CEO excellence – Ken Frazier from Merck

As CEO of Merck, Ken Frazier gained the respect of his employees, shareholders, and the broader community not only through the company’s performance during his 11-year tenure but his handling of several tests of his leadership.

Now Merck’s former executive chairman, he recently shared how his experience growing up during the Civil Rights Movement shaped his career, how he ensured that science stayed at the core of Merck’s mission, and how he sees business’s role in society.

In a two-part episode of the Inside the Strategy Room podcast, Frazier spoke with Vik Malhotra, former chairman of McKinsey’s Americas region and co-author of last year’s bestseller CEO Excellence, and Steve Van Kuiken, the former leader in McKinsey’s Life Sciences Practice and former global leader of McKinsey Technology. This is an edited transcript of the discussion. For more conversations on the strategic issues that matter, follow the series on your preferred podcast platform.

Vik Malhotra: You often talk about your humble roots in Philadelphia. What lessons did you take away that informed your future leadership?

Ken Frazier: Most of us are products of our background; that’s certainly true of my life. I was raised in the inner city of Philadelphia during the Civil Rights Movement. My younger sister and I came along at a time when Philadelphia’s social engineers were engaged in what they called school desegregation, an attempt to bus some Black children from the inner city to schools in white areas. That was one of the most important developments in my life because the quality of the education I received was significantly higher than the standard in the local schools. It drove how I thought about myself and my role in the world. Our society has a big challenge to provide opportunities to everyone.

I went to college and law school, then came back to Philadelphia to practice law in a large firm. I became a partner but spent a lot of my time doing civil rights work—death penalty cases, voting rights. I also taught law school in South Africa during apartheid. Those experiences also shaped my views of what makes our society and values unique.

Vik Malhotra: How did these values translate into your work at Merck?

Ken Frazier: Before I joined Merck, I never thought about working for a company. I loved being a lawyer and the commitment to social justice. But I had represented Merck for years and found its mission was similar: I was focusing on legal justice; they were focusing on alleviating human suffering. I saw a parallel in terms of the values.

I came to Merck in the early 1990s. The CEO at that time, Roy Vagelos, is an icon, and I worked directly for him running public affairs. A big part of my role was to put into writing his views of Merck’s salient purpose in the world. I couldn’t imagine better preparation for one day becoming CEO.

Vik Malhotra: In your early days as CEO, what was your vision for Merck?

Ken Frazier: In the lead-up, reporters and analysts would ask me what my vision for Merck was and I would respond, “The last thing Merck needs is Ken Frazier’s vision for Merck.” Merck had been around for 125 years and had a clear mission and purpose. In fact, in the early 1950s, the company’s former president, George W. Merck, was on the cover of Time because he gave a speech at a medical school in which he said, “Medicine is for the people, not for the profits.” Every Merck employee knows and believes in that quote. When I became CEO, I felt that my job was to be the guardian of the company’s longstanding values around scientific excellence and translating that cutting-edge science into medically important therapeutics and vaccines. My job wasn’t to establish the purpose—it was to reaffirm the purpose.

Steve Van Kuiken: How did you approach the decision to focus on the science? At the time, Wall Street had negative views of pharmaceutical companies’ R&D investments.

Ken Frazier: You’re right. I still have a report from an influential Wall Street analyst headlined, “In order to create value, pharmaceutical CEOs should stop investing in R&D and invest in non-pharma assets.” That was a common view at the time. When I became CEO, Merck was in year two of five-year earnings guidance and the Street expected me to cut R&D. In fact, if I was to stay on that earnings road map, I would have had to cut R&D.

I think I was 25 days into the job when I told the board that I intended to withdraw the remaining three years of the guidance. As you can imagine, that was not a popular idea, but I felt strongly that if Merck was going to be an R&D-focused company, this was our moment of truth. Saying “we are a science-based company” has enormous rhetorical appeal, but what matters is whether you invest in the science with a long-term view or do what’s more acceptable to investors in the short term. We withdrew the guidance and the stock got hit hard, but it was necessary in order to confirm that we were an R&D-based company. It turned out that the people who bought the stock during the sell-off were investors who believed in that strategy, so without planning it, Merck ended up with the right investor base.

