CFO Studio Magazine with Dominic Caruso, CFO, Johnson & Johnson

Sustainability’s ROI 8 WWW.CFOSTUDIO.COM Q4 2016 J ohnson & Johnson has a long history of making investments that reduce energy consumption, reduce waste, and use sustainable practices. CFO Dominic Caruso says that by asking for “significant return on investment” from these initiatives worldwide for the past 10 years, the company is achieving nearly 15 percent ROI on average. One of the challenges in implementing programs in the pharmaceuticals industry is that regulators have to sign off. “They’re in your camp when you’re doing these kinds of things, but it takes a little longer. You can’t just switch a water source or change the way your gases are captured, because you might [affect] the manufacturing process and the product itself,” says Caruso. Carbon emissions and waste disposal are probably the biggest cost-saving opportunities in sustainability. The company has a goal to reduce carbon emissions by 20 percent by 2020 and by 50 percent by 2050. Progress is posted on its website and in annual reports. The responsibility to safeguard the commu- nities where J&J works is everyone’s. “It is part of Our Credo, and therefore part of everyone’s responsibility to ensure we are being good stewards of our environment,” he says. Certainly there are groups within procurement and supply chain that focus on sustainability, but it is also built into the way the company does business. One billion people in 60 countries use J&J’s products each day, so each employee is committed to being mindful of the global footprints being made. it is one of the only two U.S. corporations with a AAA S&P credit rating (beating even the U.S. government). On Fortune ’s list of the World’s Most Admired Companies, J&J is the top-ranking pharmaceutical company, and in June J&J topped the list of Barron ’s 100 most respected companies. But hitting numerical benchmarks, Caruso insists, is far from the company’s primary motivator. When asked how useful and valuable it is for the company to have a moral compass like the Credo, Caruso doesn’t hesitate with his answer. “What Our Credo does for us,” he says, “is to require us to always stop and think, reflect, not to be simply reactionary to current developments, but to be grounded in our decision-making.” Although the Credo cannot insulate the company from the realities that face leading global companies today — including litigation and regulatory challenges — it is an ethical platform and decision framework that the General, son of one of the founding brothers, felt would be needed when he took the company public. Embedding Principles “Our Credo has lots of constituencies: doctors, nurses, patients, employees, and our shareholders. Our shareholders are listed last, but it’s really just another of our responsibilities,” says Caruso, age 58. As CFO, he sees part of his job as helping the company grow through proper allocation of cash. Under his leadership, the company has articulated its disciplined capital allocation strategy. This begins by paying dividends to shareholders. Subsequently, he considers M&A opportunities, using about 30 percent of J&J’s free cash flow for value-creating acquisitions, and finally, share repurchases. Another component of his role is to maintain an ethical organization by developing leaders in the finance area who live and breathe the company’s values as he does. J&J’s Finance Leadership Development Program (FLDP) is well recognized as a “leader feeder,” providing exceptional training in a two-year rotational program that gives young hires the chance to work in multiple areas of the business in three eight-month assignments. The program has particular appeal to millennials, Caruso says, because it provides prompt, regular feedback, and with quick rotations, they are “not stuck in one place for a long period of time.” He says that J&J successfully recruits top graduates who might otherwise go to Wall Street or Silicon Valley by dint of its Credo and social responsibility activities. “[Millennials] appreciate when the organization they work for has a mission aligned with their values.” Although he was well beyond entry level when he joined J&J, Caruso himself benefited from the company’s focus on talent development. After graduating from Drexel University in 1980 with a B.S. in Finance, he went into public accounting at Peat Marwick Mitchell, now known as KPMG. In 1985, he joined Centocor, a startup now called Janssen Biotech. He became CFO of Centocor in 1992, then added the role of general manager of that company’s diagnostic division. In 1999, Centocor was acquired by J&J. That’s when his own J&J development story began; two years later he became VP of Finance of its Ortho- McNeil Pharmaceutical subsidiary; and in another two years he was tapped for a bigger job. “In the summer of 2003, I went to the office of our then CFO, Robert Darretta,” he remembers. “We were meeting to discuss succession planning as part of our normal talent-planning cycle.” It was a sunny June day, and the office was at the top of the World Headquarters Tower, with views over the Raritan River and the Rutgers University campus. Darretta started the meeting by reminding Caruso that “as part of our Finance leadership development priority, we are always looking for that key question we have about a leader’s ability to be successful.” Darretta wanted to know if Caruso’s success would be transferable outside of pharma, where he had spent most of his career. According to Caruso, Darretta said: “We’d like you to take a role in our medical devices business. It will teach us more about you and COVER STORY