee’ of $687m and three Japanese transactions were used to cover up prior-year losses.

Three directors resigned including chairman Tsuyoshi Kikukawa, but much of the board remain in place.

There are even fears that links to organised crime were established through the nefarious behaviour, although no firm conclusions are being drawn yet.

Nevertheless, Woodford left Japan after being fired, citing concerns for his safety, and when he returned to provide his testimony to the police, he came with security.

In a remarkable twist in the tale, Woodford mounted a bid to return and lead the company. Calling on the board to resign, Woodford wanted to install a new management team, but has been rebuffed by the firm. Olympus is now suing its former board members linked with the fraud, and looks to have averted a stockmarket de-listing.

Eurozone crisis

Almost certainly the year’s most damaging dithering was seen in political circles. Two of Europe’s leaders – Greece’s George Papandreou and Italy’s Silvio Berlusconi must carry much of the blame for prolonging and deepening the debt crisis not just of their own countries, but the whole Eurozone.

Papandreou holds a Masters’ degree from the London School of Economics – unfortunately his study was not in economics, but in sociology.

His decision to hold a referendum on the country’s latest bail out in November – without consulting anyone in advance – wrongfooted and confounded Angela Merkel and Nicolas Sarkozy.

In fairness to Papandreou, he inherited Greece’s already crippling debt when he was elected in October 2009. And the crisis can be viewed from an alternate perspective – the fatal weaknesses in the Eurozone of not enforcing fiscal discipline and probity on Greece before the financial crisis had sown the seeds of disaster.

UBS

While many heads of banks remain conspicuously in place despite some colossal failures of oversight, one bank chief executive did step down this year.

Swiss banking groups UBS wrote off more than $50 billion in the credit crisis and had to turn to the Swiss government for a bail-out in October 2008, with some of its most toxic assets transferred to a special fund owned jointly with the Swiss National Bank.

Former Credit Suisse chief executive Oswald Grübel came out of retirement to lead UBS in 2009 when it was still recovering from the financial crisis.

But Grübel resigned following a $2.3 billion loss in September caused by a rogue trader at the group’s investment banking arm.

Grübel felt it necessary to accept responsibility for the incident, but many don’t see him as being the most culpable for the incident. Some commentators have pointed the figure at Carsten Kengeter, the head of investment banking and in principle, the manager directly responsible for the lack of systems in place to prevent a trader going rogue.

The board has repeated its commitment to maintaining a mixed portfolio of private banking, investment banking and asset management, and has dismissed calls for it to exit the volatile world of investment banking.

But UBS has pledged to rely less on its investment banking arm, and will make its trading less complex, and less risky.

Actelion

The Hedge fund Elliott Advisors attempted to orchestrate a boardroom coup of the Swiss specialist pharma compay Actelion this year.

The group claimed the current management were not competent, and were pushing for a change of management, or a quick sale to a larger pharma company. But Elliott was decisively repulsed after several months of a very public dispute, with shareholders convincingly backing the existing management.

Actelion responded to the criticism by bolstering its board with two new heavyweight members, former GSK chief executive Jean-Pierre Garnier and former Schering-Plough chief financial officer Robert Bertolini.

After having won the tussle for power, Actelion’s chief executive Jean-Paul Clozel told Dow Jones: ‘‘So much energy was spent for this fight, which should have better gone into the development of new drugs.”

Wal-Mart China

The head of Wal-Mart in China resigned in October after the world’s largest retailer ran into trouble with Chinese authorities leading to store closures and employee detentions.

Ed Chan announced his resignation along with head of Human Resources Clara Wong, in another setback for Wal-Mart which is facing stiff competition from local firms in the strategically important market.

The company closed more than a dozen stores in central China following allegations that non-organic pork was being sold as organic pork over the past two years.

The allegations are in truth innocuous compared to many of the shocking breaches in food safety seen in China.

Authorities in Chongqing have arrested two Walmart China employees and held a further 37 other people over the incident.

Both resignations announced were said to be for personal reasons and were not connected with the investigations in Chongqing, a spokesman for Wal-mart Asia.

This is the second round of top-management resignations at Wal-mart China in less than five months. In May the company’s chief financial officer and chief operating officer resigned ‘to explore other opportunities,’ the company had said.

