Navneet Bhatnagar: Merck has had a very long and successful journey that is inspiring for other family businesses. Let us start with the business and then move on to the family aspect. Please tell us about the early history and growth of your business. Essentially, when and how it all began and gained momentum?
Professor Dr Stangenberg-Haverkamp: Yes, in 2018 we celebrated our 350th anniversary in Germany. We are the oldest pharmaceutical and chemical company in the world, so it surely has been a long journey for Merck. It all started in 1668, when our founder, pharmacist Friedrich Jacob Merck bought a pharmacy in Darmstadt, a small town near Frankfurt. It was — and continues to be — mandatory in Germany for a pharmacist to own and operate a pharmacy. My ancestors were pharmacists and the pharmacy was passed down over generations. Sometimes, the family faced the untimely demise of the incumbent leader, leaving a young child behind. In those cases, the wives fought hard to retain the pharmacy within family ownership and they managed to do that successfully.
A major change came when Emmanuel Merck took over the pharmacy in 1816. He was a scientist and a genius strategist with both scientific and business capabilities. In those days, the key ingredients of pharmaceutical prescriptions were alkaloids, which are plant extracts. Pharmacists extracted these themselves but the quality of the end-products was inconsistent. Emmanuel Merck developed innovative methods, standardized those processes and scaled up to reach industrial-level production of alkaloids. In 1827, he decided to offer 48 different alkaloids to pharmacists in Germany with the promise of top quality, purity and deliverability. That established Merck as an industrial company manufacturing pharmaceutical and chemicals. The products gained market confidence and the business grew rapidly. Emmanuel’s three sons, Carl, Georg, and Wilhelm, who were well trained as pharmacists, chemists and merchants, joined him in 1850 as partners in the family business. The business expanded to London (1883), New York (1887) and Moscow (1899). The family members travelled to Mexico, Japan, and China to sell products and promote Merck across the world. In 1904, the company moved to the outskirts of Darmstadt, where a new factory was set up. Soon thereafter, Merck started to manufacture readymade medicines, pills and ointments, taking its portfolio to 10,000 different products.
How did the two World Wars and their repercussions impact Merck’s business?
Merck suffered very badly due to the two World Wars. In 1917, the US government confiscated and expropriated our American subsidiary Merck & Co, which it deemed enemy property. This subsidiary was managed by the founder’s grandson, George Merck, who had moved to New York in the 1880s. It was a big blow because the US arm was our largest international business, employed more than 3000 people and made a substantial contribution to the Merck business. After the First World War, George Merck, an American citizen by then, bought back the shares of the US Merck & Co but continued to operate it as a separate business, independent of the German Merck.
During the next 15 years in Germany, Merck continued to bring the business back on track, but soon the Second World War started. About 90% of our business and factories were destroyed in bombings. All our international subsidiaries were either confiscated by foreign governments as deemed enemy property) or sold due to rising costs and losses. So, after the World War-II in 1945, we had to rise again from the ashes and start from scratch, which we did by focusing on select niche areas. The recovery was slow and involved painstaking effort. Gradually, from the 1960s to 1980s, Merck re-established its subsidiaries across the globe.
Merck has been a family partnership but it has transformed in the last 25 years or so since it went public. Could you say more about this transformation?
During the 1990s, we needed to recapitalize the business to remain competitive. So we came out with an initial public offering (IPO) in 1995. The Merck stock was listed in the Frankfurt Stock Exchange with 25% of our equity floated in public. We raised 2.5 billion Deutsch Mark and channelled it all back into the company to fund expansion.
In the early 2000s, my uncle, who had been running the company for 40 years, stepped down and my cousin Jon and I were elected to lead the business. It was time to sharpen the strategic focus and strengthen capabilities in speciality areas so we decided to make strategic acquisitions. In 2007, we acquired the Switzerland-based biotech company Serono from the Bertarelli family. It was an expensive but a very good acquisition because Serono produced very high-quality biotech medicines. The Merck stock became a constituent of the DAX 30 Index. We realized that our generics business had become a poor strategic fit. It was a commodity business, so we sold it to Mylan.
