The John Brown Era Comes to an End at Stryker
BY ROBIN R. YOUNG CFA, DECEMBER 13, 2004
He doesn't look old enough to retire. And when he started, he didn't look old enough to be CEO. Yet 27 years after becoming Stryker's CEO, John Brown is letting go and stepping down. The man walking in the door to replace him is roughly the same age (41 years) as John Brown was when he joined the firm that cold Michigan day in February, 1977. Stryker generated $23 million manufacturing hospital beds and surgical instruments in Brown's first year.
If a single word could capture John Brown's reputation at Stryker it is consistency. As he was taking Stryker public in 1979, he made a promise to grow sales and earnings 20% a year. And to Wall Street's continuing amazement, he has delivered year in and year out. So completely has that goal been internalized by Wall Street that the consensus earnings growth rate (consensus of 25 analysts) for 2004-2009 is 20.0%. Not 20.5% or 19.5%. 20.0%. Over the past five years, Stryker's compound earnings growth rate is 24.7%.
Stryker's sales in this, John Brown's final year as CEO will be $4.3 billion - roughly 187 times larger than it was when he joined the company. Stryker's earnings this year are expected to be about $575 million - 25 times larger than the firm's sales when he joined in 1977. Finally, Stryker's cash balance last quarter was $92 million - 4 times larger than the annual sales in Brown's first year.
When John Brown joined Stryker in 1977, the company was recovering from the plane crash death of its CEO, Lee Stryker, son of founder Dr. Homer Stryker. Dr. Homer Stryker would participate in hiring John Brown and then live to see the firm he founded go public and enter the large joint replacement market with the acquisition of Osteonics in August, 1979. To this day, Dr. Stryker's family still owns approximately 30% of Stryker Corporation.
While John Brown now personifies Stryker for Wall Street, its customers and its employees, it wasn't always the case. In those early days, by his own description, John Brown was an "iron fisted", hands-on manager. In an excellent interview with MX editor-in-chief Steve Halasey conducted earlier this year, John Brown characterized his 1970's style as a highly centralized, even controlling one. "There is no question about that. There is nobody who loves detail more than I do." When it became "painfully obvious that I was the biggest problem in the company", Brown changed and from that mid-course adjustment came Stryker's now famous decentralized corporate structure.
Stryker now has (if we counted correctly) 15 major divisions whose managers as well as the managers under them are given significant levels of responsibility for driving the corporation's performance. Truly, getting this $4 billion elephant to dance is John Brown's greatest accomplishment.
As decentralized as it is, Stryker is a tight ship. One interesting anomaly of Stryker's culture under John Brown is that, even with his emphasis on innovation - Stryker has no R&D budget policy. No, for example, percent of sales targets for R&D. Each Stryker executive is given the latitude to build their particular business in the most efficient and innovative manner he/she can. If that turns out to be an R&D budget of 5% of sales, fine. It could be 10% or 3%. Whatever. Just so long as it helps drive the business metrics to an overall 20% revenue growth and consistently rising earnings.
Under Brown, the CEO's job was a seven day a week lifestyle. A seminal moment for him came two years ago when he chose to have elective heart valve surgery to fix an old (30-year-old) defect. As he has described since then in various media interviews, the experience brought to him the realization that he needn't die at the CEO's desk. It was, in fact, his role as Chairman and CEO of Stryker to effect an orderly CEO transition.
So the next generation CEO enters the firm in the form of former Pharmacia Exec Stephen MacMillan. MacMillan will have 2 years of tutelage under Brown as Chairman. To be sure, however, MacMillan will be running the show. John Brown wont be answering the phone, leading meetings or talking to analysts after December 31st/2004.
John Brown and his wife, a longtime teacher, will remain in Kalamazoo and will likely split time between their condominium in Chicago, family in Atlanta and a home in Michigan.
The following are some of our favorite John Brown quotes:
- "The important thing is not to make promises You'll have a hard time fulfilling, because then it's too tempting to perform accounting tricks to make sure you meet the numbers. We've always placed value in being consistent, but we're also ambitious. We've delivered sales growth of 20 percent per year ever since I can remember, except in 1998 and 1999, when we were writing off acquisitions."
- "The problem with health care is that there is no standard by which providers and customers can measure quality. High quality health care at reasonable costs is what we want. ... To get better control of cost we will have to get better control of quality."
- "In most major purchasing decisions we choose carefully, but there is very little customer research in health care spending."
- "Our code of ethics is fairly simple: don't lie, don't steal, don't cheat. The ethics we practice are those that we learned at our mother's knee, so we think they are good. Now, I realize I am oversimplifying it a little bit, but not a whole lot. Because if you follow the spirit of this, you are not going to find individuals getting into trouble with their company, or companies with their shareholders or with the legal profession or with the government regulatory group."
- "I think R&D expenditures last year were about 5% of sales, but we do not have a set number. We do not say it has to be 7% or 5%. To my knowledge, we have never cut an R&D budget in the 27 or 28 years I have been with the company. What we do, though, is tell everybody, all the divisions: make sure that you have enough new products coming that we can sustain our 20% profit growth and that you can sustain your portion of that 20% profit growth year in and year out. This puts a lot of responsibility on the shoulders of the individual R&D groups, who have to make sure they have plenty of new ideas coming."
- "There are probably three big trends in orthopedics going on right now.
- One is navigation - minimally invasive surgery. I think that combination will be going forward.
- Two is the whole ceramics movement. We are going to have more competition in that field in the next few months, so that market is going to heat up. The acceptance of ceramic material as an implant material for orthopedics has been particularly good for Stryker, and I think that acceptance is going to continue.
- Third, I think that orthobiologics - bone growth factors - are going to play a very important basic role in orthopedics down the road. Not so much in the next two or three years but by the end of this decade, I think we are going to see a lot more use of bone growth factors than we are seeing today, and with good results.
- "Our officers running the divisions get to enjoy the same excitement and pleasure of running their own business that I did, because we gave them an awful lot of autonomy. That has really paid huge dividends over the years. People know now that if they are president of a division or in charge of sales for a division, it is a big responsibility. People are not going to tell them how to do it, but they are expected to meet the goals. The expectations are high. So that has worked exceptionally well for the company."
