суббота, 19 января 2013 г.

JOHNSON & JOHNSON.Corporate governance


       Introduction
Johnson & Johnson (J&J) is an American company, engaged in the research and development, manufacture and sale of a broad range of health care products. It is listed on the NYSE and its common stock is a part of the Dow Jones Industrial Average.
The corporation conducts business in 60 countries of the world focusing on the production of the goods related to human health and well-being. With more than 250 subsidiary companies worldwide J&J Corporation employs approximately 118,000 people having the headquarters in New Jersey, United States. 
Today the key people in the life of the company are the chairman of the board, William Weldon, and CEO, Alex Gorsky.

Founded in 1886 by the Johnson’s brothers, the company started with a production of ready-to-use surgical dressings. In 1920s the list of the products expanded when the company begun to manufacture skin and hair care. In 1941 a separate division for surgical products was created, which later became known under the title of Ethicon. In 1970s the corporation launched a line of products for women’s health care needs and toiletries. Later the shelves of the stores all around the world were loaded with baby care goods. And in recent years, J&J has expanded into such areas as biopharmaceuticals, orthopedic devices, nutritionals and internet publishing.

Difficulties Johnson & Johnson is facing?
During a routine inspection at production facility in USA on April 19, 2010 investigators found a few "manufacturing deficiencies" that led to manufacturing mistakes (New York Times, April 25, 2010).
It appeared that some products contained "a higher concentration of active ingredients that is specified", other contained "inactive ingredients that may not meat internal testing requirements" (Food and drug administration FDA). Following the line of examinations, it was decided by the board of Johnson & Johnson to recall some of the products from the shelves in the 12 countries.
In April 2012 company officials revealed that efforts to fix the manufacturing products that caused the recalls where taken longer than expected and some brands will not return to the shelves until 2013. The recalls and lost market share have cost the company $1,5bln. Also, to retool the Lordstown fabricating plant, J&J spent about $100mln (Wall Street Journal).
In April 2011 the company pleaded guilty in bribing European doctors and agreed to pay $70mln in fines (Telegraph, April 2011). In April 2012 a judge in Arkanzas ordered Johnson & Johnson to pay $1,2bln in fines for minimizing dangers associated with Risperdal, and antipsychotic drug.

Business Aims of Johnson & Johnson
According to Johnson & Johnson official website "People are our greatest assets". Attracting, developing and retaining a base of employees that reflects the diversity of Johnson & Johnson customers is essential to the company's success.
For a long time the company controlled the bigger part of health care market and produced a wide range of medical goods.
The Company is identified to have a tall organisational structure. It is organized into three core business segments: Consumer, Pharmaceutical and Medical Devices and Diagnostics, each of which has more departments in a command.
·         Consumer branch includes a broad range of products used in the baby care, skin care, oral care, wound care and women’s health care fields, as well as nutritional and over-the-counter pharmaceutical products and wellness and prevention platforms. These products are marketed to the general public and sold both to retail outlets and distributors throughout the world.
·         The Pharmaceutical segment includes products in the following areas: anti-infective, antipsychotic, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management and virology. These products are distributed directly to retailers, wholesalers and health care professionals for prescription use.
·         The Medical Devices and Diagnostics segment includes a broad range of products distributed to wholesalers, hospitals and retailers used in the professional fields by physicians, nurses, therapists, hospitals, diagnostic laboratories and clinics. These products include Biosense Webster’s electrophysiology products; Cordis’ circulatory disease management products; DePuy’s orthopaedic joint reconstruction, spinal care, neurological and sports medicine  products; Ethicon’s surgical care, aesthetics and women’s health products; Ethicon Endo-Surgery’s minimally invasive surgical products and advanced sterilization products; LifeScan’s blood glucose monitoring and insulin delivery products; Ortho-Clinical Diagnostics’ professional diagnostic products and Vistakon’s disposable contact lenses.

