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Mon 9 Apr 2018 02:49 PM

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What has kept the world's oldest pharma company running for 350 years?

Dr Frank Stangenberg-Haverkamp, chairman of the executive board and the family board of E. Merck KG, says it's partly because no one in the family owns a private jet

What has kept the world's oldest pharma company running for 350 years?

What would you say is the biggest difference in terms of decisions made between large and old family run businesses versus other corporations?

Speed of decision-making is of paramount importance to run a business in today’s world. A family business has a very defined ownership which enables faster decision-making compared to only stock-listed corporations. We have the same compliance rules as other companies and we follow them very strictly, however the speed of decision-making differs because of the different nature and dynamics of a family business.

I can speak on behalf of E. Merck KG that holds 70.3 percent of the total capital of Merck KGaA. This helps to accelerate decision-making processes as the family members have provided their trust in me. However, the family does not participate in the management of Merck KGaA, it makes the fundamental entrepreneurial decisions of the company. The executive board of Merck KGaA manages the business and these non-family board members  are fully empowered to make decisions.

What benefits does separating leadership and management in a family owned business bring? Is it essential that they be separated, or could a family business prosper by keeping both together?

It’s a question that we always ask ourselves. Some 15 years ago, the family has asked me to join the board and become the CEO of the company. However, we follow a very rigid governance to keep separation between operative business and ownership. I can tell you about the company strategy, and Merck KGaA’s Executive Board is the body responsible for its execution.

Our involvement in strategy is part of our long-term thinking. We don’t think in quarters but in generations. Nevertheless, quarterly results are very important and we need to be promptly informed about financial matters, such as our rating.

All Members of Merck KGaA’s Executive Board are employed by the holding company, E. Merck KG - which is fully owned by our family. The family directly employs our six top directors and has a very close relationship with them.

Because everybody strictly follows the rules, the differentiation between leadership and management works very well. The danger is if you’ve got a chairman with a dominating personality and who is hungry for power. He/she could very easily interfere with the business. Some find a temptation to overstep the role, which is fortunately not in our case.

One of our main goals is to empower our management team. We have succeeded for 350 years as a business because we empowered non-family members. My great grand uncles formed a wider board and invited leading non-family members who were helping them to run the business. They empowered them with the same power as they had - which made them unlimited liable partners. If you empower people, then you get the best people, otherwise you will only get second or third choices. This is a key factor that we learned early on from our ancestors.

This factor can also constitute the weakest link of a company or family business. In quite a few companies  family members must run the business even if they are incapable of doing so. These businesses and individuals could get competent professionals to do it on their behalf however this is not always the case. This is one of the main reasons why some family businesses don’t survive.

The Merck family consists of more than 200 people. Not every family member can run a company. It isn’t easy and we have a rigorous process to pick the right two or three to continue helping to supervise the running of the company.

At times there have been disputes in ownership, leadership, stake and status of roles in large family businesses that have garnered a lot of press attention. Did the Merck family ever go through such tumult? Is there a way to prevent such situations from arising, or are they inevitable? If they are inevitable, how do you manage them?

If I say ‘no’, over 350 years of business you won’t believe me. So, yes and no. My uncle who was in the business used to tell us, “Arguments are fine, as long as you leave the room with a solution, never fight”, because if you fight there will be no winners and only the business will suffer. “If business suffers you suffer. Always try to find a solution.” His words are very close to my heart and I preach the same to my nephews, nieces and children. The family has a tradition of being cooperative. We understand that there are family members who don’t understand the business well enough to run it. Other relatives may be ambitious but they must prove themselves worthy of the responsibility.

Family members are not allowed to work actively in the business. There are only two family members in the business, myself as head of the family and Family Board, and my cousin who is currently my deputy and runs the Partners’ Board which is a supervisory board.

We make sure that the business is not jeopardised by family members.

What does your role entail? What are your primary responsibilities? How does your day-to-day unfold?

I’m informed about business updates on a regular basis. I have a jour-fixe with each member of our executive board on a monthly basis. I meet the CEO every second or third day to exchange views. There is a close alignment between family, represented by me and my cousin, and the management board.

We have a very complex business as we focus on three main areas that are all specialised, hi-tech and science-driven namely healthcare, life science and performance materials. I worked as an investment banker before getting into this business and it was steep learning curve for me – it took me five to ten years to really understand the business.

