A Publication of Rothlin CSR in Action

Written by:Mark Pufpaff, Helen Xu

Edited by:Dennis McCann

Shanghai Husi Food

Company LimitedExpired meat, anyone?

Table of Contents

Chapter 1 – Seeing

Chapter 2 – Judging

Chapter 3 – Acting

Discussion Questions

SEEING

Food safety is a serious issue in China. A survey published by the ChinaYouth Daily in March, 2015 revealed that 77% of those Chinese citizenspolled stated food safety as their top “Quality of Life” concern.Significant, to say the least.

In 2014, Shanghai Husi Food Company Ltd. (Husi), a subsidiary of theUnited States-based OSI Group (OSI), was investigated for and eventuallyfound guilty of supplying reprocessed and expired meat to their westernfast-food clients operating in China, lying about production andexpiration dates, and providing false guarantees about the storage life oftheir products. Corporations such as McDonalds, Yum! Brands, andStarbucks were among those who were drawn into the limelight of thescandal.

The scandal went public due to undercover journalists, working at a localnews station named Shanghai Dragon TV, and a whistleblower namedWang Donglai, who was an employee at Shanghai Husi from 2009-2013and claimed that the firm forced him to forge expiration dates on theirmeat products. As the practices of Husi began to gain exposure,government regulators launched formal investigations.

In immediate response to these accusations, OSI, at a July, 2014 pressconference in Shanghai, stated that it would investigate thoroughly itsentire operations in China, replace its management team at Husi’sShanghai location, and build a physical quality control center in Shanghaiitself. However, in a February, 2016 press release protesting the verdict

arrived at by the Shanghia Jiading District People’s Court, OSI expressedoutrage and plans to appeal, claiming that the verdict was unjust andbased on distorted facts and indifference to pre-existing Chinese lawsand precedence.

The fallout of the verdict resulted in 10 arrests with corresponding finesand prison sentences, corporate fines of RMB 1.2 million (USD 182,000)for each of Husi’s Shanghai and Hebei branches, and the suspension ofoperations at the Shanghai location. On the corporate side, the scandalforced OSI to terminate the employment of over 300 Husi factoryworkers.

The response from Husi’s clientele was unsympathetic:

“We have stopped using all food material provided by the company[Shanghai Husi] and some of our restaurants nationwide [China] mayhalt serving some products.” – McDonalds Corporation

"We have launched an investigation into the supplier [Husi] and have azero-tolerance policy for any supplier's violations of laws and regulations[they subsequently ordered Kentucky Fried Chicken (KFC) and Pizza Hut’sChina locations to stop sourcing meat from Husi]." – Yum! Brands

However, a public survey, carried out after the scandal became known,revealed that 78% of respondents believed that these corporations hadprior knowledge of Husi’s product quality problems.

JUDGING

Food safety is important because people’s health is at risk. Asconsumers, we want to put our trust in the quality of the food, meat orotherwise, that we are buying. We want to associate food brands withintegrity and a commitment to standards of excellence. For somethingas fundamental as nourishing ourselves, we need to have confidencethat those providing for these needs are acting in our best interest.When food safety scandals occur, like the one surrounding Husi, a criticalbreakdown of trust results. To reiterate what those polled by the ChinaYouth Daily emphasized, nothing less than our quality of life is at stake.In the Husi food safety scandal, there are two questions this case aims toreflect upon:

What is the responsibility of a manager?

A Chinese commentator stated that the scandal was the result of poormanagement, of a deficiency in the oversight of Husi’s meat processingoperations. This is an important observation because a manager, ifnothing else, is responsible for knowing the work ethic of their team andthe integrity of the products they are producing. At Husi, whether themanagement team intentionally ordered their teams to process,package, and sell expired meat or they simply were not aware that thiswas happening, they are still responsible for the results. In regards tothe former, incompetence is never an excuse for allowing unethicalbehavior.

