Legal, Ethical, and Professional Aspects of Fonterra's Crisis Report

This report provides a comprehensive analysis of the ethical crisis faced by Fonterra, a global dairy company, focusing on the WPC80 incident. It examines the definition of the ethical challenge, organizational expectations, and Fonterra's current ethical behavior. The report delves into the stakeholders' interests, including employees, suppliers, society, and shareholders, and discusses effluent and nitrogen management systems. It further explores strategic options, assessments, and offers recommendations to address the crisis. The analysis highlights the impact of the crisis on consumer trust, loyalty, and the company's reputation, emphasizing the need for ethical conduct and effective crisis management within the dairy industry. The report also outlines Fonterra’s code of business conduct and its commitment to sustainability, human rights, and fair working conditions, while assessing the company's values and their practical application in managing ethical dilemmas.

Course qualification DIPLOMA IN BUSINESS AND ENTERPRISE
MANAGEMENT
US/Prescription title: Legal, ethical and professional aspects of Business
Course/Paper number: ABD705
Student name: JINHO SONG
Student ID: 174482A
Teacher: Mabruk
Assessment type: 1st Assessment
Due date: 13/May/2018
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Table of Contents
Executive summary..............................................................................................................................2
Introduction.............................................................................................................................................3
Definition of the ethical challenge of Fonterra..............................................................................4
Organisational expectations..............................................................................................................6
Fonterra’s current organizational ethical behavior......................................................................7
Fonterra’s stakeholder interests.......................................................................................................8
4.1 Effluent management systems................................................................................8
4.2 Nitrogen management.............................................................................................8
4.3 Waterway management........................................................................................10
Strategic options and assessment.................................................................................................11
Conclusions..........................................................................................................................................12
Recommendations.............................................................................................................................13
References...........................................................................................................................................14
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Executive summary
Ethical behavior is considered a major aspect that organizations have to devote
much care to implementing and maintaining it. Ethical crises could be very harmful to
the organization and customer relationship as it affects their emotions, trust, loyalty and
perception. Fonterra is a global dairy company that faced an ethical crisis due to the
mismanagement of the crisis at the time of the incident. This report provides an
analysis of the crisis, organizational expectations, ethical behavior and it discusses the
stakeholders' interests, options assessment and recommendations.
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Introduction
Fonterra is a global dairy nutrition company, it is owned by 10 thousand farmers and
their families with roots in New Zealand. Fundamental beliefs in the ability of the dairy
milk to make a difference provide it with power. The sustainability strategy is the core of
its cooperative, it includes sustainability of the strategy, dairying, operations and
consumption (Fonterra Co-operative Group Limited, 2018a). The company is
committed to providing dairy farming for people around the globe. The company has
been dairy farming for over a century, in the current time its products are found in every
family home (Fonterra Co-operative Group Limited, 2018b).
Australia is the biggest market to Fonterra outside New Zealand. The company direct
markets include Indonesia, Malaysia and Sri Lanka. The dairy demand in china the
world’s largest population country is expected to double in the next ten years. The
company offers dairy ingredients to many leading food companies (Fonterra Co-
operative Group Limited, 2018c). The company has a very well documented ethical
guide ‘The Way We Work – Code of Business Conduct’, but it has faced a severe crisis
caused by the WPC80 incident. The following section provides an analysis of the
Fonterra ethical challenge, organizational expectations, current ethical behavior,
stakeholders' interest, strategic options and assessment and recommendations.
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Definition of the ethical challenge of Fonterra
There are environmental costs from the dairy industry, they include the cleaned and
uncleaned pollution according to the environmental standards. The cost of clean-up
effect is much higher than the cost of not polluting the environment, including the
economic, social and environmental costs in New Zealand (Foote, Joy, & Death, 2015).
The ministry of environment in New Zealand gives high attention to the problem of
water pollution and devote much care about the accepted levels of water pollution. The
accepted standard to protect the freshwater ecosystem in Australia is less than half a
milligram – 0.44 mg/l – of nitrate-nitrogen/liter of water. The ministry of environment in
New Zealand allows the level to be set at 6.9 mg/l which represents 15 times the Anzac
quality guidelines (Joy, 2017).