We have more than 200 people in the family – a number that keeps growing – and the business has to be managed. These family members have equity in the holding company but not shares, and most have less than 1% participation. Nevertheless, all proceeds from the small participation goes back into the business and disposal of such participation is very rigidly regulated. Our family is linked to a very strict family contract which runs now till 2030 to make sure that happens, and my wish is to extend it to 2040, ensuring of course that the family stands behind my decision. If a family member wants to opt out of this contract, they must accept a hefty discount.

What is a vital decision you have had to make in your role?

There are several key ones. In 1995, my uncle facilitated the listing of the company which opened the door for development. Another key decision was the kick off the transformation of the company from a decentralised model into a strictly centrally controlled vibrant science and technology business.

The acquisition of Sigma Aldrich was also a key decision that we took, marking the culmination of almost a decade of transformation.

It’s often said no one in the Merck family owns or flies via private jet? Is this true, and why? It’s also been reported that family members who are shareholders of the company keep their earnings within the company. Why is that a uniform practice?

The rule of the family is that we work hard. Our children are encouraged to live off their own income and not off the dividend, and that’s also a reason why we pay low dividends – we leave them in reserve in the company. A member of the family once said: “Look, the family business is far more important than individuals in the family. Whatever decision you take, the business has to be paramount, and not the family. Leave the money in and don’t take it out, it is only then that the company can thrive and flourish.”

If we extract the money from our reserve, we will need to raise new funds at the stock exchange which would be very expensive for us – we would lose on our equity and we don’t want that.

There is not one private jet in the family, I can assure you.

What brings you to Dubai?

The Middle East is an important region for us. Many people don’t know or realise that our philosophy is not only to target the big markets, but to enable access to our products wherever possible. A small market relative to its potential and size can be equally important to us. The Middle East covers interesting countries in that respect, despite all the conflicts. The GCC countries are of high importance to us.  From the Dubai office, we cover Middle East, Africa, Turkey and beyond in some functions.

It’s very important for me to meet the people who run our business and the staff. Therefore, I travel to our offices around the world regularly and sometimes with our family board members. It’s not as easy as it was when I was 30, but it’s still important that we do it – to pass on the message that we are listed, but that there is still a family behind the business, we are not a myth.

The healthcare industry is undergoing an interesting time: advancements on the one end, and a growing sentiment against pricing practices. What are your thoughts on that?

When it comes to our healthcare division, we are a mid-size pharma company – that’s the reason why we are very focused on specialities in certain areas like diabetes, cardiovascular, multiple sclerosis, fertility, growth hormones and of course oncology. We focus on areas where the treatment of patients is in a specialised hospital or centre and there is an unmet medical need.

Also, critics sometimes may not understand this business, they underestimate the cost of research. The development of a new drug costs around US$ 1.7 billion dollars and only 12 percent of drugs entering clinical trials ever make it to patients. That is a problem. That’s one reason why we are moving to partnership models. We’ve partnered for certain products with Pfizer to cover the American markets for example, and that’s a trend you will see more and more in the pharmaceutical industry.

How do you see the industry progressing over the next five years? Is there a great tidal wave of disruption or opportunity that the industry is bracing or preparing for? And where do you see Merck will be placed in that future?

There is already a disruption if you look at the different models which did not exist five years ago, be it the digital patient care models or how pharma companies are finding synergies. Partnering models are also evolving in the healthcare industry and companies are advised to look at these options very carefully.

What enabled you as a family to stick around for 350 years?

Our secret is the following: first, family business should come before your private business. Second is the modesty of the family. Third is the fact that we empowered non-family members quite early – in the 1920s. These three reasons are the key to our success. Of course, the absence of family conflicts is another contributing factor.The family members who handle the business are seen as trustees and not as investors. What we really want is to make sure that this ownership is passed on to our grandchildren in better shape than we took it on. My oldest grandson is now old enough to understand these principles. The idea of trusteeship is deeply rooted in our family business. And, of course, no family member is allowed to work in the company.

We have a strict training program for our youngsters that we call the Merck Family University where we set 3-5 day a week training courses. It is not a pre-condition but preferable training to go through before getting voted onto the family board.

We encourage other family members who wish to work with us to apply to other companies and work their way up the ladder on their own. Then they could look at Merck and have a chance to look at a top job.

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