Known and Unknown

by Donald Rumsfeld

  As we began our official talks, the Saudi king’s servants brought tea out to us in the ornate formal throne room. I had quickly learned on my trips to the region that it was wise to ration my tea intake during these long meetings, and after a sip, I held my small cup aside.

  After a few moments I looked up to find King Fahd staring at me with a puzzled look. He had noticed I wasn’t drinking my tea, and like a good Middle Eastern host wanted to make sure it was to my liking. He thought I might want a sweetener.

  “Canderel!” he called out, his arms thrust upward, accentuating his exuberance. My worlds collided.

  Canderel was the European brand name for Equal, the tabletop sweetener produced by Searle that seemed like it had consumed much of the last five years of my life. Searle had waited for close to a decade for approval from the U.S. Food and Drug Administration to be able to market it. Now I was being offered it in a royal palace many thousands of miles from Searle headquarters in Skokie, Illinois.

  Prince Saud, the young, Princeton-educated member of the royal family who was the new foreign minister, rose from his chair and walked over with a small dispenser of our company’s new product.

  I suspect King Fahd had no idea of my connection to the sweetener. But with a smile on his face, he said that his wife had him use it in his tea. The king, a large, joyful man, proclaimed proudly that he had slimmed down by several kilos as a result. His still sizable presence shook as he said it.

  I don’t recall what I said in response, but I certainly remember what I thought. I would have given anything for a video of the scene to use as a commercial. It would have been an award winner.

  G.D. Searle was again becoming a healthy presence in the industry, thanks in part to the no-calorie sweetener in Equal and Canderel that over time became broadly known as NutraSweet. But it had only happened after a long period of legal uncertainty, as well as a revised business strategy. We restructured the company to position Searle back on an upward path. When I arrived there in the spring of 1977, the company’s future was anything but bright.

  CHAPTER 18

  Searle’s Sweet Success

  G. D. Searle & Co. began in 1888, when a Civil War veteran and pharmacist, Gideon Daniel Searle, started a small company with a chemist in Chicago. Nine decades later, the business had become a global conglomerate. It had developed an impressive number of products: Dramamine, Metamucil, and Aldactone, as well as Enovid, the first mass-market oral contraceptive that would become known simply as the Pill. The company’s rise into a major conglomerate had proved challenging. By 1977 the company had experienced weak earnings for eight straight quarters. Its stock price had fallen sharply, hitting a low of $10.75 per share, about half of its price a year earlier. Analysts wondered if its future was a long, downward slide. That concern had a way of getting shareholders’ attention.1

  So too did the choice of a new chief executive officer that year. Of all the people that the Searle board of directors could have selected to come in as the first non-family CEO, they chose a relatively young former public official with no background in the corporate world, let alone pharmaceuticals.

  At the company’s annual meeting where I was introduced to the shareholders as the future CEO, a middle-aged woman stood up.

  “My name is Ethel Shapiro; I am a shareholder,” she said. She noted that commentators were observing that little in my past experience made me a likely savior for the struggling pharmaceutical company.

  “Mr. Rumsfeld,” she asked bluntly, “why are you worth the $250,000 annual salary you will be receiving as CEO?” The amount was significant, to be sure. It was, in fact, four times what I had made as secretary of defense.

  It was a fair question, and I suspected other shareholders might have been wondering the same thing.

  “That sounds a lot like my mother,” I replied, and many in the room laughed. As it happened, my mother was surprised by my decision to accept the Searle position. She believed I had established myself in government and wondered why I would want to get involved in an industry I knew little about and that had such obvious risks. She knew drug companies were often involved in complex and costly lawsuits. Searle, in fact, was at that moment undergoing a federal investigation into the accuracy of its research. Legal charges against the company had been filed and others were pending.

  In answer to Mrs. Shapiro, I observed that I had not set my salary; the Searle board of directors had. I added that I was confident the board would have many opportunities to review my performance over time to determine whether I deserved that level of compensation. And I told her I would do my best to earn it.

  It had not escaped my attention, or the Searle family’s for that matter, that I had no relevant business or pharmaceutical industry experience. But I had been involved in managing large, complicated, international enterprises. Perhaps the deciding factor for the Searle family was my disinclination to shy away from making the tough choices that would be needed to get the enterprise on an upward path. The family knew me. Back in early 1962, not many people thought a twenty-nine-year-old with no experience in elective office could win a seat in Congress against a large field of more seasoned opponents. But Dan Searle did.

  I, in turn, believed in Searle. Taking the reins of the pharmaceutical company was an opportunity to help develop products of value to people. My father, in particular, would have considered it honest and worthwhile work. There was some press speculation that I might be considering a run for the U.S. Senate from Illinois in 1980. To signal the seriousness of my commitment to the company, and to refute the speculation, I signed a five-year contract with Searle, even though the board of directors had not asked me to do so.

