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Report of WPC80 Independent Inquiry for Fonterra Board

WPC80 Board Review Questions  and Answers

What was the scope and approach of the Board’s Independent Inquiry?

  • The scope given to the special oversight committee by the Fonterra Board was “to challenge every aspect of the business.” The committee was asked to identify how the events unfolded and why and to recommend steps to build systems and procedures in Fonterra that would reduce the chance of this happening again.
  • Over a two month period, members of the Inquiry team visited eight plants, conducted interviews with over 70 people within Fonterra, from the Board down, and also had discussions with more than 30 of Fonterra’s key stakeholders in a number of markets – customers, farmer/owners, politicians and regulators, members of the diplomatic corps, industry stakeholders, members of the media, financial analysts and institutional investors and employees.

How did the Inquiry team ensure independence?

The process involved two tiers to ensure independence:-

  • An oversight Committee

An independent oversight committee, appointed by the Fonterra Board, was chaired by Sir Ralph Norris, an appointed independent director.  Two other appointed (independent) directors were included, Simon Israel and John Waller.   The two farmer-elected directors were Blue Read and Professor Nicola Shadbolt.   Two distinguished non-directors – retired New Zealand High Court judge, Dame Judith Potter, and Auckland University Vice Chancellor, Professor Stuart McCutcheon, completed the committee.

  • Independent Inquiry Team

The independent Inquiry team was headed by New Zealand lawyer, Jack Hodder QC, with members of his Chapman Tripp team; Dutch dairy industry expert, Jacob Heida; and Australian crisis management and communications expert, Gabrielle Trainor. Jack Hodder was the author of the report.

What are the overall themes of the report?

There are ten findings on the cause of the event, 23 recommendations for Fonterra management and 10 recommendations for the Fonterra Board.  The report strongly endorses management’s Operational Review and progress on its implementation. While the recommendations go beyond those in the Operational Review, none is in conflict.

The themes identified are:

  • that Fonterra is a very successful global business, with expertise, efficiency and values that it is justifiably proud of;
  • Fonterra is well advanced on a “journey” from being a cost-focussed dairy ingredients producer to being a customer-focussed global food products supplier second to none in its aspirations, standards and people;
  • There is an opportunity, especially in some areas of weakness highlighted by the WPC80 precautionary recall events, to further strengthen Fonterra’s processes, culture and governance;
  • There is a need to respond fully to increased global consumer expectations of conspicuous food safety and quality excellence; and,
  • There is a need to engage comprehensively with stakeholders, including in the context of Fonterra’s position as a “national champion” within the New Zealand economy.

What is Fonterra’s response to the report?

Fonterra welcomes the report of the WPC80 Independent Inquiry for the Fonterra Board.  It notes it is wide-ranging and thorough and provides Fonterra management with important in-depth observations and recommendations to strengthen the Co-operative for the future.

Fonterra has learned lessons from what has been a difficult experience, subsequently found to be a false alarm.  Fonterra understands the anxiety caused to customers, regulators, shareholders and other stakeholders, both in New Zealand and around the world, and especially parents in relation to the quality of infant formula.

The independent report affirms Fonterra’s position as a global leader in food production and safety with a proud history.  The report has comprehensively examined what happened and identifies where Fonterra needs to further improve in order to maintain and enhance its global position.

The independent board report findings strongly endorse the operational review recommendations and the progress made on implementation. It also contains new recommendations that are consistent with Fonterra’s approach to its reputational rebuild. 

The additional recommendations provide important feedback for Fonterra regarding the way it interacts with its broad range of stakeholders, both at times of crisis and during the course of normal business.  

What did the report identify and what are the findings?

