Question

Reputation risk can be viewed as a “meta” risk – the risk of risk itself.    Alternately,...

Reputation risk can be viewed as a “meta” risk – the risk of risk itself.    Alternately, one chief risk officer (CRO) defined it as “the by-product of all other risks.”    As a by-product or second-order risk, it amplifies the ill effects of primary risk events, such as   bad management, ethics violations, or a catastrophe. According to Reputation Review 2012, a report from Oxford Metrica sponsored by Aon P.L.C., a public company runs an 80% chance of suffering a reputational risk that can cost at least 20% of its equity value in any month over a five-year period. Privately held companies face similar risks.

Read the article listed below and explain how Johnson & Johnson mitigated the reputation risk in the aftermath of the 1982 Tylenol crisis.

Tylenol made a hero of Johnson & Johnson : The recall that started them all

By JUDITH REHAK and INTERNATIONAL HERALD TRIBUNE MARCH 23, 2002

It has been almost two decades since a consumer products company's worst nightmare became tragic reality for Johnson & Johnson. In the space of a few days starting Sept. 29, 1982, seven people died in the Chicago area after taking cyanide-laced capsules of Extra-Strength Tylenol, the painkiller that was the drugmaker's best-selling product.

Marketers predicted that the Tylenol brand, which accounted for 17 percent of the company's net income in 1981, would never recover from the sabotage. But only two months later, Tylenol was headed back to the market, this time in tamper-proof packaging and bolstered by an extensive media campaign. A year later, its share of the $1.2 billion analgesic market, which had plunged to 7 percent from 37 percent following the poisoning, had climbed back to 30 percent.

What set apart Johnson & Johnson's handling of the crisis from others? It placed consumers first by recalling 31 million bottles of Tylenol capsules from store shelves and offering replacement product in the safer tablet form free of charge.

"Before 1982, nobody ever recalled anything," said Albert Tortorella, a managing director at Burson-Marsteller Inc., the New York public relations firm that advised Johnson & Johnson. "Companies often fiddle while Rome burns."

James Burke, the company's chairman, was widely admired for his leadership in the decision to pull Tylenol capsules off the market, and for his forthrightness in dealing with the media. In a news conference only a month and a half after the tragedy, he gave a full chronology of what the company had done. "He looked in complete control," said Tortorella.

The moves were costly. Johnson & Johnson spent more than $100 million for the 1982 recall and relaunch of Tylenol. A much smaller recall in 1986, and a second relaunch also ran into millions of dollars. But Johnson & Johnson's shareholders were hurt only briefly. In 1982, the stock, which had been trading near a 52-week high just before the tragedy, see-sawed in panic selling but recovered to its highs only two months later.

Investors have had little to complain about since then. If you had invested $1,000 in Johnson & Johnson shares on September 28, 1982, just before the first Tylenol episode, you would have $22,062 today, after four stock splits. The company has paid out increasing dividends for 39 years.

Michael Holland, manager of the Holland Balanced Fund, said Johnson & Johnson's handling of the crisis was confirmation of its superior management. "It's one of the reasons it is the largest holding in my fund," he said. Johnson & Johnson is a very different company today. Once known for consumer products such as baby shampoo and Band-Aid bandages, it has become a pharmaceutical powerhouse. Last year, 45 percent of sales came from prescription drugs, up from just 18 percent in 1980. Its medical devices division is also generating excitement for its new drug-coated arterial stent, which is considered a medical breakthrough.

"It illustrates a strength of Johnson & Johnson that is nearly unique, their expertise in medical devices and in pharmaceuticals, and their convergence," said Scott Davison, an analyst with U.S. Bancorp Piper Jaffrey.

Homework Answers

Answer #2

The following are the steps Johnson and Johnson had taken to mitiagte the reputation risk :

1. Brand relaunch accompained by aggresive media campaigning : The aggresive media campaigning would counter the negative news which was a risk for the reputation of the company while at the same time can highlight the positives.

2.Recalling the harmful and defective tablets : This though a costly proposition, gave consumers the confidence that Johnson andJohnson is commited to their safety and is recalling a harmful product. Also the company gave new safer tablets for free. This ensures that the consumers would not move to other brands. By again consuming Johnson and Johnson product, the consumers again willl develop the belief that the companys products are safe.

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