Social and Economic Benefits. Can a Company do both?

Below is a video with Professor Patrick Murphy, Co-Director of the Institute for Ethical Behavior Worldwide, discussing the ethical decisions of the 1982 recall.

Stakeholder theory and shareholder theory have arisen as rival responses to the question of who properly constitutes a firm and therefore what obligations a company has. Ed Freeman believes that a firm is made up of many stakeholders and all must be considered when operating a business. “Capitalism works because entrepreneurs and managers put together and sustain deals or relationships among customers, suppliers, employees, financiers, and communities. The support of each group is vital to the success of the endeavor,” (Freeman, 2000, pg.176). In contrast, Milton Freidman feels that the company exists to maximize value for the shareholder and thus all activities should be geared to achieving this goal. “There is one and only one social responsibility in business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, (Friedman, 1970, pg. SM17). Based on these ethical approaches, a company will feel differently about the responsibilities it has as a business.

In a shareholder ethics approach, Milton Friedman would argue that any socially responsible action that takes away from maximizing profit is against the company’s duty as a business. However, in a stakeholder ethics approach, Ed Freeman believes that a company will obtain a greater benefit in the long run if it considers all groups involved with the business. Therefore, a company that follows a stakeholder approach has a duty to more than just its shareholders; it has a social responsibility as well. “The social responsibility of a business encompasses the economic, legal, ethical and discretionary expectations that society has of an organization at a given point in time,”(Carroll, 1979, pg.500). Therefore, corporate social responsibility widens “the scope of the firm’s obligations from economic and legal spheres to the social and ethical ones,” (Sison, 2009, pg. 244). The question then becomes, can a company be socially responsible and still be profitable in the long run? I argue that it can. To support this argument, I will examine Johnson & Johnson’s management of the 1982 Tylenol crisis. Johnson & Johnson provides a great example of a company who prided itself on its company credo, which instilled a stakeholder ethics approach. The company used its credo, business ethics and sociological imagination to guide its decisions throughout the crisis and prove stakeholder ethics can still produce a beneficial bottom line.

Johnson & Johnson was founded in 1886 and became a trusted company producing consumer products such as baby powder, lotions and shampoos, in addition to selling pharmaceuticals, (Johnson & Johnson 2012). By 1982 Johnson & Johnson was a $5.4-billion-a-year health giant who owned 149 companies in addition to McNeil Consumer Products, the maker of Tylenol. Sales for Johnson and Johnson were looking strong as the company’s earnings were up 16.7% in 1981 (Moore 1982). The company had been listed as one of the top 100 best places to work, and was adamant and proud of their company credo written in the 1940s. The credo prioritized the company’s responsibilities into four groups. The company’s first responsibility is to “the doctors, nurses and patients, to mothers and fathers and all who use our product and services,” (Johnson & Johnson 2012). Credo This recognition emphasized the duty the company felt for its customers. The company’s next responsibility was to the employees, then communities and finally to its stockholders. The company believed that when it “operates according to these principles, the stockholders should realize a fair return,” (Johnson & Johnson 2012). It was with this basic foundation that the company structured its core values and ran its business.

Tylenol had its beginning with McNeil in 1960 when the company carefully promoted Tylenol among doctors and pharmacists as an alternative pain reliever for people who had stomach problems and could not take Aspirin. In 1975, McNeil began strongly advertising the product to the public and by 1982 Tylenol had a 37% share of the $1-billion analgesic market. At this time, Tylenol was the largest single brand in the health and beauty category and found in the homes and offices of 100 million Americans (Deighton, 1996, pg.246). It was estimated the Tylenol contributed to 7% of Johnson and Johnson’s worldwide sales and 15% to 20% of the company’s profits the previous year (Moore 1982). The future looked strong for Tylenol and Johnson & Johnson, but then tragedy struck.