In 2010, we bought Millipore, a large life science business based in Boston. In 2014, we acquired AZ Electronics which made chemicals for the semiconductor industry. In 2015, we acquired Sigma Aldrich, another lifescience business in St. Louis and became one among the top players in global lifescience business.
In 2018, we celebrated 350 years of Merck. The German Chancellor Frau Angela Merkel came to celebrate with us and we inaugurated our Global Innovation Center in Darmstadt.
Our strategic business interests are now refocused on the key areas of healthcare, life science and performance materials. E Merck KG has a broad portfolio of nearly 500,000 products, which include innovative prescription drugs for oncology, multiple sclerosis, infertility, cardiovascular and metabolic diseases. It also includes life science equipment and supplies and performance materials – i.e., special chemicals for the semiconductor industry, pigments and liquid crystals. We are research and innovation driven. Our research and development budget is about € 2.1 billion as against a profit (EBIDTA) of € 4.5 billion.
What are the nature of family ownership and involvement in Merck’s business?
Though 29.7% of our stock is owned by the public, the remaining 70.3% is held by E Merck KG, our holding company. This entity continues to be a partnership – a uniquely German legal form. So while we are under the keen scrutiny of analysts, financial advisors, bankers, and investors – which assures transparency and good corporate governance, we continue to have family control over the business. Ours is a big family tree with 156 family shareholders and overall about 279 family members across four generations, from the tenth to the 13th). The family holding is well-distributed; nobody has more than 2-3% equity participation in the holding company. Though none of them is dependent on income from Merck, they do expect decent dividend earnings from the business.
The holding company has no shares in the listed company, Merck KGaA, but owns 70.3% of the equity. Hence family members have no exit route. Under our family contract, members cannot sell their equity participation. They can only transfer their equity participation to another family member, that too at a discount of 20% to the market value of the shares of the listed entity.
Family members do not enter the business by default. They are well-educated and have carved out independent careers in diverse professions. Indeed, family members are only involved at a strategic level in the Merck business. For that, first they are required to get a University qualification, gain experience outside, make a successful career and only after long years of experience, they are elected to the family’s Board of Partners. So only the best and the most motivated members of the family join the Merck business and provide strategic direction and oversight.
Merck is distinguished among family businesses for its robust family governance. Please tell us more about your family governance mechanism and its interface with business governance.
Our corporate and family governance structures and their interface are very clearly defined, which allows us to maintain the balance between the two systems. On the business side, our listed entity, Merck KGaA, which conducts all the business, has its own Executive Board and a Supervisory Board. These Boards are a mix of family and non-family members, including renowned industrialists. That ensures adherence to high standards of corporate governance practices.
Our family governance structure is multi-layered. The family Partner’s Meeting of E Merck KG is the largest family entity which has all 156 family shareholders as its members. This body elects 13 family shareholders that become the members of the Family Board for five years. The Family Board keeps strategic oversight on the business. Any acquisitions, divestments or financial transactions above half a billion Euros require the approval of the Family Board. From the Family Board, five members are elected to Board of Partners, one member is nominated to the Executive Board of E Merck KG and four members are nominated to join the Supervisory Board of Merck KGaA.
The Board of Partners is the most significant board as it exercises day-to-day operational control over the business. Four non-family members, usually outstanding industrialists, are also included in the Board of Partners. From the Board of Partners, two members are elected to join the Executive Board of Merck KGaA and they play a crucial role in providing strategic direction to the business in alignment with the family’s long-term vision. This unique governance mechanism helps us achieve coordination across both the family and business systems.
Most family businesses struggle to survive beyond three generations. How has Merck been able to sustain itself for 350 years and across 13 generations?
