Edition: May/July 2018
Editorials

COMPANY REPORTS

When a crisis happens

Can it have been foreseen? Tiger Brands showed a lack of leadership maturity in its failure to report on how it responds to such key issues as marketplace behaviour and food safety, Rob Worthington-Smith* contends.

In handling pension funds, trustees face a choice similar to picking a driver for a race. If it’s a quartermile drag race, you’ll be looking for lightning reflexes and death-defying courage. But if you’re a passenger in a 24-hour reliability trial, then you’d be more likely to look for a responsible driver who can be depended on to reach the finish safely with minimal wear and tear.

Tiger Brands makes a good case study for what can go wrong when shareholders get the team selection mixed up. Tiger has suffered a number of scandals over the years, the most egregious being its collusion with rivals to fix bread prices.

In the latest disaster, hundreds of its most vulnerable customers – mothers, babies and those with weak immune systems – became ill and even died of listeriosis. The contaminated products were eventually tracked to two food processing facilities, one being a Tiger facility in Polokwane for Enterprise meats.

In the FM editor Rob Rose asked: “Is it just atrocious luck that Tiger Brands has ended up on the wrong side of three reputation-crushing disasters in the past few years? Or is there a deeper cultural nonchalance towards rules at the company?”

If there is a deeper culture of disrespect for rules at Tiger, this would surely be a malaise we would expect the board of directors to detect and deal with, just as you should where your driver continuously cuts corners and runs traffic lights. Indeed, your pension-fund members might well ask: “Are you, as our trustees, picking the right leaders for the companies in which our funds are invested?”

While it is a hit-and-miss exercise to pick the entrepreneurial F1 driver required to run a successful IT start-up, we actually do have tools to assess whether we have a reliable team of drivers at the wheel of our large and well-established corporate vehicles. We’ve called this set of tools the FarSight model. It uses the international Integrated Reporting standard to interrogate the hundreds of pages of source material that make up a company’s Integrated Report, its website and other communications put out from time to time by the company’s leadership.

Every two months we analyse a sector of around eight JSE-listed companies. We submit our findings to the asset-management industry through our channel partner, Legae Securities.

The model forms an opinion on the maturity of the leadership team by first making a list of the company’s most material issues (among Tiger Brands’ most material issues are marketplace behaviour, food safety and treatment of waste). Next, we analyse the company’s Integrated Report (and any other corporate communications) for how maturely we feel the leadership has responded to these issues.

We look at four aspects:

  • How well does leadership understand these issues, including how they may be a concern to society and how they may impact on the company in terms of reputation, regulation, licence to operate and competitiveness?
  • How committed is leadership in terms of holding itself accountable for how these issues are dealt with successfully or otherwise?
  • How effectively does leadership measure progress in terms of dealing with these issues, using comparable, relevant and reliable performance indicators?
  • How clear and logical is the link between the challenges presented by these issues and the strategy being pursued by leadership towards an outcome that will be sustainable and profitable in the long term?

Taking food safety as an example, we would expect a mature leader to report something along these lines: “The delivery of hygienic and healthy food to our retail customers is critical to our reputation and our ongoing licence to operate. Given the increasing intensity of the processed food industry and the proliferation of pathogens across territories, we recognise that every facility is vulnerable to contamination and that every step in our food chain needs constant monitoring by alert and trained staff.

“We have updated our ISO 22000 monitoring protocols and aim to have all quality control staff trained and certified by Q2 next year. In compliance with FSSC 22000 we sample every batch of product at every discrete production and distribution step. This year we reduced contamination levels from 85% to 81% of maximum allowable levels across all products and are aiming to achieve 70% by 2020 (where the global standard for food safety is 75%).

“Following concerns relating to the capacity of Department of Health officials to enforce standards across the industry, we have joined an industry initiative that aims to fund new mobile laboratories for DOH staff, as well as industry training in the monitoring of food hygiene for 30 new DOH internships for each of the next five years.”

the next five years.” This paragraph contains fewer than 200 words for possibly the most material issue in a report that typically runs to over 50 000 words. So how many words were written in Tiger’s Integrated Report?

FarSight looked at its 2015, 2016 and 2017 integrated reports and found almost nothing save for the following in the latest report: “In FY17 we saved a further R220m through customised sourcing strategies that ensure supply continuity, capacity for growth and rigorous compliance to food safety protocols.” Ok, we get the message that cost-cutting can lead to compliance…

Our assessment of Tiger, completed in January 2017 (but still valid for 2018), concluded: “Reviews from the chair and CEO are weak and fail to address or provide insight into significant Governance, Ethics, Labour, Society, Customer and Environmental (GELSCE) issues. No mention of anti-competitive behaviour, a vulnerability for this industry, and misleading with respect to product health concerns, particularly in the way Tiger Brands’ Eat Well, Live Well programme is portrayed.”

On March 15, the listeriosis crisis becomes the story of the day. The news conference held by Tiger chief executive Lawrence MacDougall couldn’t possibly meet with a sense of societal goodwill. This is because Tiger had neither a stated strategy, nor reporting, on the issue of food safety in its integrated report. If Tiger had included even a brief summary, there would have been some evidence that food safety was on the leadership’s radar.

Reporting does something else too. It forces a company to confront its publicised shortcomings; for example, why its food-hygiene performance is worse than international standards. Why should local standards be less stringent? Why is government not playing its role in enforcing standards? What’s measured and publicised has a way of focusing attention.

Thus, when MacDougall faced the media, his claim that food safety had always been a top priority for Tiger rang hollow. And whatever line of defence he took around culpability for contaminated food on supermarket shelves became a case of damned if he did, damned if he didn’t.

The accompanying diagram shows the results of all the sector analyses we completed in our 2017-18 cycle. Highlighting the food-processing sector, it’s noticeable that Tiger is not the worst reporter. Also, the food sector as whole performs worse than most other sectors.

The most mature companies, with the least residual vulnerability, are those in the top left-hand quadrant. The least mature, with highest residual vulnerability, are in the bottom right-hand quadrant. On average weighted by score, companies in the bottom two quadrants lost more than half their JSE value in the period between their 2017 and 2018 assessments.

When times are good, the rising tide tends to lift all boats. When the tide runs out, or when industry tsunamis come over the horizon, it is generally the companies with less mature leadership that find themselves marooned or swamped, losing value for their providers of capital.

Trustees wield power through their fund managers’ proxy votes on shareholder resolutions. For example, how well aligned to material issues are the incentives offered to executives in the remuneration report?

Use this power to ask whether your leadership teams are responding maturely to issues such as food safety in the food industry, or responsible lending in the banking industry. This should be leadership’s first and foremost responsibility when getting behind the wheel to drive fund members’ pension cargo into the future.

* Worthington-Smith is the founder of FarSightFirms. com. Its FarSight model analyses leadership maturity based on the IIRC’s Integrated Reporting Framework, an international standard designed to guide companies towards better reporting of their value creation.

FarSight Score versus Residual Vulnerability