Johnson & Johnson Stinks Up Its Reputation

Bulldog Reporter

The Public Relations Journal

February 1, 2010

In 1983, a year after the Tylenol tragedy in Chicago, I was in that city looking forward to hearing the keynote speaker at a communications seminar. His name escapes me but his task a year earlier is burned in my memory. He was a high ranking C-Suite executive from Johnson & Johnson who had led the team from

J&J sent to Chicago to deal with people dying from tainted Tylenol.

By then our discipline and the general public had made J&J's handling of the tragic incident Legend. He opened his remarks describing his feelings. He said he felt ill as his plane descended into O'Hare, as he had the first time he came to deal with the tainted Tylenol issue and every time since. And then he gave us an inside view of the sequence of events from the first report linking Tylenol to the unfolding tragedy. From the beginning management at J&J had acted to protect people. Help those harmed, prevent additional harm, and search for the source.

You’ll note that "Fault" is conspicuous by its absence. J&J did not hesitate to help those damaged, or to suffer massive losses by immediately recalling a product that ultimately was shown to be harmless. Nor did they stop there. When their products returned to the market it was in sophisticated packaging to protect against future efforts to tamper with them. Before the Chicago incident Tylenol enjoyed about a third of the market, more than double its nearest rival. Even though Tylenol was then, as it is now, just a J&J brand name for acetaminophen, a compound with no patent protection, none of its competitors were able to take over its dominant share of market.

A year later when I was reliving the horror story through the eyes of this frontline player, J&J had already been rewarded for its response by a rebound in market share. They were soon back to a third or better of the market; a position now at serious risk. They are facing charges of using kickbacks to a nursing home Pharma provider to push their Alzheimer's drug to unsuspecting old folks. And, of dodging possible contamination reports for nearly two years before issuing the recall of foul smelling products across several J&J lines.

A company as trusted as J&J may come away not much harmed. They may retain their massive market share or most of it. But what if the latter should prove to be the case? How much over the next few years would the loss of a point, or two,, or three,,, cost J&J? And how vulnerable are they now to the slightest misstep?

It's important for them to find out what's causing the foul odor, both in their products and in their marketing practices. However, it is much more important to find out who in their midst is responsible for exposing their reputation to these potentially catastrophic issues. In both cases they need to remember their first duty is to serve and protect the public. Then they need to rid themselves of those who twisted the J&J culture and caused the stink before it permeates the entire organization.

Comes the Revolution

IR Alert
The Journal of Investor Relations

January 21, 2010


CEO Compensation will be in our shareholders' crosshairs this year

Anyone in our discipline who believes that public outrage will end at financial sector bonuses is whistling through the graveyard. Executive compensation will be the next target and our shareholders will hit us hard. Anytime the gap between those at the top of our economic food chain and those further down grows too wide, folks rebel.

Teddy Roosevelt became perhaps the most successful occupant of the White House in the twentieth century riding such a rebellion. The former Rough Rider rode roughshod over arguably the most powerful businessmen in our history.

A trustbuster president and master politician led the first revolution during the last century. Growing in the background even as Teddy spoke softly and carried a big stick was the American Federation of Labor. Labor pioneer Samuel Gompers gathered a group of disparate trade unions together under one banner. His dream laid the foundation for John L. Lewis to leverage his position as head of the Coal Miner's UMWA into the head of the AFL-CIO and a partnership with another Roosevelt, Franklin D. This revolution carried up to World War II and created a major portion of middleclass America during the last half of the twentieth century.

That same time span, however, saw the roots of another revolution-inspiring trend: ballooning salaries at the top of America's corporate structure. At the end of World War II, these executives earned salaries that allowed room for fair compensation to the middle management and those below. In the ensuing decades, however, executive pay scales have grown way out of proportion to those at the other end of the scale.

Depending on whose figures you use, just the last thirty years have seen a huge disparity emerging. In the early 1980s, CEOs were earning about forty times as much as their average hourly employee. Today they are earning ten to twenty times that much; five hundred times as much is common and a thousand times as much is not unheard of.

Not only that, they are paying a smaller percentage of their income in taxes than those at the bottom of the scale. Who says so? Warren Buffett, who issued this challenge in a 2007 interview on NBC television: "I'll bet a million dollars against any member of the Forbes 400 who challenges me that the average (federal tax rate including income and payroll taxes) for the Forbes 400 will be less than the average of their receptionists." So far he has had no takers, because he's right.

What does that mean for us? It means that not just the folks on the street are fed up with executive compensation. The shareholders we face day to day are increasingly going to raise this issue, and what we're hearing this week tied to banking bonuses is just the tip of the iceberg. We need to be ready, and we need to know the numbers, be it for our CEO or the CEOs of our clients. We need to know the ratio of our top folks versus the hourly folks, and yes, we need to know the tax rate they pay and how it compares to those who greet our visitors (and our shareholders) when they walk up to the reception desk.

