Confidential Witness: J&J Knew Tylenol Factory Was Failing in 2007

A claim by shareholders suing Johnson & Johnson (JNJ) that management knew about quality control problems at the company's troubled Tylenol plant in Fort Washington, Pa., as early as August 2007 shows that you just can't keep secrets inside really big corporations.

The suit, brought by investors on behalf of the company against J&J's own management, including CEO William Weldon, alleges that J&J has been systematically mismanaged since 2003 when it began ignoring dozens of "red flags" in the form of litigation alleging illegal marketing practices, quality control problems, and subpoenas from federal authorities seeking information about how the company sells drugs.

Most of the allegations are old. But there's a firecracker buried on page 26 of the suit, which Bloomberg didn't report: The plaintiffs allege they have two confidential witnesses ("CW4" and "CW5") who worked inside J&J's McNeil Consumer Healthcare facility in Fort Washington. One witness says that staff at the plant sent a report to former worldwide chairman Colleen Goggins in 2007 describing "widespread manufacturing problems" at the plant (click to enlarge):

The other witness says equipment at the plant was so old it was ruining batches of medicine:

CW4 worked in the Validations department. CW4 stated that he had learned that upper management refused to invest in new equipment at the facility. CW4 explained that the Validations department had identified that certain equipment needed to be replaced. CW4 stated that the effort to convince upper management to purchase new equipment started before he worked at McNeil and continued throughout his tenure. CW4 stated that due to the age of the machines, there were times when the machines would not work at all, or the machines would completely ruin a batch or take three to four times longer than they should.

Goggins resigned in September, despite being a potential successor to Weldon. If she did ignore problems at the plant brought to her by her own employees, her early retirement now makes a whole lot more sense.

Moreover, this is a lesson about transparency and secrecy in large corporations. One of the main problems with J&J is its size and structure: It is a jumbled archipelago of 250 companies in 57 countries, all with separate names and management trees. It has about 115,500 employees. How likely is that employees will be able -- or willing -- to keep the secrets management wants them to?

And, more importantly, why should they? On top of J&J's Caribbean-style corporate structure, Weldon and Goggins made a disastrous decision in 2006/2007 to decentralize J&J's quality control and compliance programs. This left them literally unaware of what was going on inside their various operating companies.

J&J is a virtual case study of the difficulties of keeping secrets in the modern corporation and the liabilities that attempting to do so creates. Secrecy is not a strategy. It's a sign of failure.

Related:

• Tylenol Chief Keeps His Job Despite 11 Product Recalls
• How J&J Allowed Its Tylenol Factory to Rage "Out of Control"