E. Coli, contaminated beef and shoddy governance

An E. coli crisis is hurting the food industry in Western Canada. Can it be traced to poor corporate governance?

 

Cattle in pasture beside XL Foods’ Lakeside Packers plant at Brooks, Alberta on Monday, Oct. 1st, 2012, 2012.  (THE CANADIAN PRESS/Larry MacDougal)

I recently spoke with a director of one of Canada’s largest food companies about risk, which is particularly pertinent with an E. coli crisis now unfolding in Alberta. He told me the most important risk for him, one that could cause a “run on the bank” (his words), was food safety. Food safety was front and centre in his mind, and for each of the other independent directors and for the company’s management.

It seems the management of XL Foods Inc., at the centre of the contaminated beef recall, has not figured this out. “Governance” does not even appear on their sparse website. Safety does, in a general way. But neither XL nor its parent company, Nilsson Brothers Inc. appear to have any independent directors.

As I have argued previously, independent directors bring objectivity and an external perspective into the boardroom. They are honest brokers to keep an eye on management. A good independent board will not prevent a disaster but almost always will lessen its likelihood.

Contrast XL’s board situation with the other major beef processor in Canada, Cargill Ltd., and its commitment to food safety, its “ethics open line,” and their responsibilities in the area of supply chain and risk management. The company, which is owned by Cargill, Inc. in the U.S., has a board composed of six independent directors along with six managers and six members of the founding family members.

Cargill claims to be the largest private company in the U.S. in terms of revenue and, although private companies like Nilsson Brothers and Cargill are not required to have independent directors, forward-thinking ones do such as McCain Foods.

Now, according to the Mayo Clinic, the most common way to acquire an E. coli infection is by eating contaminated food such as ground beef: “When cattle are slaughtered and processed, E. coli bacteria in their intestines can get on the meat. Ground beef combines meat from many different animals, increasing the risk of contamination.”

The way you mitigate food safety risk is through internal controls, including segregation of duties, restricted areas, approval, records and reconciliations and a culture of food safety and not cutting corners. Management is inherently conflicted in assuring such controls, and internal controls cost money. This is the reason for government inspectors and, most importantly, a competent and independent board of directors to approve the control regime to begin with.

Good agri-businesses take governance seriously. Farmers, director-farmers and CEOs in the U.S. are eager to learn and implement the latest trends in corporate governance, risk management and internal controls. I am heading to Calgary next week to speak on these same topics with the directors of Livestock Identification Services Ltd., as well as directors of a few additional beef industry groups and one being a newly formed national beef agency called Canada Beef Inc.

Risk management and internal controls are not profit producing activities per se. No one likes to be controlled, least of which entrepreneurial employees. However, ask yourself if defective internal controls are worth the price, reputationally and financially? Do you think XL Foods has taken a financial and reputational hit because of the tainted beef? What about the farmers coping with a price decline? What about Maple Leaf Foods? Most importantly, what about the health and safety of customers? It can be indeed be a run on the bank if consumers don’t have confidence, and it can get worse unless governance checks are put in place.

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