  My time at Searle was a formative experience for me, unlike any challenge I’d ever faced before. It is in essence the story of a former government official unfamiliar with the daily workings of the business world finding his way. With the help of a superb team, I took the reins of a troubled company with great potential and developed a strategy to turn it around. We moved quickly to tighten budgets by reducing staff. We sold off entities not related to what we decided were our core businesses. We decentralized decision making and rigorously measured our progress against our goals.

  Setting goals was the most important task we faced, because it forced us to decide what our priorities were. We also needed broad agreement on the priorities among the directors and senior managers so that everyone was pulling in the same direction. It was critically important to ensure that those goals and priorities were known throughout the organization.

  When I arrived at Searle, one of the first things we did was to put together several task forces with a mix of employees, board members, and thoughtful people from outside the company to examine what I had decided were the key problem areas of the company’s operations. They then offered specific recommendations. I knew Searle needed changes, but I didn’t want change for change’s sake. I needed to make sure the changes we were considering were the right ones. And I needed to make sure we could achieve broad support in the company to move forward with the changes.

  After the review was complete, Searle’s senior management and I agreed on our top priorities: focusing the company on its core businesses and laying the foundation for future growth. To achieve our goals, we decided we would trim excess layers of management and sell off subsidiaries that either were peripheral to Searle’s mission or were unlikely to produce significant results. We resolved to work with the federal government to try to determine the fate of one especially promising product, aspartame. And we would invest significantly in research and development to ensure there would be more products in the pipeline in the years ahead.

  Over my eight years at Searle, I became a believer in the rule that “What you measure improves.” A corollary rule in the military is that “You get what you inspect, not what you expect.” We needed to select the key metrics for each of the company’s divisions that would be indicative of the company’s long-term performance. Whi
le our goals included improving our earnings per share, leading to a higher stock price, the priorities we selected and measured had to be ones that would move us in the right direction. We decided to hold our own feet to the fire by publishing these metrics in our annual report so our shareholders could see our goals and how well we were doing in meeting them. Either our indicators were getting better or they weren’t, and if they were, it would eventually be reflected in our company’s overall value.

  One of the single most important tasks of a senior executive is to recruit and rely on the right people. A rule I had observed was that “A’s hire A’s; B’s hire C’s.” I’ve seen terrible organization charts that worked because of the people involved and impressive organization charts where the enterprise struggled because of the people involved. At Searle, I was looking for people who brought knowledge and expertise different from mine. I favored candidates with high energy and a sense of humor because I knew we’d be working long hours in a tough environment.

  The senior management also needed to work well as a team. We could have the brightest, most capable people in the world, but if there was no commitment to the company’s broader mission, their talents would not be enough. I learned that lesson as a midshipman on the USS Wisconsin, when the battleship ended up stuck on the New Jersey shore. A dozen tugboats tried to push the Wisconsin free. One tug would hit the ship, then another. It wasn’t until all of the tugboats were organized in a coordinated effort that they put their bows against the hull of the battleship and pushed it free.*

  At Searle, two people stand out as leaders of our team effort.† I invited John Robson to serve as Searle’s chief operating officer. Robson had played a critical role in my congressional campaigns, was an accomplished lawyer, and also had public service experience as chairman of the Civil Aeronautics Board, among other appointments. He took the lead in legal and regulatory affairs and I trusted his judgment implicitly.

  I also turned to Jim Denny, a man I’d known in college who was serving as the treasurer of Firestone Tire & Rubber Company. Denny’s name appeared on a list of three candidates for the important position of Searle’s chief financial officer from an executive search firm I had engaged. To my surprise—since I wasn’t eager to hire an acquaintance—he turned out to be the unanimous choice for the job. Given my modest business background, I made sure Denny’s office was close by. Not a day went by that I didn’t step over to ask his advice on business questions. Robson, Denny, and I were so engaged in what we were doing that we tended to overlook the traditional niceties of an executive suite. We were perhaps too informal for some directors who, as Denny later put it, “expected more than ham and Swiss on rye with cole slaw for their board meeting lunch.”2

  The board of directors, too, saw changes. A few of its members had joined when the company was still a family-oriented enterprise, rather than a global conglomerate. I worked to ease some members off the board, particularly those who were also in Searle’s management, in favor of experienced outsiders who could bring the company a fresh and broader perspective.*

  There is a danger that CEOs and senior executives can get too engaged in details, which can prevent them from having the necessary distance to see trends and the broader picture. When I was a flight instructor in the Navy I noticed novice pilots often took control of an airplane by grabbing hold of the stick too tightly and overcontrolling. As a result, the motion of the plane became jerky. It can be similar in any organization, whether in business or government. An executive who holds on to everything too tightly can lose sight of the larger issues. “Find ways to decentralize” is a guideline I included in Rumsfeld’s Rules. “Move decision-making authority down and out. Encourage a more entrepreneurial approach.” No one person can make all the necessary decisions in a large and complex enterprise. The best organizations have multiple leadership centers that are working in tandem toward the same goals.

  Robson, Denny, and I encouraged the heads of Searle subsidiaries to tell us their priorities to increase their profits for the longer term. For example, we saw potential in one of Searle’s units, then much less known than it is today.

