Recalling a dilemma

Bittersweet: Masterfoods spent $10 million on a candy bar recall but sales rose 250 per cent.

A group of executives were gathered in the boardroom for a crisis meeting. Trace elements of egg had been found in one of the company’s products – while this might seem minor, egg was not listed as an ingredient on the packet.

The dilemma was whether to run a product recall with such a borderline tainting of the product. Eventually, David Hawkins, the owner of crisis management firm Socom, which had been called in to consult, told the group they weren’t the right people to decide. “I said they needed to ask the people with an allergy to egg if they thought it should be recalled,” Hawkins says. “Ultimately, it’s the consumer’s decision.”

The company approached a body that deals with allergies, explained the situation and asked for guidance. “The group said it’s not life threatening but it’s nasty, so it would be better to do it,” Hawkins says. The company went ahead with a recall and walked away from the incident with its brand intact.

A product recall is every manufacturer’s nightmare but they’re extremely common. In the first half of 2011, the Australian Competition and Consumer Commission has been involved in nearly 1000 recalls. Regulations set out procedures to handle the legal and technical obligations but managing the moral and reputational issues is less straightforward. It might cost a lot but Hawkins, who played a large role in Masterfoods’ management of the Mars and Snickers recall in 2005 after it received threats that the chocolate bars had been poisoned, says the investment pays off.

“Studies show a 22 per cent differential in corporate performance between companies that manage a recall well and those that don’t,” Hawkins says. When a recall is managed properly, the big cost is in lost stock. “If it’s poorly managed, the biggest liability is loss of future sales, which can make stock loss seem almost insignificant,” Hawkins says.

Masterfoods fell into the first camp. It spent more than $10 million to protect the safety of its customers and when the product was returned to shelves, those customers rewarded them. Sales went up 250 per cent and stayed at that level for the next four months.

The best way to avoid a recall escalating into a disaster is to do the right thing. “We ask clients three questions,” Hawkins says. “What’s happened? What are you doing about it? And, are you proud of what you’re doing?” That last question occasionally causes executives to squirm but it helps focus their minds on the big picture.

“Things go astray when people think about how they can get away with doing the bare minimum, as opposed to what they should do to feel proud of the product and maintain the organisation’s reputation,” Hawkins says.

The other golden rule is to take responsibility. “Don’t deny wrongdoing or blame anyone else,” Hawkins says. “It’s like any personal relationship – people are far happier when someone apologises and says, ‘We didn’t do the right thing but we’re fixing it’. ”

BP’s handling of the Gulf of Mexico oil spill is a lesson in what not to do.

“People forget and if you’ve handled it well, they forget a lot quicker,” Hawkins says. “If you treat people with disrespect, like BP did, people remember for a long time.”

The legal requirements of recalling a product differ depending upon whether consumer safety is at risk.

“If there’s any potential risk of causing harm to consumers, then you’d say it’s a safety-related recall,” Piper Alderman partner Teresa Schafer says. “In some instances, like where labelling is incorrect and could cause confusion but there’s no risk of harm, it’s not safety related.”

To meet legal obligations in a safety-related recall, a company must immediately involve the appropriate regulator. Recalls generally are triggered when a problem is identified by a consumer report or when the company discovers an issue through testing.

“The moment you identify the need to investigate a possible recall – of any type – you need to quarantine existing stock,” Schafer says. “That will in some way mitigate any subsequent liability.”

In the event of any recall, Schafer says it’s best to assume safety is at risk until proven otherwise.

“From the outset, you need to consider legal liability and you don’t pre-suppose it won’t be a safety-related recall,” Schafer says. “You just don’t make those assumptions.”

The overriding obligation is to ensure consumers are protected.

“You may later release the stock if it’s determined there’s no risk,” Schafer says. “The problem [arises] if you wait and it then becomes a serious problem and you haven’t quarantined it earlier.”

Under consumer laws, companies are liable for any defective products. For therapeutic goods, there are civil and criminal penalties for manufacturers that produce a product likely to cause harm. Schafer, a scientist who worked in the pharmaceutical industry for 13 years, says high standards of practice in the sector make safety-related recalls rare.

“The general standards of consumer products and manufacturing are very good,” Schafer says. “A company can’t manufacture therapeutic goods unless they’ve been issued a manufacturing licence that says the site achieves satisfactory standards, which are quite high.”

BRW

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