Business ethics and its influence in the food industry



In the late of 2008, Sanlu Group, one of the largest dairy producers in China, was alleged of producing contaminated baby milk powder, which affected about 53,000 children within the country. Infants were reported to develop kidney stones after consuming the milk for few days. The babies were in a bad shape with most of them having high fever with trouble in their urinary tract.

The issue of food safety is not 'a ''new'' issue in itself, and there have always been

problems with adulteration and food quality' (Collins 1993; Maxwell and Slater

2003). Food safety initially emerged in China as a trade issue in the early years of the

21st century, but this has now become an important domestic issue (Wang, Maoa,

and Gale 2008).

The incident had shown that Chinese daily industry act in lack of poor social responsibility to consumer, poor regulation and supervision of daily products between different official departments. This report presented how poor business ethics, supply chain management, regulation and supervision caused the incident.

Business ethics and its influences

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Business ethics can be defined as written and unwritten codes of principles and values that govern decisions and actions within a company. In the business world, the organization's culture sets standards for determining the difference between good and bad decision making and behavior.

In the other words, business ethics is a way of an organization how to balance the interests of stakeholders, like NGOs, shareholders, employees, customers, because it influences business operations of an organization in general.

In the most basic terms, a definition for business ethics boils down to knowing the difference between right and wrong and choosing to do what is right. The phrase 'business ethics' can be used to describe the actions of individuals within an organization, as well as the organization as a whole. (White, 2009)

In today's modern business world, the road to success requires more than merely technical skills, practical knowledge and a good product. Business ethics are achieving and sustaining the success. The public of today has high demands of those behind the steering wheel of modern business. Greater accountability and transparency, up-to-the-minute market information, reliable financial and market data, etc. are essential gauges for investment decisions. Business ethics become the fundamental building blocks that link up all these expectations. (ICAC, 2007)

Business ethics include responsibility of fair competition in both internal and external of company. For example, provide a fair staff promotion chance, not because someone self-interest. People in organization are motivate to work because everyone have chance to get promote. The tender bidding price should not disclose to others parties by received benefits and the other companies are willing to do business with you, because of fair competition between others.

Corporate are response to protect the natural environment, to reduce or prevent pollutions, like air, noise, water and solid waste etc. Also, require ensure the labors are working in safety environment and correspond to countries regulation.

If the business ethics and the laws broken by firms, they usually end up being fined. Many companies have broken anti-trust, ethical and environmental laws and received fines worth millions. The problem is that the amount of money these companies are making outweighs the fines applied. Billion dollar profits blind the companies to their lack of business ethics, and the dollar sign wins.

The main goal of business ethics is to treat all employees and customers justly and fairly. It is believed that by following a moral and ethical code, business will improve. When a management team adheres to management ethics, employees become motivated and a workplace environment becomes motivational.

Business ethics in food industry

Generally speaking, to ensure productions of food are safety not harmed the health of consumers, not underpaid to labor or suppliers etc. are some examples of the businesses ethics in the food industry, otherwise, firms may become have bad reputation in the industry between consumer and suppliers.

After the negative news becoming public, the Chinese government instructed action lead to the local milk collection centers stopped procuring milk from the dairy farmers and pushing them to face huge financial losses and no income. Though the scandal originated at Sanlu but it took into its grip on almost the entire dairy industry in China. AS the contamination took place at the supplier level, Mengniu and Yili were also affected as a result. The unsafe milk also affected the exporting milk to other countries and damaged the image of "Made in China" milk.

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According to Contract Theory, Sanlu should keep to their commitments laid down in contracts in guaranteeing their products' quality safety, informing its consumers of the ingredients contained in its products. However, it is claimed in Theory of Reasonable Care that the buyer and the seller share unequal status. Enterprises who take the advantageous position no matter in product design, production or information supply are expected to care for their consumers by guaranteeing the safety of their products. According to Theory of Social Cost, enterprises should be responsible for all the costs caused by their products' defects, which will lead to more effective use of social resources by internalizing all these costs into their product prices. (Song, 2009)

In the case of Sanlu, the middlemen want to earn more money, they started diluting the milk and adding melamine to it. Also, the massive competition of industry lead not checking on quality related issues. Moreover, most of milking station was not well equipped because booming of middlemen to earn money; they are not likely invested too much on facilities. Such checks were conducted only at Sanlu. But as the company failed to maintain its quality standards, like HACCP, it led to the outbreak of the milk scandal.

The production stoppage steered insecurities about the future prospects of 60,000 dairy farmers, who used to supply milk to Sanlu. Though the scandal originated at Sanlu, but it also affected other suppliers, like Mengniu and Yili of dairy industry reputation of China.

