Peloton Interactive Inc. on May 5 announced that it is recalling its treadmills in a statement from CEO John Foley who also apologized for the company’s initial refusal to comply with federal safety regulators’ prior request for this action. George Ball, assistant professor of operations and decision technologies and Weimer Faculty Fellow at the Indiana University Kelley School of Business, studies the causes and effects of product recalls. Below are comments from Ball.
“Recall decisions like this are very difficult for managers to make, especially the ones that are high profile and associated with consumer injury. Managers have to balance the firm financial health with consumer safety. Thus, this is a rich area of research. The research that my colleagues and I undertake in this field deal both with the regulator and the firm. My comments will attempt to address both perspectives.
“I will start with the regulator. I am currently involved in a research project with two colleagues that is specifically critiquing the Consumer Product Safety Commission for situations very similar to this Peloton recall. There are three main regulators in the US that oversee product quality and in particular recalls: the FDA, NHTSA and the CPSC.
“Of those, CPSC is the least proactive and in my view, least successful in properly managing product recalls and their timeliness. This is because there are two main ways in which a firm can push firms to recall; they can force them to, or they can work with the firm management to help encourage them, or nudge them, to recall. The FDA is very good at influencing firms while NHTSA is quite good at mandating recalls. CPSC does neither well.
“In particular, the FDA frequently chooses to use their relationships with senior quality executives at firms to nudge them to recall when FDA feels it may be necessary and the firm has not yet acted upon the quality problem. Conversely, NHTSA mandates approximately 20 to 30 percent of auto recalls, such that they choose to force instead of nudge. However, in both cases, while neither industry (medical products and autos) are perfect when it comes to recall timeliness, and both have suffered unfortunate well-known examples of firms dragging their feet in the recall decision, both have a well-developed approach.
“CPSC mandates practically no recalls and they do not, from my research, have strong relationships with firm executives that can help them nudge firms to make the quick recall decision. Thus, this Peloton example is one of many in which consumer product firms may take too long to recall.
“From the firm perspective. There are several potential red flags that may indicate the firm took too long. The longer a consumer product industry CEO has been in their role, the slower they are to make recall decisions. This is because the longer a CEO is in the role, the less open they are to taking responsibility for such high-profile mistakes. Interestingly, a new CEO, such as one who has been in their role for two to three years, is much more likely to recall a faulty product.
“The CEO of Peloton definitely falls into the category of a fairly long-tenured CEO who has his reputation tied closely to the firm’s success. Secondly, the more stock a CEO owns in their firm, the slower they are to make the recall decision, because they are trying to protect their financial welfare. The CEO of Peloton appears to have a significant fortune at stake in Peloton stock, which would be consistent with our research. The more stock a CEO owns, the slower the firm take to recall defective products.”