Wal-Mart has been in China since 1996, and its presence moved up a gear in  expansion in 2007, when it bought a 35% stake in Taiwanese supermarket chain Trust-Mart, and it now has a total of 353 stores on the mainland.

This makes it the second biggest player in China’s supermarket sector behind China’s Sun Art, but its rapid expansion has hit profitability.

China’s supermarket sector is forecast to grow at a compound annual rate of 10% between 2010 and 2015, according to Euromonitor, but fierce price competition is making it difficult for foreign companies to make a profit in China.

Wal-Mart is just of a handful of supermarket giants trying to gain market share in the country – China’s homegrown Sun Art and China Resources Enterprise, France’s Carrefour, the UK’s Tesco and Germany’s Metro.

Wal-Mart’s travails reinforce the suspicion that Western companies are being subjected to stricter enforcement than Chinese-owned firms – but overseas firms are determined to ride out the difficult times to have a long term presence in the world’s most populous country.

Apple

After having been ejected from his own company in 1985, Steve Jobs wanted to make his second departure from the company more graceful than the first.

After more than a decade away from the company, Jobs returned to the helm at Apple in 1997, and swiftly reinvigorated it. He made the company’s developers focus on user-friendly, aesthetically pleasing and desirable products, and a string of hits followed – from iMac computers, to the iPod, iTunes, the iPhone and the iPad.

But Jobs was diagnosed with pancreatic cancer in 2003, and battled with the disease for a further eight years, right in the midst of his company’s seemingly unstoppable growth.

Jobs resigned as chief executive in August this year, but didn’t let the wider world know just how little time he had left.

He ensured the company was in safe hands by preparing his long-time chief operating officer Tim Cook to take over, and then died on 5 October, just weeks after stepping down.

KV Pharmaceutical

The US pharmaceutical company is suing its former chief executive Marc Hermelin to avoid paying him a retirement and compensation benefits. The saga behind the current legal action is one of the most astonishing and regrettable tales of management gone wrong ever seen in pharma.

Hermelin was chief executive and chairman of KV Pharma when serious safety concerns emerged about medicines produced at the company’s manufacturing sites. These included the production of dangerous, oversized morphine tablets at its now-defunct Ethex subsidiary.

The quality issues were so severe that KV Pharma was ordered to suspend manufacture and distribution of all its own-made products in January 2009, and was only cleared to return a few lines to the market in September 2010.

The company’s official line at the time was that Hermelin retired from the company, but the new lawsuit indicates he was fired for misconduct.

KV Pharma is currently trying to avoid payment of retirement benefits and compensation of around $37 million, and force Hermelin to repay part of the salary and other financial benefits accrued in the period leading up to his departure from the company. It is also trying to avoid paying legal expenses incurred by Hermelin during this period.

He was fined $1 million, ordered to forfeit a further $900,000 and jailed for 30 days last year, after pleading guilty to two counts of introducing adulterated drugs into the US supply chain. He has also been banned from participating in federal health care programmes by the Department of Health and Human Services.

Court papers indicate that he is accused of not only failing to keep the company’s production units in compliance, but also impeding investigations by the FDA into the quality failures and blocking an internal audit set up to remedy the situation.

While it retained the right to sell a few products made by contract manufacturers, the implications of that suspension can be seen from its finances. In 2008 the company recorded annual sales of around $580 million, but this fell to just $9 million last year.

In June it sold off its generics business to Zydus Pharmaceuticals in order to re-position itself as a speciality branded drug maker. In 2008, the company received warnings that it was producing powerful painkillers, including morphine, of the wrong size and strength. KV recalled its drugs, laid off three-quarters of its employees and halted its manufacturing operations for almost two years.

KV’s wholly owned subsidiary, Ethex Corp., pleaded guilty in March to criminal fraud charges for making and distributing medicines that endangered public safety – and drew $27.6 million in fines and restitution. No charges against individuals have been filed.

Marc Hermelin was ousted as KV’s chief executive in December 2008 as the result of a board investigation into mismanagement. But in June, he engineered a proxy fight at KV’s shareholders meeting – firing chief executive David Van Vliet and reasserting control of the ailing firm.