Sanlu Ethic Scandal!!

Case introduction:

The Sanlu milk powder was a food safety incident in the People's Republic of China, involving milk and infant formula, and other food materials and components, adulterated with melamine.
The scandal broke on 16 July, after sixteen infants in Gansu Province, who had been fed on milk powder produced by Shijiazhuang-based Sanlu Group, were diagnosed with kidney stones.  After the initial focus on Sanlu - market leader in the budget segment - government inspections revealed the problem existed to a lesser degree in products from 21 other companies, including Mengniu, Yili, and Yashili.
The issue raised concerns about food safety and political corruption in mainland China, and damaged the reputation of China's food exports, with at least 11 countries stopping all imports of mainland Chinese dairy products.

A number of criminal prosecutions occurred, with two people being executed, another given a suspended death penalty, three others received life imprisonment, two received 15-year jail terms, and seven local government officials, as well as the Director of the Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) were fired or forced to resign. Sanlu group also borrowed 9 billion yuan to compensate the babies’ families which are suffered in this incident. After paying the compensation, sanlu group stopped its business and claimed bankruptcy.

 

The main cause of this incident was that Sanlu appended
"Melamine" to its product. The reason is that melamine has a high nigtrogen level, which is 66^ nitrogen by mass. Therefore,  Melamine- as a small organic molecule with a high nitrogen content-can easily fool the quality control equipment into thinking that nitrogen (from protein) is present at normal levels and so the milk is passed as good at a fairly low cost. Unfortunately, it is possible that melamine accumulates in the body and causes toxicity problems – basically damaging the kidneys and forming stones (solid deposits within the kidneys or bladder). 

The World Health Organization referred to the incident as one of the largest food safety events it had to deal with in recent years, and it suggested that the crisis of confidence among Chinese consumers would be hard to overcome. A spokesman said the scale of the problem proved it was "clearly not an isolated accident, but a large-scale intentional activity to deceive consumers for simple, basic, short-term profits."


Theories behind the case:


1.    Ethical decision making

The behavior of Sanlu reflects their ethical decision making is following the cost-benefit theory. A cost benefit analysis finds, quantifies, and adds all the positive factors. These are the benefits. Then it identifies, quantifies, and subtracts all the negatives, the costs. The difference between the two indicates whether the planned action is advisable.

（Originally create)

Sanlu has benefited from adding melamine into the milk. They could use the way to achieve protein level and meet the requirements of government. But they only need to pay much fewer costs to achieve the benefits. Therefore, by evaluating the benefits and costs, Sanlu decided to add melamine into their products.


But after the scandal was released, Sanlu eventually compensate 9 billion to the victims and customers. This behavior can be explained in moral right. The moral rights approach concerns itself with moral principles, regardless of the consequences. Under this view, some actions are simply considered to be right or wrong. ( Approaches to Business Ethics.htm )


Sanlu found that milk crisis has affected so many people and their families and noticed that the damage it brought was really huge and irreparable. Therefore, they spend 9 billion RMB, which was quite a huge cost, to fix the scandal and follow the moral rights.


2.    Organizational decision making

Addressing ethics in decision making in business or other large organizations or groups (e.g., government) does point to the need to ensure that key focusing decisions (the decisions highlighted in green) have been made and are in place. In particular, the business decision for core values should be in place to provide the goals/requirements that will be used to create and constrain the criteria used in the network of business decisions. This focusing decision can influence criteria for decisions throughout the network of business decisions (the decisions in blue), directly influencing ethical decision making and organizational conduct. Additional related decisions include choosing the business mission and the code of conduct that will add compliance criteria to decisions across the business decision network.

Therefore, Sanlu should set up its own code of conduct and have the ethics training from the top management to the people who are in charge of the supplying.

33. Social responsibility:

As far as this case has showed, Sanlu is using the traditional method which is “shareholder” approach. This traditional approach suggests that the only responsibility managers have is to the owners, in other words, the shareholders. If they take this approach, managers will only be concerned with maximizing the profits of the business so as to improve the earnings of the owners. Traditional methods of the studying the performance of firms, within accounting, have been measured in financial terms, looking at profit and loss accounts, the balance sheet and the cash flow statement. These tools are used to maximize shareholder wealth within the firm. Because Sanlu is using shareholder approach, it append melamine in its product to maximum its profit.

