Grounded

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As Seen in CFO Studio Magazine Q4 2016 Issue Cover Story

A DOCUMENT FROM 73 YEARS AGO GUIDES THE DECISIONS OF JOHNSON & JOHNSON CFO DOMINIC CARUSO

-BY JULIE BARKER-

-PHOTOGRAPHY BY MATT FURMAN-

 

“OUR CREDO.”

So begins a four-paragraph statement penned by General Robert Wood Johnson II in 1943. “We believe our first responsibility is to the doctors, nurses, and patients, to mothers and fathers and all others who use our products and services,” it starts.

Paragraph three expounds: “We are responsible for the communities in which we live and work and to the world community as well. …We must maintain in good order the property we are privileged to use, protecting the environment and natural resources.”

These principles of corporate responsibility are chiseled into twin slabs of marble eight feet high and five feet wide at the entrance to Johnson & Johnson’s headquarters in New Brunswick, NJ. The same words appear at the entrance of all the J&J facilities around the world, and no matter how routine it becomes to see the words, everyone pays attention to them.

Dominic Caruso, J&J’s Executive Vice President and Chief Financial Officer, who joined the company in 1999, has long since internalized the Credo’s meaning. If a business leader calls him and says, “I need to speak with you about Our Credo,” it’s clear there will be little debate; the General’s words themselves will point to the right solution.

He got such a phone call in 2007, just months after J&J’s $1.4 billion acquisition of Conor Medsystems and its unique cardiovascular stent. At the time, J&J had 45 percent of the $6 billion worldwide market for coronary stents, according to a May 2007 article by MD+D (Medical Device and Diagnostic Industry). The unique stent was being offered in some foreign markets but had not yet received FDA approval. New tests, however, gave J&J reason for concern: A competitive stent was a safer choice for patients. “We withdrew that product from the market,” Caruso says.

Caruso, who was CFO of the medical devices business segment at the time, says walking away from the product’s potential was “gut-wrenching,” but it was a decision made “easy” by the Credo, which creates a structure for thinking about the implications of every action. J&J’s cardiovascular business leader at the time “knew this would be financially painful,” says Caruso. “But he explained the situation, and what he heard from me was, ‘Okay, I get it.’”

Throughout its 130-year history, J&J has earned a reputation as a top-performing company. Along with Microsoft, it is one of the only two U.S. corporations with a AAA S&P credit rating (beating even the U.S. government). On Fortune’s list of the World’s Most Admired Companies, J&J is the top-ranking pharmaceutical company, and in June J&J topped the list of Barron’s 100 most respected companies.

But hitting numerical benchmarks, Caruso insists, is far from the company’s primary motivator. When asked how useful and valuable it is for the company to have a moral compass like the Credo, Caruso doesn’t hesitate with his answer. “What Our Credo does for us,” he says, “is to require us to always stop and think, reflect, not to be simply reactionary to current developments, but to be grounded in our decision-making.”

Although the Credo cannot insulate the company from the realities that face leading global companies today — including litigation and regulatory challenges — it is an ethical platform and decision framework that the General, son of one of the founding brothers, felt would be needed when he took the company public.

Embedding Principles

“Our Credo has lots of constituencies: doctors, nurses, patients, employees, and our shareholders. Our shareholders are listed last, but it’s really just another of our responsibilities,” says Caruso, age 58. As CFO, he sees part of his job as helping the company grow through proper allocation of cash. Under his leadership, the company has articulated its disciplined capital allocation strategy. This begins by paying dividends to shareholders. Subsequently, he considers M&A opportunities, using about 30 percent of J&J’s free cash flow for value-creating acquisitions, and finally, share repurchases.

Another component of his role is to maintain an ethical organization by developing leaders in the finance area who live and breathe the company’s values as he does. J&J’s Finance Leadership Development Program (FLDP) is well recognized as a “leader feeder,” providing exceptional training in a two-year rotational program that gives young hires the chance to work in multiple areas of the business in three eight-month assignments.

