Corporate Governance and Business Ethics in Merck - Essay Example

 Corporate Governance and Business Ethics: Merck Introduction Merck is an American multinational, dealing with pharmaceuticals. It was founded in 1891 as one of Merck KGaA’s subsidiary. Headquartered in New Jersey, it is seventh largest in terms of revenue and market capitalization. Kenneth Frazier is the current president, chairman and CEO of Merck. Few of its top known products are Singulair, Gardasil, Fosamax and Proscar (Merck, 2014a). The company has been well-regarded for its ethical stance and been awarded with many accolades and prizes in this category. Merck has been responsible for improving affordability and accessibility of drugs worldwide, especially in developing nations. Merck reached about 269 million individuals through its numerous corporate social responsibility partnerships and programs (Merck, 2014a). The current study will focus on corporate responsibility activities and corporate governance codes followed by Merck. The study will also analyse environmental conditions across USA, which are supporting or hindering corporate governance activities of Merck in USA. National institutional environment and other stakeholders in USA In the literature review conducted by Hawley and Williams (1996), the US corporate governance was reviewed. Four governance models were identified, which were finance model, stakeholder model, stewardship model and political model. In the financial model, major focus is given on construction of incentives and rules for effective alignment of managerial behaviours with principal owner’s desire. On the other hand, political model, stakeholder theory and stewardship theory are majorly ethnocentric. The society of United States has been encouraging businesses, which are socially responsible and been promoting only those profit making firms that have proved their intention of improving and not harming the society. However, this struggle for companies to meet society’s expectations is constantly challenged due to changing nature of society, in terms of their demands patterns. As a result, the US government has set out some legal and environmental regulations, which are compulsory for all businesses in US. The business affairs department of US government deals with all CSR activities and policies governing businesses in US. The objective is to promote ethical and responsible business practices and ensure effective partnership and coordination among companies, business, US embassies, civil society firms as well as numerous stakeholders. Human rights and corporate citizenship Major regulatory laws controlling businesses in USA are human rights and ethical and acceptable corporate citizenship. The US government has laid down some strict policies so that corporate undertake only those activities, which are deemed as socially responsible, ethical and promote sustainable development. The above law sets the fundamental base of governance for any organisation or business. Major businesses across US as well as worldwide have established their own business principle statements and corporate governance laws coinciding with the US laws. It is very important for companies in US to follow these practices and governance codes. The major objective of setting this law is to protect human rights of local individuals, employees and all associated stakeholders. Labour and Supply Chains In response to the US laws for ethical supply chains and labour management, many organisations have undertaken ‘Ethical Trade Initiative’, implementing ethical labour policies, human rights and standards for environmental protection. For instance, a recent act was passed known as California Transparency Act for supply chains. According to this act, all manufacturers and sellers with annual worldwide revenue of more than 100 million dollars will have to provide information about their supply chain processes, stages as well as all details regarding their labour management policies (Farhat, Shepherd and Tenerelli, 2012). The objective was to spread necessary information to consumers regarding the firm’s efforts in eradicating human trafficking and slavery from the supply chain process and also educate them about companies with responsible and ethical supply chains (US Department of State, 2013). The above act has added tremendous pressure among organisations to develop compliance policies and risk management for advancing their level of corporate citizenship. Organisations presently must create a culture focussing on CSR compliance and accurate disclosure of information for building a positive corporate reputation (US Department of State, 2013). Stakeholder and government relationship A stakeholder is any individual with influential power on a firm’s actions and decisions as well as can be affected by the same. Corporate stakeholders generally include customers, employees, communities, suppliers, regulators and government. Stakeholders are increasingly influencing in corporate and business decisions and as a result, firms are collaborating with stakeholders with the objective of understanding their concerns and views on numerous social, environmental, economic and corporate governance issues. As stakeholders have gained ability to impact failure or success of a firm, the