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Johnson & Johnson: The Corporate Tiger Woods

The pharmaceutical industry has had more than its share of ethical challenges. It is not viewed by most people as harshly as the financial services industry, but most trust surveys will show it ranks near the bottom of industries in terms of trust.

I find this particularly ironic, because a great number of employees of pharmaceutical companies are genuinely and sincerely committed to bettering the lives and well-being of patients, and of supporting the physician and hospital markets. Some of them are self-deluding, but not all; and they have much data to back up their beliefs.

At the same time, the geography of the pharmaceutical industry is fraught with slippery slopes. When does supporting research cross the line into suborning favorable opinions? When does patient education become patient brainwashing by TV ads? Where is the dividing line between quoting opinion leaders and wining and dining them while soliciting the quotes?

These questions are every bit as challenging as questions about marking to market in the absence of transactions, or about the line between consumer choice and engineered addictive foods. In Pharma, it is never easy to distinguish where the plain ends and the mountain begins.

Johnson & Johnson Made it Look Easy

Which is why Johnson & Johnson, for so many years, made it look easy. First of all, they are not primarily known as a pharmaceutical company. Instead, they are known for two things: baby powder, and the iconic Tylenol response. They still teach cases in business schools about J&J’s quick and forthright response to a case of Tylenol tampering at the retail level umpteen years ago.

Second, and more important, they are known for the Credo–a set of beliefs articulated by Robert Wood Johnson in 1943, frequently quoted, and posted in front hallways of the company’s buildings in hometown New Brunswick, New Jersey (and I believe elsewhere as well).

I and many others have cited it as notable for making shareholder rewards the result of, rather than the purpose of, serving customers and community. J&J got corporate social responsibility and customer focus literally decades before other companies did.

That Was Then, This Was Now

Then, things changed. Or to be more clear, it suddenly became apparent that things had already changed.

First, the company announced another recall, including Benadryl, Motrin, and–again–Tylenol.

Problem is–the recall was a result of complaints starting 20 months prior. This was the exact opposite of the promptness for which Johnson & Johnson had become known in Round One.

But that’s not all. On the same day, the Justice Department filed charges against Johnson & Johnson for a fairly simple, in-your-face, kickback scheme. The federal case joins a whistleblower suit filed by two former employees of Omnicare, the company to whom the kickbacks were paid.

Whistleblowers, Justice Department, kickbacks. Say it ain’t so, Joe.

What’s it Mean When a Leader Falters?

It is troubling when the pharmaceutical firm with the most clearly positive image for ethical and consumer-friendly behavior gets serious egg on its face.

It is even more troubling that the nature of these offenses directly contradict the reasons for the previous good reputation: namely, transparency versus subterfuge, and timeliness versus foot-dragging. This is not a PR problem, at least not in the main; it is a contradiction of values. This is the corporate version of Tiger Woods.

But most troubling of all, to me at least, is the besmirching of the Credo. That was as well-written a document as I am aware of in the corporate world. I know people at Johnson & Johnson who speak about the importance of the Credo; I know others who know the firm more directly, and who are much more outspoken about the values-driven nature of the firm.

Now I feel stupid, and those others look like dupes. This incident has ramifications well beyond the negative press for Johnson & Johnson. It is a failure of culture, and has to call into doubt the sincerity and the power of other companies’ programs for values-based leadership. It fosters cynicism, an emotion already in serious oversupply in and around business.

And absolutely worst of all: I’ll bet big bucks that nearly all the wrongdoers on the J&J side don’t see anything wrong with what they did. I’ll bet we’ll hear phrases like "technical distinctions," "reasonable people can differ," and "narrow definitions of the law." Sometimes it looks dark out not because it’s night, but because your head is stuck where the sun don’t shine. And that’s a form of blindness that is catching.

I find that all pretty depressing. I welcome comments in particular from TrustMatters readers in the pharma industry. How are you feeling about this?

 

 

HBS’s Bill Sahlman on the Financial Crisis: Why it Happened, How to Fix It

Few people are more qualified to explain what went wrong in the financial industry than Harvard Business School’s Bill Sahlman.  His resume covers just about every aspect of the industry.

In an HBS Working Knowledge paper titled Management and the Financial Crisis (We Have Met the Enemy and He is Us …)  he gives us a very special view of what happened—broad and deep, and holistic to boot. He also gives us an idea of what should be done.

He gets an A+ for the explanation; for the recommendation, maybe not so much.

My summary cannot do his paper justice; but to whet your appetite, I’ll touch a few bases.

Managerial Incompetence Was the Driving Factor

Black swan theory fans notwithstanding, Sahlman argues this meltdown was not unique except in scope and scale. What we had was a massive failure of five largely managerial systems: Incentives, Control and Information Technology, Accounting, Human Capital, and Culture.