The program has particular appeal to millennials, Caruso says, because it provides prompt, regular feedback, and with quick rotations, they are “not stuck in one place for a long period of time.” He says that J&J successfully recruits top graduates who might otherwise go to Wall Street or Silicon Valley by dint of its Credo and social responsibility activities. “[Millennials] appreciate when the organization they work for has a mission aligned with their values.”

Although he was well beyond entry level when he joined J&J, Caruso himself benefited from the company’s focus on talent development. After graduating from Drexel University in 1980 with a B.S. in Finance, he went into public accounting at Peat Marwick Mitchell, now known as KPMG. In 1985, he joined Centocor, a startup now called Janssen Biotech. He became CFO of Centocor in 1992, then added the role of general manager of that company’s diagnostic division. In 1999, Centocor was acquired by J&J. That’s when his own J&J development story began; two years later he became VP of Finance of its Ortho-McNeil Pharmaceutical subsidiary; and in another two years he was tapped for a bigger job.

“In the summer of 2003, I went to the office of our then CFO, Robert Darretta,” he remembers. “We were meeting to discuss succession planning as part of our normal talent-planning cycle.” It was a sunny June day, and the office was at the top of the World Headquarters Tower, with views over the Raritan River and the Rutgers University campus. Darretta started the meeting by reminding Caruso that “as part of our Finance leadership development priority, we are always looking for that key question we have about a leader’s ability to be successful.”

Darretta wanted to know if Caruso’s success would be transferable outside of pharma, where he had spent most of his career. According to Caruso, Darretta said: “We’d like you to take a role in our medical devices business. It will teach us more about you and teach you more about yourself.”

Caruso’s first thought was, “Why would I want to do that?” And even though it was a beautiful, clear day, he remembers imagining the storm he would be entering in a new, unknown environment.

As it turned out, taking that job was one of the best moves of his career. “I expanded my network and exposure across the company and was able to demonstrate my value beyond the pharmaceutical sector. Being new to the role allowed me to ask probing questions that my business partners may not have been asked in a long time.” He didn’t mind challenging the way things had always been done.

Leaving behind a niche he knew well and immersing himself in a far different one gave him an opportunity to say, “Wait a minute: What am I really good at?”

“We all have unanswered questions,” says Caruso. “You just have fewer and fewer of them as you go up the ladder.”

Caruso proved that he was good at leading, not just good at what he did in a particular sector. He was named CFO of J&J in 2007. At that time, the stock price was around $50; today it’s climbed to an all-time high above $122.

Long-Term Value

Caruso seems formal but comfortable during an interview and in between other pressing obligations. He is gracious with his time and articulate. We were in a small conference room down the hall from the office where he had met with Darretta 13 years earlier, talking long-term versus short-term value. A few weeks prior, Larry Fink, the CEO of BlackRock (which is one of J&J’s top-five shareholders), sent a letter to chief executives of the S&P 500 urging them to lay out for shareholders their value-creation plans each year. When asked his reaction to that letter, Caruso says, “First of all, I was glad that he called upon CEOs to take a longer-term view of their responsibilities to shareholders and to not be overly influenced by short-term thinking.”

Caruso notes that many of the shareholders he meets with are “long-term, loyal J&J shareholders,” though he does meet some who wish J&J would do more share buybacks. “That’s more of a trader mentality than an investor. The majority of our shareholders have more of an owner mentality,” he says.

“I think [Fink] was appropriately critical of companies that just react to short-term shareholder demands, and he was giving at least his endorsement to say, ‘Look, there are other shareholders who have your back.’ And that’s good to know.”

Caruso remarks that CFOs in the pharmaceutical industry tend to be more long-term thinkers compared to those in other sectors, because they are used to an environment where development times are drawn out. “You’re more patient, you’re making long-term investments, you’re continuously funding research and development to find cures.”

Later, he says one of the most exciting parts of his job is watching innovations become reality. For example, the finance team was involved in structuring a transaction with Genmab, a Danish biotech company, whereby J&J and Genmab would co-develop a drug for multiple myeloma. Subsequently, in 2013, the therapy received Fast Track designation from the FDA. Finance has been in the mix at each juncture in the product’s development, he says, and now the drug “is benefiting patients.”