Then, as trusted advisors, we need to have a heart to heart with our CEOs.

Dear A.I.G., I Quit!

Poor Jake!

An A.I.G. EVP vented on the New York Times opinion page today (3.25.09). Jake DeSantis is quitting because he has been betrayed by the company that has paid him to make money for them trading “Commodities, Energy, (and) Derivatives” according to his public profile on the professional social media site, LinkedIn. Now A.I.G. (and most of the rest of us) expect him to give back the +/- million buck bonus he was paid earlier this month.

Jake says it’s unfair that A.I.G. is reneging on the deal they promised him. That the division where he labored 10-14 hours a day was not responsible for the “credit swaps” that sent A.I.G. reeling. That he had agreed to work for $1 a year on the belief that he would be rewarded for his effort with the big bonus in question. It was a deal, a “contract in writing,” and he should get to keep his money. So there!

Jake says, “I was raised by schoolteachers working multiple jobs in a world of closing steel mills. My hard work earned me acceptance to M.I.T., and the institute’s generous financial aid enabled me to attend. I had fulfilled my American dream.” Jake graduated from M.I.T. S.M., Materials Science in 1992. His thesis? "Chemical Vapor Deposition of Iridium and Rhodium from Organometallic Precursors conducted at the Los Alamos National Laboratory”, where he was an intern.

Bright guy, most of us can’t pronounce that stuff let alone understand what it is about. So where did this scientific genius head? To the Union Bank of Switzerland (UBS) where he worked in “Equity derivatives trading.” Isn’t that what’s being called “toxic” these days? After six years at UBS he moved to A.I.G.. Over the last eleven years Jake made a lot of money.

He says, “I know that because of hard work I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust. Some might argue that members of my profession have been overpaid, and I wouldn’t disagree.”

Hard work? Actually most would argue that commodity and derivative trading during the boom years that Jake has been at it, was a piece of cake. If -as he says- he and his fellows have been overpaid, why did it not occur to him earlier that the retention contracts he and others signed to hang in there and try to salvage the company that has made him rich were wrong? Is he saying that the sailors on a sinking ship should be given a contract assuring them of a big pay check before they agree to help to bail it out? Just because the hole in the bottom of the ship is in the bow doesn’t relieve those in the stern from the need to help save the ship.

That’s what it’s all about, Jake. If the American people -few of whom are as privileged as you- are going to throw billions of their hard earned dollars into saving your company, shouldn’t you be willing to work for a $1 a year and live off the fat of the land (all the money you made in the last eleven years) for a couple years to help save the company that has been so good to you? When little folks all over the country are being asked to give up part of their earnings, why are you whining all the way back to your luxury life?

Where is the moral compass that allows your vindictive plan to be sure that the company that put you where you are and/or the taxpayers who are trying to save the company do not get one cent of the bonus that you are giving up. Where would you be if A.I.G. had been allowed to fail? There would be no bonus. Nor would there be most of the other goodies that assure that you and yours will live comfortably for the rest of your lives.

You stepped off the ethical high ground when it even crossed your mind that you should be paid to do the right thing. Maybe you didn't lose any money for your company but you are a loser Jake!

The Thinker

Today my friend and colleague Chris Dunstan introduced me to Nick Bostrom. Professor Bostrom's thinking makes my hair ache. He functions at a level that I can only imagine. Yet he lays out his thoughts in verbiage that reads as easy as a summer breeze.

This fable that Chris shared with me is particularly resonant as I progress through the final year of my eighth decade. Enjoy:
http://www.nickbostrom.com/fable/dragon.html

If you are intrigued with his thinking try his website:
http://www.nickbostrom.com/

If you can advance his agenda, you might want to think about it.

The Wages Of Trust

In less than forty-eight hours two of the most breathtaking ethical breaches in memory popped up in the news. Last Wednesday evening (12/10/08) legendary Wall Streeter Bernard Madoff reportedly met with two of his key executives and told them his money-management business was “all just one big lie;” “basically, a giant Ponzi scheme.” The senior employees understood him to be saying that he had for years been paying returns to investors out of the cash received from other investors. In that conversation, Madoff said, “he was ‘finished,’ that he had ‘absolutely nothing.’ ”

The next morning he was arrested by federal agents accused of fraud, a multibillion-dollar scheme — $50 billion by Madoff’s own estimate. Wealthy people found themselves broke; charitable organizations, colleges and universities learned that their endowments were diminished or gone. No one knows how long this elegant con man had been bilking his clients. His firm had been in business almost fifty years.