  Pearle Vision was first formed in 1961, when an optometrist named Stanley Pearle opened a store in Georgia that not only offered eye examinations but also could produce prescription lenses on-site and sold a wide selection of frames. The division’s president, Don Phillips, embarked on a well-conceived plan that used the profits of existing Pearle Vision centers to build new centers and exponentially expand the franchise. The approach allowed us to increase the number of Pearle Vision centers from 240 in 1976 to more than 860 by 1981. We then franchised some of the centers to increase the incentives for store managers. Still later, we took a portion of Pearle Vision public while retaining a majority interest and management control. Our shareholders profited at each stage of the process.

  To get clarity and insight into how things were really functioning at Searle I dug down into one division at a time. I had a habit of asking employees from senior managers to lab technicians direct questions, some of which may have seemed intrusive, but it was the best way I knew to gather the information I needed. On occasion, my approach made people uncomfortable, particularly if they didn’t have ready answers. But more likely than not, they would have the answers the next time.

  Like many companies in the mid-1970s, Searle had acquired numerous subsidiaries. Before I decided what to do with them I resolved to visit most of them personally. A number of the units were related only marginally to Searle’s core businesses. One subsidiary’s business was to produce and sell sperm from livestock. Its main source of revenue came from an aging bull named Astronaut. As fine a bull as he was, it was clear that this revenue stream was finite. Another was a centrifuge factory in France plagued by labor union activism. I had some inkling that the situation there was difficult when I was advised I should show up for my visit late at night, not during working hours. A visit by top management was not likely to be well received by the workers, I was told. Hostile labor conditions and weak earnings made the decision to divest an easy one.*

  I decided to divest Searle of a number of its subsidiaries, even though I knew it would have the effect of temporarily reducing our revenues and earnings, since a number of these companies were profitable. Within a year I had directed the sale of twenty companies. One Rumsfeld Rule I developed is “Prune. Prune businesses, products, activities and people. Do it annually.” Perhaps paradoxically, my intent was not to make Searle smaller through these divestments—I wanted to reinvigorate the company and invest in our core businesses to achieve growth.

  To reduce costs and improve performance, we initiated a sizable reduction of Searle’s corporate headquarters staff, which had the added benefit of decreasing the distance between the top of the organization and our customers. In good times, the company was able to afford a growing corporate payroll, but times had changed. We needed to let some people go and move others from corporate headquarters to the divisions. Keeping in mind the memory of the way Bob Haldeman had summarily requested blanket resignations from Nixon’s cabinet and subcabinet the day after his 1972 reelection, I wanted to treat our employees as fairly as possible.

  It helped that the cost-cutting measures extended to all corners of the company, even to the executive offices. It was not a pleasant task for a new CEO to have to tell longtime members of the board of directors that it was necessary for them to leave the board, but the reality was that we needed new talent at the top if we were to succeed.

  As the one making these decisions, I felt a responsibility to meet with as many of the people being let go as I could. I had already been out of a job several times in my life when I left the Navy and after several political campaigns, so I knew what it was like, particularly with a family to support. My words to them were what I felt would be helpful to me if I were in their shoes. I knew they would have to go home and explain their situations to their spouses, children, friends, and neighbors. I told them the truth�
��that the decision did not reflect on them. The reality was that the pharmaceutical industry and the company were both changing; U.S. companies, including Searle, needed to adjust to globalization. We were eventually able to provide many leaving Searle with outplacement assistance services to ease their transitions.

  The rapid changes we were making at Searle caused heartburn for some, especially among our traditional investor base. I decided to freeze the company’s stock dividend. This was not a uniformly well-received decision, particularly by shareholders who were accustomed to receiving dividend checks that increased over the years. The idea was to gradually move our shareholder base away from investors focused on dividends to investors more interested in the company’s long-term growth.

  I also decided to increase our investment in Searle’s pharmaceutical research and development with the money we received from selling off some of our subsidiaries. One of my concerns was that the research and development division had too few promising new products in the pipeline. A number of the patents on existing products were expiring and would begin to face competition from generic drugs. I knew we needed to invest more if we were to be a successful research and development–based pharmaceutical company.

  One of the more underappreciated aspects of the pharmaceutical industry is the time and investment put into research and development. Time and again the pharmaceutical industry has been singled out as a villain in corporate America and as the main culprit in escalating health-care costs. In fact, pharmaceutical and drug costs are less than 12 percent of the total of health-care costs.3 I never cease to be amazed at people, particularly lifelong politicians of both political parties, most of whom have never created anything of value, savaging those who do. Successful pharmaceutical companies have to invest; that is to say they have to put at risk hundreds of millions of their investors’ dollars in an effort to discover new therapies to save lives, extend lives, and improve the quality of lives, and, yes, also to try to make a fair return for their investors while doing so. More often than not, many years of trial and error result in dead ends. But with expensive facilities and talented researchers, breakthrough discoveries do occur. And even when efforts are unsuccessful, they learn what need not be tried again. Because of companies like Merck, Pfizer, Searle, Gilead Sciences, and others, millions of people in our country and across the globe are living longer, healthier lives.