The product harm crisis is a public incidence in which the product is found to be
dangerous and could be disastrous to the organization. It often results in product recall,
this was the case of Fonterra milk crisis in New Zealand in 2013. The literature
illustrates the existence of a significant relationship between the consumer moral,
expectations and loyalty and the crisis. The product harm usually involves ethical
dimension that affects the human emotions towards the organization. These emotions
are the main driver of the consumer moral behavior (Samaraweera, Li, & Qing, 2014).
Fonterra milk has caused an extraordinary series of events during the period (1
February 2012 and 2 August 2013) in New Zealand. The crises started when Fonterra
suspected whey protein concentrate (WPC80) produced at one of its manufacturing
sites contained pieces of plastic. The main cause for this was a lens of a torch sucked
into the processing machine. Also, it has discovered a non-standard transfer pipe or
flexible hoses used in the reworking or both of them that is used in production.
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These unethical activities led the company to do more investigations until it has
reported to the ministry for primary industries that there is a confirmed Clostridium
botulinum (C. botulinum) in the WPC80 which can cause botulism.
A big challenge to Fonterra was represented in the actions that the ministry has taken
to prevent any possible harm to people's health. The ministry used its legal rights to
warn the consumers of using a certain infant formula products and Fonterra recalled
the WPC80 in New Zealand and overseas and Danone subsidiary Nutricia also did the
same. No cases of illness related to the consumption of the affected product were
detected. Another challenge represented in closing the entry of certain New Zealand
dairy products to some countries, others initiated product testing or announced a
product recall. The government has established terms of reference for the
requirements of the dairy food safety that is consistent with the principles of the
international risk management (Government of New Zealand, 2014).
Fonterra has a responsibility towards its stakeholders, including, the employees,
suppliers, society and the environment, they are discussed according to the
Government of New Zealand (2014), as follows:
 Regarding the employees, the management of Fonterra did not seek the assistance
of the senior managers in the organization as many involved individuals could not
solve the problem. The employees who considered the level of danger that could
harm infants were worried about the future of their jobs. Employees did not feel safe
at the workplace and could not decide whether they will be able to sustain their
career.
 The suppliers are irresponsible about the problem, as they follow Fonterra
guidelines and the company code of ethics. They would prefer to work with a stable
company that follows the enforced ethical guidelines in order to keep a good
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reputation in the marketplace. No successful supplier would be comfortable to work
with a company that caused an international instability due to an ethical issue.
 The society, the human emotions towards the organization is severely affected and
the company lost loyal customers in different countries. People have the right to feel
afraid of the company products as it directly harms their infants who could be
affected by many diseases (Samaraweera, Li, & Qing, 2014).
 Shareholders: The environment, economic and social and environmental impact in
New Zealand were very high (Foote, Joy, & Death, 2015). Shareholders have to be
worried about their investments in Fonterra as the ethical dilemma of the infant milk
has a big impact on the company reputation. Investors would rather prefer to sell
their shares and invest in a more successful company.
Organisational expectations
The company expects that its suppliers respond and support its ethical standards
indicated in the code of practice in relation to the health and safety at workplace,
environment, economic sustainability, fair pay and workers' conditions. These
requirements comply with the international labor organization and ethical trading
initiative. Suppliers and other contractors are expected to express their readiness and
intent to comply with the code of ethics and the subsidiaries are required to ask their
suppliers for the same. The suppliers are expected to use a proactive approach
towards maintaining the safety standards, health and the environment also the
occupational health management. It is important to monitor and evaluate the progress
towards the health and safety targets to assure they are achieved within the required
time (Fonterra Co-operative Group Limited, 2017). According to Collins (2009) and
Hodder, Trainor, & Heida (2015), from the egoism perspective, the suppliers' actions are
closely related to Fonterra ethical standards and they do the right actions.