Sahlman also flatly says “Greed played a role but the bigger problem was incompetence.” What he means by competence largely comes down to managers. I find this hugely commonsensical, and rare at the same time. In other words, I think he’s very right.

He is inclined also to give a bye to some of the usual suspects: accounting firms, boards of directors, and regulators, to some extent. His reasoning is hard to argue with: the complexity of the products engaged in ran far beyond the relatively meager abilities of those in the aforementioned roles.

Sahlman singles out Goldman Sachs and JPMorgan Chase’s Dimon as examples of good managers who clearly avoided most of the damage caused by their inept competitors.
His diagnosis, refreshingly, puts the blame squarely at the feet of business itself—particularly management. A management that runs the company through over-leveraging and over-optimism is a management team that is grossly incompetent. Even they wouldn’t have generally wanted the results they ended up with.

What I also like about Sahlman’s view is that it treats impersonal tools like incentives not as exogenous dehumanizing variables, but as things completely within the realm of management—and he makes management squarely responsible for their use. As far as I’m concerned, this is the best of HBS talking; the old-school HBS that assumes managers have a responsibility to run organizations holistically, for the long run, and in the interest of stakeholders–not slavishly to a few slanted metrics.

The Solution–an Overseer?

After such a great analysis, I’m left a little cold with Sahlman’s solution. It is to have a sort of outside observer—not a government interveener, since Sahlman is not sanguine about government intervention, but a new kind of monitor. This monitor would have a scope to cover the five broad areas Sahlman outlined at the outset.

The problem is not with having a holistic view; I’m all for it. And while Sahlman is rather vague about the statutory authority of the “monitor,” I figure that could be figured out.

My concern is that, in the end, Sahlman sounds like the consummate insider; his specific knowledge of the situation runs the risk of blinding him to the system’s flaws.
In this case, the one flaw that worries me is the belief that one more systemic overview will finally get it right. It’s the idea that our problem is the lack of a comprehensive enough model; that if we just had a little more data and a better model, we could finally model the world.

Here I have to agree with Taleb’s Black Swan theory: the problem with models is that they never model what hasn’t been envisioned. And while you won’t get a better dose of commonsense in business than what Sahlman serves up, I’m still sceptical about this part.

A Different Idea: Management by Values

So do I have a better idea? Well, I do have another idea. And it lies in the one area Sahlman puts least emphasis on—culture. While Sahlman talks about ethical cultures, he seems generally to mean a focus on long-term risk management and an aversion to illegality. Necessary, but not sufficient, for a good culture.

Those traits are jacks for openers. We need to be cultivating belief systems, not just management control systems.  We need mental models that talk about relationships, that actually live out the idea of long-term relationships instead of relegating them to the thin air of risk management managers.

We need baked-in beliefs about the role of business in society, that get promulgated not by monitors and smart managers, but by high school teachers and b-school profs, by bloggers and journalists and marketing managers and bankers alike, and in the most mundane areas of business. That’s a culture: a set of beliefs that people unconsciously share about ‘big’ things like fairness, relationships and the value of one’s word.

One of the best insights I ever got from HBS could easily have been articulated by Sahlman himself, I suspect: as things get more complicated, you’re better off managing by values than by policies.
 

Does Your School Trust Its Students? Do You?

Companies work hard articulating their values. For example, take a look at a short excerpt from Johnson & Johnson’s Credo.

  • Everyone must be considered as an individual.
  • We must respect their dignity and recognize their merit.

Thinking about and articulating values aren’t limited to big companies. A couple of years ago, one of my kids attended a school where the 8th grade students collaborated to create rules for their own behavior – values in action. The class worked hard together, and then voted on the rules the students would follow.

The rules the students created bear a passing resemblance to those quoted from J&J’s Credo – a document developed in an exercise that I would imagine took J&J many committee meetings and people hours to formulate. Here are the rules from the students as I recall them from parents’ night: ·

  • Be inclusive, share and work together
  • Talk things out
  • Don’t pull other people into your fights
  • Don’t get stressed out if an assignment is too hard
  • Always encourage fellow classmates
  • Include everyone all the time
  • Respect everything and everyone: classmates, teachers, and their belongings
  • Work hard to do your best.

I have to hand it to the school administrators. They believed in their students. They trusted that their students would create great rules for themselves. They also trusted that their students would both follow those rules, and impress upon each other the value of obeying or living by the rules.

And it worked! Designing rules collaboratively enabled both buy-in and self-enforcement. When these kids finished eighth grade they had a great start collaborating on, creating, and living values. I look forward to seeing how they bring their collaborative skills and values into the working world in a few years.

You Lying, Cheating Dog, You

Most of us lie, at least a touch.  Maybe cheat a little bit, too.

But it’s interesting to explore just why, and when, we do so. That’s the subject of a charming little piece in the current Harvard Business Review (February 2008, paper only) called “How Honest People Cheat,” by Dan Ariely.

