Further episode would have serious implications for Fonterra: inquiry team.

Strip away the comfort statements in the independent inquiry report on the botulism food scare for Fonterra's board and one sentence jumps out: "In circumstances involving global reputational risk and notwithstanding the high calibre of its people and most of what it does, Fonterra fell short of the expectations of excellence associated with a leading global nutritional products company."

It's an understated - but nevertheless damning - indictment that gets to the heart of why New Zealand's largest company (which is also the world's biggest dairy exporter) is now having to retrofit a range of measures from board level down to bolster its risk management and food safety measures, after its precautionary recall of product potentially affected with the clostridium botulinum bacteria exposed defects at both governance and operational levels.

That the scare turned out to be the result of a false positive test does not mitigate the need for Fonterra to up its game, as the inquiry team underlined at yesterday's press conference.

Put simply, Fonterra already has form when it comes to food scares: The Sanlu melamine disaster of 2008 - which required a comprehensive campaign by government agencies working alongside Fonterra to ensure it did not suffer reputational damage from the criminal actions of its Chinese joint-venture partner; this year's botched disclosure of DCD nitrogen inhibitors in New Zealand milk powder which upset Chinese officials who first heard about it through news media; and finally what the inquiry team euphemistically refers to in its report as the "WPC80 events".


"The committee has no doubt that a further episode would have serious global implications for Fonterra," said the seven members of the "oversight committee" headed by Fonterra independent director Sir Ralph Norris.

They are right about that.

As the report indicates, it was the failure of Fonterra executives to learn the lessons from the DCD affair and escalate the quality issues to CEO level at an early stage that contributed to a snowballing disaster.

No heads will roll on the basis of this report. Chief executive Theo Spierings is safe. But the organisation will have to shake itself up to deliver on its aims to move further up the value chain. Judging by yesterday's press conference, Fonterra chairman John Wilson is determined to do just that.

The restoration of Fonterra's reputation, particularly in China, is already well under way. But directors' hopes that the current New Zealand food safety regime will continue to retain an element of flexibility seem improbable given the punishing tone still emanating from Chinese government officials.

At yesterday's press conference, inquiry report author Jack Hodder QC underlined the courage of the Fonterra board in turning the microscope on the company's performance and also making the report public.

The report has been "trimmed for trial" - that is crawled over by the company's legal counsel to ensure it does not prejudice Fonterra's position given, in particular, French giant Danone's potentially looming legal suit over the $500 million loss it claims to have suffered due to the loss of market share.

But the 21 decision points identified by Hodder and inquiry team members Dutch dairy industry expert Jacob Heida and Australian crisis management and communications expert Gabrielle Trainor show up considerable failure by company executives to "join the dots" and get to the heart of what they were really dealing with - a snowballing crisis involving product destined for infants and the very reputation of their own company.


The report is rather imprecise when it comes to dealing with why Fonterra did not simply quarantine all potentially affected whey protein when it discovered quality issues at its Australian Darnum plant in March this year.

Here's a truncated transcript of Hodder's explanation of why the question of quarantining the affected product did not feature among the inquiry's 21 decision points.

"It was picked up in several ways - broken down into three or four decision points. There were decision points when the testing was being done. There were decision points about when to start trace back. It was a combination of those things that added up to the entire process ...

"There wasn't a single point at which somebody said let's quarantine the whole thing or didn't say that."

Asked if there had been a decision point earlier on this score, Hodder replied: "Absolutely had they understood what they were testing for, had they escalated that process and there been some more input into the exercise then the trace back systems would have started earlier and they would have realised that quarantine was required."

Fundamentally it is this combination of a lack of true oversight and insight into what was at stake which motivated the recommendations to toughen food safety oversight and also risk management.

Finally the board will separate out the risk issues around its reputation and food quality into a separate committee which will have oversight of the new internal team on this score.

It's a long overdue measure given the other significant risk issues the company has had to deal with in the past five years.

And it's even more critical given that Fonterra is now on its journey from being a cost-focused dairy ingredients supplier to being a customer-focused global food products supplier which intends to develop more of its own brands.

There are casualties. Two managers have resigned. Another has been redeployed within the company.

Public relations firm Baldwin Boyle - which has supplied an inhouse communication team for more than a decade - will be a casualty. Judging by comments at the press conference, the PR consultancy was already on the way out with its functions gradually being replaced as Fonterra builds up its own internal capacity under group communications director Kerry Underhill.

But an inquiry team member indicated that process should be completed asap.

The Fonterra inquiry was led by the oversight committee headed by Sir Ralph Norris. It included fellow Fonterra independent directors John Waller and Simon Israel; Fonterra farmer-shareholder directors Blue Read and Nicola Shadbolt; and retired High Court judge Dame Judith Potter and University of Auckland Vice-Chancellor Stuart McCutcheon.

The report is robust.

But it will take the Government-directed inquiries to get to the full scope of how this food scare snowballed to the point of affecting New Zealand's own reputation and the role of the food safety authorities in how it escalated.

There are issues around AgResearch and the need for an internationally recognised and rated food testing regime that are still to be decided.