The serious and repeated errors made by Fonterra over DCD should mean an end to the cosy little concessions all New Zealanders make to the dairy giant

You would have thought Fonterra might have sharpened their crisis management after the tainted milk scandal in 2007, which illustrated the extreme sensitivity around the integrity of their products. Instead, Fonterra have made a ham-fisted mess of the DCD issue.

The company has managed to escalate a small and manageable issue into one that endangers the reputation of the entire New Zealand agricultural export sector. The substantive issue should not have been a crisis: traces of DCD (dicyandiamide) were found at levels that are not harmful to human health. I completely accept the safety of their products. 

The only reason this issue transformed into crisis is that Fonterra has been less than frank.

They should have been open and transparent, setting out the full facts when they knew them. They should have made public the information they gave the government about the nature of DCD. There should have been no limit to the information they provided about the science around DCD or the affected products. They should have trusted consumers to decide for ourselves what to do with the information instead of expecting consumers to trust Fonterra.

What's more, they should routinely tell consumers everything they know about what’s in their products. Pointing out that they are monitoring for substances and disclosing results would reassure the public, and even more so if they have to go to some trouble and disclose barrels of information. If occasionally their monitoring turns up something that needs attention and then they tell us what they are doing, then that would make me trust them more.

Because they didn’t do the right thing, they lost trust. Consequences must flow from this.

Fonterra knew about the issue before its share float. Its behaviour is indistinguishable from that of a company that put its own capital management priorities ahead of the best interests of its customers. 

The information appears to have affected its share price. If so, then it's 'material information', and therefore it’s hard to see why Fonterra didn’t have an obligation to disclose before it listed. By failing to do anything on this point, the NZX and Financial Markets Authority have put the interests of Fonterra ahead of the interests of small shareholders – and when regulators put the interests of listed companies ahead of those of investors, those investors get more reluctant to invest. Fonterra's cavalier behaviour is a good example of why New Zealand has long had one of the world's worst performing sharemarkets.

Fonterra’s chief executive Theo Spierings has made the crisis worse by attacking and threatening critics of his flawed handling.

He failed to understand the fault here lies entirely with Fonterra. The only statement he should make is to take responsibility and provide information.

Instead of being a good corporate citizen, Spierings has minimised, evaded and implied that anyone who asks questions about DCD is endangering New Zealand. He has the responsibility exactly back to front: the risk is created by his own failure to be forthcoming.

Fonterra’s failure has Chinese trade partners losing trust not just in a flawed and floundering company, but in all of New Zealand. That can’t be tolerated.

Successive governments supported Fonterra on the logic that what’s good for Fonterra will be good for New Zealand. The latest episode shatters the reasoning. Fonterra's selfishness is threatening the wider economy, not helping it. Business writer Fran O’Sullivan noted the Chinese People’s Daily – a mouthpiece for the Chinese government – wrote:

“The DCD incident has made people ponder the issue of whether foreign milk is reliable and whether Chinese consumers can believe in it unreservedly.  Can we heighten the vigilance of Chinese people toward foreign milk powder?”

A Wall St Journal headline (amongst others) reported a "milk scare" had hit New Zealand. Creating those headlines is economic vandalism, for which Fonterra is totally responsible. Or irresponsible.

Once a company no longer deserves to be trusted, it is impossible to justify excluding it from the normal laws that apply to the rest of our economy. The consequence for Fonterra’s botched mishandling of the DCD issue should be the withdrawal of the cosy political consensus that has excluded the company from the Commerce Act.

That will cause the break up of the company, and end the decade-long privilege it has enjoyed. If New Zealand had multiple dairy export co-operatives, we would spread risk instead of being held hostage by one errant corporate.

Fonterra was given special status only because it was supposed to benefit the entire economy. Instead it's behaving as an arrogant, entitled monopoly. The cooperative model works well, but Fonterra made these errors when it was shifting from a member-owned model to a shareholder-based model. The consequence is threatening our economy.

It can’t continue.

Comments (2)

by Peter Salmon on February 13, 2013
Peter Salmon

Fonterra seem to have a habit of escalting problems into crises and then handling them badly.

 

As many have noted before Johnson and Johnson in the USA demonstrated how to handle such problems effectively when their Tylenol product was the target of a scare campaign

Fonterra seem to be impervious to learning.

by Brendon Mills on February 16, 2013
Brendon Mills

Not sure if breaking up Fonterra is the answer. Despite its flaws, I am proud of its existence, and its co-op ownership structure, which enables a wide range of people to have a stake in the business, from iwi incorporations to SOE's to universties to family owned holdings. Hell, it even *employs* its truck drivers, (and not have them as owner-operators).

Its just that there needs to be more farmer input, rather than outsourcing the whole thing to the the suits.

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