Despite a wave of negative press reports and a series of product recalls that reportedly cost the company upwards of $900 million,
J&J share price has not fallen off the deep end.
These days the pharmaceutical giant’s stock is selling at around $62 per share, approximately the same amount it was selling for at the beginning of 2010, and up from the $50 per share it was selling at in January 2009.
Rick Hansen, corporate governance counsel at Chevron, attributes J&J’s steady stock price, at least in part, to the fact that the company ‘has consistently demonstrated over the years its ability to communicate to the public.’ Other experts point to J&J’s prudent decision making.
Ken Bertsch, president of the Society of Corporate Secretaries and Governance Professionals, observes that J&J’s actions during another dark period – namely the Tylenol recall of the early 1980s – represent as good a job as any management team could have done under the circumstances.
Doug Chia, J&J’s corporate secretary, says his goal – and the goal of the rest of the board – is to keep the company on track despite what he describes as an ‘abnormal’ year. A suit filed by one J&J shareholder in September alleges the company acted improperly during a recall of Motrin products. In an incident that has since been deemed a ‘phantom recall’, a subsidiary unit of J&J hired contractors to buy defective Motrin, according to the US Food and Drug Administration.
There are also questions about whether the company misled investors prior to releasing statements about contaminated plants in Puerto Rico and Pennsylvania.
In December a group of shareholders reportedly filed a complaint calling for more vigilant corporate governance and criticizing J&J for ignoring several ‘red flags’. The complaint cites a lack of responsibility by the board to its shareholders. ‘It’s up to the company to execute and deliver on the promise that we made to people to get things back in order,’ says Chia. ‘We are fully committed to that.’
Having formerly joined Tyco in the wake of a series of legal and public relations woes that plagued the toy company’s board of directors, Chia is no stranger to corporate crisis.
He says the role of a corporate secretary often picks up pace during periods of recalled products and PR difficulties. With the constant transactions and business dealings a company as big as J&J faces, Chia is always deciding what needs attention, and how much, he says.
‘My first question is: is this something the board needs to know about? Is this something it is going to want to know about?’ he asks, emphasizing the importance of filtering information to the board while always keeping it abreast of vital developments.
Speed of response
Chia says when it comes to incidents requiring the board’s attention, what many people do not realize about the pacing of the news cycle is that a number of maneuvers have already taken place at the corporate governance level, because certain information is available only to the board and news coverage about the situation is often behind the actual event. The faster the board can act to take measures to mitigate the situation, the better, he adds.
His experience at Tyco and J&J has provided him with an opportunity to see firsthand the challenges a corporate secretary can face. The logistics, organization and information-gathering aspects of his job have all seen noticeable increases in demands on his time over the past year, he says. During 2010, keeping the board up to speed, coordinating meetings and being a ‘conduit’ between the managers and the board have kept him busier than normal.
The experience, though stressful, is valuable and exciting, Chia says. ‘You really learn a lot in those types of situations,’ he observes of cases in which hypothetical problems become real. Management has kept a level head and has not ‘abandoned ship’, while the board of directors has appropriately monitored the recalls, he adds.
There are a couple of keys to avoiding disaster when unsavory situations arise, experts say. The first is having an emergency management protocol in place; the second is being transparent. And the latter is pivotal, according to Chia.
Suzanne Hopgood, who has served on a number of boards during investigations by the SEC, the Department of Justice and the IRS, enumerates some strategies for handling similar situations in a recent piece for the Conference Board. ‘Companies really want to be aware of wrongdoing long before it reaches that level of materiality, and that speaks to a culture within the company of sharing concerns and being rewarded for sharing those concerns,’ Hopgood says. ‘That requires building trust and a culture of integrity over many years.’
Preparedness is key
Hansen points to a number of corporations criticized for lack of a crisis management plan or a succession plan as examples of what not to do. These include Exxon Mobil, which was slow to realize the magnitude of the Exxon Valdez oil spill of the 1980s.
Intel was equally negligent with regard to its malfunctioning chips in 1994. The company issued only a partial recall of the chips at first, and recalled only the chips of those directly affected by the faulty product.
Conversely, when McDonald’s chief executive Jim Cantalupo suddenly died in 2004, a succession plan was already in place, keeping share prices and consumer confidence intact, Hansen says.
Hopgood further suggests having a team of people already in place to deal with unflattering situations before they occur. Having outside counsel on hand, a public relations firm at the ready and a ‘communications blueprint’ already written can help alleviate some of the post-mishap confusion some companies experience.
‘When a crisis hits is not a good time to be searching for a criminal defense lawyer or public relations firm,’ she points out. ‘The crisis team should consist of senior management, the CEO, board spokesperson – who may or may not be the chairman – the audit partner, a criminal defense attorney, a crisis expert from a communications agency, company counsel and any other critical experts.’
Bertsch and Hansen also endorse the notion of having the right people in place before they are needed. The role of the board, and those who support it, Bertsch points out, is to be vigilant, especially when things are going well. ‘Eventually there are always issues,’ he explains. ‘Then the board’s support role becomes more challenging.’