Factors of widespread sufferings of infants

The China government law, does not restricted the food production satisfy international standards, like HACCP, ISO, GMP etc. According to Article 39, The Food Hygiene Law of the People's Republic of China:

Article 39: Whoever, in violation of this Law, produces or markets food which is not

up to the hygiene standards, thus causing an accident of food poisoning or resulting in a disease caused by food-borne bacteria, shall be ordered to stop such production or marketing; the food causing such food poisoning or disease shall be destroyed; the illegal gains shall be confiscated and a penalty of not less than one time and not more than five times the illegal gains shall concurrently be imposed; if there are no illegal gains, a penalty of not less than 1000 yuan and not more than 50,000 yuan shall be imposed.

Sanlu, the farmer and the middlemen, assume they have no illegal gains, in milk contamination case, they only penalties for nothing compare with other affected babies. Unlike other developed countries, have regulation to ensure food safety.

"The U.S. Department of Agriculture (USDA) and the Food and Drug Administration (FDA) require that all food establishments send samples of their merchandise for testing," said Sandra Acosta, president of Biowell. This is done to ensure compliance with Hazard Analysis and Critical Control Point Principles (HACCP).

The FDA defines HACCP as "a management system in which food safety is addressed through the analysis and control of biological, chemical, and physical hazards from raw material production, procurement and handling, to manufacturing, distribution and consumption of the finished product."

If a company had a HACCP plan in place, it prevents the bad effect and enjoy benefits that related HACCP. These included issues such as reduced consumer complaints, reduced potential for illness or injury, and reduced potential for adverse publicity. These negative effects were not the best way to "sell" the program to management. Positive benefits were those that could show cost savings, enhanced efficiencies and increased revenues if HACCP was implemented.

The positive benefits included becoming a more desirable co-packer or supplier, the opportunity to mandate HACCP for a company's suppliers, enhanced product quality, reduced waste, improved employee morale and reduced product liability and other insurance. If Sanlu pursue some international standard, like HACCP plan, it reduces the risks of milk contamination and may be not too much infant sufferings kidney stone and dead.

The milk contamination

Before only Sanlu had set up the collection centers in the Hebei, the quality of milk is easily controlled. But, after the China Mengniu Diary and Inner Mongolia Yili Industrial Group they promoted the general public to enter into business by becoming dairy farmers, the scenario changed.

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As industry is booming, more related farmers joined, like dairy farmers, milk collection station owners and milk distributors, to meet the demand of milk of those companies. To capture greater market, these entrants started offering dairy farmers higher prices so that the farmers sell the entire milk to them and not to Sanlu. Some middlemen added melamine, which makes milk appear to have more protein, so they could sell in a higher price.

According to the national standard for milk powder (GB5410 - 1999) has three grades for milk sources, with protein percentage as the most important indicator. Consequently, the milk companies pay milk stations different prices for different grades. In certain seasons and in some areas in China, due to lack of fresh and nutritious feed, no milk can reach first grade at all. In order to be paid more, the milk suppliers from some milk stations had been adding Melamine to milk to increase the protein percentage, which was not a secret at all in the dairy industry. It is found out that if a milk company employs strict testing procedure; their milk suppliers would add less or even no Melamine at all. Lack of third-party testing might also be the cause of this practice. (Chen, 2009)

The contaminated milk have seriously affected the babies, they were in a bad shape with most of them having high fever with trouble in their urinary tract. Industrial chemical - melamine made the milk appear highly rich in protein. But, the melamine came with cyanuric and it reacted to form a crystalline acid, was also mixed with the baby powder.

Moreover, most of the milking stations were not well equipped with the facilities needed to check whether the milk was contaminated or not. Thus, Sanlu's product has caused severe harm to many babies and their families.

Finally, almost 300,000 babies had suffered from urinary problems after consuming milk powder laced with melamine, due to contaminated milk powder this year, China's health ministry has said; more than five times as many cases as previously disclosed. It also raised the melamine scandal's death toll from four to six infants, underlining the impact of the country's worst safety scare in years. More than 860 babies are still hospitalised, with 154 of those classed as severe cases. (Tania, 2008)

Measures of Sanlu

After Sanlu's open declaration about the contamination issue, the company decided to recall its product. The company finally recalled about 10,000 tons of the contaminated milk powder and sealed 2,176 tons and leaving 700 tons of milk powder yet to be withdrawn from the Chinese market.

