Andy Rios

Merck & Co., Inc.: Addressing Third-World Needs

Section 3

Drawing on various industry experts and other prominent cases, this brief memo analyzes Mercks recent decision to establish the Mectizan Donation Program (MDP) and recommends a rubric for making difficult ethical decisions going forward. We start our analysis by evaluating the impact of corporate social responsibility (CSR) through the lens of The Limits of the Market for Virtue by David Vogel. Acknowledging the unprecedented public, business and academic interest in CSR, Vogel states that a market for virtue exists since companies and managers increasingly believe that CSR makes business sense. CSR activities can give firms access to socially conscious capital, create a buffer in the event of public relations crisis, increase brand loyalty and potentially attract more driven talent. This last point is especially relevant in Mercks case as Dr. Vagelos initially approved funding for Mectizan in large part due to employee moral concerns. He feared that employees, a key stakeholder group at Merck, would be negatively impacted should the company decide not to pursue a drug that could alleviate substantial suffering in the world. Viewed through this light, Merck appears to have made the appropriate decision to pursue MDP and may even reap some business benefits from it. However, according to Vogel, the evidence to support a business case for CSR is weak and the market for virtue has real limits. Citing that many responsible firms perform poorly while many irresponsible firms experience success at least in the financial sense, Vogel posits that CSR is neither necessary nor sufficient as a competitive strategy. This may stem from the fact that CSR appears to not play a central role in companies, rather it tends to be on the the margin. In light of CSRs deficiency in addressing both private and social goals, Vogel touts government regulation as the best battle-tested alternative. However in Mercks case, legislation requiring pharmaceutical companies to address third-world drug needs would be heavily contested and thus extremely unlikely. Nonetheless, taking into account that the market has not substantially rewarded Merck for its altruistic endeavor and that in the absence of legislation other pharmaceutical companies have not emulated MDP in any significant shape or form, Vogels expanded argument for regulation has much merit . To achieve this regulation, Vogel proposes, among other things, expanding CSR to include a corporations stance on public policy. Therefore, while Merck deserves some praise as the exception to the rule for

Andy Rios

Merck & Co., Inc.: Addressing Third-World Needs

Section 3

committing to MDP on its own, the company may still fall short of the scope of the social responsibilities if its not actively shaping the policy agenda according to Vogel. With mixed results for MDP and Merck by utilizing Vogels work, we move on to Creating Shared Value, where Porter and Kramer advocate for repurposing corporations to create shared value, which involves creating economic value in a way that also creates value for society by addressing its needs and challenges. The authors list a variety of ways that companies can create this shared value, two of which can be argued are present in MDP. First, employee productivity is enhanced through MDP. Although not every employee is involved in the program and MDP is not a financial investment in employees like a wellness program, it can be argued that having the program is a long-term investment in the company and employees that will increase their motivation. Secondly and more importantly, curing river blindness, a disease thought to afflict some 85 million people around the world, will enable cluster development in fertile third-world areas that were previously decimated by this disease. These clusters, according to the authors, play a crucial role in driving productivity. Their development, therefore, would contribute significantly towards developing the economies and raising the standard of living in poor third-world areas affected by the disease. Utilizing this shared value framework, which shares similarities with Mill and his philosophy of producing the greatest good for the greatest number, it appears that Merck has done well through MDP. Both of the aforementioned works seem to look favorably upon MDP (if not Merck as well); however, we would be remiss to not alert Merck to the potential of setting a dangerous precedent with MDP. We have seen cases, namely Levi Strauss & Co., where decisions set a standard to which you will likely be held to in the future by different stakeholders. In the Levi case a generous compensation package for one plant shutdown led employees, shareholders/investors and the public to believe that the same would be offered in any subsequent shutdowns. The same could apply to Merck in the sense that the different stakeholders would anticipate or demand that the company bankroll other drugs with little or no financial promise. This could have bad consequences for Merck and the pharmaceutical industry as a whole as both would be discouraged from allocating resources to research on diseases affecting the third-world. Lessons from Aristotle and Ethical Breakdowns also provide

Andy Rios

Merck & Co., Inc.: Addressing Third-World Needs

Section 3

examples of the dangers of a slippery slope. Another issue with MDP is that the integral distribution component involves a significant deviation from the Mercks core compe tency as a pharmaceutical manufacturer. This along with the slippery slope certainly would give some of Mercks shareholders pause. Taking into account the aforementioned works, we believe MDP is a good program and Merck has done humanity a service. While we do not think Merck should be intimately involved in distribution concerns or other activities outside of their core competencies, we do understand that the company had few options at that point in time. As far as the shareholders are concerned, we believe that Merck had that latitude to pursue MDP because of its wellknown culture: It is not for the profits. This culture, which contributed to Merck scientists being inspired to think of their work as a quest to to alleviate human disease, is integral to the companys success. That said we present a framework for navigating similar nebulous situations going forward. The basis for our recommendation comes from the combination of Creating Shared Value and A New Era for Business, which references like Vogel a changing business landscape where companies and society are increasingly intertwined. This work provides model for incorporating changing sociopolitical dynamics into the c-suite strategic decision-making process. It highlights five areas (Risk, Renewal, Regulation, Relationships and Reputation) that need to be actively managed by the CEO himself. These five areas are all largely selfexplanatory and Merck did address them throughout the planning of MDP. The real value of this framework comes from taking a proactive approach and integrating a process that takes corporate social responsibility directly into high-level decision-making - a notion that is echoed by Creating Shared Value. If this had been done internally at Merck, MDP would likely have had a quicker and smoother launch. This would have likely happened due to a higher commitment to explore projects that impacted a broader set of society and more robust relationships with NGOs and other organizations that could have helped with logistics and distribution components of MDP. In addition to the Five Rs presented by the McKinsey framework, we would add Relevance to formalize analyzing and prioritizing opportunities through the lens of the companys core competencies. Word Count: 1204