Best Practices: Making the Hard Decisions

When the term “best practices” is used in a business ethics context, the case involving Johnson & Johnson and Tylenol always comes up. We will briefly review the case for those not familiar with it. Recently we met with Ralph Larsen, the chairman and CEO of Johnson & Johnson from 1989 to 2002. He shared some of the internal thinking that makes this case so important. This is a best practice of dealing with a product crisis in a socially responsible way. But since such crises can never be anticipated, the real best practice is a solid commitment to do what is right regardless of the cost, and a decision-making process that supports this.

Review of the Case

On September 29, 1982, a 12-year-old girl from the Chicago area died after taking an Extra Strength Tylenol capsule. By October 1, 1982, six more people from the Chicago area had died after taking Tylenol. After discovering the link to Tylenol in all cases, the Chicago area police broadcast warnings about taking the product.

Johnson & Johnson responded to the news by distributing warnings to hospitals and distributors, while halting production and advertising. On October 5, 1982, Johnson & Johnson issued a nationwide recall of Tylenol products, pulling 31 million bottles of Tylenol with a retail value of over $100 million from the shelves. They also advertised in the national media, urging people not to take Tylenol. When it was discovered soon after that the problem came from tampering in a particular store, rather than from production, they offered to exchange newly packaged Tylenol products for any Tylenol that had already been purchased by the public.

They also posted a $100,000 reward for the arrest and conviction of the killer, but no conviction has ever been made.

The response to Johnson & Johnson actions was highly praised at the time, leading to rapid financial recovery. According to Wikipedia, “While at the time of the scare the market share of Tylenol collapsed from 35 percent to 8 percent, it rebounded in less than a year, a move credited to J&J’s prompt and aggressive reaction. In November it reintroduced capsules, but in a new, triple-sealed package, coupled with heavy price promotions, and within several years Tylenol had become the most popular over-the-counter analgesic in the U.S.”

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While this much of the case is well known, and can be found in many versions on the Internet, what is less well known is the motivations behind the Johnson & Johnson deliberations, and the expectations they had at the time for the outcome of the case.

Ethix: What was the reaction when the case came to light?

Ralph S. Larsen: While I had left the company for a couple of years, and came back after 1982, I knew all the key players and am very familiar with the discussion around the case. It was an extraordinary event. Nothing like that had ever happened before, so there were no guidelines to follow. No one had anticipated this in their wildest dreams.

We didn’t know if the problem was in manufacturing, caused by a disgruntled employee, in a warehouse, in the distribution channel, or in the stores? Within a matter of days there were separate deaths. So immediately we recalled the capsules throughout the Chicago area, and later did it nationwide.

Was there any dissension about this decision?

There was a group of six or seven senior level decision makers involved in the deliberation, including the CEO Jim Burke. The style of decision making at J&J is one of engagement and participation. Sometimes people would take a position on an issue simply to air the issue, to make sure that everything was considered. Jim Burke made the decision at the end of the day that they would recall Tylenol nationally. But to show how open the process was, Mike Wallace from 60 Minutes was invited in to watch the proceedings with Jim Burke and his top staff, and to film them. People soon forgot the cameras were there, and you would be amazed at the candidness of the conversation.

Did anyone ask the question about what this decision might mean for the shareholders?

No one ever asked what the cost would be. It was not in the decision-making process. Whatever the cost would be, that’s what it would be. No one sat down and said, if we recall it from six states it will be this much, eight states it will cost this much, etc. People’s lives were at stake. And at the end of the discussion, Jim Burke simply said, “I want every bottle off the shelf.”

In light of the result, where the brand came back very quickly, did anyone consider that this decision might be the best result for the brand?

The common wisdom in the room was that this was the end of the product. No one strategized whether this would be the best for the brand. If Jim were here, he would say, “At every point in the decision-making process, the only question we asked ourselves was what is in the public interest? And if the public interest was to recall everything, that would be the decision.”

Starting in the 1990s, there was a big push on “maximizing shareholder value” across corporations in the U.S. and then around the world. Would the decision at Johnson & Johnson look the same today if the case had arisen more recently?

Yes it would. We had a very simple credo. Our first responsibility is to our customers, including doctors and nurses, and all the people who use our products. Our second responsibility is to our employees, including paying fair wages and doing what is right by them. Our third responsibility is to be good corporate citizens. Our last responsibility is to the shareholder. But if you do well by the first three, the shareholders do very well. Everything we did was for the benefit of the shareholder but it is the 100-year view of the company. When it came to the quality or safety of the products, no one ever tried to put a dollar figure on it.

What we did after this case, and it continues to this day, was to reinvigorate our credo challenge program. We bring executives together to argue whether the credo still makes sense, and whether we are fulfilling the responsibilities of the credo. And is it still relevant today. We bring 20 or 30 executives into a room for (several days) to discuss the principles in many different situations. One reason for doing this is to make sure everyone understands each word of the credo and its implications. The second reason is to re-infuse each element of the credo. We have more than 115,000 people in our company from all around the world, and when people are in a different culture and far away from headquarters, you could easily think this is nonsense, words on a paper in the office but not meaningful day to day.

The easiest way to get fired at J&J is to violate the credo, or to be known as someone who doesn’t take the credo seriously.

In credo discussions, we didn’t focus exclusively on this case because we didn’t want to build our company around a catastrophe. But we extracted lessons from the case and they have become part of the training of the whole company. During my tenure we added the guidelines

Tell the truth • Tell it all • Tell it fast.

This is a large company, so there are issues all the time with governments, and communities of the world. You can’t have a large company and not have issues to deal with. But as we have all learned, it is not the initial incident or problem that is so bad, but the cover up. We learned to be very forthright.

Are there other good companies?

There are lots of good companies whose management and people are as honest as the day is long. They care about their customers and their employees. Given a decision tree, they do what is right as best as they can figure out. And if it is not right, they put it right. And in the end, this is simply very good business.

Our Credo

We believe our first responsibility is to the doctors, nurses, and patients,
to mothers and fathers and all others who use our products and services.
In meeting their needs, everything we do must be of high quality.
We must constantly strive to reduce our costs
in order to maintain reasonable prices.
Customers’ orders must be serviced promptly and accurately.
Our suppliers and distributors must have an opportunity
to make a fair profit.
We are responsible to our employees,
the men and women who work with us throughout the world.
Everyone must be considered as an individual.
We must respect their dignity and recognize their merit.
They must have a sense of security in their jobs.
Compensation must be fair and adequate,
and working conditions clean, orderly and safe.
We must be mindful of ways to help our employees fulfill
their family responsibilities.
Employees must feel free to make suggestions and complaints.
There must be equal opportunity for employment, development
and advancement for those qualified.
We must provide competent management,
and their actions must be just and ethical.
We are responsible to the communities in which we live and work
and to the world community as well.
We must be good citizens – support good works and charities
and bear our fair share of taxes.
We must encourage civic improvements and better health and education.
We must maintain in good order
the property we are privileged to use,
protecting the environment and natural resources.
Our final responsibility is to our stockholders.
Business must make a sound profit.
We must experiment with new ideas.
Research must be carried on, innovative programs developed
and mistakes paid for.
New equipment must be purchased, new facilities provided
and new products launched.
Reserves must be created to provide for adverse times.
When we operate according to these principles,
the stockholders should realize a fair return.
Johnson & Johnson