As Sanlu is the leader dairy manufacturing company in China, our group really think that Sanlu should adapt the stakeholder approach instead of shareholder approach. In  seminal text ‘Strategic Management: A Stakeholder Approach’, Stakeholders are defined in numerous ways, but the most commonly quoted definition is: any group or individual who can affect or is affected by the achievement of the organizations objectives. (Freeman, 1984)The stakeholder approach believes that managers should take into account the views of all the stakeholders of the business and not just the owners. It is hoped that by doing this the stakeholders will take an active interest in the well-being of the business.

Examples of the stakeholder approach and its potential benefits to the business include:
(1) Offering customers good value products and excellent after-sales service means that they should return to the business again in the future;


(2) Providing the local community with sports facilities may lead to better relations with local people which may then lead to an increase in sales;


(3) Providing the larger community with a benefit, such as books or computers for schools, may encourage people to think well of the business, and so they may buy more from it in the future;

If Sanlu is using stakeholder approach, it would consider that its decision of appending melamine in milk will damage its customers a lot and atop doing so because the stakeholder approach emphasize that Sanlu should not only consider its own profitability, it should also consider the benefit for its customers.

   

   4. Leadership Qualities 

Ethical competency:

For a manager to be an excellent, he or she should be equipped with many competencies/capabilities. Just as a mechanic requires a precise set of skills to mend cars, leaders require a certain array of competencies to enact effective leadership. (Cragg & Spurgeon, 2008) The leader qualities that we are talking now are confined in ethical scope.

A good leader needs to possess many qualities. On ethical aspect, integrity, dedication, magnanimity, openness, fairness and assertiveness are all key factors. Apparently Sanlu did poorly on its integrity and magnanimity.

(1)   Integrity:

Integrity is the integration of outward actions and inner values. A person of integrity is the same on the outside and on the inside. Such an individual can be trusted because he or she never veers from inner values, even when it might be expeditious to do so. A leader must have the trust of followers and therefore must display integrity.

Melamine is used in plastics and other industries and is strictly forbidden in food processing. (Xinhuanet, 2008) However, Sanlu Group ignored the regulation and they added Melamine into raw milk so that the protein content of the milk appeared higher than it is actually. It is not only morally unethical, but also illegal. In order to get through the food safety examination, Sanlu added Melamine to artificially improve the ammonia content and the protein content as well. Sanlu, to some extent, lied to the State food and drug administration as well as consumers by illegally and improperly using chemicals.

(Sanlu is adding mountains of Melamine into the fresh milk.

Cow: What are you doing with my product?

Azrael: I am coming.)

Source: http://finance.aweb.com.cn/2009/3/28/22520090328151859730.html

What was the consequence? Obviously, consumers lost trusts on Sanlu. Or we can say that Sanlu badly hurt consumers’ confidence on milk consumption. Sanlu, in the consumers’ mind, means “poison”, ”unsafety”,” calculosis”. Later it even became the sign of “unsafe food in China”. The comic below satirizes the Sanlu:

Note: The giant here was totally petrified. He attributed this to “Sanlu” and said “it is because I have been drinking Sanlu when I was kid”.

More comics related to Sanlu, you can visit: http://tieba.baidu.com/f?kz=480388927

Sanlu was not the only one to add the Melamine into the milk powder. Other manufacturers also did so. You may wonder why Sanlu was first exposed to media. Well, Sanlu was the one that added substantial amount of Melamine into the milk powder. Therefore, compared to others, it was the most unethical one and resulted in most serious hurt to consumers. 

(Mengniu Dairy: What I did was to add Melamine into the milk powder. What the hell, you just added a bit milk into the Melamine.

Sanlu: It is none of your business.)

Source: http://www.lifeall.cn/tie-56532761-1.ahtml

(2)   Magnanimity:

Magnanimity means giving credit where it is due. A magnanimous leader ensures that credit for successes is spread as widely as possible throughout the company. A good leader takes personal responsibility for failures. This sort of reverse magnanimity helps other people feel good about themselves and draws the team closer together. To spread the fame and take the blame is a hallmark of effective leadership.

(Originally Create)

In the case of Sanlu, the management team denied that the Melamine was added in the production process. Instead, they announced to public that some illegal dairy farmers added the Melamine in the fresh milk. Of course, the lie was suspected by many expert even many netizens had the inquiries on this statement by Sanlu.