One of the most important reasons for our long-term survival is adherence to our values. Emanuel Merck said, “Whatever you do, think about the company first, not about the family or yourself!” Till today, “company first” continues to be our guiding principle. For instance, money is ploughed back into the business for growth. The interest of the company takes precedence before the family and its members. In addition, integrity, responsibility, achievement, transparency, courage and respect are the core values of the Merck family and business. We practice these values in our daily conduct. For instance, we feel personally responsible for the well-being of the employees and their families. Thus, we have a tradition that is very strongly rooted in values which have been effectively passed on through generations. That has helped us survive for long.
The culture of ownership as trustees for future generations is another key reason that has kept us going. For instance, at every family meeting, I say to the other family members that you are here only as trustees, you can use the dividend but make sure that the ownership of the company is passed on to the next generation in even better shape than before.
We follow the tradition of modesty in the family and refrain from show of wealth. We do not have private jets, Rolls Royce or yachts. We are members of a normal working family. That is how all of us were brought up.
Another important value we adhere to is not to quarrel in order to ensure family unity. My grandfather said, “You can fight and argue but you have to come to an agreement in the end.” Up to now, the rule has worked.
We also care to have a strong bond of trust with our management and staff in general. We have had sophisticated family governance for over 100 years and non-family members were included in top positions since the 1920s. We empower our board and provide powers to non-family members at par with those of family members. Both family and non-family members have served on our board as partners with unlimited liability.
We also believe in a strong separation between operational management and business ownership. But those who are involved in business leadership, i.e., the five managing directors and the two family members are unlimited partners. This means that their personal assets are put on the block if the business does not do well. It raises the personal stakes and ensures that correct and timely business decisions are made and that there is effective oversight. These measures have served us well so far in sustaining Merck.
Merck aims to sustain its legacy much longer. Tell us about the initiatives you are taking to groom the next generation family leadership.
Yes, this is an important focus area. We have started the next generation leadership development initiative in a very structured manner. Annually, we conduct the ‘Merck Next Generation (MNG) – 1’ education programme for the next generation family members who are 15 to 23 years old and the ‘MNG – 2’ programme for the 24 to 35 years old family members. Every year, we take the next generation members to one of our factories and international markets to show them how Merck works. Then we have the Merck Family University. Around 20 family members are selected every five years for a comprehensive programme. In total, five modules of this programme are conducted by top business schools, while other modules are conducted by in-house expert instructors. Bright family members take this programme to potentially prepare themselves to take up a Board position later on.
We also allow young family members to do internships at our facilities throughout the world. This provides them with global exposure and an opportunity to get familiarized with an international culture. We also encourage family members to join the Academy for Family Business conducted by the Witten University. Every family member regardless of age can get some basic training there on family governance, finance and other business-related subjects. Once every two years, we send the next-generation family members to the Family Bonds meet where the youngsters from other prominent German business families exchange views.
In addition to these efforts, we organize regular family activities and outreach efforts that strengthen family bonding among members across generations. These include the annual family day where all family members meet and exchange ideas and concerns, an annual family news magazine that reports on important happenings in the family and business, an annual family summer party at the evening of the Annual General Meeting, an annual Extraordinary partners meeting, three regional fireplace evening meetings and a self-organized ski week for all family members in the Swiss Alps. So we have been quite organized in our family leadership development efforts and hope that these initiatives will help transfer the Merck values and traditions to the next generation members who will take the Merck legacy forward.
With an annual sales figure of € 15 billion and present market capitalisation of around € 44 billion, German pharmaceutical giant Merck has 52, 000 employees who work in 66 countries.
In 1984, Dr Frank Stangenberg-Haverkamp was elected to the Board of Partners of E Merck KG and has been the Chairman of the Board from 2004 to 2014. In January 2014, he was elected Chairman of the Executive Board and the Family Board of E Merck KG. Dr Frank Stangenberg-Haverkamp started his career with the German Air Force, which he left as Lieutenant.