A simple experiment. Give a few thousand people math problems to solve for money. Use a control group to establish average scores. Then rip up the exams in front of the test groups, and ask them to self-report how well they did.

The control group got 4 of 20 right. The test groups, on average, reported getting 6 of 20 right. By one measure, they cheated by 50%. By another, they cheated 12.5% of the available opportunity to cheat.

Then the researchers made it interesting.

1. They varied the risk of getting caught. Result? No change at all.

2. They substituted poker chips (redeemable later for money) for money itself. Result: a doubling of cheating.

3. They preceded the test by having participants reflect on their own standards of honesty, e.g. the Ten Commandments or an honor system. Result: complete cessation of cheating.

Ariely draws three conclusions:

1. Most of us will cheat a little, given the opportunity
2. Our consciences impose limits even when there’s no risk of sanctions
3. Non-monetary exchanges allow people to cheat more, e.g. backdating stock options.

Ariely seems to make the most of the third one, suggesting it explains Enron, for example.

I would emphasize it another way.  This elegant little study suggests that the threat of individual punishment carries far less weight than does the exhortation to do right by a group norm.

Now, it’s quite a leap from a small study to suggesting that prisons should focus on rehabilitation rather than punishment and retribution—but that’s the direction.

It’s a leap to say that white collar crime will be deterred less by Elliot Spitzer-like prosecutions than by airing criminal behavior to the disapproval of a broad public—but that’s the direction.

If you can’t trust someone, do you follow Ronald Reagan and “trust, but verify?”  Or do you have a sit-down with them about their responsibilities to be trustworthy? Let’s just say this study is anti-Reagan. 

At root, this study reminds us that much of individual behavior is not explained by that old economist standby, the “rational, self-aggrandizing homo economicus,” who does all that he does in order to improve his own economic well-being.

It suggests that human beings are also—very much—social creatures. We even build our own personal values systems (aka consciences) based on our sense of what furthers our relationships to other human beings.

Is that so hard to understand? 

Business Ethics and Self-Orientation

The Harvard Business School Working Knowledge series has a track record of picking fascinating topics, even if I’ve occasionally accused them of over-analyzing the obvious.  Not so in a current article.

Why We Aren’t as Ethical as We Think We Are, by Tenbrunsel et al, is not only a terrific topic, but—in my humble opinion—it’s treated very provocatively. It raises big issues well.

Here’s HBSWK’s abstract:

People commonly predict that they will behave more ethically in the future than they actually do. When evaluating past (un)ethical behavior, they also believe they behaved more ethically than they actually did. These misperceptions, both of prediction and of recollection, have important ramifications for the distinction between how ethical we think we are and how ethical we really are, as well as understanding how such misperceptions are perpetuated over time…Key concepts include:
• All individuals have an innate tendency to engage in self-deception around their own ethical behavior.
• Organizations worried about ethics violations should pay attention to understanding these psychological processes at the individual level rather than focus solely on the creation of formal training programs and education around ethics codes.

That second conclusion contrasts with the usual business approach to "ethics."  Many corporate “ethics” initiatives amount either to probabilistic analyses or to brainwashing about political correctness.

Harvard Business School’s own ethics program is, if I recall, built around analyzing three constituencies: business, the law, and society (the latter including prevailing norms and mores).  The manager’s job is to intelligently balance the response.

This approach doesn’t distinguish between “ethics” and corporate strategy.  If the overriding goal is the long-term survival and success of the company—which it nearly always is (think "sustainable competitive advantage")—then "balancing" is just another exercise in corporate optimization.  The concept of a “conscience” in such models is a curiosity that seems to exist solely in others—just another data point or constraint to be optimized.

Yet how can “ethics” be discussed absent a treatment of the formation of conscience?

It can’t.  To their credit, the authors suggest conscience is individually meaningful, and affected by emotional processes. They say the psychological angle may be heretical to some ethicists—but I think the personal angle is even more heretical to most business thinkers, stuck in modes of alignment and processes, where "conscience" is an alien concept.

The article has meaning beyond ethics.  Look at this pattern.  People think they are more ethical than others; and they rewrite their past (and future) ethicality relative to current actions.

This is also a pattern not just of ethics, but of self-orientation.

A study asked faculty and students to rate how often they thought about the other group, and how often they thought the other group thought about them.  Yup—students and faculty alike thought mostly about themselves—but students assumed that faculty were also absorbed by their thoughts of students.  And faculty assumed that students were consumed by thoughts of faculty.  Everyone projects their own levels of self-absorption on to others, no one noticing the true similarity—self-absorption itself.

In its low-grade form, this is human nature.  In extremis, it is narcissism.  Another extreme form is encountered in alcoholics.  In both cases, the individual projects an over-inflated sense of one’s own importance on to others. (For narcissists, the projection is always positive—for alcoholics, it’s an oscillating  sine wave of positivity and self-revulsion).

