From the outside, the 2017 upheaval that led to Mario and John Molina being ousted from the company their father founded seemed to happen in a matter of days, but it was actually years in the making.
The company was at a critical crossroads. Founded 40 years ago, Long Beach, California-based Molina Healthcare was plagued by underperformance and stagnant growth. Questionable acquisitions and an antiquated “friends and family” approach to talent decisions were preventing progress on a key issue: adapting to the newly enacted Affordable Care Act. Dale Wolf, whose experience in the healthcare industry included four years as CEO of Coventry Healthcare, had been dogged by Molina's decision-making since joining the board in 2013. So when the opportunity arose, he seized it to make a case for change.
“I ran a company in this industry and I knew the industry well, so I thought I had some credibility,” he said, “so my speech that day was explaining to the board why the actions of management were not consistent with the success of managed care.”
After follow-up conference calls and in-person meetings, within a week the board agreed to fire both executives, appoint an interim CEO, and appoint Wolf as non-executive chairman of the board. Seven years later, the result is clear: an enterprise value that has increased nearly tenfold, from approximately $2 billion in 2017 to more than $20 billion by 2023. In addition to creating significant value for shareholders, the growth has reshaped Molina Healthcare's market presence and positioned it for expansion.
CBM recently spoke with Wolf about the board's decision and Molina's transformation journey. Excerpts from the conversation have been edited for length and clarity.
Can you talk a little bit about the circumstances that led to the leadership change at Molina Healthcare in 2017?
The main issue was that the company's performance had been continually underperforming and the board felt the need to take action.
Shortly after I joined the board, the ACA was passed. During that time, the company's revenues increased significantly, but profits stagnated. When we looked at our revenue profile, we were lagging far behind our competitors and we weren't meeting our targets. We had poor financial management. This was the business problem that led the board to conclude that change was necessary.
What were the conversations like about removing the founding family from management? Was there any pushback from those who were loyal to the management team?
It was an interesting board meeting. There was only one item on the agenda. There were some people on the board who Mario handpicked to be on the board, and it was hard for them because they had known Mario for a long time. But cool heads prevailed and we got there. It wasn't easy, but it wasn't as hard as you might think because we spent a lot of time talking about the issue. We didn't act until everyone was in complete agreement. So at that point the board itself, regardless of our previous relationship, was ready to embrace change and accepted me as Chairman.
I'm not saying we wouldn't have done it if it hadn't been unanimous, but it would have been much better if it had been unanimous. So we worked really hard until we got unanimity, and once we got there, nobody looked back. Everyone was on board. And the rest is history.
How did the company's shareholders, employees and customers react, and what level of involvement was required after the decision was made?
It surprised everybody, because what we did was no small feat. In this business, your customers are state Medicaid agencies, so they're a different kind of customer. I've never spoken to anyone like that. In a way, they don't care about what's going on at the corporate level. They care about their employees and their specific contracts with the state.
Shareholders were thrilled. The stock price reacted very positively on the day of the announcement and continued to do well thereafter. Shareholders had the belief that the company had the assets and the opportunity, but was underperforming. So they assumed that someone else could do it, and they were right.
During the interim CEO's tenure, I met with our largest shareholder to discuss why we were making this decision, what we wanted from a new CEO, and why Molina is a great company. They had no concerns about the change. All they wanted to know was who was going to run the business and how we thought it would be successful.
At the time, there were some activists spying on us, and I spoke to a couple of them a few times.
What were they looking for and how did you handle that conversation?
You know, activists are trying to get you sold and make a quick buck. So the discussion was very similar to the discussions I had with major shareholders about why this was a good business and what kind of person to find for the CEO role. I remember saying, “This is a great job. We're not going to have a hard time finding the right person for this job.”
I told them the truth, as I would tell anyone: the company was poorly run. We needed change. We took action. We looked for opportunities to bring our revenue and profit margins in line with the rest of the industry. And we said, “Watch us.”
The change in leadership was sudden, but you were able to bring in a new CEO fairly quickly. How did you go about finding a successor?