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The Fonterra ethical policy is applied to all of its global operations, including the not
fully owned subsidiaries, it provides a parameter to its employees in situations related
to ethical behavior. It offers a guide in cases of conflict of interest situations. This policy
is supposed to act as a guide to the organization towards honesty and integrity in all of
the company's business practices. This policy is applicable for all of the company
stakeholders, including the third party. Fonterra values are referred to as ‘The Way We
Work – Code of Business Conduct’. If any conflicting ethical issue exists, employees
can discuss them with their direct manager, the HR department or contact The Way We
Work Hotline. Conflict of interest happens when a stakeholder acts against the
organization's best interest. These cases are recorded in the Conflict of Interest (COI)
Register by the individual who concerned it and should be registered manually
(Fonterra Co-operative Group, 2018). According to Collins (2009) and Hodder, Trainor,
& Heida (2015), 'The Way We Work – Code of Business Conduct' of the company
reflects the egoism of the company and the way it expects stakeholders to respond to
it.
Fonterra’s current organizational ethical behavior
Fonterra’s Code of Business Conduct “The Way We Work” conducting is created to
assure conducting business effectively and efficiently and gain a reputation for dignity
and honesty. The company devotes its efforts to ensure an agreed level of
sustainability, including the poor working conditions and the environmental issues,
especially in the developing countries. The company is highly committed to upholding
the human rights, environmental protection and maintaining fair working conditions. It is
also committed to its suppliers to improve their labor conditions and environmental
practices (Fonterra Co-operative Group Limited, 2017).
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Fonterra values articulate how it acts, the company focuses on the cooperative spirit,
doing what is right to do, exceed the challenge boundaries by monitoring the customer
expectations and finally make it happen through the delivery of exceptional results
(Fonterra Co-operative Group, 2016).
Fonterra’s stakeholder interests
3.1 Effluent management systems
The dairy industry is extensively depending on the two- pond treatment systems that
remove the carbon and enhance the gaseous removal of the nitrogen. The nutrient
removal is done through a series of transformations and more sophisticated process
than the two- pond treatment systems (DairyNZ Limited, 2015). The dairy farms have a
liquid waste stream from the milking sheds and its related yards generally referred to as
effluent. This milking sheds and yards are mixed with the wash down water used to
clean the waste from these areas. The effluent contains dissolved nutrients, organic
matter and salt. Large quantities of water should not be thrown in the effluent. The
effluent should be managed through continuous application systems or treatment and
storage system. The continuous application systems have limited storage that relies on
the collection of the effluent twice daily after the milking process. It is advantaged for its
low cost for the gravity flow system, but disadvantaged for the high capital cost for the
pump and tanker system. The second way of effluent management is the treatment
and storage systems. It employs single or multiple ponds to treat the daily inflow of
effluent and to store the liquid and solid effluent. This system is advantaged for its
freedom from the requirement of daily attention and it offers a recycling effluent for
cleaning yard (The State of Queensland, 2013). Fonterra rules in relation to effluent
state that animals should not eat materials that contain milk with toxins or any harmful
ingredients, ruminant protein and materials grown on land treated or irrigated with meat
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waste (DairyNZ Limited, 2015). According to Collins (2009) and Hodder, Trainor, &
Heida (2015), The cultural relativism, the effluent management systems should be
designed and operated according to the national culture, mainly the laws to be
considered an efficient system.
4.2 Nitrogen management
Nitrogen and phosphorus are essential to plant growth. Nitrogen is present in all
living cells, it is a chemical element that has a major effect on the plant growth and
quality. Nitrogen is converted in the soil to become nitrate, which has a negative effect
on the environment. The changing effect of nutrient management should be
considered on the level of the farm system, the business goals and the regulatory
requirements. Coping with the regulatory requirements is expensive (DairyNZ Limited,
2013). Nitrogen fertilizers are critical to the productivity of farm grains. It represents a
major input and operating cost for the dairy industry in New Zealand as there is a
significant difference in the variability in the productivity gains from it and the economic
effect is usually measured on the level of the whole production system (Gourley et al.,
2014). Fonterra has a nitrogen recording program, the company depends on nitrogen
in planting crops used to feed the animals. The company manages nitrogen for
maximum profitability and lowering the environmental impact. The farmers work
towards nitrogen loss commitments under Fonterra Sustainable Dairying (Fonterra
Cooperative Group Limited, 2016). According to Collins (2009) and Hodder, Trainor, &
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Heida (2015), nitrogen should be managed according to deontology. People should be
treated in the same way Fonterra wants to be treated and their right is to live in a healthy
environment.