Over the weekend another jaw dropping story emerged. A high flying lawyer, Marc Dreier, popped up in the news. Seems the wheels have been falling off his practice over the last couple months. Dreier set up his own firm a dozen years ago. He soon had several branch offices and was able to attract lawyers from the top of the talent pool with lavish financial deals. Flashy is the only way to describe the firm and its founder.

Dreier is said to have used his connections with clients to bilk outside investors by issuing phony promissory notes. Is that gutsy or what? To keep the scheme afloat he was paying interest on the notes, perhaps from cash coming in from new investors, another Ponzi scheme. One of his clients began to smell a rat after Dreier showed up with a group of people in their conference room for a meeting that nobody in the company knew about. The light dawned when the company’s CEO got a phone call asking about the firm’s promissory notes Dreier was offering. Fake notes as it turned out.

Earlier this month Dreier showed up in the offices of a public service pension fund, again with a group of potential investors. However, a savvy receptionist cut him off on his way to the conference room and called the cops. Dreier ended up in the slammer. Even then he was still squirming and managed to grab $10 million from a client’s escrow fund. Now it turns out that most of the firm’s escrow funds are empty.

Compared to Bernie Madoff’s huge $50 billion rip-off, Marc Dreier’s deals that add up to a few hundred million seem like peanuts. It’s not the size of their deals that lines these con men up beside each other, it’s the trust relationships they preyed on and betrayed. We are way beyond the ethics realm and into bizarre criminal behavior. However Madoff and Drier played on the vital ingredient of ethical behavior: “trust.” Do their actions damage the vast majority of us who strive for an ethical climate? You bet!

But honest folks should have no fear of these deals. There was good reason to doubt both Madoff and Dreier. In Madoff’s case it was the age old rule, “If it sounds too good to be true, it probably isn’t.” Many in the financial world were onto Madoff years ago and refused to buy into his deals for that very reason; the returns he promised were too good to be true.

In Dreier’s case it was the seller who was out of place. Lawyers have many important roles, but hawking financial instruments is not one of them. It’s pretty safe to say, “Never allow lawyers to be involved in business decisions, especially where money is involved.” They can advise if something is within the law, or suggest wording, but they are notoriously bad business people and just don’t have any business in business.

Am I blaming the victims of these con men? Yes! While those who were led into Madoff’s deals by financial pros may deserve a little slack, they still should have paid more attention to the deals. And anyone who buys a financial instrument from a lawyer should know that it may not be worth the paper it’s printed on.

Beware “Blind” trust.

Cognitive Dissidence

Impact Analysis is a by-monthly newsletter published by Manzella Trade Communications (www.ManzellaTrade.com). It is private labeled by a number of World Trade Centers and Chambers of Commerce in the United States. My ethical business model message was published in its November/December 2008 issue.

Guarding Our Most Valuable Asset

Nothing is as valuable as reputation. And yet we see corporate reputations squandered daily. In truth most companies and most people spend every day trying to do the right thing and protect their reputation. Very few set out to do anything less. So how does it happen?

In a variety of ways but mostly a little bit at a time. I call it the “Paper Clip Slip.” Anyone who hasn’t walked off with a company owned paper clip hasn’t ever worked with paper clips. The problem comes when it grows to a box of paper clips, or pencils, or something else.

The process we use to justify this petty larceny is called Cognitive Dissidence. It’s a very valuable human trait that we would be whimpering wrecks without. After we choose between the alternatives we need to move on. We all know people who agonize over every choice and are filled with doubts, sometimes for days. Cognitive Dissidence is the mental function that tells us we made the right choice and we become more convinced every hour that the other options would not have been as good.

The problem comes when we have too much of this trait. We begin to justify our actions no matter how outrageous. Actually, excessive Cognitive Dissidence is often admired in the C-Suite. A decisive executive can be a real asset to any organization. However, the same strong leader can steer the ship into treacherous waters sure that they are on course to success. And when things don’t look too good it is easy for them to justify actions that threaten the reputation of the company. When it goes sour they say, “I did what I had to do.”

Others come into corporate life with a distorted view of what you have to do. They believe that you have to do what it takes to win in a dog-eat-dog climate. Where do these people, some of them the best and brightest of our youngsters, get this idea? That’s easy! Good news is not news, so almost everything they see and hear in the media involves the baddies. And it’s not just the news media. Books, movies, TV shows, it’s all about the interesting nasty stuff, in business and in life.

Doing the right thing is not always easy. Sometimes it’s not even clear what the right thing is. We face hard choices everyday. What is clear is that an ethical business model is the best choice. The research shows that companies that put the best interest of their stakeholders first –their customers, their employees, their suppliers, their communities, the environment, and finally their shareholders and lenders– win in every way.