You can't go as fast as you want to, but you have to get it done. We hired a search firm that we've used before. They did a good job for us. I thought that was normal for a sudden CEO search. We fired the team in May and brought in a new guy, Joe Zubrecki, who had led Hannover Insurance, in November.
This is partially my own bias, but I knew we needed someone who really knew the business and what steps to take to make a managed care company successful. And of course, that person had to have the leadership qualities, build a team, communicate with investors, create the right culture, and be confident that they could do some of the things that we talked about. Joe fit all of those criteria.
What other strategic priorities did you make? What changes led to the transformation that followed?
One of the priorities was people. Only one executive survived from the old system to the new. He's still there. He's a great guy. Joe liked him right away. The rest of the team was completely restructured. Family members left. Performance standards were put in place. The culture was completely changed.
The second is financial discipline. In this business, low cost wins. Joe and the team embodied that. Know your business, know your numbers, and give guidance that you can meet or exceed. That was the second piece.
The third, and it's related to that, is to have performance expectations. Today, we have the highest margins in the industry and we're growing as fast or faster than other companies. That was our goal and we've achieved it.
How did you achieve the highest profit margins in the industry and grow your company's valuation from $2 billion to $20 billion?
To be fair, we've grown. We've scaled. That's helped. But the other thing is, they're not wasting money. They're paying attention to expenses and keeping costs down. The other thing is, it's managed care fundamentals. You have to get your billing edits right. You have to negotiate with the state right. It's business fundamentals. So they're paying attention to the fundamentals, keeping costs down, and we've changed our culture and our people.
And leadership. Joe is a great executive. He knows the business inside out. He communicates well with the board. He's a great talent piper. And frankly, after he became chairman and got some background from us, we fired him.
Your industry experience has been valuable to Molina. How important is relevant industry experience in your role as a director and, if you have it, how do you deal with the temptation to overstep your remit?
That's a good question. Personally, I would never be able to be an executive at a technology company or a manufacturing company. Actually, maybe you could, but I don't think you'd add value there. So I think industry experience is very important. Not everybody has to have industry experience, but you do need some industry experience to be an executive.
Regarding your second question, one of the advantages for me is that I had a board of directors as a CEO. I understood the pressures that a CEO feels, and I understood how a board can be helpful or disruptive. Having chaired both, I know the appropriate role that a director or chair should play. I have seen some people fit that role well and vice versa. People who are very detail-oriented and operationally focused can sometimes cross the line. You have to rein that in so that it doesn't happen on the board. This is something that comes with experience.
What advice can you offer other directors and chairs in dealing with contentious developments and forming the consensus you were able to reach?
Number one, trust your instincts. I should have realized sooner that this was the right thing to do. All the signs were there. Replacing a family CEO or CFO at a public company is never an easy task, so I don't think anybody should take it lightly. But on the other hand, like every employee issue that I've ever dealt with, after it's over, you think, “Oh, I should have done this sooner.” So trust your instincts and act. Don't wait.
In consensus building, there's no substitute for talking to people and sharing your experiences, opinions, and concerns. That's how you build consensus. This situation was very specific, involving a founder and his family, so I don't think I've applied it much to other work I've done recently. But it really comes back to trusting your instincts. If it quacks like a duck and walks like a duck, it's probably a duck. So trust your instincts and go for it.
What do you think are the big issues facing boards right now and that they should be thinking about and planning for today?
Aside from the usual things like succession planning, strategy, incentive systems, hiring and firing executives, I would say don't get too caught up in the latest fad. I believe AI is very real and will transform business in many ways. But I'm happy to be on the fast track. That's the approach we're taking with AI. If you've been in the industry for any length of time, you've seen these fads come and go. DEI was a buzzword for a while. AI is now a buzzword. Enterprise risk management was a buzzword for a while.
There is a risk of being left behind if you don't join early, but it's not difficult to follow suit quickly, and I've always found that to be the safest and most successful approach.