Now, I understand why analysts had the view that they did. Merck and the whole industry had gone through a fallow period in terms of R&D productivity. The challenge in this industry is that transformational medicines and vaccines don’t happen on a regular cadence, so if you look at a ten-year or a five-year period, you may not see the progress.

Vik Malhotra: Given that in your first year you had committed to R&D but also faced productivity issues, how did you approach resource allocation?

Ken Frazier: Someone once told me, “The long run is composed of a series of short runs.” We had to manage to those short runs. In my first five years, revenue declined, so we needed to significantly reduce our expense base. That was probably the hardest thing I ever did as CEO because that implied laying off more than 10,000 loyal, committed people who deserved better. But we needed to do that in order to invest in R&D and to convince investors to continue giving us the necessary capital. We ended up with a very successful cancer drug called Keytruda. Had we not freed up that capital, we would not have been able to invest as strongly in Keytruda.

Vik Malhotra: How did you work with the organization to develop and put in place your strategy? Did you have to make choices that went against your colleagues’ views?

Ken Frazier: I believe there were only five decisions I made during my 11 years as CEO that might not have been what my team or the board would have done or what shareholders wanted. I always believed in consulting my team, but in those five instances, it was a question of whether we were committed to the long-term pursuit of the company’s mission, and that might mean doing something that wouldn’t be popular. If you tell your colleagues, “We’re going to be about R&D,” and then you cut the R&D budget significantly, you lose credibility.

One of the most important decisions I made was to bring in Roger Perlmutter, the former head of R&D at Amgen who had retired. He told me, “If you had not made the fundamental commitment to R&D, why would I come and recruit people to do an R&D turnaround?”

Steve Van Kuiken: When you made these five consequential decisions, where did you seek counsel?

Ken Frazier: The first one was about withdrawing the earnings guidance, and I didn’t need to make consultations because it was about whether I would stay committed to my own mission. Another was about committing to Keytruda. We were far behind a competitor, and our investors thought it wasn’t worthwhile because we would never catch up. In that case, I consulted with our R&D organization. My investors often ask, “How do you make resource allocation decisions?” I didn’t—I trusted the people in charge of the R&D enterprise. I often talked to Roy Vagelos, [former Merck CEO and chair] Dick Clark, or [former Schering-Plough CEO and chair] Fred Hassan. Having a kitchen cabinet of experienced leaders was something I found very helpful.

Vik Malhotra: How did you shape the culture, and what role did your leadership team play in that?

Ken Frazier: Leadership at Merck is a team sport. When a company is successful, the CEO gets a lot of credit for what I call the big moments, but leadership is in the many small, quiet moments with the team. You have to assemble the right talent and figure out how to work together, making sure the company has the right intensity, operational cadence, and accountability. It’s great to have a mission, but we have to deliver what we say we will deliver. I also committed to developing people in the middle tier of the organization who I thought could become senior leaders. I chose up-and-coming people as my chiefs of staff for 12 to 18 months, for example.

Vik Malhotra: One CEO I spoke with said, “It’s not about a team of stars. It’s about a star team.” It sounds like that’s what you assembled.

Ken Frazier: Not at the beginning. A bunch of talented people working together will not necessarily like each other. By the time people get to a certain career stage, they are set in their ways. One of the biggest challenges for a CEO is to assemble a team of talented individuals and then create an environment in which they work together effectively. They have to work together for the common good, for the enterprise. The question I asked was, “Is the person behaving in a way that puts Merck first rather than themselves or their area of responsibility? Is that person doing what is in the best interests of patients?”

Vik Malhotra: Did you put in place processes that reinforced those behaviors?

