Shareholders should be asking why they are paying PR firm high fees for reputation management.

Neither Fonterra nor its PR consultancy Baldwin Boyle gave enough weight to the message blared across the latter's homepage, "Reputation is your greatest asset", as they prepared to deal with the major risk to the nation's dairy trade and the valuable New Zealand brand.

It's now two weeks since it was announced that trace residues of DCD had been found in some dairy products during tests done by Fonterra last year.

Let's make it clear the level of the residues is not a threat to the health of those that consumed them. But there is a major perception issue as some markets - including China - have an unwritten rule of zero tolerance.

It is obvious from the results in-market where Chinese consumers have dramatically cut their purchases of New Zealand-sourced infant formula that Fonterra and the Ministry of Primary Industries have dramatically underestimated the risk to the valuable dairy export trade.


Neither Fonterra, the ministry nor DairyNZ has yet to adequately explain the four-month hiatus between the September discovery of the DCD traces and when the issue was made public on February 24. But the lack of transparency has upset many others in the industry where there are mutterings of a cover-up.

And the trade risk is now a full-on reality as Fonterra, officials and other New Zealand dairy exporters, who are suffering collateral damage to their own brands, try to remedy the situation and rebuild trust in New Zealand as the safe source of food.

This aspect of the New Zealand brand positioning should not be underestimated. It is why New Zealand dairy products have commanded a premium price in overseas markets (predominantly China but also in Taiwan and Southeast Asia).

Fonterra shareholders should be asking why they are paying the PR firm high fees for reputation management after the clear failure to communicate news of the DCD discovery in a timely fashion to officials and consumers in both countries, let alone the Chinese media which has strongly panned New Zealand's reputation for food safety in the wake of the mismanagement.

It may be that the seconded executives to Fonterra are too much part of the system to challenge big-time managers (or the board). If so, there needs to be a shakeout.

The fiasco has some ironies.

Soon after the March meeting of the National People's Congress - which will formally cement Xi Jinping and Li Keqianq as China's next president and premier - John Key will make his long overdue visit to celebrate 40 years of official relations between New Zealand and the People's Republic of China.

As with Key's first formal visit to Beijing in May 2009 - food safety will be on the agenda again.


Not necessarily the official agenda as in 2009 when Premier Wen Jiabao appealed to Key to help China learn how to set up safe food processes in the Chinese dairy industry in the wake of the Sanlu melamine disaster.

But because the Chinese side has been asking behind-scenes questions over what New Zealand and Fonterra have learned from the Sanlu affair, where the deliberate contamination of milk supplies with melamine caused some babies to die and many thousands to suffer kidney damage.

In May 2009, then Fonterra chairman Henry van der Heyden accompanied Key to the Great Hall of the People, shaking Wen's hand and also meeting President Hu Jintao during the official discussions.

Van der Heyden said then that Fonterra had made a long-term commitment to the burgeoning Chinese dairy market.

Key told me then the Chinese leadership had seen Sanlu as "a one-off incident". He said the message from the Chinese was: "It is behind us now and from our point of view we want to rebuild our agriculture sector and you're part of that."

In May 2009, Fonterra's sales to China were already booming. It had forecast a near trebling of the amount sold by July 2009 compared with the preceding financial year.

The dairy co-op was not keen to be publicly seen as a beneficiary of the fallout from the Sanlu affair. It was sensitive to any suggestion that it might recoup the $201 million writeoff on its shareholding through increased sales of foreign powder to China as consumers turned to trusted food products.

It's pertinent to recall that Fonterra did commission an independent audit by Control Risks Group to pinpoint weaknesses in its processes.

Numbered copies of a cut-down version of the Control Risks Group's report were given to members of Fonterra's Shareholders' Council to study under strict confidentiality conditions.

Problem is much of that confidential report is understood to have focused on Fonterra's problems "in market" (in particular how to ensure its own milk supplies were safe).

It is debatable to what extent Fonterra or its risk advisers thought through the reputation risk from uncovering problems with New Zealand-sourced products no matter how infinitesimal that may seem from a New Zealand perspective compared with easily spooked Chinese consumers.

Baldwin Boyle seconds Graeme McMillan, who is also a director and shareholder of the PR firm, as Fonterra's PR manager.

It's an unusual arrangement that has worked well as Fonterra has navigated the highly political shark-infested waters as it built support among farmer-shareholders for the capital restructuring and boosted directors' reputations.

Problem is Fonterra and its PR advisers still approach their challenges from a co-operative perspective instead of that of a food company which also has a listed vehicle - Fonterra Shareholders' Fund.

It needs to become much more in touch with its markets, consumers and investors.

It could start by getting sound internal management and an external PR firm whose fortunes are not so bound up with Fonterra's that it can't afford to seriously challenge management.

Postscript: I was surprised to get a call from Larry Williams' producer saying Fonterra had taken issue with an item I had published recounting a CCTV report that broke the news that Shanghai inspectors were probing three foreign companies' dairy products saying they would "seal and destroy" any found to contain DCD.

Producer Melita Tull told me that Louise Nicholson (a former managing director of Baldwin Boyle and in the process of moving to a full-time role at Fonterra according to the Herald's Insider column), had queried the report's accuracy. Tull asked for further information from Nicholson. It never came.

In fact, the CCTV report - and comparable reports by Shanghai Daily - reliably reported the inspectors' moves and also the subsequent announcement that in one of those markets (Shanghai) no products with traces of DCD residues were discovered.

In my view the Nicholson call was simply symptomatic of Fonterra's PR mindset on this issue: Stymie the New Zealand information flow and the problem will go away. Fat chance.