Brown envelopes, botulism and Fonterra

August 11, 2013 § Leave a comment

Fonterra CEO Theo Spiering fronts the news media in Beijing

Fonterra CEO Theo Spiering fronts the news media in Beijing

It is difficult to feel sorry for Fonterra. In fact, it is hard to feel pity for any business with a monopolistic influence. Remember the bad old days of Telecom and the deliberate underinvestment in New Zealand broadband? The latest bolt of lightning to hit New Zealand’s Big Dairy may not be a doppleganger for the ghastly 2008 Sanlu poisoning disaster in which hundreds of babies in China drank toxic milk but it still has the potential to do as much harm.

Luckily, there is no human cost this time round, unless you bet on the heads that are likely to roll over how long it took to identify a botulism threat. The source of the contamination – a dirty pipe – happened last year but it was only identified this year and revealed.

Although the real danger was small, botulism is potentially fatal and the company has again been thrown into another massive damage control exercise, recalling product, saving face and limiting the withering publicity, especially in a key market, China.

China is important because that’s where a lot of Fonterra’s projected growth in the coming years is set to come. Both the Chinese and New Zealand governments have asked the company to please explain and the dairy farmers who are shareholders in the business are angry because of what they see as another breach of trust by the white collar class that runs the corporate side of things.

The botulism fright makes Fonterra’s DCD fertiliser contamination scare last year look like a practice run, but if you add it all up, the charge sheet is starting to fill up. If there is another quality scandal, the damage will be deeper and not just to Fonterra but also to the brand the New Zealand government has built for the country as clean and green.

That’s why the stakes are so high. It is no wonder Fonterra’s chief executive, Theo Spierings, flew directly to Beijing to mollify Chinese fears about the safety of New Zealand milk products. Chinese consumers have enough to worry about with their own domestic food production. Buying overseas food products at a premium means they shouldn’t have to worry about its safety and if Chinese parents lose confidence in New Zealand Made, they will buy baby formula from our competitors.

With so much at stake, I followed news of the Fonterra response on Twitter. There would have been considerable pressure to deliver a convincing performance to win over the Chinese and foreign media in the Chinese capital. A Daily Telegraph journalist, Malcolm Moore, live tweeted the media conference.

There were a couple of small gaffes. Moore tweeted Theo Spierings referred to the Republic of China twice which is the name for Taiwan (China’s official name is the People’s Republic of China) but by and large, the apology delivered had been convincing.

But there was one curious aspect to the whole media show. Moore said brown envelopes were given to Chinese journalists but apparently, not to the Western reporters and a Fonterra public relations flack was evasive about what was in them.

It may be a minor detail in the scheme of things but it is interesting for illustrating a cultural trait of doing business in China. Assuming that what was inside the brown envelopes was cash, Fonterra would have been ostensibly trying to elicit the goodwill of the Chinese journalists there with a small gift.

The amount of cash would not have been significant. It would have been to cover the cost of travel and maybe lunch. When I worked at the Asia New Zealand Foundation, visiting Shanghai Daily journalists used to tell me that this is a common practice in China, particularly in covering business events and the inference of gift giving in such a context is favourable publicity.

The difficulty for Fonterra in following this local custom is that it looks like a bribe, in a country where bribery is a hot political, social and economic issue. Gift giving is a Chinese custom and, unlike in the West, cash is an acceptable gift. Every Chinese New Year, Chinese families give red packets of cash to children and others.

But in a business networking context, the line between giving gifts and bribery is such a grey one. Many foreign companies working in China have an official no cash gifts policy – either receiving or giving. I found these guidelines on a US China business solutions website:

Although gift giving is an important part of Chinese culture, the US Foreign Corrupt Practices Act prohibits American companies from making “corrupt payments” of money or anything of value to foreign officials for the purpose of obtaining or keeping business. This includes both direct payments and indirect payments through intermediaries. The law provides an explicit exception for “facilitating payments” for “routine governmental action” such as obtaining permits, processing governmental papers, and securing services such as police protection, mail pick-up and delivery, phone service, power and water supply. However, the lines between “corrupt payments” and “facilitating payments” can sometimes be hazy, so when in doubt, seek advice of counsel.

The public relations company employed by Fonterra might carry out this practice with journalists for many of its clients under the category of ‘facilitating payments’ but it does raise uncomfortable questions about whether to do in Rome as the Romans do. What happens when this practice runs counter to a corporate culture that is trying to underline its integrity and transparency as its leadership tries to repair its reputation after making a second egregious mistake? If so, then maybe Fonterra should come clean about it and not evade the issue.

It’s a conundrum to ponder and it could, of course, be much worse, as Glaxo Smith Kline is finding out to its cost.


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