J&J Directors on the Line

A group of Johnson & Johnson (J&J) shareholders are seeking legal retribution for what they see as managerial oversights and ignorance of “red flags” that may have provided notice of the recent federal investigations of the company’s “manufacturing defects” and potentially illegal “marketing practices.” The multiple investigations began earlier this year when the company froze operations at a Pennsylvania manufacturing facility following a recall of children’s Tylenol. J & J is the world’s largest manufacturer of health care products, but in the past year it recalled over 40 different medicines because of incorrect or sloppy labeling and/or contamination of the products. The government investigations, and some of the recalls, involved, among others, Motrin and children’s Tylenol. (Johnson & Johnson Shareholders Seek Damages from Directors | Injury Board Charlottesville, 1/1/2011)

This is one suit worth watching. Generally, the courts have stayed clear of second guessing business judgment. Will this case be any different? The case may turn on whether or not the board acted “in good faith.” If, by some miracle, the courts side with shareowners, expect Robert C. Pozen’s recent call for professional boards to get a lot more traction. (see A New Model for Corporate Boards, WSJ, 12/30/2010)

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