What started as a storefront pharmacy in Queens, New York, during the Great Depression is now a Fortune 300 provider of healthcare products and services with sales edging up on $13 billion this year. Henry Schein went public in November 1995 at a split-adjusted price of $8 per share; the stock recently hit $183. By any measure, the company has done well by its shareholders, yet it is not run solely for their benefit. At meetings with shareholders, CEO Stanley M. Bergman is explicit: “We say we do not exist for the investor. Instead, we say we are committed to making sure the business does just a little bit better each year. The consistency of our performance is reflected in our stock price.”
Born and educated in South Africa, Bergman immigrated to the U.S. in 1976 with his wife, Marion, and joined Henry Schein in 1980 after working as a consultant for BDO. At the time, Henry Schein was a closely held catalog business, yet it had a tightly knit patriarchal culture based on employee and customer loyalty. “Henry [Schein] would go on vacation to Florida,” recalls Bergman. “While there, he would see Smucker’s jelly and come back with a case for everyone in the company. For Thanksgiving, everyone got a turkey; at year-end everyone got a case of wine.”
In November 1989, Jay Schein, the founder’s son and at the time the chairman and CEO, died, and Bergman was tapped to run the company. Bergman had promised both Jay Schein and the Schein family he would continue to provide a great place to work and grow the business. Yet the company had two key challenges: The distribution business was not doing well, and there was virtually no management of expenses. Driven by a culture that cared about people, Henry Schein’s infrastructure was far too expensive. For every dollar it gave in salary, it paid out another $1.20 in benefits. Bergman and his team needed to transform the company into a profitable venture while simultaneously guarding the culture it prized.
“We gave birth to a culture today where the values are constant, but the culture adapts.”
A few years earlier, President Reagan had signed legislation that allowed the generic drug market to take off. As a result, Henry Schein’s generic drug business had skyrocketed, as had its dental supply business, including items such as masks and gloves, the use of which became mandatory in response to infection risks then said to be prevalent. Ultimately, the pharmaceutical business was sold to provide the Schein family with liquidity. However, the distribution business—then at break-even—had reached an inflection point. The company needed a cost structure that would support a profitable business.
The response from Bergman and his team was twofold. They decided to transform the company’s catalog business into a leading platform for dental technology and, later, veterinary products. Dentists and vets know their work, but not all are proficient in the business of running their practices. For example, at that time, dentists didn’t know what to do with computers, so Henry Schein educated them, creating the largest installed base of computing systems for the profession in the process. Over time, the company became the trusted partner in practice management solutions for dental and animal health practices.
Bergman also moved to “industrialize the culture,” his characterization of the shift to rationalize Henry Schein’s culture into one that cared about people but provided benefits in a way that the company could sustain with scale.
“We gave birth to a culture today where the values are constant, but the culture adapts,” he says. “We err on the side of higher benefits and probably a little bit less in compensation. People looking for long-term employment are generally comfortable with the benefits at Henry Schein. Those looking for something more short-term probably will
not last because our salaries are not the highest.”
The combination of early digitization and refining the company’s values-based corporate culture gave Henry Schein a secure platform for consistent growth. Its 10-year total annual average return to shareholders as of the end of 2016 was 14.83%. Its EPS CAGR over the same period is almost 12.5%.
Now, the biggest challenge Bergman faces is ensuring the culture adapts. The company has 21,000 people spread over 33 countries and serves one million customers through 3,000 suppliers. Its dental business accounts for 48% of revenue, followed by animal health at 28.7%, medical at 20%, and technology and value-added services at just under 4%. An average of 174,000 cartons are shipped daily through 62 distribution centers. The business is heavily regulated, and product recalls are often a problem to execute. It also has formidable competitors in companies such as McKesson, Amerisource Bergen and Patterson Cos., many of which have taken a page or two from the Henry Schein playbook. The business today has many more moving parts than when Bergman took control in 1989.
Chief Executive caught up with Bergman at the company’s headquarters in Melville, New York. Excerpts from that conversation follow.
Q: Ninety percent of what you sell is what others sell. Why are you double the size of your competition when everybody has access more or less to the same products?
A: The success of Henry Schein is largely dependent on our philosophy of balancing the needs of our constituents. On the one hand are our suppliers. We want those who work closely with us to be very successful. For example, we are the exclusive distributor in this and other countries for Colgate, one of the best brands in the world. They really know how to do marketing. In the dental space, they have an outstanding sales force. But we are their exclusive distributor in the dental space, not in the retail space. And they work with us because we help them. Of course, we carry P&G and all the rest, but we have a special relationship with Colgate based on a kinship of philosophy as it relates to the societal role of business. They are very philanthropic, as are we.