  • Fonterra did not include any sulphite-reducing clostridia (SRC) tests in relation to any of its production of WPC, notwithstanding its acceptance of SRC tests under at least one contract with a major customer to manufacture products utilising WPC80.
  • Some errors of judgement were made in preparation for the reworking process applied to the relevant WPC80 batches at Hautapu.
  • The standard pre-start up automatic cleaning regimes used by Fonterra plants required improvement.
  • There was insufficient senior oversight of the crucial decision to engage AgResearch to test for C. botulinum.
  • The commissioning, design and limits of the C. botulinum testing were inadequate.
  • Fonterra was unable to promptly and definitively track the destinations of the affected WPC80 batches.
  • There was only belated recognition (and delayed escalation to senior management and the Board) of the explosive reputational risk involved – a failure to “join the dots” between (a) C.botulinum, (b) infant food products, (c) consumer sensitivities, and (d) Fonterra’s global reputation.
  • Fonterra’s crisis management planning, including the external communications aspects, was inadequate for an event of this kind and scale. 

What are the recommendations for management (summarised)?

  • Fonterra’s food quality and safety specifications and testing should be reviewed to ensure that they were of “best in class” standard: consistent with the most rigorous requirements of customers, and with international best practice.
  • Risk management and crisis management processes should be strengthened, including by establishment of a specially trained and multi-disciplinary (but not full-time) Incident Management Team and regular relevant training, global best practice product tracing systems, and a new Risk Committee of the Board.
  • Reputational risk assessment should form part of the criteria for escalation and assessment of non-standard external scientific tests.
  • Plant cleaning programmes should be amended.
  • There should be continued building of a directly-employed strong, specialist and experienced communications team, including in key global markets, supplemented with contracted high calibre local expertise where appropriate.
  • There should be enhanced and sustained efforts to address adverse perceptions held by a material proportion of key stakeholders, by Fonterra redefining the style and substance of its engagement with them.
  • The Inquiry should be reconvened after nine months and again after 18 months to review Fonterra’s progress on those recommendations.

What are the recommendations for the Board (summarised)?

  • The Board should endorse explicitly as a core principle that Fonterra, as “one company”, always strives to perform at the best practice level for leading global food product organisations.
  • The Board should similarly explicitly endorse the paramount importance of food quality and safety to Fonterra’s global and local reputation.
  • The “risk” component of the Board’s Audit, Finance and Risk Committee should be transferred to, and developed by, a separate Risk Committee.
  • The Board should accept greater responsibility for developing and maintaining relationships at the most senior levels of Fonterra’s external stakeholders, including in government and media within and outside New Zealand.
  • The Board should actively review ongoing progress towards shedding the adverse “Fortress Fonterra” perception held by a material proportion of external stakeholders.

Will there be any disciplinary action against any Fonterra staff?

Fonterra’s Operational Inquiry and the Board’s independent inquiry both found no one person or event led to the recall and subsequent events.   It was a series and sequence of events Fonterra hopes to ensure never happens again. And while Fonterra notes, in the end, it was a false alarm, it also notes it leaves no room for complacency.

The Board has expressed its confidence in management to restore the organisation’s reputation and make it an even stronger company.

The report refers to adverse perceptions of Fonterra.  What will be done about this?

Fonterra, like all big organisations, needs to work hard to earn trust by investing in its relationships with all of its stakeholders and the wider community.  Large organisations are generally comprised of decent, hard-working, talented people, as is Fonterra. This is a great opportunity for Fonterra to take stock of how it is perceived and to take steps where necessary to address those perceptions.

How is Fonterra addressing its communications problems?

Fonterra has considerable experience with communications and crisis management but the nature of this complex event highlighted areas for improvement. Fonterra accepts this and the recommendations for change. Fonterra had already decided, prior to this event, to make changes in its communications structure, for example, the appointment of a new Group Director of Communications who is further developing communications skills and expertise within the organisation.

What is Fonterra’s position on offering compensation to its customers?

Fonterra is continuing to work with affected customers and will fulfil its legal obligations.

When will all the recommendations be implemented?

Eight of the twenty recommendations in the Operational Review have already been implemented and the remaining twelve are well underway.  The additional recommendations from the Board Report will now be incorporated into plans and progressed.  Fonterra will be open with its progress on these recommendations and will formally provide progress reports to the Inquiry Team in nine and eighteen months as recommended in the Report.