Fonterra responds on ethics

October 12, 2008

Last week’s NBR led with a story linking the disbanding of Fonterra’s ethics committee with the San Lu crisis and I commented on it here.

The comapny’s CEO Andrew Ferrier responded to the NBR with a letter to the editor this week saying the story was without foundation.

It’s not on line so here’s an abridged copy:

The suggestion that Fonterra has become a less ethical organisation under my leadership is outrageous and I reject it utterly. There is simply no factual basis for this story. . .

The article was entirely based on observations by the former external chairman of our internal ethics committee, Dr Simon Longstaff.

. . . As management and staff at Fonterra can verify, integrity and ethics are absolutely at the core of Fonterra’s way of working and corporate values and of my management style.

It was my decision . . . to disband the committee in the form that it was because I wanted to elevate ehtical considerations to the highest level of management under my personal direction.

Ethics has to be instilled and driven through an organisation from the very top and should not be the responsiblity of a middle and lower level management sub group.

. . . My and Fonterra’s every action in handling the San Lu crisis has been driven at all times by the highest ethical considerations. . . Fonterra’s sole priority was the health and safety of Chinese consumers and taking every practical step within the constraints of the Chinese system to protect them. . .

I have no questions over Fonterra’s ethics and agree with the importance of instilling ethics through an organisation rather than regarding them as an adjunct.

My concern is that Fonterra’s very high standards did not seem to be shared by San Lu in which it had a 43% investment.

Neither company can be blamed for the melamine poisoning which was an act of sabotage. But had the ethics and quality standards which Fonterra requires in every link of the production chain in New Zealand been required by San Lu in China the contamination would almost certainly have been picked up before anyone’s health was put at risk.

The company has learned the hard way about the difficulty of investing in other countries whose systems and standards are so different from ours. But the real test will be what it does now to ensure its standards are met everywhere it operates and that may mean it has to have a majority share in any overseas investments.


Are Fonterra’s ethics up to scratch?

October 3, 2008

NZ Farmers Weekly has an interview with Warren Leslie, the Dairy Board’s last chief executive, who said:

he would have “moved heaven and earth” to declare a product recall immediately he had information about poisoned milk.

He also said the Board had discussions with San Lu, in which Fonterra has a 43% stake, two years before Fonterra was created but they had other priorities.

“The whole arrangement in China needed to be very carefully thought through … if you don’t start with really good milk you can’t make the range of product we can here.

“The first thing you have to do is to try to get the standards raised. In any investment we might have made anywhere, we would have wanted to put our own people in, get our own standards in place and generally raise the bar,” Larsen said.

Does that mean the Dairy Board would not have been keen on a joint venture, or only invested in a majority shareholding?: “That would have been a matter for the board, but certainly from a management point of view the answer to that is yes.”

Larsen said his reaction to the SanLu crisis was “one of great sadness”.

“If you look at the chart of risk that most corporates use, the model we had had a big centrepiece and it in were the words ‘food safety’. Food safety is absolutely and utterly non-negotiable. Other risks are negotiable in business but if you are a food company your reputational risk, your brand equity is all on the line, and you do not put it at risk.”

So would Larsen, as Fonterra did, have initially settled for a quiet trade recall of Sanlu product, as advised by local Chinese government authorities? : “Like hell I would’ve.”

The NBR reports that former independent chairman of Fonterra’s disbanded ethics committee Dr Simon Longstaff also has concerns about the San Lu investment and said had the committee still been in place:

he was ‘almost certain’ it would ahve been involved from the outset in putting procedures in palce for setting up the joint venture with San Lu . .

Dr Longstaff is now the executive director of the St James Ethics Centre in Sydney. He said ethical considerations for Fonterra include:

* the “health and safety of the consumers of these products” – though Dr Longstaff accepts it’s extremely difficult to try to protect consumers against malicious conduct of others.

* Concerns for the welfare of Fonterra, and its capacity to generate wealth for New Zealand.

* The duty of a really significant New Zealand company not jsut to look after the singular interests of its farmers but also to recognise that whatever it does has the capacity to affect New Zealand’s reputation; and

* Whether the board or senior management have maintained a capacity to deal with these ethical issues in a complex world which “refuses to be tamed by our ignorance”.

“Most ethical questions are not good versus bd, right vbersus wrong – it’s competing interests all being [weighed],” Dr Lognstaff said. “The thing about making good decisions – it’s not jsut a matter of common sense. It requires engagement, confidence and you’ve got to care. If anyone in the company was involved in a decision which sought to place the interest of the company or its partners in China ahead of the children, then that in my mind would be fudnamentally wrong. A betrayal of the ideals of New Zealand.”

I don’t believe that Fonterra deliberately put commercial interests ahead of children’s lives. But I do wonder if the company had all the information it needed before it went into partnership with Sanlu; and the delay between its representatives on the board discovering there was a problem with melamine poisoning in the milk and the public recall indicates major deficiencies in its procedures for dealing with serious quality issues.

Inquiring Mind comments on and links to the NBR article here.


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