latter is increasingly embedding CSR policies in its business and corporate decision making processes. According to the latest government reports, more and more stakeholders are filing environmental and social resolutions with US firms. There was a 3 percent rise in shareholders’ support for similar resolutions from 2012 to 2013 (Noked, 2013). These statistics also show that stakeholders and general mass show more confidence towards companies with a strong CSR and corporate governance background (Noked, 2013). Environment and energy The government of United States have established sector specific initiatives with the objective of building energy efficiency, responsible management of resource as well as climate change. The Energy Resource Bureau of US controls business activities in order to promote reliable, secure and cleaner energy sources. Corporate governance codes and the regulatory framework of Merck Mechanisms for corporate governance vary across national and institutional environments. However, two major categories have evolved. Prevalent in economies such as, Spain, France, or Germany, is large shareholder controlling system. On the other hand, market control mechanism is more prevalent in nations such as, UK and US. The market controlled corporate governance system is dominated by liquid capital markets. Market is favourable for takeover and market control and board of directors and external directors play a crucial role. Ownership is mostly diffused. Effective and positively perceived corporate governance is beneficial for both shareholders and customers. So, Merck has been deploying strict corporate governance policies for long-term success of its businesses. The company established Merck’s ethics office in the year 1995 (Merck, 2014b). The objective was to support Merck’s dedication towards standard corporate responsibility, accountability and conduct. According to this corporate governance codes, every employee is responsible for abiding by prescribed business practices and ethical principles. The office is managed and developed by several professionals and is supported by numerous staff and professional experts in corporate ethics. The overall budget allotted for this office in the year 2012 was 2.5 million dollars (Merck, 2014b). This office also serves as a resource for employees for hoisting issues regarding compliance and ethical related concerns. The company has established multiple channels through which employees can contact the office such as, intranet, telephone, email, AdviceLine or by directly contacting the ethics officer (Merck, 2014b). Issues related to employee-manager behaviour and relationships are also handled by the ethics office at Merck. Maintaining a flexible and ethical work environment and corporate responsibility at office are two other major factors which are controlled and monitored by the firm’s regulatory framework and corporate governance models. Timely investigation and escalation of concerns regarding complaints and violation of corporate governance codes are critical. Being a pharmaceutical company, the company has to maintain strict and transparent ethical policies and codes of conduct. Therefore, individuals violating these laws are subjected to immediate termination (Merck, 2014b). The corporate responsibility department at Merck is further subdivided into categories such as, council for responsibility and public policies, CSR working group, executive committee and board committee (Merck, 2014c). The CSR department is mostly dependent on Merck’s employees and managers and their coordination with the department. The Council For Public Policies oversees targets, approaches and progress of the company’s CSR activities against set performance indicators. Other important activities include identification of external stakeholders and developing policies for strategic engagement (Merck, 2014c). Analysis of two important corporate governance factors at Merck’s Board of directors Extensive research has been conducted to identify criteria for a sound board of directors. Board size is one of them. According to Yermack (1996), negative relationship exists between market value of the firm and board size. However, size of the board can have both negative and positive effects, depending on decision making capability of the board. Company value and performance can also be affected by board composition. During the annual meetings for shareholders, Merck appoints its 12 directors. The board manages majority of the decision making process for the company. Apart from that, all functions regarding the board and associated policies are regulated by the board of directors themselves. The objective of the board is to protect long-terms goals of Merck and its shareholders. It is compulsory for the board to meet minimum six times every year and provide review and strategic direction to the company (Merck, 2014d). The company affairs are regulated by establishing four major committees. These are Audit committee, corporate responsibility and public policy committee, benefits and compensation committee and research and development committee. With the help of these committees, board of directors monitors and implements the strategic planning processes. A review of the company’s overall corporate strategies as