“if you only worry about the clinical care, you will not be around in a competitive market, and if you only care about making money, well, you’re not discharging your responsibility.”
In addition, there are our customers. Yes, we want to sell more product to them, but our goal is to help our customers succeed. Most of them are small to medium-size businesses. We want to help them operate a better business so that they can provide better clinical care. Because if you only worry about the clinical care, you will not be around in a competitive market, and if you only care about making money, well, you’re not discharging your responsibility. Our philosophy is based on the notion of what a good family financial advisor does: People don’t buy stocks anymore—yes, you can do that, but generally, families seek somebody who will help them manage their assets.
And then we have our field sales consultants, who are trained in SME management for each of the different specialties. So we have our suppliers and our customers, and bringing the two together is our Team Schein philosophy. This is what I mean when I say we “industrialized” our culture. Our third constituency is our investors. We’ve been clear with Wall Street from day one: We promise our investors we will do everything we can to provide them with a consistent rate of return. It’s not necessarily going to be the highest,
but we’re focused on consistency. And we promise to take our earnings and turn them into cash.
Q: You’ve said that your secret sauce is your company’s devotion to social responsibility. But almost every company has a social responsibility program. Do you feel that what you do directly helps the company enjoy bigger profit margins or higher returns?
A: Yes, absolutely. It’s not about issuing the check. Yes, we do that. It’s about engagement of the company in making a difference. You’ll find Henry Schein people in American Dental Association meetings. There’s somebody from Henry Schein in that building in Chicago working with dentists to advance the profession several times a week.
One of the most successful philanthropic community service programs in dentistry is a program called Give Kids a Smile. Until healthcare reform was passed you had to be very poor to get dental care, or you had to be one of the fortunate people who had dental insurance, or you had to have money. So we worked with the American Dental Association to found Give Kids a Smile, where we arrange for dentists to provide kids with free dental care at 2,000 sites around the country. We’re not providing the procedures, but we’re there bringing in supplies and sitting at the tables shoulder to shoulder with the dentists. I would submit to you that this put us in a completely different relationship with our customers than just writing a check would.
Now, you can’t say to people, ‘Part of your job is to do philanthropic work or social work.’ People need to want it. I believe people are at Schein because they see something special in our culture that encourages this. I mentioned our close relationship with Colgate. We get together with them based on shared philanthropic ideas. I met the CEO of Colgate sitting at the table of the dean of NYU dental school. NYU’s dental school graduates the largest number of dentists in the country. It does outreach with many clinics, and Schein and Colgate work with them. Working together with our constituents is not only a good thing, I believe our shareholders appreciate it. There are studies—one from Babson and one from Harvard—that show that companies with a purpose that are engaged in finding ways to make society a better place have higher rates of return.
A: It’s not easy. You have to make sure your management subscribes to the DNA. So how do we get management? Three ways: First, we grow from within—but we can’t keep up because we’ve grown faster than we’ve been able to grow from within. We have a philosophy of promoting from within. Several of our senior managers do not even have a university degree.
Second, we go outside to recruit, but that is not so easy. It’s not unheard of to have a dozen interviews to meet all of senior management. It may take as long as a year—something we get criticized for—but we want to be careful that we’re not hiring on technical merit alone. The test I like to give is, ‘Can that guy run a good summer camp? Will he get everybody to play well in the sandbox?’
Third, about 25% of our sales are in joint ventures where we own less than 100%, but more than 50%. We get talent that we couldn’t afford to hire, because they’re partnering with us in the way they would partner with private equity. [In turn], we provide an orderly
way for them to liquidate their positions. This allows us to gain enormous talent. Because it’s not possible for any one company to have all the expertise that one needs.
Q: What advice would you offer entrepreneurs who are trying to build up their closely held companies and establish a bigger market for themselves?
A: It’s all about people and results—but mostly about people. Perhaps in real estate it’s about finding the right location, but our business is a people business. Our lead director is Phil Laskawy from EY. I would submit to you that he brings more to our board than you can imagine, because we are closer to EY than to a product company. We’re a people business.
The question is, how do you get all these people to work together? And that’s what you focus on. Go get the best talent—make it the best that you can afford. Make an environment where people like to work and have everybody working together for the betterment of the customer. It sounds easy. It’s not easy. The execution is difficult.
NOTE: Stanley Bergman was honored as Chief Executive’s 2017 CEO of the Year on Tuesday, July 18, at an invitation-only dinner event at the New York Stock Exchange. In attendance was more than 100 of his CEO peers and business colleagues.