On the morning of September 30, 1982 Johnson & Johnson learned from reporters that on the previous day, a 12-year-old girl in Elk Grove Village, Illinois, took a Tylenol Extra Strength capsule laced with cyanide and died suddenly. Six more deaths followed in the Chicago area due to the laced capsules (Moore 1982). Johnson & Johnson was stunned by the information, as it was unsure how the capsules could have been laced with cyanide. The company decided to handle the crisis in three steps. The first step was to identify the problem and contain the issue by being open and honest with the public. The next step was to recall the product, no matter what it meant to the company. Finally, the company asked for the publics’ trust by reintroducing the product with new safety modifications. In the following paragraphs, I shall explain these decisions and steps in more detail as I argue how the company’s stakeholder approach and corporate responsibility guided the decisions that saved the company and the product.

The first step in handling the crisis was to identify the issue and make the public aware of what was going on. Johnson & Johnson used sociological imagination as it placed its own troubles in the context of the larger society (Mills 1959). The company understood this was a public issue and the company had a duty to respond. Immediately after learning of the crisis, Johnson& Johnson’s CEO James Burke set up a meeting with other top executives including Lawrence Foster, head of public relations; Joseph Chiesa, president of McNeil Consumer Products; and David Collins, chairman of McNeil (Moore 1982). With the help of Burke, Collins set up a 7-member crisis team whose first task was to find out what issue they were actually facing, and then determine how to go about correcting it. The team handled communications and all strategies as it aided the police and FBI in finding the responsible party. Following the company credo and stakeholder ethics approach, Johnson & Johnson recognized its key stakeholder at this time was the public and it had an obligation to notify them. The group identified its key publics as the consumers, medical profession, employees, other internal groups, and the FDA. The team notified all the publics and kept in close touch throughout the crisis. Johnson & Johnson opened its doors to the media, as it needed them to relay as much information to the public as possible. The company recognized its duty to its stakeholders and kept an honest and open stream of communication.

One example of the company’s honesty and transparency occurred in the first day of the crisis, as the company was trying to discover if the poisoning could have come from one of its manufacturing plants. The company first came out with a report that the plant did not use cyanide on the premise, however they soon learned that cyanide was used in the quality assurance facility next to the manufacturing plant to test purity of raw materials (Moore 1982). The company quickly released the new information and was honest about the mistake. Due to the company’s honesty, the reports that came out were not blown out of proportion, but rather just reiterated what the company revealed. Over the course of the crisis, the media was very kind to Johnson & Johnson and kept them in a positive light. The company’s honesty and integrity, and clear responsibility to its consumers paid off as the media became an aid to the company in alerting the public and keeping Johnson & Johnson’s reputable name. I strongly believe this was due to the company’s belief in social responsibility and its duty to provide for all stakeholders. The company’s main concern in the early developing of the crisis was to alert its customers and keep the community and country safe. It was not focusing on its own profits or actual role in the poisoning, but rather on its social responsibility to the country and stakeholders.

The next step in Johnson & Johnson’s positive management of the Tylenol crisis was the decision to recall its products regardless of the cost to the company. In the week following the seven deaths, Burke worked to continue the company’s good relationships with the police and health authorities investigating the crime. Once the FDA and FBI discovered that the contaminated capsules had come from two different plants, one in Texas and one in Pennsylvania, they were able to rule out the possibility the poisoning could have occurred inside the company (Moore 1982). The next question was whether a total recall of the product should occur. Burke and Johnson & Johnson were actually the first party to advocate for a recall, but it took a copycat poisoning in California on October 5^th to convince the FBI and FDA that a recall was in order. It was at this point that a recall of all Tylenol capsules occurred. This included 31 million bottles of Tylenol with a retail value of over $100 million. (Moore 1982). While, Johnson& Johnson was not responsible for the poisoning, the company remained adamant about its social responsibility and duty to all stakeholders. I believe Ed Freeman would have supported this decision, as the consumers and public were the top priority at this time and if the situation was handled correctly profits would come later. Due to the company’s ethics and values, the company felt financial losses were justified in the short-run in order to fulfill the company’s responsibility to consumers and its commitment to social responsibility.