well as long-term operations planning takes places on an annual basis. Critical discussion areas include clinical development and research, global sales and marketing, manufacturing capacity, capability and strategy and political and public environments affecting Merck’s operations and business. According to the stewardship theory, when a CEO acts as a chairman too, a unified leadership is formed building trust and stimulating performance motivation (Muth and Donaldson, 1998). William B. Harrison is the lead board director at Merck and maintains positive relationship between important shareholders and the board (Merck, 2014d). Executive remuneration In terms of executive remunerations, Merck has been following a four-stepped growth planning with the objective of meeting business challenges and creating exquisite shareholders value. The first strategy is to execute the core business of Merck, which includes core brands, research and development, launching of brands and targeting the largest market. The second strategy is expansion in fast growing and emerging markets like, Japan. Third one is extension of complementary businesses of consumer care and animal health. The last strategy is excellent cost management while continuous investment in company’s strategies. The importance of these strategies in the compensation management policy is that achievement of objectives and targets will directly result in increase in executive compensation along with shareholder’s value (Merck, 2014d). Figure 1 Executive Compensation Pattern at Merck (Source: Merck, 2014d) The benefits and compensation committee considers advisory votes of shareholders as an important element while setting compensation of key executive offices. These include CEO, CFO and three other executive officers. Shareholder’s advisory is a key indicator of shareholder’s strong support towards strategy, philosophy as well as objectives of the compensation programs. These compensation policies are frequently updated and revised as per changing internal and external environment and shareholders demand. Figure 2 Direct Executive Compensation at Merck (Source: Merck, 2014d) Another factor determining employee compensation is the company scorecard. This scorecard helps in translating company’s priorities into operational terms through tracking and measuring achievement of the key objectives. These achievements are both long-term and short-term. The scorecard calibration ranges from 50 percent to 200 percent of the awarded opportunity, which runs along with performance (Merck, 2014d). This scorecard takes into consideration safety and health outcomes and compliances. Figure 3 Company Scorecard- Merck 2012 (Source: Merck, 2014d) CSR practices of Merck Corporate Social Responsibility can be described as the way an organisations manages and addresses its social, environmental, economic and corporate governance impacts and the subsequent impact of these activities on stakeholders of the organisation. CSR also provides the organisation with an opportunity to strengthen business operation through risk mitigation, cost savings and value enhancement and simultaneously contribute to the society. By focussing on critical interaction areas between organisation and key stakeholders, the issue of continuous value creation in organisations can be addressed. Companies are increasingly realising the importance of CSR activities because of various reasons. Apart from developing long-term brand image and reputation of a company, such initiatives make an organisation sustainable, which in turn results in cost minimisation, innovation, better employee engagement and better partnerships and joint ventures. Being one of the largest and most reputed pharmaceutical organisations in the world, the major CSR goal of Merck is to indulge in groundbreaking innovation and provide greater value to both society and stakeholders. The company’s technological developments, strategic partnerships and innovative research focus on four priority areas. Access to good health Providing better healthcare facilities to developed, developing as well as underdeveloped nations has been one of the key focus areas under Merck’s CSR practices. The major KPIs (key performance indicators) determining success achieved by access to good health include research and development, manufacturing and supply, registration, commercialization and community investment. Figure 4 KPIs for Access to better health- 2011-2102 (Source: Merck, 2014e) The above figure clearly indicates that Merck has effectively increased its presence in developing as well as developed countries. While Merck has been involved in numerous practices pertaining to environmental sustainability, it has realised the increasing importance of deeper involvement. For instance, the company has been involved in establishing solution for vaccine container recycling. Another comparatively new CSR practice for reducing paper wastage was through a strategic merger between HP and Merck. Apart from that, Merck’s environmental strategy includes reduction of GHG and facilitating clean water. Figure 5 KPIs for Environmental Sustainability 2011-2012 (Source: Merck, 2014f) The company has been provided with regular capital funds for supporting the above projects at different Merck facilities. The