As Sanlu and the country's Health Authorities confirmed that the company's milk powder was contaminated, 109 stores of Walmart and 118 stores of Carrefour stopped offering the products of Sanlu at their stores in China.

It was doubted that the company was aware of the contamination from December 2007 as customers had started complaining about the ill effects of taking the milk by infants. But it seemed that the company was reluctant to launch a thorough in-depth internal food safety investigation about the said affair. No alarm or caution was raised by the company to deter their consumers from buying the milk.

"For a comparatively long time, the Sanlu Group failed to report this incident to the government," said Health Minister Gao Qiang. "The Sanlu Group should shoulder major responsibility for this."

When Sanlu milk powder was detected contain melamine, one of Sanlu shareholder - Fornterra, suggested Sanlu to recall milk powder products. But, neither company executives nor provincial health authorities took any action.

Sanlu thinks that the products which contain melamine not produced by them, they are not original Sanlu products. The recall action may treat as bad news of Chinese company; it also damaged the reputation of the company, so that why Sanlu do not recall the products immediately when it inspected have problem. The number of infants affected could be reduced sharply.

After disclosed the milk scandal, the dealers were not able to pull off the entire product from the market as Sanlu declared that it wouldn't be able to reimburse them for the recalls made. Also, Sanlu had a fund of 800,000,000 yuan, out of which 700,000,000 yuan was estimated to be the compensation amount that the company needed to pay to its customers. To regain its goodwill, the company promised to pay the hospital expenses of the babies affected by drinking the contaminated milk powder.

Sanlu Group has paid 200,000 yuan to the parents of the first child to die after drinking melamine-tainted milk, Xinhua reported. Also, Sanlu and 21 other dairy companies offered 200,000 yuan to families whose children have died, 30,000 yuan for severe cases such as kidney stones and kidney failure and 2,000 yuan for less severe cases. (The China post, 2009)

Measures of China Government

According to previous regulations, any company in China could apply for the inspection-exemption if they had maintain good quality record, large market share, and implemented standards up to or above national or international levels.

The products that passed state or province-level inspections on three consecutive occasions were awarded the qualification. While producers still must report the inspection-free products' quality status on a regular basis, State Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) organized spot checks on these products annually (Xinhua, 2008)

AQSIQ had cancelled the exemption qualification of Sanlu and the other brands of its baby milk powder, other kinds of milk powder and sterilized milk, after Sanlu and others producers milk contamination scandal.

To improve the quality standards of dairy products targeting non-food additives, it would adjust its baby formula standards to allow tests of poisonous substances such as melamine. No melamine tests were conducted on dairy products in the past. New standards would be published later this year, AQSIQ said.

According to the Food Hygiene Law of the People's Republic of China, article 43:

If anyone, in violation of this Law, produces or markets the principal and supplementary foods intended specially for infants and preschool children which do not conform to the nutritive and hygiene standards, he shall be ordered to stop producing and marketing such foods, a public announcement shall be made immediately to recall the sold foods and the foods shall be destroyed; the illegal gains shall be confiscated and a penalty of not less than one time and not more than five times the illegal gains shall concurrently be imposed; if there are no illegal gains, a penalty of not less than 1000 yuan and not more than 50,000 yuan shall be imposed; if the offence is serious, the offender's hygiene licence shall be revoked.

It is not serious for offense of Sanlu does not immediately to recall the sold foods and announce to the public for the defective milk powder, people only can sue on civil way, not criminal. If have illegal gains, only penalty of not less than one time and not more than five times of the gain or penalty not less than 1000 yuan and not more than 50,000 yuan. It is too minor compare with the profits. The law cannot be well penalty offended people. It also cannot force corporate to consider the public safety.

Chinese daily industry reform - Supply Chain Management

The poor supply chain management is one of the main reasons caused Sanlu milk powder contamination. It involved too much middlemen in collect milk from the farmers that provide a chance for businessmen who act in poor business ethics, try to earning more by affected public safety.

It suggested that Sanlu and other market player try using closed supply chain management and own a farm, which is a starting point of the milk. From feeding the cows and collect milk, all milk supply process from Sanlu private farm, to reduce the risk of defective milk supply.

In the current global business environment, to allocate resources advantages, achieve cheaper labor and expand its customer base, outsourcing and the relocation of manufacturing and production have been the key features of the emerging global economy. But, the outsourcing has increased risks of companies' reputation. While it shift of responsibility towards external parties or suppliers, the company cannot know the outsourcer how they conduct the business.

Chinese daily industry reform - Legal Aspects

There is no basic law for food safety in China. For instance, there is nothing on inspection, testing, and quarantine of agricultural products. Lack of legal requirements would always mean low cost for non-compliance. In the legal system of American and British, punitive damages/exemplary damages have made noncompliance very costly for defaulting companies.