4.3 Waterway management
New Zealand dairy industry is concerned with the water quality, political and
institutional solutions are implemented to deal there with concerns. Increased dairying
results in increased rates of nitrate and phosphate in the waterways. There are
different factors that affect the waterway management, including the climate. The
central government has to provide implementation guidelines to provide certainty to all
stakeholders. The regional councils have to focus on the waterways management
within their regions and design the entire water management systems (New Zealand
Institute of Economic Research, 2012).
About 80% of the waterways in New Zealand are protected by fencing and 65% of
them are protected by vegetation (DairyNZ, 2015). All of the dairy companies use the
GIS mapping to record the farm boundaries and the waterway protection status (Shaw
et al., 2017). Fonterra continuously progresses on stock exclusion from waterways.
97.4% of the defined waterways on mapped Fonterra were cleaned. It managed to
fence 2,441 kilometers to maintain the water quality (Fonterra Cooperative Group
Limited, 2016).
According to Joy (2017), wasted water issue does not exist in reality. This is because
the rivers and lakes have evolved over millenniums due to the natural water flows. The
taken water finds its way back to waterways in other states.
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Strategic options and assessment
There are three strategic options as follows:
First: Train farmers on waste management
Fonterra has to provide the suitable training to the farmers to allow them to know the
best practices. Training will assist them in following the ethical guidelines. Through
training, farmers could eliminate the dirty draining and educate how to deal with its
negative impact on the environment.
Second: Punish farmers who disobey code of practice
Fonterra has the right to punish farmers who do not follow its code of practice.
Punishment could take the form of financial compensation to be paid or it could be to
stop dealing with the guilty farmers for a period of time until they manage not to pollute
the environment.
Third: Hire external inspectors to check the farmer
Fonterra could decide to hire inspectors to assure that farmers follow the guiding
ethics. Inspection is expected to limit the occurrence of dirty draining. It is a costly
option for the company, but it is expected to yield good results.
According to the mentioned strategies, Fonterra has five options to select among them
as follows:
Collins’ decision-
making framework
Option 1: Train
farmers on waste
management
Option 2: Punish
farmers who disobey
code of practice
Option 3: Hire
external inspectors to
check the farmer
Egoism Yes Yes Yes
Social group
relativism
No Yes Yes
Cultural relativism No No Yes
Utilitarianism Yes No Yes
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Deontology Yes No Yes
Option 1: This option falls under the categories of Egoism, utilitarianism and
deontology. This option is expected to benefit the company image, the farmers and the
stakeholders. It is expected to benefit the farmers who only the farmers who cause a
dirty drain. It is not expected to impact the social group or their culture.
Option 2: This option falls under the categories of Egoism and social group relativism. It
is expected to impact the farmers who caused the dirty draining directly and to affect
the attitude of other farmers who followed the ethics to be more cautious not to make
any mistake in the future. The stakeholders, the law and everyone will not be affected
by the punishment.
Option 3: This option is expected to be the best option, as it guarantees to fulfill the five
proposed dimensions by Colin. It will assure no dirty draining by farmers, following
Fonterra ethics and will be applied to all farmers within the social group. Also, the
opinions of the local advisors will be considered, will maintain a better relationship with
the stakeholders and assure that the environment will not be negatively impacted.
Recommendations
Fonterra failure to report the problem either in a timely or effective manner to the higher
management levels inside the company or the regulatory bodies has caused the
WPC80 incident (Government of New Zealand, 2014). Also, it has to keep managing
the dirty dairying including, the Fonterra, nitrogen and waterways to assure
sustainability on the strategic, social and environmental levels. Fonterra is
recommended to use option 3 of the hiring external inspectors to check the farmers.
