In his new book, Fixing the Game, author Roger Martin argues that our theories about the fundamental goals of a corporation are fatally flawed. Martin cites the Gulf of Mexico oil spill, where the top priority for BP was to protect shareholder interest, and compares it with Johnson & Johnson’s response to the Tylenol crisis of 1982. J&J placed its consumers first by recalling 31 million bottles of Tylenol capsules and offering free replacement. This extract from Fixing the Game illustrates how the handling of the crises by the two companies affected their long-term reputation.
On April 20, 2010, the Deepwater Horizon oil well, under lease to BP, exploded in the Gulf of Mexico, killing eleven workers and spewing crude oil into the water.
BP quickly went into damage-control mode, blaming the rig owners, Transocean, for safety lapses. BP then went on to attempt to minimize the scope of the damage, as CEO Tony Hayward explained: “The Gulf of Mexico is a very big ocean. The amount of volume of oil and dispersant we are putting into it is tiny in relation to the total water volume.” By the end of May, Hayward, clearly tired of being pilloried by the media and the US government, finally apologized....
Not just a disaster for the environment , the Deepwater spill proved to be one for BP as well. It’s become a case study of how not to handle a public relations crisis.
Thankfully, we have long had a case study of how we should handle even the most unimaginable crisis, courtesy of Johnson & Johnson (J&J). On September 29, 1982, a twelve-year-old girl in Chicago died after taking a capsule of J&J’s Extra-Strength Tylenol. Six other deaths followed shortly thereafter, and police soon linked all seven deaths to Tylenol, hypothesizing that a single murderer had placed bottles of cyanide-laced Tylenol on the shelves of Chicago-area drug stores and supermarkets. It appeared that the tampering was limited to Chicago, but no one knew how many bottles were affected, who had done the tampering, or why it had happened.
J&J was in a terrible bind. Tylenol represented almost a fifth of the company’s profits, and any decline in its market share would be difficult to reclaim, especially in the face of rampant fear and rumor. Yet, rather than attempt to downplay the crisis — it was after all, likely the work of an individual madman in one tiny part of the country — J&J did just the opposite. Chairman James Burke immediately ordered a halt to all Tylenol production and advertising, distributed warnings to hospitals across the country, and within a week of the first death, announced a nationwide recall of every single bottle of Tylenol on the market. J&J went on to develop tamper-proof packaging for its products; an innovation that would soon become the industry standard.
Burke’s response is often touted as a show of great personal integrity, one that led the company to make the right, albeit profoundly difficult, choice in the face of terrible uncertainty. So the question is: how was Burke able to navigate through the worst crisis of his career and emerge unscathed — celebrated, even — while BP’s Hayward was transitioned out of a battered, weakened company with his reputation in tatters? What led Burke to respond in one way and Hayward so dramatically in another? Was Burke simply a moral paragon, able to see what others could not and bravely act on his own conviction? Or, was something else at play?
It is too easy to say that Burke was a saint and Hayward was not. Rather, Burke and Hayward acted as they did because each was directed to do so by his company’s abiding purpose. In the wake of the Deepwater Horizon spill, Hayward’s actions suggest that BP’s profits were at the heart of its crisis response plan. The company’s values statement, as articulated on its public Web site, begins, “BP wants to be recognized as a great company — competitively successful and a force for progress.” It goes on to describe BP as “progressive, responsible, innovative, and performance driven.” Competitively successful and performance-driven are typically code for shareholder value-oriented priorities, so it stands to reason that protecting the company’s share price and financial viability was paramount. Hayward acted as he did because shareholder value theory told him to do so. All of his actions — limiting liability, distributing blame elsewhere, and attempting to minimize the scope of the problem — were an attempt to protect his shareholders. Yet, despite all of Hayward’s efforts, BP lost more than half of its market capitalization between April and July of 2010.
At J&J, Burke’s actions were also deeply informed by his company’s vision, a vision he saw literally every time he walked through the lobby of his headquarters. There, engraved in granite, are the words of legendary J&J chairman Robert Wood Johnson, articulated in 1943 in preparation for the company’s initial public offering and enshrined as the company’s credo ever since:
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...We are responsible to our employees, the men and women who work with us throughout the world... We are responsible to the communities in which we live and work and to the world community as well... Our final responsibility is to our stockholders. When we operate according to these principles, the stockholders should realize a fair return.
The pecking order is clear and unambiguous: customers come first, employees are second, communities third, and shareholders absolutely last.
Given the prevalence of shareholder value theory in our modern economy, J&J’s credo is a shocking articulation of very different priorities. With those priorities in mind, Burke had no choice but to do all he could to protect J&J’s customers — even if those actions might put profits at risk. He forged ahead with an unprecedented recall, long before all the facts were clear or careful planning could be done, knowing that the capital markets might see it as an extreme and costly overreaction. He proceeded, well aware that the recall might be an implied admission of guilt, putting the company in legal harm’s way and exposing its shareholders to substantial losses. Yet Burke followed the credo regardless. Customers came first and stockholders came fourth — and he acted accordingly. He didn’t put “meet quarterly profit expectations” at the top of his list. In fact, he put it squarely at the bottom. And how did his shareholders do in the end? Although sales of Tylenol took a huge hit in the months immediately after the recall, J&J’s share price was largely unaffected by the crisis. And, as the new tamper-proof Tylenol packages hit the shelves, market share quickly rebounded.
As it happens, J&J’s investors seem to do just fine, crisis or no. J&J is one of the fifteen most valuable companies in the world, as measured by market capitalization, meaning that it has created as much shareholder value as virtually any company in the world. In fact, it created the tenth-highest value of any company that chose to set up shop in anything other than energy or banking.
The world tends to believe that shareholders will benefit only if they hold first place, at the very core of the business. Yet, that prevailing theory simply does not hold in the case of J&J. J&J not only puts shareholders last, it doesn’t even talk about maximizing their value. It only states that they “should earn a fair return.” Notice it isn’t “will earn a great return,” but “should earn a fair return.”
Reprinted with permission from Harvard Business Review Press. Copyright 2011 Roger Martin. All rights reserved.
FIXING THE GAME: HOW RUNAWAY EXPECTATIONS BROKE THE ECONOMY, AND HOW TO GET BACK TO REALITY
Authors: Roger L Martin
Publisher: Harvard Business Review Press