HBR: Is your company too dependent on treating a single disease?
Harvard Business Review, November 2015.
Adi Ignatius
Leadership with a Conscience
The world’s top-performing CEO isn’t a household name. In fact, Lars Rebien Sørensen doesn’t even look like a big-time global executive. We recently traveled to the quiet town of Ridgefield, Connecticut, to meet with the CEO of the Danish pharmaceutical giant Novo Nordisk at his lakefront summer home. He met us in shorts, sandals, and a polo shirt, dressed for a bike ride later that day.
How did this mild-mannered, bespectacled executive land in the #1 spot on our list? It’s partly due to his company’s (darkly) fortuitous decision years ago to focus almost exclusively on diabetes treatment. The runaway global growth of the disease has driven up the company’s sales and stock price. But his standing also reflects Novo Nordisk’s deep engagement with social and environmental issues, which now factor in to our calculations. “Corporate social responsibility is nothing but maximizing the value of your company over a long period,” says Sørensen, who has been with the company for 33 years. “In the long term, social and environmental issues become financial issues.” (See our interview with him on page 60.) HBR’s ranking of CEOs is meant to be a measure of enduring success. We track and analyze each CEO’s performance starting from day one of his or her tenure. Our goal is to create a list that gets beyond the most recent quarterly or even annual results and truly evaluates long-term performance. In the past, our ranking was based exclusively on hard stock market numbers. We looked at total shareholder return, as well as the change in each company’s market capitalization. (For more details, see “How We Calculated the Ranking.”) We liked the fact that the ranking was based solidly on data and not on reputation or anecdote. Yet it also felt incomplete, because it failed to account for the many aspects of leadership that go beyond mere market performance. And so this year we’ve tweaked things. We’ve added to the mix a measurement of each company’s environmental, social, and governance (ESG) performance. For this we relied on the calculations of the investment research firm Sustainalytics. We now weight long-term financial results at 80% and ESG performance at 20%. We’ve also changed our methodology to include CEOs who took the reins before 1995. In the past we had excluded those executives because data for one of our metrics—industry-adjusted returns—wasn’t available that far back. For this year’s list, we’ve analyzed the performance of those CEOs as well, using the returns generated from 1995 onward. As a result of these shifts, the 2015 list is very different from last year’s. On the purely financial metrics, Amazon’s Jeff Bezos leads all other CEOs—just as he did last year. But Amazon’s relatively poor ESG score drags Bezos down to #87 overall. Sørensen finished sixth in overall financial performance; that, combined with a relatively high ESG rating, earned him this year’s top slot. Why does Novo Nordisk score so high on ESG? According to Sustainalytics, the company benefits from, among other things, its decision to offer insulin at a steep discount to consumers in developing countries; its transparent and limited political lobbying practices; and its responsible policy on animal testing. The decision to add CEOs who began prior to 1995 also shook up our ranking. About one-quarter of this year’s top 100 started the job before then, meaning they all are new to the list. At HBR we continue to experiment with the perfect measure of a CEO’s worth, and we look forward to getting our readers’ input. Are we right to include these critical, but less easily quantifiable, measures? Are there further ways of fully evaluating companies and their CEOs? Our view is that, in an era of big data and greater transparency, consumers and investors increasingly want to understand a company’s culture and values. They want to analyze its social behavior, not just its share price. These new measurements will only get better over time. As for Sørensen, he’s happy to be scored in all aspects of the job. In fact, he dismisses the purists who argue that “the business of business is business.” As Sørensen puts it, “I would change that to say the business of business is business—but with a longterm perspective.” And in that calculation, social and environmental issues are critical.
“ Consultants will tell you this strategy won’t work, but it ensures our reputation” Lars Sørensen
Lars Sørensen of Novo Nordisk, this year’s #1 CEO, describes why he doesn’t believe in diversification, why excessive pay hurts a CEO’s ability to lead, and why corporate social responsibility will pay off in the long term.
