Professional Documents
Culture Documents
A
t the beginning of 1994,
Lessons learned
Bausch & Lomb was a
respected company G Star performers – whether people or divisions – require careful
with an apparently inspection and controls.
strong position in the US optical G Senior corporate executives who exhort subordinates to reach targets
products and eye-care sector. It must make sure that the reported figures are real.
had charmed investors with G Aggressive sales drives and accounting practices can, for a while,
double-digit earnings growth most mask strategic business weaknesses.
years from the mid-1980s up until G Companies should watch out for a growth in receivables and credit
1994. lines, which can be used to inflate reported earnings that might never
But it was about to be plunged turn into cash flow.
into a strategic crisis and a growing
scandal concerning the figures it no evidence of complicity in the cer and more attempts to restruc-
had reported to investors. By the fraud by senior corporate officers, ture the company2.
end of 1994, the US Securities & the debacle severely tested The lessons of the Bausch & Lomb
Exchange Commission (SEC) had investor faith in Bausch & Lomb’s case seem pertinent again in 2002,
begun a formal investigation into corporate culture and internal as the receding economic tide
the company’s accounting prac- controls. reveals how easy it is for companies
tices. It also marred the record of to focus on the form of their finan-
The investigators were to con- Bausch & Lomb’s long-term chair- cial reporting, rather than the eco-
clude that, during 1993, executives man and chief executive officer, nomic substance of their activities.
at two of the company's main divi-
The story
‘
sions artificially boosted the com- The debacle severely tested
pany’s reported earnings by At the time of its accounting scan-
wrongly recognising dubious rev- investor faith in Bausch & dal, Bausch & Lomb was one of the
enue from the sale of contact Lomb’s corporate culture and longest established companies in
lenses, and by inventing fictitious the US. It was proud of a heritage
sales of Ray-Ban and other internal controls’ that began as early as 1853, when
branded sunglasses. John Bausch, a German immigrant,
The SEC finding, published in Daniel Gill, who retired in late 1995 set up an optical goods shop in
19971, described a series of bad as shareholders grew increasingly Rochester, NY – a city that remains
practices at the divisions. It con- restive about the SEC investigations the headquarters of the modern
cluded that Bausch & Lomb had and the company’s poor 1994–95 company.
made materially false and mislead- results. The value of the company’s Through the 20th century the
ing financial statements in 1993–94 shares sank by about a third in that business made many fundamental
that led to an overstatement of period. innovations in optical technology.
revenue by $42.3 million and net Bausch & Lomb survived, but the It claims to have produced the
income by at least $17.6 million or scandal alerted investors to the first optical quality glass made in
11 per cent. major strategic problems that the the US, and to have made the
Well before those findings were company faced. Over the past lenses that took the first satellite pic-
published, the accounting scandal seven years, the company has tures of the moon. Early in the 20th
had obliged Bausch & Lomb to struggled to identify a successful century it developed some of the
issue an earnings retraction, and long-term strategy – a struggle that earliest effective sunglasses, and
had led to the departure of execu- entered another phase in late 2001 from the early 1970s it brought to
tives at the problem divisions. and early 2002 with the announce- market some of the first soft con-
Although SEC investigators found ment of a new chief executive offi- tact lenses.
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From the early 1980s, a more was designed to allow the in-house
driven style of management at direct sales force to shift its atten- Timeline of events
Bausch & Lomb under new CEO Gill tion to the product of the future:
began to turn that technical disposable contact lenses. But, cru- Early 1990s: The contact lens
expertise into fast business growth. cially, the strategy also concen- division (CLD) of Bausch & Lomb
This growth was substantially led by trated SVS sales efforts within a sales faces strategic business risks as its
contact lens and lens care prod- channel that could sign up to large market share crumbles in the
ucts, and by international sales of inventories of contact lenses. face of soft disposable contact
key brands such as the classic Ray- During the second half of 1993, lenses.
Ban sunglasses. But these star per- the senior executives of the con- September 1993: CLD concludes
formers also lay at the heart of the tact lens division achieved their a price-cutting sales promotion
company’s developing problems in September quarterly sales target by that, though successful, leaves
the early 1990s. discounting the SVS product and the division badly placed to
The contact lens division’s sales thus selling large amounts to key meet sales targets in the next
were dominated by a type of soft distributors. This made the task of quarter.
contact lens known as SVS, meeting the December target December 1993: CLD plans an
designed to be worn for around six even more difficult. aggressive sales & marketing
months. However, since the mid- The SEC enquiry later found that, programme that will lead it to
1980s, this kind of contact lens had to achieve the December target, oversupply third-party distributors.
been inexorably losing market the contact lens division devised a Mid-December 1993: Last minute
share to disposable contact lenses. sales & marketing programme that, attempts to secure distributor
Bausch & Lomb had entered the in effect, allocated vast numbers of sign-up to the sales programme
market for disposable lenses late contact lenses to third-party distrib- lead to fatal adjustments in the
because it had not wanted to can- utors3. There was little demand agreements with distributors.
nibalise existing product lines. As a among the distributors for this Divisional CLD managers begin
result, the contact lens division inventory, but they were keen to to break – rather than bend –
found itself playing catch-up in this retain their status as ‘authorised dis- Securities & Exchange
developing market sector with tributors’ of Bausch & Lomb prod- Commission and accounting
some powerful rivals, notably ucts. They were also assured that rules on revenue recognition.