Ken Frazier: I thought the operating grid was too complicated, so we shrank it down to three things: top line, bottom line, and pipeline. We also stopped rewarding people for how their individual divisions performed. In my first year as CEO, I remember saying when people submitted their divisional scorecards, “Isn’t this interesting? The divisions all did better than Merck.” People realized the point—that we should all live and die with the enterprise. We also changed the operational cadence so that we were meeting monthly to go through the most important operational elements.

Vik Malhotra: How did you approach talent at Merck more broadly?

Ken Frazier: If you are in the business of inventing transformational medicines, you need to recruit, retain, and promote top scientific talent. A lot of my focus was on returning to a condition where we could expect repeated successes from our research labs. The Keytruda success, Roger would say, was due to him recruiting [chief medical officer and global clinical development leader] Roy Baynes, and Roy Baynes then recruited a team of experts in developing immuno-oncology drugs. We had no cancer drugs before Keytruda, so this experience was not resident in the company, and bringing in those people was a fundamental change in the culture.

Beyond that, you need the right leaders running all the critical areas. We ensured that the entire leadership team made judgments about the people coming up in the organization. We also made regular talent reviews part of the business reviews and brought the fruits of those talent reviews to the senior team so everybody could see how individuals were evaluated by their group leaders.

Steve Van Kuiken: Merck is a global and very decentralized company. How did you manage the inherent diversity and complexity?

Ken Frazier: The only way a global company like Merck can be run effectively is for the CEO to delegate power. There was no way I could make all the decisions in all the critical markets. I believed the concept of a pyramid was the wrong way to think; the better approach was an inverted pyramid. In the org chart, who was the farthest person from the customer? Me. Who was the farthest person from the manufacturing line? Me. Who was the farthest person from the research bench? Me. So why should I be making decisions when I am not the person best equipped to make those decisions? The CEO’s job is to be a compass, not a GPS.

When I was a lawyer, the ethos of our firm’s senior partners was, “Hurry up and grow up so you can service your clients.” When I came into a corporation with a hierarchy, the implicit idea was, “Wait for your boss to tell you what to do.” With the rapid change around the world, successful companies are those that equip their technical people, their scientific people, their customer-facing people to make decisions.

Take Keytruda. It is our biggest drug, but it wasn’t invented at Merck. It was invented at Organon, which was acquired by Schering-Plough, and then Merck acquired Schering-Plough. One day, I happened to run into the two scientists who worked on Keytruda, and they said, “Our bosses didn’t believe in this program, and they kept urging us to stop.” When I asked them why they didn’t stop, they laughed and said, “Because our bosses were portfolio managers rather than scientists. We knew the potential.” Imagine if these two young guys had given up because they were told to give up. You don’t want people to pursue unproductive ventures, but you want those closest to the scientific issues making the fundamental decisions.

Vik Malhotra: How did you think about your stakeholders?

Ken Frazier: Patients came first, then physicians and the medical community, regulators, investors, the communities in which we did business, employees, and society at large. All were important stakeholders, and they had conflicting needs most of the time, but the decisions I considered most important were those that could directly affect patients, and as a result patients’ caregivers. A pharmaceutical company doesn’t have to swear the Hippocratic oath, but “first, do no harm” and hopefully help people are principles that certainly guide us.

Regulators and government officials are also critical. Governments are our customers in much of the world, so interacting with ministers of health and finance and understanding what they expected from the pharmaceutical industry was important. But when I first became CEO, I couldn’t think much about the external environment—95 precent of my time was on internal matters as we addressed urgent problems. The middle was a period of tremendous growth and investment in our products and plants. Toward the end, I oriented more toward the outside as chairman of the industry association, spending time in Washington, D.C., and Brussels trying to create an environment conducive to R&D.

Vik Malhotra: How did you view the job of the CEO?

Ken Frazier: I thought it was important to be humble. My dad was a janitor, and he was ten feet tall in my eyes. I understood that when people came into my office, they were speaking to the CEO—they were not speaking to Ken Frazier. I also knew that when I was in that chair, my job was to serve my employees and patients; it was not about me. People respect the chair, and when you are in that position, you need to do what you can to leave the place in better shape than you found it.

