I have been an observer of business for many years. It did not escape my notice that many corporations which were once staples of the American corporate elite are no longer here. In Search of Excellence (Tom Peters), Built to Last andGood to Great (Jim Collins) and at least a dozen other books have lifted up the names of seemingly stable companies who were viewed as exemplars of excellence in business management. Interestingly enough, over 40 percent of the companies touted for excellence have gone out of business, been acquired, or have fallen out of the Fortune 1000 ranks. What happened?
Students of America’s unprecedented global financial superiority in the 20th century know that the leading corporations were those that had a clear vision, a strong culture, and distinguishable character. They succeeded and survived by sticking to their strengths and avoiding distractions. They obviously knew the importance of providing a generous return to shareholders. But for many, shareholder return was the result of a clear focus on customers, employees and community.
Johnson & Johnson, long known for sticking to a credo that put customers first, is the latest of many corporate stalwarts to lose sight of its core values only to find itself stumbling with customers and investors. A bevy of product recalls in 2010 left the company reeling as customers lost trust in J&J products — the J&J Brand — and fled to generic brands.
J&J’s 2010 sales were down 5.5 percent from the previous year. In announcing the results, chairman and chief executive William C. Weldon acknowledged in the earnings release that 2010 was “a challenging year.” He added that “the business continued to deliver earnings growth.”
The company said sales were significantly impacted by recalls of certain over-the-counter medicines and the suspension of manufacturing at the McNeil Consumer Healthcare Fort Washington, Pa., facility. About those recalls, Mr. Weldon said in the press release, “We have made a commitment to restoring these products to the levels of quality and compliance that consumers expect of Johnson & Johnson.”
The Party Line
Notice that Weldon first addressed investors’ concerns. Only later in the release (almost as an afterthought) did he comment on J&J’s quality issues and customers’ expectation. This is an inversion of the values that made J&J the leader in its industry. Yet, it is standard language for modern CEOs who want to be the darling of Wall Street. What it is missing is the assurance that J&J recognizes that it somehow lost its way; that it let down its consumers; that it violated a sacred trust. In other words, it would be good for Weldon to validate what everyone already feels and knows to be the case; J&J lost its way and dropped the ball.
Contrast this response to the famous Tylenol scare of the 1980s. Then chairman James Burke heroically admitted that there was a problem, he took the financial hit, and he committed to take measures to restore the confidence in the brand. This not only illustrated J&J’s integrity in the eyes of the buying public, it also reinforced the importance of adherence to credo values for J&J employees. J&J’s fortunes took a quantum leap after that episode.
The Credo Unpacked
J&J is a century-old human healthcare product and services provider. Most people know them as the makers of such “trusted brands” as Band-Aid, Baby Powder, Tylenol, and One-Touch (blood glucose monitor). These brands became trusted and preferred because of J&J’s dogged adherence to its Credo values. Within the company there are legendary stories about average employees taking heroic action to make sure the credo was being followed. Things like shutting down a production line; volunteering to recall major products; passing on a major game-changing acquisition; and supporting employees and community activities are among the dozens of stories that help define the character and culture of J&J.
The decades old credo reminds J&J employees that their No. 1 responsibility is to the consumer and their final (No. 4) responsibility is to the shareholder, not the other way around. In between are responsibility to employees (No. 2) and responsibility to community (No. 3).
The sustaining belief at J&J has been that if you take care of the first three, you would accomplish the fourth. Invert this order and J&J becomes just like everyone else and loses its claim to greatness.
J&J introduced the credo in 1943. Even today, the company touts with pride its desire to adhere to the words introduced nearly 70 years ago. Its website says:
“The values that guide our decision making are spelled out in Our Credo. Put simply, Our Credo challenges us to put the needs and well-being of the people we serve first.
Robert Wood Johnson, former chairman from 1932 to 1963 and a member of the Company’s founding family, crafted Our Credo himself in 1943, just before Johnson & Johnson became a publicly traded company. This was long before anyone ever heard the term ‘corporate social responsibility.’ Our Credo is more than just a moral compass. We believe it’s a recipe for business success. The fact that Johnson & Johnson is one of only a handful of companies that have flourished through more than a century of change is proof of that.”
Losing Their Way
Losing customer trust is a branding nightmare for any company, but even more troublesome for a company like J&J, which sells drugs and medical products. It prided itself for decades that customers would “never have to question a decision to buy a J&J product.”
So how does a company whose No. 1 value is “quality products that help consumers” become so lax on quality that it creates massive recalls and lost production? The answer is simple. Companies, given the right internal or external pressures, like people, can lose their way. They forget who they are, and begin to act out of character and ultimately violate their culture – their foundation.
Great men and women falling from grace is an oft-told story. History is replete with people who get caught up in their fame, seduced by their success, and lose sight of their core values; of “who they are.” We’ve all seen examples of this from corporate chieftains, spiritual leaders and politicians. One of my friends said that if you want to analyze why this happens, you only have to follow the money, the seduction of power, or both.
Great companies also fall from grace when they forget “who they are.” Think of the sterling corporate names of the 20th century in finance, manufacturing or transportation that lost their way as they diverted from values that built their stellar reputation. Bear Stearns and Pan American Airlines are two examples of one-time industry stars that did not survive. General Motors Corp., is one still fighting to live on.
GM stunned the world when it entered bankruptcy in 2009, needing a government bailout to stay afloat. But the downfall of a company that epitomized America’s industrial world dominance for nearly a century was not surprising to those who watched the company’s foundation of innovation give way over two decades to a culture of profit above anything else.
“GM’s biggest failing, reflected in a clear pattern over recent decades, has been its inability to strike a balance between those inside the company who pushed for innovation ahead of the curve, and the finance executives who worried more about immediate returns on investment,” said the New York Times in a December, 2008 article.
