Major product recalls are significant events in economic life. The day-to-day lives of consumers are affected. The stock value of the company will take a hit. Whether the impact will be long-term or short-term depends in large part on how the recall is handled.
For consumers, the advice is pretty simple: take major product recalls seriously. In the hustle and bustle of daily life, it’s aggravating to have to deal with something like taking your car back to the local dealer, especially if you haven’t been impacted by the defect. But safety is more important.
The company whose product is being recalled has a tougher dilemma on their hands. They answer to shareholders and a recall always means a hit to the bottom line. While one would hope the safety of the consumers is the top priority (regardless of impact), it’s also safe to say that handling a recall in a responsible manner is simply good business.
When a company looks at the long game—by immediately taking responsibility for the defect and issuing a full refund—they can actually come out stronger. Studies have shown that 87 percent of consumers become more likely to purchase a particular product if they know the company acts honorably after a mistake.
The evidence from an objective evaluation of stock market share prices after a recall further supports the theory that brand loyalty goes to the honest. One of the most famous—and tragic—product recalls in history happened with Tylenol in 1982. After 13 people died, it was concluded the pills were being laced with cyanide after they hit the shelves.
Even though the fatal actions were taking place after the Tylenol was shipped out, manufacturer Johnson & Johnson immediately took responsibility and recalled all the remaining bottles for repackaging. It saved lives—and from a financial standpoint, the company won plaudits for its bold action in responding to the crisis.
On the flip side, Toyota was less than forthcoming in a 2010 recall of over 8 million cars. The gas acceleration pedal was becoming stuck in the floor mat and may have been responsible for 89 deaths over the course of a 10-year period.
Toyota would later have to pay a $1.2 billion fine from the Justice Department for covering up what the company knew about the car’s shortcomings. There were over $2 billion in additional product-related costs after the recall. Over 3 billion dollars was lost because someone decided it wasn’t worth fixing the floor mats. Toyota’s stock price continues to run behind the market as a whole, even 10 years later.
The phrase “honesty is the best policy” can seem hackneyed and hard to live by. But even in the cutthroat world of big business, it remains true.