The Men Who Run GlaxoSmithKline

Published in Company Comment on 6 July 2012

What you need to know about the pharmaceutical group's top executives.

Management can make all the difference to a company's success and thus its share price.

To me at least, the best companies are those run by talented and experienced leaders with strong vested interests in the success of the business, held in check by a board with sound financial and business acumen. On the other hand, some of the worst investments to hold are those run by executives collecting fat rewards as the underlying business goes to pot.

In this series, I'm assessing the boardrooms of companies within the FTSE 100 (UKX). I hope to separate the management teams that are worth following from those that are not. So far I've examined Barclays (LSE: BARC), which is mired in the Libor rate-fixing scandal, and BP (LSE: BP), which is recovering from the Gulf of Mexico disaster.

Today I am looking at GlaxoSmithKline (LSE: GSK), which has just agreed a $3bn settlement with US regulators (already-provided for), and pleaded guilty to criminal charges for overly aggressive marketing tactics and selective use of clinical trial data. But GSK's settlement relates to it conduct over 10 years ago, and the current management has clean hands.

Here are the key directors:

Sir Christopher Gent(Non-exec) chairman
Sir Andrew WittyChief executive
Simon DingemansChief financial officer
Dr Moncef SlaouiChairman, R&D

Sir Christopher Gent became chairman on 1 January 2005. The former CEO of Vodafone (LSE: VOD), he is credited with building that company from a start-up to FTSE 100 member in a series of deals, and is regarded as City heavyweight.

Joining GSK as a graduate trainee in 1985, Sir Andrew Witty, who was knighted earlier this year, became CEO in 2008. He led a clean-out of the US management team behind the drugs mis-selling, and has striven to improve the company's reputation with the public as well as with shareholders. That has included initiatives to provide medicines in the third world and development of an anti-malaria vaccine in association with the Bill Gates Foundation.

His efforts to enhance GSK's reputation with shareholders have been rewarded with a 30% rise in the share price since taking over, during which time the FTSE 100 has retreated some 7%. Rival AstraZeneca's (LSE: AZN) shares have done just as well -- such are the attractions of defensive sectors these days – but the market is more worried about the latter's patent cliff.

Witty's strategy has included diversifying away from blockbuster drugs towards emerging markets and over-the-counter pills, restructuring and cost cutting, and a couple of significant-sized acquisitions as well as increased dividend payouts and share buy-backs.

Appointed last year, Simon Dingemans is a former Goldman Sachs M&A investment banker. He's clearly there to do deals, not count beans. Dr Slaoui has worked in GSK's R&D function for 24 years, and spearheads new product development. There are 11 non-execs with backgrounds in business, finance and medicine, and a pretty impressive collection of CVs. With five women it must be one of the most gender-balanced boards in the FTSE.

I analyse management teams from five different angles to help work out a verdict. Here's my assessment:

1. Reputation. Management CVs and track record.
An impressive bunch
Score 5/5
2. Performance. Success at the company.
GSK is moving in the right direction.
Score 4/5
3. Board Composition. Skills, experience, balance
Lacks a traditional finance director role, but otherwise impressive.
Score 3/5
4. Remuneration. Fairness of pay, link to performance.
CEO pay almost doubled in 2011, but is in line with peers.
Score 3/5
5. Directors' Holdings, compared to their pay.
Witty has £17m worth of shares. All directors are required to hold shares proportionate to remuneration.
Score 4/5

Overall, GSK scores 19 out of 25 for me. It has one of the better boards in the FTSE 100. The company is not immune to the problems of the pharmaceutical industry, including the fall-off of income as blockbuster drugs come off patent, but it has a clear strategy for change, itself a testimony to its management, and is executing that strategy confidently and competently.

Let me finish off by adding that legendary investor Warren Buffett has always looked for impressive management teams when pinpointing which shares he should buy. So I think it's important to tell you that the billionaire stock-picker has recently acquired a substantial stake in a prominent UK blue chip. Buffett's investment decision is covered in full within this special report -- but hurry, The One UK Share Warren Buffett Loves is free for a limited time only.

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> Tony owns shares in GSK, AstraZeneca and Vodafone but no other shares mentioned in this article.

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kiffberet 08 Jul 2012 , 8:48am

"CEO pay almost doubled in 2011, but is in line with peers. " How can you give a score of 3/5 for that?

Did the dividend double or shareprice double in 2011? No, and nor did his peers, but double the salary anyway. That's the way of the fat cat. 1/5 surely.

Afrosia 09 Jul 2012 , 12:56pm

RBS went bust in the same year as many of their counterparts. Fred Goodwin 3/5? :-)

countingcrow 09 Jul 2012 , 1:05pm

Good article Tony - it makes a refreshing chnge from the '5 shares to buy now'.

Your assessment of GSK management is spot-on. Witty has lead a remarkable change in culture within the company since becoming CEO, espousing values of integrity, empowerment, corporate citizenship, etc.

I know because I work for the company...

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