Steve Van Kuiken: How did you maintain your energy so you could be at your best when representing Merck?

Ken Frazier: To be honest, the job was exhausting. I stayed past 65 and I started to see my energy ebb. Exercise is important. For me, faith is important. Family is important. All of those are ways of discharging. I have a great spouse. When I felt bad, Andrea would say, “It’s okay for you to complain here, but remember that no one will feel sorry for you because you are the CEO of Merck.” One night, I received an award and in accepting it I said that I felt humbled. As we were driving home, Andrea said to me, “You’re not nearly great enough to pretend to be humble, so knock that off.”

When people say that I inspire them, I always hear my wife’s voice. She likes to say, “You should be treated by a psychiatrist because you suffer from chronic high self-esteem.” We’ve been married for almost 40 years. She raised our children while I was running around the world trying to be successful. She is my best adviser because she knows who I really am. The people in the outside world only see the Ken Frazier I project.

Vik Malhotra: Did you turn to her when you had difficult decisions to make?

Ken Frazier: Absolutely. For that decision about withdrawing the guidance, she was one of my chief counsellors because I was a new CEO and, to be blunt, you worry you will get fired. Later, during the Vioxx litigation [linking the pain medication to cardiac problems], we lost the first case in a big way, and the Sunday New York Times said the company would probably go bankrupt. Andrea was in Bermuda with the kids, and I flew down because I needed a day with her. She teased me about being inept on the front page of the New York Times, but that was her way of saying, “Come on, you’re a big boy. You will survive this.”

Roy Vagelos was another important source of support. After withdrawing the earnings guidance, I got a note from Roy that said simply, “Ken, you did the right thing—Roy.” It made all the difference that these people I respect and care about are supportive. CEOs aren’t different from everybody else. We want to be accepted. When we make hard decisions, we worry that people won’t like us. Overcoming those insecurities is part of this job.

Steve Van Kuiken: You have been a role model to many people who had no direct involvement with Merck. Did that influence how you thought about your role?

Ken Frazier: During my CEO tenure, there were at most five African-American CEOs in the Fortune 500, and that did have an impact on me. People in the African American community expected me to speak to certain issues, such as voting rights when states were passing laws that could have affected people’s ability to cast votes. I was watching the NCAA tournament when I got a call from a leader in the African American community who said, “Someone needs to urge the business community to speak up on this.” So together with [former American Express CEO] Ken Chenault and a few others, we set up a group of African American senior leaders and another with 700 senior leaders across all industries. We got the business community to say, “We stand for certain principles.”

There is a debate today about whether businesses should get involved in social issues. ESG has become a political football and leaders fear being called a “woke CEO.” I fully subscribe to the view that CEOs should not be telling people, including their own employees, what to think about political issues and businesses should not get involved in political issues unless absolutely necessary. At the same time, I strongly believe that in order for businesses to succeed, we need a climate conducive both to people and to commerce. The climate that makes American business successful is based on fundamental principles such as democracy, equal opportunity, respect for private property, and peaceful transfer of power. When government officials either abandon or fail to support those principles, it’s the responsibility of citizens to act—and CEOs are among the most influential citizens. Just because somebody says an issue is political because they want to politicize a principle doesn’t mean the principle is inherently political.

Vik Malhotra: And the principles are universal. Your board supported you when you chose to speak out on a matter of principle.

Ken Frazier: Yes. [The Charlottesville Unite the Right rally] happened early in President Trump’s presidency, and when a CEO chooses to speak out on something like that, you have to consider the impact on the company. I felt strongly about speaking out as a matter of conscience. I told my board, “I’m going to step off the president’s business council. My question for you is not whether I should or not, because I will, but whether the statement about it should be on my behalf or on behalf of Merck.” I’m very proud that the board unanimously said, “We want you to speak to the company’s values.” But that was not an easy moment.