The downfall of a company is not nearly as sordid or scandalous as a personal fall, but in many ways it is more damaging. Every organization has a “culture” which is much like the core values and personality of an individual. It is not always visible but it always drives the decisions the company makes, and most likely is the foundation of the company’s success, until the company gets “lost.” Again, to analyze why this happens, we need only follow the money, the fame, the success, and the seduction of power. Many might fairly argue that smugness made many top companies wane in the face of more nimble competition. In fact, a very successful businessman once said the worst thing that ever happened to his company was success. “Success made us arrogant,” he said, “and arrogance made us stupid.”
Success leaves clues -both getting it and losing it. Peter Drucker once said, “Those whom the gods would destroy, they first give (10-25) years of success.”
The Wall Street Distraction
In the last quarter of the 20th century and into the first decade of this one, corporate leaders found it increasingly more difficult to adhere to their values because of rapid technological advances, challenges from competitors and a need to satisfy shareholders’ lust for bigger and faster profits. The pressure to stay relevant, while providing more cash for investors, pushed many of these firms away from what made them great. Firms started to stumble often bringing less, not more, profits to their hungry investors.
“In the 1990s, Wall Street and institutional investors begin insisting that companies return more cash to investors”, UCLA Professor Sanford Jacoby wrote in 2008 article about GM’s decline. These investors felt that corporate leaders were squandering resources on “lavish perks and misguided acquisitions,” he said.
“In the early years of the industrial revolution, managers of U.S. corporations occasionally said no to investor demands. A couple of things got rid of that behavior. First CEOs who bucked shareholders sometimes found themselves out of a job. Second, executive share ownership and stock options became the “coin of the realm”. Eventually they comprised the bulk of CEO pay. And now, CEOs want the same thing as the owners; high returns for owning stock,” Jacoby said.
It is not a far stretch to directly link J&J’s push for profit directly to quality problems at its McNeil Consumer Healthcare facility. The values were inverted – quality control was not as important as making the numbers.
The inversion of the credo and the consequences
J&J is a publicly traded company and therefore has a responsibility to its shareholders. No one argues that credo value 4 is not important. But corporate leaders have to recognize that if you invert the values and make profit the first concern, you are building a house of cards that will eventually fall. The question is not should we sacrifice financial results, it is how do we go about getting results. Traditionally, J&J has gotten great financial results by focusing on customers, first; employees, second; community, third; and investors, last. Today, when you ask the heads of many of J&J’s 250 businesses worldwide, what is the number one driver for their management of their business, the first response tends to be “If I make my numbers, they (HQ) will leave me alone. If I miss my numbers, I will get a lot of unwanted attention and I may get reassigned or let go.”
No one argues that credo values are ignored at J&J. Town Hall meetings are held; there are annual credo surveys; credo Action Teams are convened and new employees are quickly exposed to the history and importance of credo values. I suspect that the problem is not that employees don’t know and respect credo. It is more likely that the leaders take it for granted, get distracted, and unwittingly emphasize “the financial numbers” over “the brand equity numbers”.
Insiders, former employees and other Johnson & Johnson watchers say the erosion in company values did not happen overnight. One insider indicated that employees have had ongoing discussions for years about J&J “losing its way.” But because of the influences of entrenched corporate practices, power, money, and the pressure to satisfy Wall Street, those concerns were heard but not acted on.
“The credo is what distinguishes us,” said one former senior executive. “Over time we were not intentional about living up to those values. The real tragedy lies in what was possible. J&J could have survived the current financial malaise and demonstrated again how adherence to core values translates to business success. There were people at the table who could see the inversion taking place and who cared enough to raise concerns about decisions that clearly ran afoul of long held beliefs.”
Lessons for Leaders
Wall Street is a powerful force in the life of American businesses. Wall Street pressure to increase earnings drive internal business pressure to get results at any cost. CEO’s make their name by meeting and exceeding Wall Street expectations. Yet, great CEO’s seem to know that it is equally important how they get results.
By the early 1990s, IBM, another icon that dominated its industry for decades, had lost its way in the wake of a rapidly changing computer industry. Its mainframe business was in decline and upstarts in the areas of personal computers and software were starting to move into leadership position. Efforts to remain relevant and stem the decline of profit were not working. IBM was trying to be something that they were not. Its strength was rooted in improving on technology and applying it to solve problems. It took an outsider, Louis V. Gerstner, who became CEO in 1993 after careers in credit cards and tobacco, to remind the IBM of “who they are” and return them to acting like themselves.
IBM became the turnaround story of the late 20th century because Gerstner recognized the importance of delivering to customers what they needed – solutions. Gerstner inherited a company that had just recorded, at that time, the worse financial loss in American corporate history. His leadership, allowed IBM by the end of his tenure to steadily return profits to its investors, not by focusing on profits, but by clarifying their vision and restoring a sense of “who they are”.
What we can learn as we watch J&J navigate these treacherous waters can be summed up as follows:
- Wall Street is a major distraction. CEOs who respond first to Wall Street will find it hard to stick to the values that pushed them to the top of their industries in the first place and that sustained them for years.
- Companies, like people, can lose their way; forget who they are; act out of character; and violate their own principles.
- Values, character, and culture matter as elements of success. Because these elements are invisible, it is sometimes easy to overlook them or take them for granted.
- Long periods of success and increased executive power tempt leaders away from their “core” and impair or destroy vision.
- Leaders have to avoid sending mixed signals about what is important. Do we succeed the J&J Way (Credo Values) or do we make our numbers at all costs?
The biggest influence on corporate values and culture is what leaders talk about most of the time. Another major influence is the behavior they reward. Corporate leaders must understand that in the end, people will respond to those values that leadership emphasizes. Invert the values and you will suffer the consequences.