Take Responsibility For Your Brand!

The recent OSI food safety scandal in China provides an excellent case study on how NOT to do business.  It’s also a perfect example of one of the points I made in my first column Throw The Old Rules Out The Window.  Firms need to Rethink concepts they’ve held onto for years, they need to be able to spot the areas of risk, opportunity, and action in their value chains. Those that aren’t able to do this will find themselves reeling from one scandal to another.

Rethinking “corporate social responsibility”

Many business executives and business school professors are familiar with Milton Friedman’s famous quote from 1971: “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits”.  But those who get inspiration from Friedman’s quote often don’t realize that what he actually said was, “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits,within the rules of the road”. In the context of this article, and in the current business environment, it’s this last portion that’s the most critical. For firms that are focused on being “compliant” with laws, and trying to maintain arm’s length distance from any problems that are legally not theirs, this is very complicated.  That’s because, unlike in the 1970s when the rules of the road where largely defined (and enforced) by government regulators and agencies, today the rules and those who create them are constantly changing.   

In the case of OSI, both Yum! and McDonalds took the view that they had done everything that could be expected of them, and that the failure was “legally” OSI’s responsibility.  But the rules have changed. While an apology and an offer to “make a change” may have quelled concerns in the past, that old approach no longer works. Today, brands are held accountable even if they refuse to “accept” their legal, social or ethical responsibility.

From Xinhua News Agency. Artist: Zhang Ai Xue

Rethinking risk and responsibility

Given this new definition of Corporate Social Responsibility, firms need to begin looking differently at the risks their value chains pose.  For many firms, particularly those that have spent years creating siloed, perhaps heavily outsourced, value chains, the most difficult task is going to be rethinking the risks that their brands are exposed to. That’s the only way that they can begin to effectively create strategies to mitigate those risks.

Looking at the OSI scandal, many commentators (and corporate lawyers) immediately highlighted the fact that OSI’s failure to be responsible was at the core of the crisis.  They argued that it was OSI, not the buyers, who were “responsible” for the quality of the products they were shipping, and that it was OSI who should be held accountable; not the brands.

Consumers disagreed.

McDonalds was reduced to a vegetarian menu in many of its North Asian stores as they were unable to serve beef. Yum!, while able to find alternate suppliers, saw its traffic go down significantly as they were once again at the center of another food crisis, their third in two years.  Both, as a result, have seen their stock prices punished on the NYSE.

Which is why, for these firms – regardless of what the law says – their executives should have long ago accepted the fact that while their suppliers may be legally responsible for the quality of the product that comes off the line, the buck stops with the firm. Responsibility to their consumers and investors should have dictated that they invest heavily in developing foolproof quality assurance and audit processes where meat testing was done on a regular basis.

The solution

Regardless of the industry that a firm is in, one thing is becoming abundantly clear: there’s increased pressure along the value chain, and the costs of failure are high. To preempt crisis, and build stronger brands, firms should:

1) Rethink “responsibility” – When looking across the value chain, it’s easy to see how firms are able to compartmentalize risk.  Those who use raw material bear the risk of environmental and social damage, a sub-contractor is responsible for ensuring safety on the factory line and that wages are paid on time, and the municipality is responsible for ensuring that waste is buried, burned, or recycled.  But, when one of these stakeholders fails, or when expectations change, it’s often the brand that pays in the form of increased prices, regulation, and stakeholder boycotts.  That’s why it’s in firms’ interests to think about these risks differently.  It’s not about whether or not a firm is compliant with today’s regulations and consumer expectations. The issue is: at what scale would they be affected by a crisis?

In the case of the recent OSI scandal, separate from the operational failure that took place, the biggest failure of Yum!, McDonalds, and other buyers was believing that they could point the finger at OSI and consumers would understand.  Sure, they were legally in the right, and had done everything that the laws required of them; but that wasn’t enough. They should have understood that their consumers expected more of them. Particularly as their firms used safety as a key selling point.

2) Get boots on the ground – Having a Code of Conduct and product quality standards is a great first step, but unless the firm is fully invested in ensuring that these codes and standards are being met, then they’re of little value.  While Yum! and McDonalds both made it clear that they have very strict Codes of Conduct, what was also made clear in this OSI debacle was that their audit and testing process failed to protect them.  Had they been making regular visits to their key supplier, and regularly testing the product that they were being sent, they would have been able to catch problems early and make adjustments before it became a crisis.

3) Make material adjustments – For many firms, tied to their Codes of Conduct and audit regimes is the threat that the buyer will select another supplier when failures occur.  Yet, this option is rarely exercised. When the OSI story broke, McDonalds immediately issued a statement that they would suspend all orders from the Shanghai supplier, only to have it come out that they were going to move the orders to another facility.  A decision that, once public, further exacerbated consumer concern and led to more media reports about the brand’s responsibility to its consumers.

4) Be transparent – As the number of scandals continues to grow in size, scale, and tangibility, a consistent call for transparency is being made.  It’s a call that’s made all the easier by the fact that smart phones and social technologies are increasing the speed and pressure that firms face, and have reduced their ability to “influence” anyone.

For Yum! and McDonalds this will be a critical issue going forward, and based on the past experiences of textile and electronic firms, we can expect that both firms may find themselves in a position where they need to not only open up about their suppliers, but also open up about product formulation and process.  That’s something this McDonalds advertisement attempted to do last year.

Increasing pressure

In the wake of this recent scandal, brands that were sourcing their proteins saw their business models severely damaged.  Investors paid the price overnight as both stocks fell, but more pain is sure to come as both Yum! and McDonald’s have issued warnings about their upcoming quarterly earnings report. If history is a good indicator, it could take up to two years for investors to recover from these loses. What firms need to understand is that, as the impacts of failed systems (economic, social, and environmental) grow in size, scale, and tangibility, catalysts for change are no longer coming through regulators alone.  For firms who fail to understand this, and there will be many more, the risks to their business model are growing.Responsibility is not about doing “good” when you have the extra time, or a bit of budget, but about a value that the firm places on doing things right, and at full cost.  Cutting corners, and thinning products, may “work” for a period of time, but with the rise of demands from stakeholders, and their ability to share and curate information, the pressure is growing for a fully transparent model.

The rules of the road have changed, and it’s time for business leaders to do the same.