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Clarity from Switzerland

The corporate annual report, a widely ignored document, could do with a makeover. It is generally devoid of transparency, candor, and life. Most companies seem to regard it as a chore. In recent years, these reports have been reduced in size. Many companies now greet shareholders with a bland statement placed in front of the 10-K report they file with the Securities and Exchange Commission. Talk about tough reading.

If you want to see just how big a missed opportunity this is, take a look at the annual reports of the Swiss pharmaceutical giant Novartis AG. The company sets a new standard for delivery of information in clear, nuanced, and felicitous prose. This year’s version, which you can see at www.novartis.com/annualreport2009, runs to 264 pages, is published in English, French, and German, and is adorned with 33 striking black-and-white photographs shot by Magnum Photos photographer Steve McCurry. Each year Novartis commissions a photographer to contribute his or her perspective on health care. McCurry’s photos come from 10 countries.

The Novartis report combines well-organized financial statements with citations of corporate citizenship and governance practices. The writing is lean, beginning with the mission statement, expressed in two sentences:

We want to discover, develop and successfully market innovative products to prevent and cure diseases, to ease suffering and to enhance the quality of life.

We also want to provide a shareholder return that reflects outstanding performance and to adequately reward those who invest ideas and work in our company.

The devil being in the details, here are some things that Novartis communicates in its annual report:

The board is independent. Only one board member, CEO Daniel Vasella, currently works at Novartis. Others include the former chairman of Porsche (Wendelin Wiedeking) and the senior associate dean at Harvard Business School (Srikant Datar). The 12-person board of directors includes two women, an African-American and former CEO of Young & Rubicam Brands (Ann Fudge) and a Chinese entrepreneur (Marjorie Mun Tak Yang). Novartis underlines the diverse composition of its board as “a critical success factor for its work.”

There is a commitment to transparency in compensation practices. The report details the compensation of top executives, which is now heavily weighted toward equity awards instead of cash. Vasella received 83.8 percent of his 2009 total compensation (CHF20,471,929, or US$19.1 million) in shares. Originally, stock options were limited to 400 key executives. Now they go to 11,000 employees, or 11 percent of full-time staff. Further, employment contracts contain a “clawback” provision enabling Novartis to “reclaim bonuses if it later emerges that the bonuses were paid out based on false information or dishonest management.”

Novartis cares about its employees. In 2005, the company pledged to pay employees a living wage in every country where it operates. Last year, for the first time, no upward revisions in pay were required to meet this pledge. The lost-time injury and illness rate at Novartis facilities has been halved in past three years, to 222 incidents per 200,000 hours worked.

The company’s transparency extends to embarrassing information. For instance, in 2009 Novartis received 913 reports of misconduct, up from the 884 reported in 2008. Of these reports, 240 were substantiated; 155 employees were fired for misconduct.

Sandoz, the generics division of Novartis, was faulted in 2008 by the Food and Drug Administration for improper practices at its plant in Wilson, N.C., resulting in a halt in new product approvals from that site. In response, the company voluntarily recalled a number of products and revised procedures to the FDA’s satisfaction. Jeff George, head of Sandoz, replaced the top management at Sandoz–United States, as well as the management team at the North Carolina factory.

For those concerned with the company’s health, there is a 120-page financial section that disgorges a staggering number of statistics, including sales of the top 20 drugs (representing one-half of total revenues of $44 billion); a table showing 17 selected major drug approvals in 2009; a breakdown of sales and income by division, quarter, and geography; and the number of shares owned by each director and members of the executive committee.

In the 2009 report, Novartis highlights China as its “most important market of the future.” Pharmaceutical sales there are expected to nearly triple by 2013, to $70 billion, making China the third-largest pharmaceutical market, after the U.S. and Japan. Novartis plans to invest $1 billion in China over the next five years, and its research center in Shanghai will grow from 160 to nearly 1,000 employees.

When it comes to social responsibility, Novartis reports it is doing all the right things. It belongs to the United Nations Global Compact, the world’s largest corporate citizenship initiative, whose 5,000 corporate participants voluntarily adhere to 10 principles related to human rights, environmental protection, and anti-corruption.

After the World Health Organization declared a pandemic in 2009, Novartis ramped up production of H1N1 flu vaccines, with nearly 300 employees volunteering to relocate to work in vaccine factories in Marburg, Germany, and Liverpool, United Kingdom. The company is also supplying drugs to treat malaria and leprosy in developing countries free of charge or at cost.

Novartis voluntarily committed to the Kyoto Protocol binding companies and countries to specific goals for reduction of greenhouse gas emissions. It’s transforming its headquarters in Basel into a “carbon-free campus” and a mecca of art and architecture.

Critics of “Big Pharma,” especially the most zealous animal rights activists, will never be completely satisfied. Nevertheless Novartis uses its annual report to spell out the high standards it maintains in using animals for drug testing. It also makes clear that its employees have been subjected to severe harassment by activists. Cars of employees have been vandalized, a fire was set at a sports club used by Novartis employees in France, and Vasella’s vacation home in Austria was torched. “In a particularly repugnant incident,” the annual report says, “the graves of Dr. Vasella’s family were desecrated and the urn containing the remains of Dr. Vasella’s mother was stolen.”

It’s unusual for an annual report to include such a cornucopia of information. It bears the earmarks of Vasella, the physician who, in the course of 14 years as CEO, has transformed the sleepy Swiss drug company into a groundbreaking pharmaceutical giant. (In the 2009 report, he announces he is passing the reins to an American, Joe Jimenez, head of the pharmaceutical division.) Vasella never minced words or served up platitudes. In 2006, he confronted U.S. Secretary of State Condoleezza Rice at the World Economic Forum in Davos, asking whether the United States wasn’t “playing into the hands of enemies” by using torture to fight terrorism. He has also spoken forthrightly about the “maldistribution of wealth” in an interview with the New York Times, pointing out that the richest 20 percent of the world’s 6.1 billion people receive 74 percent of the world’s income. Asked by William J. Holstein (an s+b contributing editor) in that interview about the propriety of CEOs speaking out on political issues, he replied: “I know that some of my fellow CEOs believe they should not express themselves on political issues at all. They should just do business. I think that is not the right attitude. First of all, we are citizens of whatever country we are from. We have a citizenship responsibility. Secondly, I do believe we have to examine our own beliefs and value systems regularly. We cannot act in a void.”

This commitment to openness and transparency is reflected in the Novartis annual report. It’s a report that benefits shareholders, securities analysts, and the general public by presenting a compelling picture of the workings of the company. It reinforces feelings among employees that their work is meaningful, and that they will be held to a high standard. And it addresses forthrightly the health-care and social issues confronting the company and its industry.

Read it and copy.

Author PROFILE:

  • Milton Moskowitz is a member of the editorial board of Business and Society Review and codeveloper (with Robert Levering) of Fortune magazine’s annual survey of the “100 Best Companies to Work For.” He is the author of seven books, including Everybody’s Business: A Field Guide to the 400 Leading Companies in America (Doubleday, 1990).
 
 
 
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