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29 September 2008

Does Fonterra deserve its Sanlu punishment?


Fonterra is facing a major crisis over the way it and Sanlu, which it 43% owns, handled the recall of Sanlu's infant formula contaminated with the toxic protein-boosting agent melamine.

Some highly emotional criticism has been fired in Fonterra's direction, as might be expected given the nature of the crisis. The human implications of contaminating infant formula on such a scale are horrendous.

But are the media and everyone else who is having a go at Fonterra judging the dairy giant fairly? Or how much of the criticism is driven by a media pack mentality and a thirst to pass judgement?

Coincidentally, the coroner last week released his judgement on the unfortunate case of Mrs Folole Muliaga who died last year after a contractor for Mighty River Power disconnected power to her house. As a result, the oxygen concentrating machine on which she relied for respiration ceased to function.

Mrs Miliaga's death triggered a media storm which pummelled Mighty River Power, the district health board and the unfortunate contractor. Words like ‘manslaughter' and ‘murder' were tossed around with scant consideration for the lack of facts about what happened on the disconnection day and with even less regard for the impact this might have on the contractor involved.

The coroner's decision, many months later, has totally exonerated the contractor. But no doubt the bruising effects of media molestation will stay with the contractor and his family for the rest of their lives.

Sure, there were huge gaps in the district health board's procedures. And the standard of PR practice in Mighty River and its subsidiary Vectra were clearly lamentable. But there was no manslaughter. No murder.

So, if we ever get to know the facts of what happened with Sanlu (which is far from likely), how fair will the judgements of Fonterra by the media and the commentariat be in the cold, hard, light of day?

First off, it is hard not to be amazed by the supposed expertise that so many New Zealand commentators have about the complexities of doing business in China, a third world country with a Communist Party dictatorship and a culture that has almost nothing in common with our western world.

Putting aside the cultural complexities, we are talking about a regime which has yet to adopt the rule of law as we would recognise it. Where capital punishment is regularly applied to defendants who don't enjoy the rights we in the west consider normal. 

Then there is the matter of dual civil and Communist Party jurisdictions, that overlap on a county, state and national level. On top of that, in many regions there is a military administration that reports direct to Beijing, as does the Public Security Bureau.

Given these realities WHAM believes the biggest mistake that Fonterra has made was to get involved in Sanlu in the way it did. A 43% shareholding in a Chinese food manufacturer inevitably had more downside than upside for Fonterra.

Look at the equation for a moment. The Chinese partner got Fonterra's capital, world-class food manufacturing and distribution expertise, and most importantly the cred that came with being associated with a world brand leader. In return, Fonterra got a toehold in a market where food integrity scandals are an almost daily occurrence.

What a price to pay. Putting your brand – your most important asset – at risk in return for getting market knowledge that could have been achieved in many other, less risky, ways. If Fonterra was going to buy into Sanlu, its shareholding should have either been below 10% or been large enough to give it day-to-day control.

The second mistake was not to have anticipated the risk and to have a Fonterra-controlled plan in place to deal with it. No business likes scandal, in New Zealand or China, but in China the consequences both legal and cultural (loss of face) of admitting failure are so much greater. Getting Chinese managers to ‘fess up' quickly – one of the first pieces of advice in any crisis manager's toolbox – was always going to be a huge hurdle.

Beyond those fundamental errors, it is still too early to determine what level of blame Fonterra should shoulder for the failure of the company to get a product recall into the public arena. As many have pointed out, 1 August – when Fonterra first learned about the scandal – to 11 September, when the western media found out, is a very long time.

But it's a long time only in a western context. For the reasons explained above, it is not a very long time in China – especially when the period covered the Olympics.

The only remaining mystery is why, when Fonterra had six weeks to prepare for the public release of news about the crisis, they made such a hash of it. The company is famously defensive in its media relationships, but it does have the benefit of the advice of Baldwin Boyle, one of the best large PR firms in the business.

Waiting five days – from 11 September to Andrew Ferrier's live press conference on 17 September – to explain yourself and most importantly, to apologise to the victims, is such a breach of good PR practice that there must be a reason for it. It was Fonterra's one chance to take some measure of control over their own reputation and they blew it.

Since then, leaks of what are purported to be Sanlu internal memos have appeared on Chinese blogs. These, according to the Sunday Star Times, talk of Sanlu paying $640,000 for advertising on Baidu, a Chinese search engine, in return for having negative stories blocked from search results.

While the Sunday Star-Times is describes this as a "PR Protection Deal", it has as much to do with legitimate public relations practice as cooking the books has to do with legitimate accountancy.

The big PR lesson Fonterra should be drawing from this nightmare is it failed to require Sanlu to adopt world-standard reputation management practices as a condition of its investment. Why not, we don't know.

But if the big co-op is so blind or negligent that it allowed a major subsidiary to operate with a such an appalling lack of professionalism in such a key business discipline, what does it say about the standards Sanlu was applying in its other operational disciplines -- technical, HR, legal and financial?

And if this was allowed to occur in China, what about South America and elsewhere?

As with the Folole Muliaga tragedy, a lot of the media coverage arising from the Sanlu disaster has been ill-informed, emotional and too quick to apportion blame. But in both cases the core concerns of the public, as expressed imperfectly by the media, are to do with the way large businesses deal with ordinary human beings.

Would Folole Muliaga have died when she did, if a major power company had acted professionally and humanely in its dealings with her family? Almost certainly, no.

Would thousands of Chinese infants have been sickened by Sanlu's infant formula if Fonterra had effectively controlled its Chinese investment and insisted on the company adopting world-class business practice? Possibly. But would the recall been carried out earlier, resulting in fewer ill children and less damage to the brand. Almost certainly yes.

Fonterra deserves the hard time it is getting in the media. Hopefully the traumatic lessons learned will mean no repeats.


- Trevor Walton

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