The final step for Johnson & Johnson was restoring Tylenol and gaining back the public’s trust and loyalty for the product. This decision to bring back Tylenol was only possible because of the responsible steps taken by the company. However, before reintroducing Tylenol, the company understood it would have to address the safety concerns of the product and understand the impacts the poisoning had on consumers. Johnson & Johnson hired an advertising agency to begin polling consumer attitudes. The polls revealed that “frequent Tylenol users seem much more inclined to go back to the product than the infrequent user,” (Moore 1982). With this information, the company focused on bringing back their loyal customers.

The company’s first step in reintroducing the product was rallying the support from within the company. The company reached out to its employees and promised the product was coming back. During the crisis and recall, the employees working on Tylenol were given other temporary jobs and kept up to date with videotaped reports of activities. This strategy made the employers feel important and kept them loyal to the company. As a result, the group was one of the biggest promoters of the Tylenol comeback. The company’s considerations for the employees follow closely with the company credo and stakeholder approach. Next, the company sent information packages to major distributors who notified half a million retailers and medical professionals. The company also came out with a 60 second television commercial featuring the medical director of McNeil notifying consumers of the upcoming return. This commercial reached 85% of US television households (Deighton, 1996, pg.249). The new triple-seal safety package was announced in November at a conference and was transmitted across the country. On November 28 the company also launched the largest program of couponing in commercial history. Within one week 80 million coupons for $2.50 off any Tylenol product were issued to the public. Ten weeks after the withdrawal, tamper-proof, triple-sealed safety Tylenol containers were placed on the shelves of retailers (Deighton, 1996, pg.250-251).

Johnson & Johnson’s ethics and values were tested by the Tylenol crisis, however the company’s crisis management proved to reiterate the company credo and belief in social responsibility. The company was open and honest with its communication, proved its loyalty to its customers and community by recalling the product, and reinstated the product with safety alterations that were later adopted by almost all other manufacturers. The company followed a stakeholder ethics approach and believed that while this may harm their financials and stocks in the short-run, it would ultimately benefit the company. The recall cost the company more than “$100 million before taxes and dropped its third quarter earnings from 78 cents a share in 1981 to 51 cents in 1982,” (Moore 1982). The company’s market value fell by $1 billion as a result. However in just four months after the first report of poisonings, “Tylenol’s share of analgesic market revenues was 35%, 2 share points below precrisis levels,” (Deighton, 1996, pg.252). (See Appendix B). The company was then able to regain complete market share within the year. Sales of the capsule form were at 85%, and tablets at 105% of previous levels, (Deighton, 1996, pg.252). While the decisions initially hurt shareholders, the response and long-term impacts have been positive. A shareholder who “invested $1,000 in Johnson & Johnson shares on September 28, 1982, just before the Tylenol crisis, would have $22,062 in 2002, after four stock splits (Rehak 2002). This further justifies the company’s belief in its credo, as it was able to provide a fair return for shareholders by practicing a stakeholder ethics approach. This decision also gave the company a positive image and formed loyal customers for the future growth of the company.

In a time of crisis, Johnson & Johnson stuck to its core values of stakeholder business ethics and belief in corporate social responsibility, in addition to proving this approach could still create a beneficial bottom line in the long run. The company showed sociological imagination as it placed itself in terms of the larger society and recognized its own troubles were social issues that needed to be addressed. By acting with sociological imagination, the company was able to increase the safety of the entire industry. It was the first company to introduce the safety triple-sealed container, and also set a standard for product recalls. The company’s actions had a great impact on society and the future of the industry. While no company is perfect and always subject to change, Johnson & Johnson responded to this crisis in a very socially responsible way and proved that both societal and economic benefits could occur from this approach.

Appendix

Appendix A: Johnson and Johnson Credo