Caruso has a deep personal interest in health-related causes. He is on the Board of Trustees of the Children’s Hospital of Philadelphia. His partner through 40 years of marriage, Debbie, also has a strong interest in the health and welfare of children. They have three grown children and nine grandchildren. Because one of his grandchildren has cystic fibrosis, Caruso became involved with the Cystic Fibrosis Foundation – Delaware Valley Chapter. He serves on the Board, and helps raise money to find a cure.

Besides being a family man, Caruso is a guitarist (rock, jazz, classical) and a golfer. He says he would enjoy having a superpower that enabled him to be in two places at one time. “If I could come to work and do what I love doing here, but also spend time at home simultaneously, that would be fantastic.”

The J&J organization has 50 other CFOs around the world reporting to him. They meet annually to discuss who is going to succeed whom, choosing from around 5,000 finance professionals in the J&J organizational structure. “I can’t possibly be involved in developing each of the 5,000 people,” says Caruso, “but I can be involved in the top 120 to 150 people: knowing who they are, seeing how they’re doing, making sure they’re answering those critical questions.”

Thinking about succession and giving the top picks the right opportunities “takes some time, but it’s really important because if I don’t get that right, when I leave, I haven’t really done a service to the organization,” he says.

Caruso doesn’t say so directly, but developing a successor who understands and will adhere to the principled business practices he has followed is how the CFO can best create long-term value.

 

The ROI of Employee Engagement

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As Seen in CFO Studio Magazine Q3 2016 Issue

PERFORMANCE AND FINANCIAL BENEFITS OF A WORKPLACE THAT EMPLOYEES ENJOY

A workplace culture that is perceived as positive and vibrant has proven financial benefits. A Chandler Macleod study, “Shaping Organisational Culture for Improved Business Performance,” quotes 2013 research from CareerBuilder revealing that 73 percent of candidates interviewed considered a slightly lower-paying job in a company if their friend said it was a great place to work.

The same research also showed that prospective employees were more attracted to a company that had a reputation as a great place to work over factors that include the company’s reputation for great products, services, and people, or even its reputation for being prestigious. An organization that is recognized as a desirable place to work provides an advantage in attracting and retaining talent.

Gallup’s 2013 “State of the American Workplace” study estimates that active disengagement costs the United States $450 billion to $550 billion per year. These alarming figures reinforce the importance of keeping employees loyal and engaged. Some forward-looking corporate leaders are doing this by using workplace design to communicate corporate culture and brand values.

“Fully Engaged,” a report released by  Strategic Consulting, defines engaged workers by the effort they bring to their work practice. These employees develop a connection to their organization, and this makes them more likely to develop innovative practices that could result in competitive advantages for the company. Greater engagement not only improves the bottom line through increased customer satisfaction and productivity, it also helps to lower employee absenteeism and turnover. Employee retention is a critical financial advantage, as each replacement can cost up to 1.5 times the salary of a position.

John P. Kotter and James L. Heskett’s 2008 book on their study of 207 organizations over 11 years, Corporate Culture and Performance, found companies that actively developed their culture returned 516 percent higher revenue and 755 percent higher income. Corporate culture refers to the shared values, attitudes, standards, and beliefs that characterize members of an organization.

To ensure that workplace design fosters corporate culture and employee engagement, many companies have taken steps, including:

• Creating workplaces with alternate space configurations and technologies that are aligned to specific business processes. This approach gives employees control over the way they prefer to work. People do their best work when they feel trusted to carry out tasks in their own way.

• Incorporating company values into space design.

• Incorporating plants and natural light, as studies have shown the links between light exposure, increased productivity, and employee happiness.