Narcissists and alcoholics—I suspect—aren’t high on ethical behavior charts either.

Which suggests the ability to get out of oneself and to see things as they are are prerequisites both for accurate observation of the outside world, and for ethical behavior.  

Which suggests that strategy and ethics actually share something—an innate focus on the Other.  Self-centered strategies, those built around optimizing selfishness, are ultimately self-destroying; good strategies are intimately bound up with markets, customers, employees, suppliers.   Ditto for ethics; an ethics built solely on corporate success is an oxymoron.  Ethics require us to be intimately bound up with others.  

Hmmm…strategic and ethical analyses share an external view…both have a psychological component…business is about people as people, not just as objects of behavioral vectors …

This is not your normal business writing.  Kudos to HBSWK, and to the authors.

 

We’ve All Caught the Detroit Disease

Ward’s Automotive was for decades a major US auto industry trade publication. Each year, Ward’s published a yearbook, with a one-page market share table near the center.

Each year the book detailed share stats for not just GM, but Chevrolet, and within Chevy, Impalas and BelAirs. Plymouths, Dodges, Ramblers—all got detailed at the model level.

Except for one line.

Imports.

From the late 50s until the late 80s, the industry lumped together Rolls Royces and Volkswagens and Toyotas in one simple category. Imports.

Not until the late 80s—when “imports” finally exceeded 25% of the US market—did they get broken out. Last week, BusinessWeek reported that GM’s US market share was at 22.6% A reversal of fortune (in 1963, GM had 51% of the US market).

Over the years, Detroit came up with dozens of excuses. They blamed “deathtrap” used cars (whose only real threat, of course, was to prices of new cars). Roger Smith blamed technology. Detroit blamed fashion quirks in California. It blamed excise taxes. It blamed Japan, Inc.

As recently as May 8, 2005 (on George Stephanopoulos’ ABC News show), none other than Jack Welch blamed labor—high health care costs, “negotiated at a time of no competition”—and argued for a break. Welch conveniently forgets who negotiated all those contracts—Detroit. Without a gun to its head.

The truth is, Detroit had—and still has—an American disease. It has a few key symptoms:

• Belief that we are the biggest, standalone market—immune from global competition—and that the Big 3 had dominant market share

• Belief that GNP growth drives auto sales, that growth means growth in market share, and that buyers are price-driven

• Belief that, in the immortal words of Lee Iacocca, brought back a few years ago from the taxidermist to re-appear on TV, “the most important thing is—the deal!”

The Japanese in particular always believed it was a global market, far bigger than the US, and that they—including Toyota—were small players on a global stage. For them it was always about growth, not share. And for them, price was not something you jacked up with leader models and white-walls and radios—it was something you set low, for growth, and built in all the quality you could, until you earned the right to sell at higher price points. It was not "the deal"—it was, profoundly, the relationship.

They were—oh, what’s the word?—right.

So, perhaps we should go outside Detroit? Maybe tap the American zeitgeist and come up with—private equity, and an industry outsider!

And so we have Bob Nardelli, late of Home Depot fame, coming in as CEO of Chrysler for Cerberus Capital, Chrysler’s new private equity owner. According to Newsweek, Detroit insiders say they expect Cerberus to shake up the moribund American auto industry. Private equity has a lot going for it—but long-term thinking tends not to be part of it. Industry expertise isn’t all bad—and Nardelli has none of it. Pardon my scepticism in this case—I don’t see this ending well.

True, Detroit is easy to pick on. But you’d think the rest of US industry would catch a clue.

On Wall Street, a new phrase was invented only a few years ago—IBGYBG. I’ll be gone, you’ll be gone—so let’s do the deal and let the suckers pay for it.

Now consumers are suckered into no-income second mortgages (“hey they wouldn’t lend me the money if they didn’t think I could pay it back, right?”) which are then sliced and diced and tranched and resold and leveraged and omigosh, looks like a credit crisis! The spirit of Iacocca lives.

In Bentonville, they learned the volume lesson, but not the price/quality lesson. WalMart is teaching a nation that anything worth having is worth having at half the price and one third the quality so you can get more things worth having—to replace yesterday’s list. Planned obsolescence lives.

In Washington, the courage to face long-term financial issues is in short supply, and the belief that we stand alone—politically, militarily, culturally—is the reverse.

We’ve ended up with: here-now, cheaper by the dozen, do the transaction, no money down, quarterly earnings—and get your buyout package just before you default on the schnooks’ pension plans.

We’ve learned well from Detroit—the wrong lessons.

Update: "We”ve All Caught the Detroit Disease" is a featured post at the the Huffington Post.  Trust Matters readers may want to check out the discussion there as well.