All the Balls are Red

In 1975, the CEO of pharmaceutical giant Johnson&Johnson presented his executive team with exactly those challenges. He sent the team on a two-day retreat to discuss the founding document of their company, the J&J Credo, which had hung unheeded and yellowing on company walls for decades after it was penned by the company’s founder. The Credo outlines the company’s specific responsibilities to all its stakeholders, starting with its customers—the doctors, nurses, patients and mothers of sick children who buy the companies medicines—as well as its suppliers, employees, host communities and, finally, the company’s share owners.

Toward the end of the meeting, one of J&J’s top executives summarized what he saw as the reality of corporate life. He said that being an executive in a large company was like being a circus juggler, attempting to keep five balls in the air simultaneously. Four of those balls were white (those representing customers, suppliers, employees and communities). The fifth ball, the one representing shareholders, was red. To the approval of most of his fellows in the room—and, in fact, reflecting the beliefs of the vast majority of corporate mangers at the time—the executive said it was possible to drop one of the white balls and still survive, but allowing the red ball of profit to fall would be fatal. At that point, the company’s president, James Burke, spoke up and said: “My friend, I am afraid you are wrong. Today, all the balls are red.”

By being the first corporate leader to acknowledge this new reality, and thus to accept the challenge of balancing the legitimate needs of all of J&J’s stakeholders, Burke later went on to become one of the most successful CEOs in North America. When his European competitors paid bribes to win business in developing markets, he refused to do so. When it was discovered that eight people had died from ingesting cyanide-laced Tylenol capsules (a J&J product), he immediately assumed full responsibility for the deaths, pulling $100 million worth of the analgesic off drugstore shelves. He then opened the company’s executive suite to the media and dealt with the issue in a transparent manner that, to this day, stands as the model for corporate crisis management. His critics in the financial community said he was a fool to do so, and that his actions would cause the company to go bankrupt. He was urged to put the interests of his shareholders first: Remember the red ball! Later, it was discovered that a psychopath had placed the poisoned bottles on the shelves of only a few stores in one city; therefore, the company was not responsible for the deaths. But by publicly assuming responsibility before that fact was known, J&J built such a strong reputation for integrity that it recovered quickly and went on to new heights of profitability.

In short, Burke did what was the unthinkable in North American big business in the 1980s and 90s: He sacrificed short-term profits to do the right thing for his company’s stakeholders in the conviction that it is the long term that counts. That he was right to do so is a lesson finally being learned in the executive suites of many large American companies.