Patients versus Profits at Johnson & Johnson: Has the Company Lost its Way? Published : February 15, 2012 in Knowledge@Wharton
For a corporate icon long held up as the gold standard in business ethics, Johnson & Johnson has suffered some stunning setbacks in recent years. Among the headaches: a seemingly endless string of product recalls, from Tylenol Arthritis Pain caplets to Benadryl to Rolaids; safety issues with the company's artificial hips, and lawsuits brought by numerous states over the marketing of its anti-psychotic medication Risperdal.
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And for a company that set the benchmark for crisis management in its response to the Tylenol tampering incident 30 years ago, J&J has looked sloppy and ineffective in its handling of these crises. While the company has not suffered a fatal hit to its brand, the stumbles have certainly tarnished its halo among consumers and created challenges for CEO William Weldon, who must convince consumers and investors alike that J&J's problems are behind it. The recent troubles are a major reversal of fortune for J&J. The company cemented its reputation for responsible management in 1982 when bottles of Tylenol were found to contain traces of cyanide, resulting in seven deaths. Then-CEO James Burke recalled millions of bottles of Tylenol and replaced them with new tamper-proof packaging. Burke's handling of the crisis put J&J's credo -- outlined in a mission statement that clearly says patients come before profits -- front and center. That credo, says Wharton professor of legal studies and business ethics Thomas Donaldson, is "in J&J's blood.... There is a real sense of what the credo means" for how the company operates. The recent setbacks at J&J, however, have caused many to question whether the firm has lost sight of that credo. The company's problems with plants in Fort Washington, Pa., Lancaster, Pa., and Puerto Rico -the sites of recalls of over-the-counter products like Benadryl and Children's Tylenol -- dragged on for years. In addition, an outside contractor for the company was found to have led a "phantom recall," sending employees to buy all the painkiller Motrin on store shelves after it was found to be dissolving improperly. Two hip devices were recalled in 2010 after the shredding of metal fragments led to post-surgical complications in some patients. And the company agreed to pay $158 million to the state of Texas to settle claims it improperly marked the anti-psychotic drug Risperdal to patients on Medicaid. Other suits surrounding the marketing of this drug are ongoing. Recalls of surgical sutures and contact lenses have been announced as well. It comes as no surprise, then, that J&J's stock has been a weak performer, gaining just 3% over the past two years while the S&P 500 is up more than 23% during that period. "It's been one blunder after another," says Michael Krensavage, founder of investment firm Krensavage Partners. "It's hard to explain." For some, the problems are evidence that J&J has lost its way. "I think the credo used to be quite real there," says Erik Gordon, a professor at the University of Michigan's Ross School of Business. "There was a time when people really believed in it and took great pride in it. But those days are long gone." Now, he says, "the major function of the credo is similar to mommy's skirt -- which you hid behind -- or like wrapping yourself in the American flag. It is to distract people from what is going on." A Tricky Balance Gordon argues that CEO Weldon's relentless focus on the bottom line -- the company's website touts its record of 27 consecutive years of...