Novartis and the U.N. Global Compact initiative.

• Author: Tavis, Lee A.

ABSTRACT

The U.N. Global Compact initiative evolved from a challenge posed by Secretary-General Kofi Annan to the business community at the World Economic Forum in Davos in January 1999. "I call on you--individually through your firms, and collectively through your business associations--to embrace, support, and enact a set of core values in the areas of human rights, labor standards and environmental practices." (1) His vision is "to give a human face to the global market. (2) Over a year of intense interaction among business chief executive officers and associations, non-governmental organizations, labor unions, and four U.N. agencies led to the formulation of nine principles. Business is invited to embrace these principles, incorporating them into their strategies and decisions.

At core, the nine principles are based on fundamental human rights as articulated in various U.N. documents. The base document is, of course, the 1948 Universal Declaration of Human Rights. Its broad acceptance provides a legitimate touchstone virtually anywhere in the world. The first two principles ask business to,

1. Support and respect the protection of internationally proclaimed human rights within their sphere of influence.

2. Make sure they are not complicit in human rights abuses.

   Principles three through six are based on the 1998 International Labour Organization Declaration on Fundamental Principles and Rights at Work. These principles request that businesses,

   (3.) Uphold the freedom of association and effective recognition of the right to collective bargaining.

   (4.) Promote the elimination of all forms of forced and compulsory labour.

   (5.) Promote the effective abolition of child labour.

   (6.) Uphold the elimination of discrimination in respect of employment and occupation.

   The remaining three principles relate to protection of the environment, tied to the Rio Declaration on Environment and Development and the comprehensive plan for sustainable development outlined in Agenda 21. Accordingly, these three principles ask businesses to,

7. Support a precautionary approach to environmental challenges.

8. Undertake initiatives to promote greater environmental responsibility.

9. Encourage the development and diffusion of environmentally friendly technologies.

   The Global Compact is a voluntary initiative with no framework for legal enforcement. The decision to embrace the principles is up to the individual enterprise. There is no screening of firms that join the Compact and no U.N. endorsement. Member companies become participants in a set of embedded networks working toward the consideration of human rights in business activities.

   Joining the Compact involves a letter of commitment from the CEO. Companies are then asked to describe in their annual financial reports or other prominent corporate reports (such as sustainability reports) the actions they are undertaking in support of the Global Compact's principles through the engagement mechanisms of Learning, Dialogue, Local Networks, and Projects.

   For some companies, independent academic analysts are invited to assess the implementation of the nine principles. The attached case, one of the first, is a study of Novartis A.G., a large Swiss pharmaceutical enterprise. The report analyzes the inclusion of the Global Compact as an integral part of a strategy for sustainable corporate development. Based on managerial interviews, the process of initiating a principles-based human rights dimension into managerial behavior is assessed. **

   TABLE OF CONTENTS 1. STRATEGIC POSITIONING 1.1 Post Merger Economic Consolidation 1.2 Strategic Expansion To Include Corporate Citizenship 2. OPERATIONALIZING A STRATEGY OF CORPORATE CITIZENSHIP 2.1 A Focus on Process 2.2 Valuable Experience 2.3 From Concept To Action 2.4 Establishing Credibility 3. EXAMPLES OF IMPLEMENTATION 3.1 Responsibility for Access To Drugs 3.1.1 Research on Tropical Diseases: Example #1 3.1.2 Ensuring Access To a Viable Commercial Drug: Example #2 3.2 Ensuring the Rights of Workers: Example #3 4. PRESENT STATUS PEOPLE INTERVIEWED APPENDIX **********

   The spirit of the Global Compact found fertile ground and has become an integral part of Novartis corporate strategy since the enterprise was formed by the merger of the two large Swiss pharmaceutical companies, Sandoz and Ciba, in 1996. Following a four-year concentration on economic consolidation and performance, Daniel Vasella (Chairman and CEO) signed the Global Compact. Together, productivity-based economic performance and a proactive approach to the expectations of society are envisioned as the key to long-term corporate success in the rapidly integrating global economic, political, and social environment of today's large multinational corporation.