To hold a sustainable competitive position Johnson and Johnson intends to maximize the global power of diversity and inclusion to drive superior business. In order to achieve the above, the company set out a list of the following steps:
·         Develop a skilled, high performing workforce that is reflective of the diverse global marketplace
·         Forster inclusive cultures that embrace  the company's differences and bring innovation to accelerate growth;
·         Work with business leaders to identify and establish targeted market opportunities for consumers across diverse demographic segments;
·         Cultivate external relationship with professional, patient and civic groups to support business priorities.
However, after a line of scandals burst in the last two years the aims of the company has changed radically.  In April 2012, in one of the interviews of New York Times Mr Gorsky, CEO of the Johnson and Johnson, stated that the company "needs to rethink the ways it brings drugs to market, expand its reach into global markets and rebuilt the consumer confidence by returning recalled brands to pharmacies shelves".

New Corporate Governance Structure and its advantages
Setting up a new governance structure, Johnson &Johnson intends to change negative attitude of consumers, investors and shareholders towards the company, by portraying itself as willing to make extensive changes, while simultaneously reassuring consumers that its existing products are safe. With the same stabilize and consolidate its position on market.
Making changes to the existing structure of corporate governance, Johnson & Johnson will prove the public that the company conducted not only the external changes in a form of improvement of manufacturing conditions, but also internal changes in the form of management process and its regulations.
Johnson & Johnson might consider such step as recruiting new specialists in the area of production monitoring. Thus the company will ensure the public there is no more need for a concern with regard to the fraud issues.
The new Corporate Governance Structure will benefit the company in the following:
·         Bring corporate success and economic growth;
·         Return investors confidence as a result of which company can raise capital efficiently and effectively;
·         Lower the capital costs;
·         Bring positive impact on the share price;
·         Minimize wastages, corruption, risks and mismanagement.
New Corporate Governance:
At this stage the corporate governance of Johnson & Johnson adopted the guiding principles:
·         Maintain a well-designed system of internal accounting control;
·         Encourage strong and effective corporate governance from the board of directors;
·         Continuously review the business results and strategic choices;
·         Focus on financial stewardships.

Board Composition and its responsibilities
1. The number of Directors must not be less than twelve (including the Chief Executive Officer). Normally at least one third of the Board should be Executive Directors employed, full time by the Society in key senior management positions.

2. The Board should include at least two third of Non-Executive Directors (including the Chairman), where at least two of which must have the requisite personal skills for the office of Chairman.
These skills should include:
sufficient experience, stature and reputation in financial services, commerce, industry, public sector or professional life to command respect as Chairman of a major financial institution;
- professional and/or business management skills, preferably gained in a large commercial, industrial or public sector organisation;
- experience of relationships at Board level in one or more major companies or bodies;
- intellectual strength, integrity and an ability to consider and discuss issues laterally and strategically;
- awareness of political, regulatory, market and consumerist issues together with an understanding about mutuality;
- interpersonal skills and an ability to make good judgements of people;
- a willingness and availability to serve as Chairman and sufficient time to devote to those duties for a minimum of 5 years;

3. A Director elected by the Board to the office of Chairman should expect to serve between 3 and 6 years in such office.
4. In order to appoint a new Chairman, the Nomination Committee should prepare a job specification, including an assessment of the time commitment expected, recognising the need for availability in the event of crises. A Chairman's other significant commitments should be disclosed to the Board before appointment and included in the annual report. Changes to such commitments should be reported to the Board as they arise, and stated in the next annual report.

5. Non-Executive Directors should be persons with similar skills (although not necessarily to the same extent or level) as are required for the office of Chairman, combined with relevant skills and knowledge with regard to the age and experience. These must be appropriate to:
- direct the general business activities of the Society (and its subsidiaries) and,
- be able to constitute specialist Committees from amongst its own members (i.e. finance, distribution, marketing, retailing, etc).

6. Non-Executive Directors should serve more than 9 years, unless a serving Chairman seeks election as a Director for a third time.

7. Individual Directors must be free of any conflict of interest and are required to disclose their business interests to the Board and Committees of the Board on regular basis.

8. Non-Executive Directors should be prepared to review their effectiveness (e.g. with the Chairman) and (if appropriate) to undertake any training and development that would help to enhance their contribution to the quality of direction by the Board.

9. The Chairman should address the weaknesses of the Board and, where appropriate, propose new members to be appointed to the Board. He also may seek the resignation of Directors (if such act is in the interests of the company only).