Why shareholders last? Because if you take care of the others, profits will take care of themselves. Do ethics driven businesses always win? Of course not. But if all things are equal these companies will do better every time, and they are a lot more fun to work for, and a lot more fun to run.

Original Thinking

My friend Brian Lee Crowley has one of the most brilliant minds on the planet. He consistently puts his finger on solutions, often those no one else even thinks of. Brian and Dori Segal have come up with and incredibly simple and powerful plan to help kick-start our economy.

This OPED has been sent to the 100 largest newspapers in the United States. Be sure the paper in your community has considered it. Send a copy to members of your Congressional Delegation.

These thoughts on solving the housing and other economic issues are as practical as they are original. That’s probably why no one will move on them, let’s hope I’m wrong.

Bill
---------------
Rebuild Housing
Through Immigration
By Dori Segal and Brian Lee Crowley
10/28/08

Desperate times call for innovative measures. Treasury Secretary Hank Paulson has already had to expand his focus from a flawed plan to buy toxic securities to one focused on taking equity stakes in financial institutions. Politicians in Washington would be well-advised to engage in a similar rethink about one of this election cycle’s whipping boys: immigration. Why? Because America’s attractiveness to the world’s best and brightest means we can put them to work solving the current crisis without vital companies falling into the hands of worrisome sovereign wealth funds or turning the US government into a major shareholder. All that is required in exchange is a chance to be part of the American dream.

America should immediately offer fast-track immigration to foreigners willing to do two things. First, they must buy a house in the United States worth a minimum of $200,000 or with a minimum area of 2000 square feet, paying cash up front. Second, they must place a further $250,000 in a government-insured account with a US financial institution or spend $250,000 to create a business in the US employing a minimum of three US citizens.

The need is immediate and urgent, so upfront entry requirements should be stripped to the bare minimum. In exchange for documented proof of health status, absence of a criminal record and the recommendation of a financial institution, major employer or government agency in their home country, they should automatically be granted a green card, good for three years, during which the US government would be able to do fuller due diligence on these prospective citizens and their documentation. Their green card should automatically become permanent if the authorities cannot prove terrorist connections or fraudulent claims in the entry documents.

During this time these newcomers would not be allowed to sell or mortgage their new home. The only grounds on which they would be allowed to withdraw money from their account would be if they failed to find a job, in which case they would be entitled to withdraw a maximum of $50,000 a year, ample to live comfortably when you don’t have a mortgage to pay. They would not be eligible for welfare and so could not fall on the public charge, guaranteeing that they are adding significant consumption to their local community at no cost to taxpayers.

Suppose that one million new immigrants (less than one third of one percent of the population) responded to this opportunity. Unlike most foreign investors, these are people who will be making the ultimate commitment to America, choosing to live there, bringing significant capital with them and ultimately becoming citizens. These one million new investors would put $200-billion into the housing market immediately, soaking up excess supply without drawing on the strained balance sheets of financial institutions.

The supply of unsold homes is now the equivalent of nearly a year’s demand, more than twice the normal level. Average prices are down around the $200,000 mark and still falling. A flood of people with ready money looking to buy at the $200,000 level would help the market to find its bottom and reverse the trend, while reducing the risk of defaults and non-performing assets on financial institution balance sheets. By allowing homes of 2000 square feet and more to qualify regardless of price, these immigrants would be especially attracted to areas where the housing collapse has been more severe, and where their investment would do the most to help the market turn the corner.

In the same vein, one million new immigrants placing $250,000 each into financial institutions would fill those institutions’ coffers to the tune of a further $250-billion — as much as the equity injection now being bruited in Washington, but without the risk associated with politicians’ being tempted to use their newfound ownership stake to mix politics with business. Those that chose instead to invest in their own business and employ Americans would both help to alleviate rising concern about unemployment and to improve the unfairly tarnished image of immigrants.

The target of one million such immigrants is not unreasonable. The draw of American opportunity is such that many families and communities would band together to amass the needed capital for one of their number as has so often happened in the past. Those who have the capital in hand would be a self-selecting group of high value immigrants bringing with them valuable skills and business acumen.

America’s strength has always been in its openness. That openness — to ideas, capital and above all people—has always been richly rewarded. Now the rest of the world offers America once again the opportunity to renew and refresh itself by drawing in a wave of dynamic and motivated new potential citizens who ask for nothing better than a chance to buy a share of the American dream.

Dori Segal, a dual Israeli-US citizen, is CEO of First Capital Realty in Toronto.
Brian Lee Crowley is President of AIMS, a public policy think tank.