“How a workspace informs and inspires an employee has become a significant expectation for corporate leaders,” says Jerry Sullivan, senior vice president  project and development services. “The new workspace that fosters greater interaction, flexibility in work uses, and includes more innovative approaches to communication and collaboration, has become vital for companies to attract new talent and retain valuable employees. This more thoughtful attention to the workplace environment has proven to have a direct impact on the companies’ bottom line.”

Behind a Turnaround

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As Seen in CFO Studio Magazine Q3 2016 Issue

THE RIGHT PEOPLE ARE THE KEY TO BRINGING A STRUGGLING BUSINESS BACK TO LIFE

CFO Andreas Rothe was prepared to talk to a roomful of financial executives about a number of ways to revitalize a business that is struggling, but the discussion kept circling back to this one point: The people. “Finding the right people to steer the ship, especially one that is sinking, is paramount,” said Mr. Rothe, who currently works in the Matawan, NJ, office of Fragomen Worldwide, the world’s largest immigration services provider, but has played a key financial role in the successful turnarounds of three companies that were floundering.

Mr. Rothe spoke on Achieving Best-in-Class Financial Performance with Limited Resources —Lessons from Turnarounds, at a Middle Market Companies CFO Dinner, part of CFO Studio’s Executive Dinner Series, held recently at Blue Morel in Morristown, NJ. Mr. Rothe opened the dialogue with the words, “First who, then what,” quoting business author Jim Collins, whose best-seller Good to Great advised corporate leaders, “Get the right people on the bus, then figure out where to go.” Mr. Rothe elaborated, saying, “Tomorrow you can decide what you’re doing with the people, even trying them out in different positions. Today, get them in the door.”

He moved the discussion along by asking if this can be accomplished if “you’re driving an old, unattractive school bus.” The answer, several in the group said, is a yes: “There will always be people who are interested in a tough environment because they see it as an opportunity to make the biggest impact.” These individuals are firm believers in the saying, “You can only go up.”

But this doesn’t mean, Mr. Rothe and others cautioned, that leaders of struggling companies should clean house in one fell swoop. Instead, “take small steps, attempt quick wins.” And, while acquiring the right people for managerial positions and some key functions is indeed possible, “you’re not going to find the right person to play every role.” That, he and others said, is where those in charge must work to retain existing staff when attempting to turn around a difficult business situation.

“You need to accept and work with some of the people who are already there, or they will leave and you will have nothing.” And it is imperative that managers make every effort to be inspiring, to motivate their teams, and to celebrate the successes of both new and current hires, alike.

Mr. Rothe then attempted to move the conversation toward a couple of other ways to breathe new life into a business that is slipping away, such as focusing on structure, processes, and technologies, but the group went right back to the question of personnel, particularly how to attract and keep the right people when the compensation that the company can offer is not competitive and the outlook uncertain.

Gregory Choi, Senior Vice President of Middle Market Banking at Capital One Bank in Edison, and a CFO Studio Business Development Partner, said he was impressed with one participant who managed to secure a top performer though the salary being offered was quite low. “This executive purposely hired someone who had the academic credentials he wanted, but was rough around the edges; a real ‘diamond in the rough,’ so to speak.” Mr. Choi went on, “He admitted it was someone he thought might have fewer options, and in a perfect world, he might not have given him a shot.”

Mr. Choi said this manager thought: “If I can see through his rather blunt and gruff exterior, I might get someone who can really make a difference.” As it turned out, that’s exactly what he got. “This new hire has brought all the desired intellectual firepower to the party, and is proving himself to be invaluable.”

Mr. Rothe applauded this move and reiterated the need to “focus on a few stars, but to be always thinking of new and unique ways of keeping everybody on board motivated and working toward the same end.” However, a good mix among people, processes, systems, and organizational structure, he continued, will help lead suffering companies to a successful turnaround, and “one that is sustainable over the long haul.”

In an interview after the dinner, Mr. Rothe expressed his pleasure and surprise over how the discussion centered entirely around people, but was never repetitive. “Everyone had the same personnel concerns, but each brought a slightly different flavor to the exchange.” He laughed, saying, “We could’ve talked about people all night.”

Copyright 2017