According to the Food Hygiene Law of the People's Republic of China, article 48:

Article 48 If anyone, in violation of this Law, causes an accident of food poisoning or a disease engendered by food-borne bacteria or causes harm to another person by other acts against this Law, he shall bear the civil liability for compensation according to law.

Also, with some of articles have previous mentioned, who fail to obey the food safety law, they only subject to civil responsibility and claim for damages by victims. Different from American and British, they are subject to criminal responsibility. Thus, China needs to modify the basic law for food safety immediately to catch up with American and EU standards.

Chinese daily industry reform - Food Safety Regulation

The China food safety regulation system has been established in 1960s, standards for some commodities and industries are outdated or inconsistent with internationally accepted ones (Dong and Jensen 2007).

Some standards set at various levels or by different departments have different or even conflicting requirements. For example, to the same moon cakes from one manufacturer, the Ministry of Health issued compliance after sampling tests, while AQSIQ failed it in its test. An extreme example is the standards set by different ministries and departments for the processing of daylilies. Moreover, government not restricted food production satisfy with HACCP and GMP those safety food production environment. It should only allowed manufacturers who have an HACCP certification of management to manufacture.

Chinese daily industry reform - Food Safety Supervision

As Henk Bekedam, a representative of the World Health Organization in China, said, the situation in China is complicated by poor co-ordination among 17 government agencies involved in food safety in the country (Cha 2007).

There are many department of Central government, like Ministry of Agriculture, Ministry of Health, AQSIQ (Quality supervision inspection and quarantine), the State Administration for Industry and Commerce are pointed to responsible for one section, but they are resulting in rather low efficiency and little cooperation. Another difficulty is that different departments are following their own regulations and standards, leading to different, even conflicting judgments. A consistent conclusion cannot be drawn.

Finally, different bodies may announce different information to the public. In fact, this has been the subject of great concern among Chinese experts, for example, in 2006, professor Li from Huazhong Agricultural University and his colleague have suggested the so-called societal supervision mode to integrate governmental, social, and personal resources, in order to lower the costs and maximize the social welfare (Li and Zhang 2006).

Therefore, it requires Chinese Central Government to set up a food safety council to monitor the food safety, coordinated those inspection departments and announces the consistent information to the public.

Chinese daily industry reform - Awareness of Corporate Social Responsibility

Corporate Social Responsibility (CSR) can be employed to manage the aforementioned reputation risk, or is thereby considered to be a form of this kind of secondary risk management (Power 2004, 35).

Companies are recommended to weave CSR into their business processes of purchasing and supply management, to establish an ethical supply chain in order to reduce risk, protect reputation, live up to stated values, enhance the productivity of suppliers, and reduce social and environmental impacts (Valentino 2007).

The main reason of the scandal occurs because of some middlemen and suppliers behave in poor business ethics. If Sanlu Group and the other milk suppliers who involved in this milk powder scandal had planned CSR effectively and established an ethical supply chain, the scandal can be prevented.

An executive meeting of the State Council (cabinet), presided over by Premier Wen Jiabao, on Wednesday decided to launch national comprehensive tests of dairy products and reform the dairy industry.

According to the meeting, the incident involving the tainted Sanlu milk powder reflected chaotic industry conditions, as well as loopholes in the supervision and management of the industry.

The meeting also reached six other decisions and ordered governments at all levels to implement them. These decisions include:

- providing the best and free medical care to those sickened by melamine-contaminated milk powder,

- confiscating and destroying all sub-standard products,

- strictly supervising the production of dairy companies with on-site inspectors,

- revising regulations on the supervision and management of the industry,

- subsidizing dairy farmers and encouraging more production by those enterprises with higher-quality products and,

- finding the cause of the incident and punishing those responsible. (Xinhua, 2008)

It had shown that Chinese government trying to improve the image of Chinese dairy industry and building confidence of Chinese products to consumer. Chinese people will they change in mind of buying Chinese milk powder from Sanlu and other companies, time will prove it. It is because earn back good will from consumer is very difficult, people are still remembered the incident for a long time. Nowadays, Chinese buy foreign milk powder rather than Chinese, they still lost confidence about "Made in China" products.


To conclude, the poor business ethics, fails to take social responsibilities for consumers, under regulation of food safety, government inconsistent inspection, poor supply chain management etc. are the main reasons of this Milk incident. It is necessary to learn from the incident, improve the inspection and supervision system and strengthen the management of the Chinese dairy industry. (3750 words)