ASK CHIEF EXECUTIVES why their companies are performing so well, and they’ll typically credit a brilliant strategy coupled with hard-nosed, diligent execution. But when you ask Lars Sørensen of Novo Nordisk what forces propelled him to the top of HBR’s 2015 ranking of the best-performing CEOs in the world, he cites something very different: luck. Based in Copenhagen, Novo Nordisk was founded in the 1920s to make insulin, then a newly discovered drug. In the years since, demand for diabetes treatments has exploded; today close to 400 million people suffer from the disease. The company now controls nearly half of the market for insulin products—which are second only to oncology drugs as the fastest-growing category of pharmaceuticals. The firm also has branched into growth hormones, hormone replacement therapies, and drugs to treat hemophilia. In a wide-ranging conversation with Harvard Business Review editor in chief Adi Ignatius and senior editor Daniel McGinn, Sørensen describes his distinctly modest approach to leadership—one that would be atypical in America but not necessarily in Scandinavia. Here are some edited excerpts.
HBR: Is your company too dependent on treating a single disease?
Sørensen: Outsiders sometimes come in and say, “You’re dependent on diabetes for 80% of your revenue—you should diversify.” But I’ve always believed that you should do things that you know something about, that you’re good at. We’ve tried a lot of diversification strategies in the past, but we’ve failed because of the inherent scientific and commercial uncertainty and our own naïveté. So our expansion has been completely organic.
What about diversifying into adjacent areas?
Since I joined the company, 33 years ago, I’ve been part of some of the most stupid mistakes. One of the worst was trying to get into glucose monitoring. Everybody said, “This makes sense. You’re a diabetes company; you should get into glucose monitoring to offer more products to your customer.” But the technology for blood glucose monitoring is different. The regulatory framework is different. The sales and distribution are different. We would not have been successful. I could share many, many similar examples. So over the past 20 years, we’ve been narrowly focused on the thing we’re really good at.
What happens to your business if diabetes is eventually cured?
After I became CEO, in 2000, I predicted we would cure diabetes in 15 years. We’re still 15 years away. But that is the big goal. I tell my employees, “If we wind up curing diabetes, and it destroys a big part of our business, we can be proud, and you can get a job anywhere. We’ll have worked on the greatest social service of any pharmaceutical company, and that would be a phenomenal thing.”
You sell a lifesaving drug at different prices all around the world. How do you manage that?
When I took charge of the company, the pharmaceutical industry was going through a major PR catastrophe in South Africa over how it priced HIV-AIDS drugs. We didn’t sell those drugs, but the problem made me consider: What if the conflict had been over diabetes drugs? How would we have responded? One of our answers was to create an independent nonprofit organization called the World Diabetes Foundation. Its objective is building capacity in countries where diabetes is poorly treated. We take a slice of revenue from each vial of insulin we sell and put it into the foundation. The foundation makes grants in such places as East Asia, some Latin American countries, and Africa. After its creation, criticisms that NGOs had been directing at us completely vanished.
Your strategy of selling both generic and highly differentiated products is unusual. Consultants will tell you companies shouldn’t do that—it won’t work. But this strategy ensures our reputation. It’s to our advantage to have high-quality generic products, human insulin, for countries and populations that can’t afford most of the advanced products that more-affluent patients want.
Why do you measure results using a triple bottom line?
Our philosophy is that corporate social responsibility is nothing but maximizing the value of your company over a long period of time, because in the long term, social and environmental issues become financial issues. There is really no hocus pocus about this. And Novo Nordisk is part-owned by a Danish foundation that obliges us to maximize the value of the company for the long term.
How do social and environmental issues become financial issues over time?
If we keep polluting, stricter regulations will be imposed, and energy consumption will become more costly. The same thing applies on the social side. If we don’t treat employees well, if we don’t behave as good corporate citizens in our local communities, and if we don’t provide inexpensive products for poorer countries, governments will impose regulations on us that will end up being very costly.