As is the case with the AGR model, the ESG model considers the dual chair/CEO role as a “red flag” — but its influence isn’t nearly substantial enough to account for such a large differential.
Risks at Johnson & Johnson
In its shareholder proposal, the American Federation of State, County and Municipal Employees, AFL-CIO — or AFSCME — argues that there is a particularly strong call for an independent chair at J&J, which has been called out by the media for “struggling to rebuild its reputation as one of the world’s most trusted brands after a series of product recalls, manufacturing problems and government inquiries.”
I believe they’re right. Johnson & Johnson (NYSE:JNJ) has faced significant scrutiny over the last few years for decisions that appeared to put short-term profits ahead of its customers. For example, the company earned the ire of the Food and Drug Administration for its continued sales of defective insulin pumps produced by its Animus unit and failure to report cases in which the pumps may have contributed to deaths or injuries. Also, J&J has had a huge number of product recalls over the last few years, including non-prescription drugs like Tylenol and Motrin, prescription drugs for HIV and seizures, contact lenses, and faulty hip implants.
The Foolish takeaway
When the CEO and chairman roles are combined, you want to be very sure that you can trust leadership to do what’s in the best interest of shareholders. With so many recalls in recent years, I believe that Johnson & Johnson (NYSE:JNJ)’s leadership has compromised investors’ trust.
I believe that prevention of problems like those at Johnson & Johnson (NYSE:JNJ) requires a board that is empowered and incentivized to offer strong oversight and sufficiently critical performance evaluations. Without governance changes that can make this happen, I think shareholders would do well to apply a discount to their valuation of J&J.
The article One Way This Company Risks Your Investment originally appeared on Fool.com and is written by M. Joy, Hayes.
Motley Fool contributor M. Joy Hayes, Ph.D. is the Principal at ethics consulting firm Courageous Ethics. Joy owns shares of Johnson & Johnson and AT&T. Follow @JoyofEthics on Twitter. The Motley Fool recommends Johnson & Johnson and Wells Fargo. The Motley Fool owns shares of Johnson & Johnson and Wells Fargo.
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