Case | HBS Case Collection | 2002 (Revised from original 2001 version)

Tracking Stocks at Genzyme (A)

Abstract

Genzyme, a tracking stock pioneer, has used its innovative capital structure as a way to frame and grow its R&D-intensive business. Facing the question of how best to integrate a new acquisition into its tracking stock structure, Genzyme's top management is forced to review how tracking stocks add value to Genzyme, whether this value is sustainable, what future governance and control problems the current structure might present, and how these problems might be best handled. A rewritten version of an earlier note.

Keywords: Integration; Value Creation; Motivation and Incentives; Conflict of Interests; Stocks; Capital Structure; Research and Development; Corporate Governance; Biotechnology Industry;

Format: Print

19 pages

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Citation:

Salter, Malcolm S. "Tracking Stocks at Genzyme (A)." Harvard Business School Case 902-023, December 2002. (Revised from original November 2001 version.)

Objective: To examine whether parents' delivery room management decisions for extremely preterm infants are influenced by (a) the degree of detail with which options-comfort care (CC) or intensive care (IC)-are presented or (b) their order of presentation. Methods: 309 volunteers, 18-55 years old, were each randomized to one of 4 groups: 1. detailed descriptions, CC presented first; 2. detailed descriptions, IC presented first; 3. brief descriptions, CC presented first; and 4. brief descriptions, IC presented first. Each received the description of a hypothetical delivery of a 23-week gestation infant and chose either IC or CC. Open-ended and structured questions elicited reasoning. Data were analyzed by chi-square and logistic regression analysis. Results: Neither degree of detail, comparing groups 1+2 with 3+4 (37% v 41%, OR=0.85, 95%CI=0.54-1.34, p=0.48), nor order, comparing groups 1+3 with 2+4 (40% v 37 %, OR=0.88, 95%CI=0.56-1.39; p=0.59), influenced the likelihood of choosing IC. Participants choosing IC were more likely to invoke sanctity of life and religiosity as personal values. Additional reasons for choosing IC were experiences with infants born at later gestational ages, giving the baby a chance, not watching their baby die, and equating CC with euthanasia. Some choosing CC wanted to avoid infant suffering. Conclusions: The degree of detail and order of presentation had no effect on treatment decisions, suggesting that individuals bring well-articulated preexisting preferences to such decisions. Understanding beliefs and attitudes motivating these preferences can assist physicians in helping parents make informed decisions consistent with their values.

Researchers and business leaders have long decried short-termism: the excessive focus of executives of publicly traded companies-along with fund managers and other investors-on short-term results. The central concern is that short-termism discourages long-term investments, threatening the performance of both individual firms and the U.S. economy. I argue that short-termism also invites institutional corruption. I define that as institutionally supported behavior that—while not necessarily unlawful—undermines a company's legitimate processes and core values, weakening its capacity to achieve espoused goals and eroding public trust. In the private sector, institutional corruption typically entails gaming society's laws and regulations, tolerating conflicts of interest, persistently violating accepted norms of fairness, and pursuing various forms of cronyism. The gaming of Securities and Exchange Commission rules by Citigroup's mortgage-banking desk in 2007 is an illuminating example of institutional corruption in the finance industry. After exploring that case, I provide a more complete definition of gaming, and explain how short-termism invites the kind of gaming and institutional corruption that occurred at Citigroup. I then examine the key drivers of short-termism in contemporary business, and their potential effects on the behavior of both executives and their organizations. I conclude by proposing mechanisms to deter the corrupting effects of short-termism, including changes in both business and public policy. While business leaders and policymakers have been cautious in implementing many of these countermeasures, we must seriously consider them if want to rein in the public and private costs of institutional corruption in the private sector.

This paper describes how the gaming of society's rules by corporations contributes to the problem of institutional corruption in the world of business. "Gaming" in its various forms involves the use of technically legal means to subvert the intent of society's rules in order to gain advantage over rivals, maximize reported earnings, maintain high credit ratings, preserve access to capital on favorable terms, and reap personal rewards-just to mention several possible motives. It is one of the most corrosive forms of institutional corruption in business. "Institutional corruption" refers to company-sanctioned behavior and relationships that may be lawful but either harm the public interest or weaken the capacity of the institution to achieve its primary purposes. The most salient consequence of institutional corruption is diminished public trust in the governance of the institution. In this paper, I describe the twin phenomena of gaming and institutional corruption—and how the former contributes to the latter, often with the support of professional advisors at law and auditing firms. I illustrate these phenomena with examples from Enron, which (apart from outright fraud) pursued one of the greatest gaming strategies of all time. I also point to the implementation of the Dodd-Frank Act as an excellent source of clinical data pertaining to gaming in a more contemporary setting. I then discuss how gaming and other trust-destroying behaviors have been encouraged by the short-term decision-making horizons of both corporate executives and managers of large investment funds, how those time horizons are largely driven by ways in which the performance of operating executives and investment fund managers is measured and rewarded, and how the directors of these entities become complicit in the gaming of society's rules and the spreading of institutional corruption. I end by suggesting possible remedies for curbing the ill effects of continued gaming of society's rules and restoring much needed public trust in the offending institutions.

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