This option takes the first priority as it falls under the five categories of Colin's theory.
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Conclusions
The Fonterra crisis caused by the WPC80 incident was not declared by the company.
Fonterra has a responsibility towards its stakeholders, including, the government, the
consumers, subsidiaries and staff. It did not inform the ministry or the Asure Quality of
the commissioned C. botulinum, which might have assisted Fonterra with guidance
about the testing process. The Fonterra ethical policy is applied to all of its global
operations, including the not fully owned subsidiaries, it provides a parameter to its
employees in situations related to ethical behavior. It offers a guide in cases of conflict
of interest situations. This policy is applicable for all of the company stakeholders,
including the third party. Fonterra is recommended to utilize the ethical strategies, as
its operating globally and its activities have implications to individuals, societies, the
environment and the human being.
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References
DairyNZ. (2015). Dairy farm practicies and management report. New Zealand: DairyNZ.
DairyNZ Limited. (2013). Nutrient management on your dairy farm. New Zealand:
DairyNZ Limited.
DairyNZ Limited. (2015, March). Effluent technical note: Dairy effluent treatment
systems. Retrieved from DairyNZ Limited:
https://www.dairynz.co.nz/media/2150124/dairy-effluent-treatment-systems-
technote.pdf
Fonterra Co-operative Group. (2016, December). The way we work: Code of business
conduce. Retrieved from Fonterra Co-operative Group:
https://www.fonterra.com/content/dam/fonterra-public-website/pdf/policies/
The_Way_We_Work_(Code_of_Business_Conduct)_December_2016.pdf
Fonterra Co-operative Group. (2018, May 07). Fonterra Group ethical behaviour policy.
Retrieved from Fonterra Co-operative Group:
https://www.fonterra.com/content/dam/fonterra-public-website/pdf/policies/
Fonterra_Group_Ethical_Behaviour_Policy_External.pdf
Fonterra Co-operative Group Limited. (2017, May 07). Fonterra supplier sustainability
code of practice. Retrieved from Fonterra Co-operative Group Limited:
https://www.fonterra.com/content/dam/fonterra-public-website/pdf/FONTERRA_
SUPPLIER_SUSTAINABILITY_CODE_OF_PRACTICE_V1_1_2017.pdf
Fonterra Cooperative Group Limited. (2016). Annual review. New Zealand: Fonterra
Cooperative Group Limited.
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Fonterra Co-operative Group Limited. (2018a, May 07). About us. Retrieved from
Fonterra Co-operative Group Limited: https://www.fonterra.com/nz/en/about-
us.html
Fonterra Co-operative Group Limited. (2018b, May 07). What we stand for. Retrieved
from Fonterra Co-operative Group Limited: https://www.fonterra.com/nz/en/what-
we-stand-for.html
Fonterra Co-operative Group Limited. (2018c, May 07). Our markets. Retrieved from
Fonterra Co-operative Group Limited: https://www.fonterra.com/nz/en/our-
markets.html
Foote, K., Joy, M., & Death, R. (2015). New Zealand dairy farming: Milking our
environment for All its worth. Environmental Management, 56(3), 709-720.
Government of New Zealand. (2014). The WPC80 incident: causes and responses.
New Zealand: Government Inquiry into the Whey Protein Concentrate
Contamination Incident.
Joy, M. (2017, January 11). 'Agency capture' shifting goalposts on environmental
issues. Retrieved from Stuff Limited:
http://www.stuff.co.nz/environment/88264980/mike-joy-agency-capture-shifting-
goalposts-on-environmental-issues
New Zealand Institute of Economic Research. (2012). Water management in New
Zealand. New Zealand: New Zealand Institute of Economic Research.
Samaraweera, G., Li, C., & Qing, P. (2014). Mitigating product harm crises and making
markets sustainable: How does national culture matter? Sustainability, 6, 2642-
2657.
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The State of Queensland. (2013). Dairy effluent management system:Technical note
E02. Retrieved from Dairy Programme Limited:
http://dairyinfo.biz/wp-content/uploads/2014/11/E02_Dairy_effluent_managemen
t_systems.pdf
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