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.