10. There should be a sufficient contact between the board members and Society members so to understand the issues and concerns and keep in touch with member opinion. Such communication should be in most practical and efficient ways (i.e. AGM, visits to the factories and plants, etc).

11. The board of direction should have 40% representatives of a female sex as a compulsory condition.

12. At least one representative originating from an overseas market should be included to the list of board members (i.e. Asian, European, African, etc).

Executive remuneration
According to European Corporate Governance Institute: "the financial institution should adopt an overall remuneration policy that is in line with its business strategy and risk tolerance, objectives, values and long-term interests" (ecgi.org). In order to attract skilled individuals, the control functions should be rewarded.

Based on the new Corporate Governance Structure, Executive Remuneration policy should be as follows:
·           Excessive risk-taking should not be encouraged;
·           The aim of any policy should be thus so to align personal and company objectives, including the overall business strategy, company values (compliance culture, ethics, etc).
·           The company should not approve actions where individuals take risks in excess of the business's risk tolerance. It is in the interests of the company at all times give due considerations to the longer term.
·           Control functions (i.e. Internal Audit, Risk Control and Compliance) should be adequately compensated in accordance with their own objectives;
·           The remuneration policy should be transparent internally and adequately disclosed externally for a public consideration;
·           All executives should have an access to the remuneration policy. They should know the criteria used to determine remuneration;
·            The appraisal process should be properly documented and transparent to the executives involved;
·           The company should be able clearly provide its remuneration policy to its authority upon request (This may include, for example, a remuneration policy statement which is subjected to regular review).
·           The board of directors should approve the principles of the overall remuneration policy of the company. The implementation of the remuneration policy should be subject to central and independent review.
·           Remuneration should be based on a combination of individual and collective performance (where defining individual performance should involve identifying: skills acquired, personal development, commitment to the business strategies, compliance with the company's controls and systems and contribution to the performance of the team) ;
·           Bonuses should be calculated based on a measure of performance which is adjusted for risks and the cost of capital;
·           The remuneration of non-executive directors should not be linked to the financial short term results of the company. Other factors, such as the time invested and their respective responsibilities should be considered;
·           The relation between bonus and base pay should be of reasonable proportion;
·           Base pay may be represented in a form of cash pay award;
·           Bonus payments of significant size should be represented in the following form only: company shares, options or other funds held in a trust or similar account;
·           Big bonuses should not be awarded purely in up-front cash (Up-front bonus payment will be considered as fraudulent activities)

Evaluation of Board and Management
(i) Board
Evaluation of the board performance is beneficial as it determines and approves board practices and procedures. There are two ways of doing so:
·         Self-evaluation (process carried out by the board of the company itself
·         Involvement of an independent body that will perform evaluation process (i.e. Institute of directors in Ireland - company, providing  a board performance evaluation service)

Self evaluation should be performed as follows:
 - reports completion and interviews conduction should be performed by an independent body (i.e. member of audit, non-executive director from another institution, etc);
- All directors should be briefed where general questions are addressed (opinions and view, with regard to other members of the board);
- Questionnaires, addressing the key areas of the business should be completed by each member of the board. The key areas should include: strategy, business principles, risk management and internal control, performance and measurement, stakeholder management and board practice;
- Assessment and evaluation of performance of every member of the board should be carried out. This should involve review of contributions made throughout a whole year, decisions made, risks taken and problem solving.
- Report on each member of the board should be completed and filed into one final report;
- The whole board should be involved in reviewing the final report in order to identify strengths and weaknesses of the board;
- As a result of such reviewing, the board should develop a plan on addressing the weaknesses of the board members so to improve productivity of the board as a whole.

(ii) Management
Process of management evaluation should be conducted by the members of board as follows:
- gather information on every manager from other managers, customers and employees;
- collect documentation with regard to performance, disciplinary actions and achievements of the managers;
- question the managers;
- request a self-evaluation from all managers;
- compile a report on each manager and file into one final report;
- review the report and identify weaknesses and strengths of the management;
- develop a plan on how to resolve the weaknesses and improve the management productivity.


Related articles:
JOHNSON & JOHNSON 1
JOHNSON & JOHNSON II.HR

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