On one hand, the management team of Sanlu was not brave enough to make the decision and bear the responsibility. The lie could only make consumers more doubt and lose trust. What’s even worse, many consumers thought that Sanlu planned for all the things. As long as they lost consumers’ trust, the business gone.

On the other hand, they evaded the responsibility and shifted the blame onto dairy farmers, who was innocent. A responsible enterprise won’t credit the failure to either inside or outside partners. The way Sanlu behaved can only scared away partners and lost their prestige in their industry.

Sanlu was not the only one practiced like this. Octopus Company also behaved the similar way. CEO Ms. Chen lied and denied their action of selling customers’ information at the very beginning and finally acknowledged their “offence”. Her inconsistency was criticized by the masses. On the contrary, enterprises who initiatively admit the fault are more appreciated by society.

We can observe from above cases that inappropriate leadership costs a lot. It concludes the very importance of leadership. Companies operating in China can reduce costs and retain talented staff by developing local, high-potential employees for leadership positions. (Byham, 2009)That may be one of the reason why Management Trainee program become increasingly popular.

5. Dilemma:

The core dilemma of management is the conflicts in the relationship between the individual and its surrounding organization. In Sanlu’s case, the dilemma faced by Sanlu is the cost and ethics. In their industry, any other milk or milk powder manufacturers all added the Melamine into the milk powder to save the cost and at the same time past the food quality test by means of artificially improving protein percentage. While they need to consider the potential damages that this practice may bring to their customers.

Sanlu weighed the two sides and chose to maximize their profit at the sacrifice of customers’ interest. They not only decided to be most unethical one. From management point of view, the Sanlu cared the short-term interest and overlooked the long-term impact, which we also called myopia. It should have been aware of the impact it would bring by adding chemicals in the milk powder. In the long term, the company reputation would be damaged and company might even face bankruptcy.

Therefore, it is very important lesson for many enterprises. When dealing with dilemmas, company should consider both short-term interests and long-term interests of company. Generally speaking, unethical behavior will ruin a company in the long term. As the Chinese old saying goes “truth will come to light sooner or later”. It may be expensive for company to be socially responsible and win trust from customers by acting ethically. Nevertheless, company benefits from doing good deeds. As what Thomas concludes "the core values for business that I have enumerated can help companies begin to exercise ethical judgment and think about how to operate ethically in foreign cultures, but they are not specific enough to guide managers through actual ethical dilemmas." (Donaldson,1996)

Therefore, it is very important for company to behave legally and ethically on the day-to-day basis. Starbucks is a good example. It recognizes that they exist in, and are part of dynamic and complex world, and as a result, the firm must follow legal and ethical standards on a day-to-day basis. This recognition is an important part of their social responsibility categorization. (Cavett-Goodwin, 2007)

Reference:

1.     Cragg, R. & Spurgeon, P. (2008). Competencies of a good leader. Retrieved from http://www.radcliffe-oxford.com/books/samplechapter/1602/05-SucceedLeader-Ch5-1a017980rdz.pdf

2.     Hakala, D. (2008). The top ten leadership qualities. HRWorld, retrieved from http://www.hrworld.com/features/top-10-leadership-qualities-031908/

3.     China's Sanlu apologizes for milk powder contamination (2008) Xinhuanet, China.com. Retrieved from: http://english.china.com/zh_cn/news/china/11020307/20080916/15089271.html

4.     Cavett-Goodwin, D. (2007). Making the Case for Corporate Social Responsibility. Essays & Articles.

5.   Why put melamine in milk? Retrieved from http://gemmabm.multiply.com/journal/item/2/Why_put_melamine_in_milk

6.  Approaches to ethical decision making. Retrieved from https://eportal.cityu.edu.hk/webapps/portal/frameset.jsp?url=/webapps/blackboard/execute/launcher%3Ftype%3DCourse%26id%3D_184620_1

7.     Addressing ethics in decision making , decision-making-solutions.com. Retrieved from http://www.decision-making-solutions.com/ethics_in_decision_making.html

8.    Shareholder and stakeholder approach. Retrieved from
http://courses.chalkface.com/public_html/encyc/U2M01-02Shareholder.html


9. Donaldson, T. (1996) Values in Tension: Ethics Away from
Home. When is Different Wrong? Harvard Business Review.


10. Byham, W. (2009) Developing the Next Generation of Chinese Business Leaders. Chinabusinessreview.com