I believe that our employees also wanted the company to speak up, but they may not share political views, and one of the challenges for CEOs today is leading a polarized workforce. Shortly after the Charlottesville controversy, I remember speaking at a manufacturing plant in North Carolina. I said, “I respect your views. I hope you will respect mine.” When I initially looked across this cafeteria filled with manufacturing workers, most people had their arms crossed. After I said that, they uncrossed their arms. That is an important aspect of leadership: showing employees that you are listening, and you respect them. If you don’t have influence on people, you cannot lead.

Vik Malhotra: You dealt with several other crises during your tenure. How did you approach them?

Ken Frazier: All the crises I handled had some fundamental issue underlying them. The Vioxx litigation was a major crisis. The Street thought it would cost us $50 billion. We decided that we would not settle, which went against the typical industry practice of settling lawsuits in the belief that juries would not understand science cases. The underlying issue was the affirmation of our values. The plaintiffs were saying that the company had put profits ahead of patient welfare and we couldn’t live with that. We responded to every allegation without waiting for lawyers to vet statements. The board told me, “We will judge you by how we emerge from this financially, but more importantly by whether you can maintain Merck’s public trust and credibility.” We make something like 11 of the 16 mandatory vaccines for children, so if people stop trusting Merck, that has big implications.

We fought the cases one by one. I think we won 14 out of 19 cases with a couple hung verdicts, and we were able to reverse the cases that we had lost. We ended up settling all the cases for less than $5 billion.

The Penn State crisis [around revelations of sexual abuse in the football facility] was a different challenge. Of all the crises I ever dealt with, that was the hardest one personally. I am a proud alum of Pennsylvania State University, and this involved the public’s perception of the football program and coach Joe Paterno, who is another person ten feet tall in my mind. We had two sets of values that we had to balance: the school’s fundamental values which include taking care of young people, and our alums’ desire to defend the school. In the Vioxx case, I felt no inconsistency between Merck’s values and our approach. In fact, defending those cases in court supported those values. At Penn State, as we began to understand the facts, it was less possible to defend the football program, so the board of trustees [of which I was a member] made the decision of allowing a thorough investigation. The president was let go. The head football coach was let go. We got lots of criticism from alums who felt Joe deserved better, but the university needed to show the world what its fundamental values were at this moment.

The third crisis was the [NotPetya] cyberattack. It was scary because such crises can put a company out of business. It didn’t have implications on values like the others did, but we still needed to maintain our customers’ and employees’ trust. I learned from these crises that if you have to pay money, you can always make more, but if you give up your credibility, that’s hard to get back.

Vik Malhotra: Did these events lead you to build or reinforce capabilities around crisis management?

Ken Frazier: You can’t prepare for a specific crisis because each one is different, but you can prepare for being challenged in a crisis. We did tabletop exercises around critical risks, such as patients being hurt in clinical trials or by counterfeit drugs. During the cyberattack, a team of people was ready to swing into action, and we didn’t miss a beat. But a company’s resilience largely comes down to employees’ sense of purpose. I will never forget traveling to our vaccine facility in North Carolina during the cyberattack. The FDA requires temperature checks every half-hour and, with the system down, that had to be done manually. Our employees were there with their notepads recording the temperatures. Later, during COVID-19, we didn’t miss a single patient in our clinical trials around the world because our manufacturing and logistics people came to work.

Vik Malhotra: In the past several years, you have devoted more time to philanthropy. What impact are you seeking to have?

Ken Frazier: In Philadelphia’s inner city, the rate of stroke is 20 times the national average, and life expectancy is 20 years less than it is in adjoining zip codes. In our business, we worry about genetic codes, but it’s your zip code that is more determinative of life expectancy, so we brought people together to provide affordable access to good food. I think the big issues in society today can only be addressed by business, so I’m hoping to work with business and through philanthropy to help address some of them. When I was a CEO, the days were long but the time in the job seemed short. I think the same is true of life. Our time is finite, so what will we leave behind?

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