Lessons by the Whey
I returned from China straight into a China Business Summit, where the profound anger of Chinese consumers was clearly and strongly expressed. The Beijing Chief of the Financial Times described it a disaster for Fonterra and New Zealand. While more diplomatically expressed, the Government of China is annoyed and disappointed. No question – we cannot survive a fourth strike.
I have now read the WPC80 Precautionary Recall Report. Although scrubbed for the upcoming damages litigation, it seems thorough and frank. Usefully for the rest of us, it contains many lessons – for management and for directors. I will focus on the latter.
The fundamental governance lessons can be grouped into Risk, Consumer Responsiveness and Global Best Practice.
Risk:
- The culture of Fonterra below top-level was oblivious to the “Explosive Reputational Risk” of C. Botulinum. The dots were not joined by those accountable.
- Not testing SRC bacteria and the absence of a certified test lab for C. Botulinum in New Zealand were ongoing risks.
- The company was caught by Transition Risk
- as it moved slowly from a decentralized production-led co-operative to a centralized consumer-brands business;
- as it transferred between IT platforms in some factories, losing traceability;
- as the organization staggered under “restructuring fatigue”.
- Decision making at plant level can be penny-pinching, without factoring risk, so that rework of rejected product using suspect old equipment is undertaken, rather than downgrading or dumping.
- The Crisis Management Plan was inadequate for a global food company. Since deadly pathogens thrive in dairy products, this failing is remarkable.
- At Board and top management level, Risk Management was not given adequate status and authority.
Consumer Responsiveness:
- Inherited from the legacy companies, the “Fortress Fonterra” paradigm still exists. Not good at listening and engaging with consumers, customers, Government and other stakeholders. The exception is the farmer shareholders.
- China is a unique consumer market, more anxious about food safety and more skeptical about manufacturer’s claims than any other. Online consumer research into products is intense. Moreover, its Government recognizes an unsafe food event as a politically inflammatory issue.
- As a B2B manufacturer, Fonterra has chosen not to engage with consumers to the depth of a B2C branded foods business.
- Weibo and WeChat social media in China are huge and lightning fast. A brand can be destroyed in hours. Fonterra’s social media team was caught short.
Global Best Practice:
- Because China is the hardest market for foreign businesses, and because Fonterra carries NZ Inc. with it, global best practice and exemplary food quality standards are paramount. The Report recommends these to the Board above all else.
I wish Fonterra every success in its reputational rebuild. It is crucial for us all.