CASE STUDY: Johnson & Johnson is a company that makes home healthcare products. Toward the end of September 1982, seven people in the Chicago area died after taking Tylenol extra-strength capsules that had been contaminated with cyanide. Within days the company recalled 31 million bottles of Tylenol capsules, and the CEO went on a massive campaign to inform the public. The company offered a $2.50 coupon for each package of Tylenol recalled. The total cost of the recall (including coupons, public relations, and so forth) was $50 million or $0.27 earnings per share (EPS), driving EPS down to $2.25; without the recall, it would have been $2.52. Following the recall, Johnson & Johnson introduced tamper-resistant packaging. Later, the company took capsules off the market and replaced them with caplets, which are more difficult to tamper with. Many other companies followed Johnson & Johnsons lead, using both tamper-resistant packaging and caplets.

DISCUSSION QUESTIONS 1. Given the cost to shareholders in both stock price decline and EPS, do you think the company made the right choice in protecting consumers? Did it put consumers interests ahead of shareholders interests? 2. Given that the company had no involvement in the poisonings, did they have any responsibility by not preventing the tampering? 3. Do you think the companys lead in preventing future product tampering by introducing tamper-resistant packaging and caplets had any benefit for shareholders? 4. Because of Johnson & Johnsons actions, would you consider recommending the companys stock for inclusion in an SRI portfolio? What else would you want to know about the companys products and practices?

2 1.8 1.6 160 140 120 100 1.4 1.2 Recall announced JNJ ($) 80 S&P 500 ($) -JNJ adj close -S&P 500 adj close 60 1 0.8 0.6 0.4 0.2 40 20 0 0 8/2/1982 9/2/1982 10/2/1982 11/2/1982 12/2/1982 Johnson & Johnson (NJ) Tylenol Tampering Case 2 1.8 1.6 160 140 120 100 1.4 1.2 Recall announced JNJ ($) 80 S&P 500 ($) -JNJ adj close -S&P 500 adj close 60 1 0.8 0.6 0.4 0.2 40 20 0 0 8/2/1982 9/2/1982 10/2/1982 11/2/1982 12/2/1982 Johnson & Johnson (NJ) Tylenol Tampering Case