Johnson & Johnson. sales that in the past had been End-December 1993: Senior
During 1993, it became appar- channelled to the direct sales team managers in the CLD include in
ent that the division was going to would now be pushed towards the their last-quarter 1993 results
have difficulty maintaining its third-party distributors (this later some goods that have been
record of constantly increasing turned out not to happen to any shipped just after the end of the
sales and meeting the aggressive useful degree). financial year. But they achieve
targets it had agreed with corpo- A few distributors refused to all-important sales targets.
rate headquarters. Even more than accept the terms of the sales pro- Summer 1994: Third-party
in most companies, Bausch & gramme, under which distributors distributors begin to advise CLD
Lomb divisional executives knew were given Bausch & Lomb credit that they cannot sell much of the
that they would be judged in terms lines for their inventory but were oversupply from late 1993 and
of whether they made those num- obliged to pay the money back early 1994.
bers. through 1994, mainly in a large 1 June 1994: Bausch & Lomb
The contact lens division decided ‘balloon’ payment in the month of warns analysts it might have
that it might best be able to meet June. difficulty meeting targets. Its share
its targets if it concentrated all the The majority agreed to the price falls from around $49 in
sales of old-style SVS soft contact programme but demanded con- June to $33 by the end of 1994.
lenses in the hands of its established cessions from executives at various continued overleaf
third-party distributors. This strategy levels within the contact lens divi-
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through its reporting failures, let rate reputation. Despite significant ways. The company faced signifi-
down shareholders and broken management efforts in the later cant strategic challenges even
federal securities laws. 1990s to restructure the company – before the scandal broke as mar-
Gill, CEO for more than 13 largely including selling off the sunglasses gins in its key business lines nar-
successful years, found himself hav- division in 1999 – Bausch & Lomb rowed.
ing to explain to shareholders a never recovered its earlier consis- There is little doubt, however, that
drop in profits in 1994 that contin- tent levels of growth. In early 2002 it Bausch & Lomb’s misreporting of
ued into 1995. Despite a recovery
plan that involved top executive
‘
It is difficult to be sure whether the
pay freezes and ideas for a major
restructuring, he decided to retire 1993–4 accounting scandal, certainly
at the end of 1995 after a series of
disastrous in the short term, has also
difficult shareholder meetings.
An internal enquiry subsequently played a critical part in Bausch & Lomb’s
cleared Gill and other top corpo-
long drift sideways’
rate executives of involvement in
the frauds, as did the later SEC find-
ings, published in November 1997. released details of its latest pro- revenues precipitated a crisis in
But the SEC findings criticised gramme of restructuring, to include investor confidence that ham-
Bausch & Lomb’s performance as a the loss of 700 jobs5. pered early efforts of its manage-
company, saying: “Bausch & Lomb It is difficult to be sure whether ment to develop a new approach.
violated the anti-fraud, reporting the 1993–4 accounting scandal, I
and record keeping, and internal certainly disastrous in the short This case history was contributed
controls provisions of the Exchange term, has also played a critical part by Rob Jameson, reference
Act.” in Bausch & Lomb’s long drift side- editor, ERisk
It also found against three senior
executives in the contact lens divi-
Notes
sion at the time of the flawed
December programme. (Bausch &
Lomb, and the senior divisional 1 For the SEC findings, on which this case study substantially relies, see the cease and desist
executives named in the order, set- order published as part of SEC Release no. 39329 on November 17, 1997. Bausch & Lomb
tled with the SEC without admitting and the senior divisional executives named in the order settled with the SEC without
or denying any wrongdoing.) admitting or denying any wrongdoing.
Commentators were quick to 2 In autumn 2001, the company appointed Ronald Zarrella as its new CEO. It was a move
point out that while senior corpo- that provoked some comment, as Zarrella had been chief operating officer at Bausch &
rate officers at Bausch & Lomb had Lomb in the period immediately before Bausch & Lomb’s accounting scandal broke in
been putting pressure on divisions autumn 1994. However, as we explain in the main text, the internal and SEC investigations
to meet aggressive targets, they cleared senior corporate executives of knowledge of the malpractice at divisional level
had not balanced this with internal that caused the company to misstate its revenues. Zarrella spent the intervening period as
controls sufficient to prevent mal- a prominent head of General Motors’ North America division.
practice. 3 In the words of SEC investigators, the division “told its distributors…to purchase an
As a result of its failings, Bausch & unprecedented amount of traditional SVS inventory less than two weeks before the end of
Lomb was subject to various penal- its fiscal year”.
ties, including the embarrassment 4 For example, “Blind Ambition”, a sensational cover story in the 23 October 1995 edition of
of the SEC enquiry and findings; Business Week. The full edition for that week contains additional reporting.
earnings retractions; share price 5 Bausch & Lomb press release, January 4, 2002, “Restructuring to Cut Approximately 700
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