The Road to a Ruined Reputation

Johnson & Johnson (NYSE: JNJ  ) enjoys a prestigious image. Its cursive logo brings to mind Band-Aids, no-bawling baby shampoo, and many other comforting products found in every medicine cabinet. For years, it's often scored highly on consumer opinion polls -- but that may be about to change.

How much tarnishing can a reputation take before it's ruined entirely? As Johnson & Johnson suffers through a long, disturbing string of recalls, investors should seriously ask themselves how the company's management ever let quality control slip so disastrously.

Trying to find who you can trust
Johnson & Johnson scores very well on Harris Interactive's U.S. Reputation Quotient, and a recent public opinion poll by Boston College's Center for Corporate Citizenship and the Reputation Institute ranked Johnson & Johnson alongside Walt Disney (NYSE: DIS  ) and Kraft Foods (NYSE: KFT  ) atop a list of companies regular people find most "socially responsible."

Unfortunately, those glowing poll numbers may no longer reflect reality. Quality problems have forced Johnson & Johnson to recall more than 40 medicines this year, including common household names such as Motrin and Tylenol.

Just yesterday, Johnson & Johnson announced a recall of 13 million packages of Rolaids soft chews. In addition to gastrointestinal relief, users have complained that these tablets include a little bonus: metal and wood particles.

Johnson & Johnson shareholders should have a blazing stomachache over this situation. This is a company whose entire brand is supposed to elicit a feeling of being comforted -- of feeling better. Wood and metal in your medicine provide no such reassurance.

Even more mind-bogglingly, Johnson & Johnson CEO William Weldon made the Institute for Policy Studies' eye-opening September report on "Layoff Leaders." He took home $25.6 million in compensation in 2009, even as Johnson & Johnson dismissed 9,000 employees from its payrolls. Even then, the company had begun to show plenty of signs of serious quality control problems.  

Different routes to ruin
Some reputation-destroyers are abrupt and dramatic. The Deepwater Horizon disaster and subsequent Gulf Oil spill did serious, lightning-fast reputational damage to BP (NYSE: BP  ) .

And it probably came as little surprise to anybody that AT&T (NYSE: T  ) was recently named the worst-rated cellular carrier, based on a survey of 58,000 of Consumer Reports readers. Apparently, everybody hates AT&T.

Such widespread loathing is a clear and obvious risk to long-term shareholders. Corporate lore is full of examples of companies that rested on old laurels, abused customers, suffered reputational deterioration, and then lost big to rivals.

Netflix's amazing success probably owed in large part to Blockbuster's inability to make its own customers happy, which created a perfect storm of ill will over many years. Fed up with Blockbuster's limited selection and punishing late fees, folks were more than ready to try out a new, exciting rival that was changing all the rules. Look where Blockbuster is now.

When trust finally requires proof
So far, it seems like everybody -- most likely including most of its investors -- believes that Johnson & Johnson's enormous brand power can withstand any storm. But no company's brand is bulletproof, and investors should never assume that public sentiment won't change.

At some point, folks might take off the rose-colored glasses and ask themselves whether they can really trust this company. And when the Band-Aid comes off, things could get painful and ugly for shareholders who've always assumed that Johnson & Johnson is one of the healthiest stocks in the marketplace.

Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on corporate governance.

Alyce Lomax does not own shares of any of the companies mentioned. Walt Disney is a Motley Fool Inside Value recommendation. Walt Disney and Netflix are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson, which is a Motley Fool Income Investor recommendation. The Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (29)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 10, 2010, at 3:50 PM, BarryStockman wrote:

    What a loser. The CEO's name is Weldon, not Welder. Next time, do some research before you publish a hatchet job. Yes, there have been some quality problems and that is well known. We investors are not fools and it's the reason JNJ stock has not risen much lately. The issues are under control and all the more reason to BUY the stock at this time.

  • Report this Comment On December 10, 2010, at 3:59 PM, Turfscape wrote:

    BarryStockman wrote:

    "What a loser. The CEO's name is Weldon, not Welder. Next time, do some research before you publish a hatchet job."

    Wow...bit of a harsh response over a typo, no? Maybe someone needs a fill up at the holiday spirit station? A little taste of egg nog, perhaps? Maybe a quick kiss under the mistletoe?

  • Report this Comment On December 10, 2010, at 4:37 PM, lemoneater wrote:

    I just bought some eggnog for my husband from the store next door. Nothing like a timely reminder!

    3M also makes bandaids, but doesn't sell medicines.

    QC is crucial when you sell Pharma.

  • Report this Comment On December 10, 2010, at 4:44 PM, visch1 wrote:

    "Yes, there have been some quality problems and that is well known."

    Some is more than one and many more than one which is where this leaderless company is headed because of the GREED factor. "Fill my pockets and the hell with everyone else"

  • Report this Comment On December 10, 2010, at 10:05 PM, stan8331 wrote:

    There has been a steady drip of bad news for JNJ for some time now. There's no way to know if things will get to the same disastrous level but this story reminds me of another company that once believed it was so large and powerful people would continue to buy its products regardless of actual quality. I'm thinking of General Motors.

    It's vastly easier to lose a good reputation than to get it back...

  • Report this Comment On December 11, 2010, at 12:04 AM, goalie37 wrote:

    @BarryStockman - I'm sure there is a reason for your anger, but I think it is counterproductive. I have made good money off information supplied by Ms. Lomax. Getting mad off a typo might prevent you from getting something valuable.

  • Report this Comment On December 11, 2010, at 9:05 AM, TMFLomax wrote:

    Thanks for the comments everybody! Lemoneater, thanks for pointing out the 3M example... yep, there is always somebody trying to grab market share for so many of these ubiquitous products like bandages.

    And stan8331, thanks for bringing up the GM example, that's another good one. (And I think Warren Buffett has a good quote about how easy it is to ruin a reputation that took ages to build...)

    I do apologize for the typo. These things happen, unfortunately, especially on Fridays, and it was quickly fixed.

    Eggnog sounds like a grand idea! Thanks again for all the comments.

    Best, Alyce

  • Report this Comment On December 13, 2010, at 5:12 PM, WileyCyote wrote:

    It is always amazing how CEOs like Welden can walk away with large "compensations" while presiding over failures.

    What happened to Quality Control? Well, quality can generate cost issues which of course, there is no reeward. The customer has no real knowledge of what it takes to generate quality products, and since times are tough we will lay off all the quality control and other unnecessary people to preserve that famous "Bottom Line"

    Yessir! Metal and woodchips in your Rollaids! (Quiet!!! If this gets out EVERYONE will want metal and woodchips.)

  • Report this Comment On December 14, 2010, at 3:07 PM, goalie37 wrote:

    (Quiet!!! If this gets out EVERYONE will want metal and woodchips.)

    LMAO!

  • Report this Comment On December 16, 2010, at 4:51 AM, TMFLomax wrote:

    That is funny! A little extra "roughage" in your Rolaids. ;) Ugh!

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