company has also applied green chemistry strategies for improving efficiency of its manufacturing processes. Employees In order to improve overall business performance and achieve long-term sustainability and competitive advantage, it is crucial to have an established, loyal and dedicated employee base. Level of employee engagement at Merck is higher compared to that in average US firms. Internal CSR responsibility of Merck includes diversity where more women employees are given executive roles and appointed on board. The overall well-being of the company is calculated through employee health assessment, injury and turnover rate. Some of Merck’s well-known CSR initiatives pertaining to employees were employee donations to eligible nonprofits firms in US, global employee volunteering and regular blood drives volunteered by the company. Figure 6 KPIs for Employee Performance 2011-2012 (Source: Merck, 2014g) Transparency and Ethics Merck performs various clinical trials for its innovative drugs and medicines. Nonetheless, the company strictly follows rules and guidelines associated with clinical trials such as, timely registration, public and media disclosure of clinical trials as well as posting clinical trials on websites. The major performance indicators for this CSR policy is training of employees as per ethical and transparent codes, giving proper response to raised issues and concerns and implementing strict actions against privacy break and breeching of any conduct. Relevant information is disclosed through CSR and financial reports. For instance, Merck’s participation in project Carbon disclosure was promoted through media as well as private stakeholder discussions. Figure 7 KPIs for Ethics and Transparency at Merck 2011-2012 (Source: Merck, 2014h) Recommendations CSR and corporate governance related issues are increasingly permeating the board rooms. In future, corporate governance is will require more detailed procedures and structures. Also, board of directors and management will have to disclose the nature and frequency of their discussions on CSR practices and policies. The CSR policies of USA and governing bodies controlling them are becoming stricter in terms of scrutiny, transparency as well as reporting. Hence, Merck will have to include detailed information of its non-financial activities and issues in the public company reports. In the year 2010, a standard for CSR report writing was established and in order to be in good lens of the US government, it is essential for Merck to follow the standard (Hurst, 2004). If wisely utilised, CSR and corporate governance can be very effective in placing Merck in a better position with the country as well as among consumers. This can be achieved by implementing industry best practices such as; 1. Offering more power to shareholders Merck’s revenue comes from its consumers. Through proxy voting, Merck can offer power to its shareholders to unseat any board member. At present, only three companies across US follow this procedure. Many organisations fill boards will allies for their own vested interest, increasing organisational conflicts. So, by giving this opportunity of unseating board executives to shareholders, company will be able to maintain a competitive edge in terms of brand reputation and customer loyalty. 2. Full disclosure of executive compensation Another way through which Merck can secure its CSR and corporate governance for future sustainability and competitiveness is through full disclosure of executive compensation system to the prime shareholders. It has been seen that companies increase the executives’ compensation at expense of other shareholders. By making the compensation policies public, Merck will be able to gain confidence from its shareholders, investors and media together. 3. Embedding CSR into the core activities of Merck NGOs and media argue that most companies treat CSR as an add-on, instead of a core business function. Majority of companies do not move beyond mere acknowledgement and CSR reports. Merck here has the opportunity of positioning itself as a credible CSR organisation by embedding CSR into core activities such as, setting fixed budgets for CSR activities and publishing thorough reports of CSR activities. Another method of improving the company’s reputation, in terms of CSR and corporate governance, is by involving students and graduates to volunteer for company’s global CSR activities. 4. Educating students and raising awareness among consumers Merck should obligate universities and business schools to make business strategies and ethics in CSR and corporate governance a compulsory part of the university’s core curriculum. Students have started to take interest in these subjects and by bridging the gap between academic knowledge and industry applications, Merck can improve its overall positioning among the next generation potential employees. Merck can also employ news media and other channels to educate society and consumers on environmentally and socially responsible practices and numerous roles that consumers can play in building a sustainable future. Reference List Farhat, V., Shepherd, W.N. and Tenerelli, F.J., 2012. United States: Corporate Social Responsibility Compliance. 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