Lessons for CBS from the Arthur Andersen debacle and the Tylenol Poisonings

In news reporting, as with accounting and pharmaceuticals, customer trust is the coin of the realm. Lose it, and you’re toast. CBS is losing it, and so far, there is no adult supervision from CBS’s parent company, Viacom. Redstone, Karmazin and Moonves would do well to remember Gresham’s law, that once the counterfeit coins are given the same value as true coins, soon all that’s left are the counterfeits.

If they can’t remember that, the executives should at least recall the differing fates of Arthur Andersen and Johnson & Johnson.

Arthur Andersen was one of the most respected of what were once the Big 8 accounting firms. Instead of dealing up front with any mistakes or crimes it had done as auditing firm for Enron, Arthur Andersen held a shredding party, destroying many of the relevant documents. As a result, Andersen was destroyed well before the guilty verdict of June 2002 for obstruction of justice prohibited Andersen from auditing public companies. It had already lost most of its customers.

By contrast, the handling of the Tylenol poisonings in 1982 by parent company Johnson & Johnson is a model of corporate ethics and responsibility — which also turned out to be good business. The backgound is that several people in Chicago died of cyanide poisoning, but no one knew why until a couple of firemen heard different reports on their official radios that mentioned Tylenol. A quick internal investigation of Tylenol’s files showed that the company was not responsible, since the poisons came from different manufacturing lots, and some packages of Tylenol showed signs of tampering by a Chicago individual. Tylenol and J&J could have hunkered down, hoping to weather the storm, the same way CBS is now behaving. J&J did the right thing instead (Tamara Kaplan, Penn State):

Johnson & Johnson’s top management put customer safety first, before they worried about their companies profit and other financial concerns.

The company immediately alerted consumers across the nation, via the media, not to consume any type of Tylenol product. They told consumers not to resume using the product until the extent of the tampering could be determined. Johnson & Johnson, along with stopping the production and advertising of Tylenol, recalled all Tylenol capsules from the market. The recall included approximately 31 million bottles of Tylenol, with a retail value of more than 100 million dollars. (Broom, Center, Cutlip, 381)

This was unusual for a large corporation facing a crisis. In many other similar cases, companies had put themselves first, and ended up doing more damage to their reputations than if they had immediately taken responsibility for the crisis.

So far, CBS management appears to be following the Arthur Andersen model, not the Johnson & Johnson model. If the phony document scandal does serious harm to CBS and the company continues to stonewall, it will be interesting to see if it impairs the Viacom stock price. If it does, Viacom and its directors may be vulnerable to lawsuits for breaching their fiduciary obligations to shareholders.

One Response to “Lessons for CBS from the Arthur Andersen debacle and the Tylenol Poisonings”

  1. J. Rice Says:

    There is something fanatically unbalanced about the CBS flagrant fraud. I prefer to call it what it is. I no longer believe they were duped or victimized. To assume so would mean they are even stupider than your average high school student with access to Google. The only possible explanation is that the stakes are high enough to warrant the self-immolation.

    It would be understandable if they wanted to defeat G.W. Bush before they have to acknowledge overstatement of earnings and holdings proportionately higher than the Time-Warner restatement that resulted in an overnight $54 billion evaporation of net worth (described by Forbes as a “goodwill write down”) that, coupled with fourth quarter losses of $45 billion, meant Time-Warner’s AOL “ended the year with a loss of more than $100 billion.” Meaning Time Warner lost $100 billion in 2003. In one year.

    We don’t know if Viacom has similar problems to account for the desperation tactics, but it’s likely that we will find out after this coming election.

    SEE CBSNews http://www.cbsnews.com/stories/2003/01/29/national/main538478.shtml

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