Bausch & Lomb's Distorted Vision

Tie the chief executive's compensation to company earnings, produce goods in high demand around the world, decentralize operations, and give the heads of business units tough quarterly growth targets to meet. That's the prescription for success in the tough new global economy, right?

Well, not always. BUSINESS WEEK's Cover Story on Bausch & Lomb Inc. illustrates how even the best business strategy can have unintended consequences when the corporate culture goes sour. A tenacious drive to meet the numbers combined with lax controls can derail even the best of companies.

For many years, shareholders certainly counted B&L as one of the very best. When Daniel E. Gill came to B&L in 1978, the maker of soft contact lenses, binoculars, and eyeglasses had revenues of $442 million. By 1993, under Gill's numbers-oriented, demanding leadership, B&L had sales of $1.87 billion and earnings from continuing operations of $193 million.

But something was rotten inside B&L. During Gill's reign, heads of operations pumped sales to a degree unseen in most other companies. Double-digit increases were demanded every quarter, every year, regardless of local economic conditions. That led, in many operations, to phony invoices, sending goods to gray markets in Asia and the Middle East, and questionable accounting for sales.

It all worked until mid-1994. B&L discovered it had a huge unsold inventory in Hong Kong. The head of Hong Kong operations took early retirement. In November, contact lens wearers brought a class action alleging that B&L had charged them different prices for the same lenses. In December, the Securities & Exchange Commission launched an investigation into whether or not B&L's contact lens division improperly inflated sales and profits in 1993. All in all, continuing earnings plunged 54% to $88.5 million in 1994, as sales fell.

Gill says that B&L's problems are due to overambitious and incompetent divisional executives. Interviews with dozens of current and former B&L executives around the world suggest a different truth: It's up to the CEO of any company to make sure that good results aren't achieved by unrealistic targets, accounting irregularities, and ethical lapses.