   This Article outlines the Novartis strategy and its implementation, including the coalescing role of the Global Compact in the drive for sustainable corporate development. Following a review of extending corporate strategy to incorporate social concerns into the economic business model in Part I, the process of implementing the strategy will be assessed in Part II. In Part III, specific examples of this strategic positioning will be outlined. (3)

1. STRATEGIC POSITIONING

   1.1 Post Merger Economic Consolidation

   Ciba and Sandoz approached the merger into Novartis ("new skills" in Latin) as an operating response to the growing competition, concentration, and institutional buying structure in the globally integrating life science industry. Both companies had roots in Basel dye production during the late 19th century, and had entered the merger after what The Operational Review called, "their best year ever." (4) External observers, however, were less reassuring as to the past history of the two companies. According to Forbes, "Sandoz and Ciba-Geigy were plodding, risk averse and assiduously Swiss firms that often got trounced by faster, fiercer U.S. rivals. The research pipeline was dry, and marketers were slow on the draw." (5) On the other side, financial analysts embraced enthusiastically the formation of Novartis resulting from the largest industrial merger in history at that time, and forming the world's largest life science company (healthcare, agribusiness, and nutrition) and the second largest pharmaceutical firm.

   The post-merger period of intense performance-based consolidation included changes in the structure of the firm as well as its management system:

   * At the time of the merger Ciba's Dyestuffs, Additives, and Plastics divisions were spun off into a separate company called "Ciba Speciality Chemicals."

   * Due to the lack of substantial synergies with other Novartis activities, Agriculture was divested in 2000 and merged with the agricultural division of Astra-Zeneca to form the Syngenta corporation. At that time, the agribusiness operation was the largest in the world. It represented 28 percent of Novartis revenue and 24 percent of operating income.

   * In 2000, Novartis shares were listed on the U.S. stock exchange as American Depository Receipts, positioning Novartis as more attractive to U.S. investors.

   * Merger personnel redundancies were reduced largely through natural attrition and early retirements. Some employees started their own businesses with financial support from the Novartis Venture Fund. The first year following the merger, the workforce was reduced by 9,199, at which point 62 percent of the anticipated merger cost synergies and the targeted 12 percent workforce reduction were achieved. At the same time, 2,400 new people with needed expertise were hired.

   * During the consolidation phase, one-third of the 100 most senior managers joined Novartis from other companies. In the United States, of the top 13 executives in 1999, only 2 remain.

   * Performance-based compensation was rigorously applied across the company with total compensation targeting the 50th percentile of the compensation offered by a set of comparable competitors. Over 6,000 employees now receive share options as part of their remuneration.

   * The pharmaceutical business was split into worldwide strategic business units centered around therapeutic areas and customers with some of its global management headquartered in the United States.

   * The Novartis presence in the U.S. market was dramatically increased--the sales force growing from 3,100 to 4,600 in 1999 alone, probably the fastest expansion in pharmaceutical history. Using direct-to-consumer advertising, upgrading sales training, and accepting the risk of comparing their products with the best the industry has to offer in clinical trials and post approval marketing, the Wall Street Journal credits Vasella with "transferring the firm into a bare-knuckled, American-style marketing powerhouse." (6)

   * The process of drug discovery and development was reorganized and revitalized to get drugs to the market more quickly. At the time of the merger, over one-half of drug sales were from patent-expired products. Development time has been shortened from 12 to about 8 years, with a sharper market-oriented focus.

   * The financial performance (See Appendix A) reflects the synergistic value of the merger and the emphasis on managerial performance.

   1.2 Strategic Expansion To Include Corporate Citizenship

   By 2000, with the consolidation process becoming secure, Vasella believed Novartis had achieved the economic freedom to be more encompassing in its response to societal claims on business enterprises. In July, Novartis signed the U.N. Global Compact following a conversation between Kofi Annan and Daniel Vasella. The Global Compact served an important coalescing role as Novartis moved to a sustainable long-term position in the market. Urs Baerlocher, the senior executive for implementing the policy, described the role of the Global Compact, "The Global Compact, its principles and requirement to demonstrate credible action, triggered a discussion within Novartis on the nature of human rights, access to...