Corporate Governance
• 6 minute read

Lessons from Fonterra’s Food Scandal

What is the difference between East and West in handling a crisis?

By Louisa Wah Hansen

New Zealand infant formula manufacturer Fonterra apologized publicly, and relatively quickly, for its product safety issue that was at the center of yet another food safety scandal in China — but this time it concerns a foreign company. Interestingly though, Fonterra was actually perceived as an “honest” company by China’s netizens, compared with how they viewed domestic producers when the melamine scandal broke a few years ago.

Why is there such a difference between the way Chinese consumers view domestic manufacturers who have committed food safety violations and foreign ones that have done the same?

Transparency Counts

Rachel Catanach, senior partner, senior vice president and managing director of Fleishman Hillard Hong Kong, a U.S. headquartered public relations and marketing agency, says that what sets the two apart is that domestic companies often lack a clear course of action that would follow a crisis, whereas foreign companies—in this case, Fonterra—tend to delineate how they plan to remedy the problem.

“It’s not just about transparency at the time of the crisis but transparency as an ongoing commitment and an ongoing process,” she explains. “That level of communication about the whole supply chain is really important.”

Prof. Denis Wang, Associate Professor of Management at the Chinese University of Hong Kong (CUHK) Business School and Director of its School of Hotel and Tourism Management, says that much business research has shown that transparency is a prerequisite for trust and for sustainable relationships. “If something goes wrong with their products, a company should tell consumers right away,” he says. In the case of Fonterra, he believes the company has done a good job in disclosing what it does know and in empowering consumers in the first instance with that knowledge.

“By fully and quickly disclosing, apologizing and treating customers as partners, and rectifying the problems to the best of its ability, customers are more willing to forgive the company,” he says.

The fact that the CEO of Fonterra personally went to China to offer a public apology as soon as it was practical was something much appreciated in the cultural context of China. “That was a very important step in showing the company’s commitment,” says Catanach. “But of course just saying sorry isn’t enough. It has to be action. People are forgiving about one mistake but if this happens to Fonterra again, then consumers’ perspective won’t be the same as now.”

While something did go wrong along the supply chain that had led to the crisis, Catanach says the company’s strong supply chain management and traceability has allowed it to isolate the problem fairly quickly and be quite specific about which parties were affected and which were not, in order for them to act quickly on the recall and avoid panic among the masses.

“Something has to be in place well before the crisis. Ongoing commitment to supply chain transparency and traceability is a really critical factor,” she says.

Prof. Wang believes it is perfectly normal for a company to make mistakes while undertaking innovative changes, such as changes to its supply chain operations. As long as it rectifies the mistakes and discloses them along the way, the value of its products would improve in the end and consumers would understand it.

A Mask for Corporate Insecurity

Why has it been so difficult for Chinese companies to be upfront and honest about wrongdoings and to offer public apologies?

According to Prof. Wang, companies in mature economies have had many years’ experience in corporate governance, and they understand how empowering their consumers would help build sustainable relationships with them. By contrast, in China, due to historical and cultural reasons, companies have been treating customers and shareholders as adversaries instead of allies.

“They have this mindset that the success of an enterprise relies on how they position themselves to leverage certain advantages in government policies and to maximize benefits. So they believe the less consumers know about what goes on in their companies and about their products, the better position they are in. Basically, they have a natural tendency and preference to empower themselves and disempower consumers and shareholders,” explains Prof. Wang.

“Companies in China have huge egos,” he continues. “If they admit their shortcomings, they believe their customers would not want to buy from them again. This mentality is totally outdated.”

Prof. Wong observes that consumers in China are developing and maturing very quickly and they prefer to see a more human side of companies instead of hearing bureaucratic and untruthful excuses for the mistakes they have made.

“Chinese consumers are quick in accessing information on the Internet nowadays and they are very smart. In fact there is a convergence between them and global consumers in terms of what they know. But Chinese companies’ attitude and crisis management skills are still lagging far behind.”

According to Catanach, there’s definitely a consumer drive for more transparency. She cites social media sites like Sina Weibo and WeChat as channels of by consumer activists.

“Sina Weibo and other channels are de facto pressure groups in many respects. There are consumer activists…. This is making Chinese companies look at how they do things differently.”

“Both are extremely powerful channels,” Catanach explains. “From a communications point of view, these channels become even more important in a crisis situation because usually they are the first to report the news and reflect the real public opinion about who is in the wrong. So companies have to make sure they are following them as closely as possible. They also need to use the channels to get regular updates.”

Make Use of Social Media

Catanach suggests that companies in China—whether domestic or foreign—devote human resources to draw up a social media communications strategy and to follow through it.

“You do have to have a strategy before you start engaging. You have to know what channel is best for your company. Not all companies should be using Facebook. But a very good way to start is by listening to what is being said about you. You have to be monitoring those channels. You don’t have to be engaging but if people are talking about you—stuff that surprises you, that should tell you something,” she says.

What about after the crisis? What should companies pay attention to?

Cavanach stresses that once a crisis is over, companies need to take the time to rebuilt the level of trust among consumers, as their view of the companies would have changed.

Here is the public relations takeaway from the Fonterra case:

Respond fast, respond fully and keep the communication lines open.
Focus on the “Concern, Action, Crisis” formula and reputation rebuilding when the crisis is over.


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