Every year, shareholders at public companies vote on whether their board members deserve another term or not. It's typically a non-event; the average director of an S&P 500 company wins 96% of the vote, according to proxy advisory firm ISS. But the directors of healthcare giant Johnson & Johnson, which hosts its annual shareholders' meeting Thursday, may face a rockier path to reelection. Investors have begun to turn against the board, with a growing contingent of shareholders voting against J&J's nominees.
In 2011, the average J&J (JNJ) director won approval from just 88% of shareholders, down from 94% in 2009. That may not sound like a steep decline, but it's actually quite low for a large corporation, according to Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. "When you get into the 80s, that's a real problem," he says.
Two J&J directors -- Charles Prince, the former CEO of Citigroup (C), and Michael Johns, the chancellor of Emory University -- received support from about 80% of voters, which is well inside the "danger zone," according to Paul Hodgson, a senior research associate at GMI, a corporate governance ratings firm. "That's a very substantial proportion of shareholders," he says. "It should be enough to make a board sit up and take notice."
A spokesperson for J&J wrote in an email that the board will analyze voting results after its annual meeting, as it does every year.
Red flags: Disappointing financials, recalls
It's easy to see why J&J's shareholders are frustrated. In recent years, the company has been charged with several legal violations and endured a seemingly endless series of product recalls. Its reputation has taken a hit. Back in 2009, before the recalls began, J&J was ranked fifth on Fortune's World's Most Admired Companies list. In 2012, J&J's overall rank dropped to 12.
The company's financial results have also been underwhelming. J&J's stock has delivered a total return of 5.3% over the last two years, while the S&P 500 has returned 17.5%. Its net income declined in both 2009 and 2011, in part because the company lost more than $1 billion in sales because of recalls of over the counter drugs.
Investors are typically wary of punishing directors for individual missteps. But J&J's troubles have been widespread. Two years ago, the Department of Justice charged the company with paying kickbacks to Omnicare (OCR), the nursing home pharmacy operator. Last year, the company agreed to pay a $70 million settlement over allegations that it paid bribes overseas. An Arkansas judge recently ordered J&J to pay $1.2 billion in penalties for illegal marketing practices.
J&J has had to recall millions of bottles of over the counter drugs made by its McNeil subsidiary, citing issues such as bad odors and an excessive amount of active ingredients. After the initial spurt of recalls in 2009, J&J shut down the McNeil plant, promising to revamp its quality assurance practices in order to get production back on track. But recalls keep popping up. As recently as February 2012, the company had to recall more than 500,000 bottles of Tylenol. J&J now says it won't reopen the plant until late 2013.