Likewise, a manager is responsible for acting ethically. In other words,

they need to comply with industry standards, national laws, and internalcompany policies. They also need to respect the rights of theirstakeholders, be them their employees, customers, suppliers, localcommunities, or national government. If Husi’s managementencouraged the relabeling of expiration dates in order to generaterevenue from outdated products, they were failing to protect theinterests of those invested in their operations.

One might ask, however, what reason there is for a business to respectthe rights of their stakeholders? Is there any morally binding reason todo so? What if it comes at the expense of profits or fulfilling quotas?What if it means closing a branch office or firing a team of employees?Legitimate (and difficult) questions, to be sure.

One answer to these difficulties may lie in the wisdom of Catholic SocialTeaching, in particular Pope Benedict’s presentation of the relationshipbetween rights and duties in Caritas in Veritate, published in 2009. Inthis encyclical, he states that rights presuppose duties, and that if we areguided by our duties, we will not only respect the real rights of eachother in society but put a limit on the rights that one may claim foroneself (for example, profit maximization is not a right). In other words,our moral duties should inform our decision making, for our duties helpdetermine our rights.

In business, then, it would be a manager’s moral duty to respect therights of their stakeholders. It is likewise their ethical responsibility touphold company policy, national laws, and industry standards. WhenHusi compromised the quality of their products by mixing expired andfresh meat, they violated one’s right to clean food. When they falsified

the expiration dates on their products to generate additional revenue,they violated OSI’s company policies. Even though Husi might havegained profits in the short-term by neglecting these duties, thedifficulties resulting from their action give a good example of what canhappen long-term. One of the hallmarks of ethical business practice isthat it is sustainable.

What is the responsibility of an employee?

Important to note is that one of the reason’s the Husi scandal becamepublic was because of a whistleblower. A whistleblower is an employeewho reveals to a relevant authority, internal or external to the company,the existence of suspicious or outright illegal behavior in the operationsof their firm.

Is whistleblowing, among other things, the responsibility of anemployee? What if it is generally frowned upon in a given culture? Orwhat if it might jeopardize an employee’s job security? How difficultwould it be to “blow the whistle” on a friend or colleague whom youadmired?

The idea that employees can (or do) have a responsibility beyond thefulfillment of their job descriptions is not very common in businessthinking. Most of the focus is on employee performance, innovation,and their ability to fulfill or exceed expectations. To say that part of anemployee’s responsibility is to report unethical company behavior torelevant authorities seems almost contrary to the interests of a business.Who wants their employees looking out for unethical behavior, anyhow?That would only give a company a poor public image, right? But this is

exactly what a company needs and an employee needs to do.

When Wang Donglai reported the alleged business practices of Husi,namely, forcing him to forge expiration dates in order to sell expiredproduct, he was identifying a serious problem, one that needed to befixed. It is contrary to OSI’s interests to have a subsidiary selling expiredmeat. It is likewise contrary to the interests of Husi’s clientele, forinstance McDonalds or KFC, to continue sourcing meat from asubstandard supplier. Even though Husi had a right to expect the loyaltyof their employees, they forfeited that right when they chose to engagein unethical business practices. Wang acted responsibly in publiclyrevealing the behavior of Husi. He enabled justice to be served.

There are of course many cases of employees accusing companies ofdoing things they never actually did. But the point here is to show howwhistleblowing, even if it seems contrary to the demands ofemployment, can be an important responsibility for an employee.

ACTING

How did Husi’s clientele respond?

Fast food chains such as McDonalds and KFC have long been underscrutiny for the quality of their ingredients. In recent years, dueprimarily to growing concerns about the health risks involved in eatingfast food as a regular part of one’s diet, these multinational chains havemade efforts to change and adapt to the demands of their consumers.From their branding to their suppliers to their food storage policies,progress has certainly been achieved.

However, much of this progress is still perceived suspiciously, as thepublic survey mentioned in the “SEEING” section above indicates. Whenfood safety scandals emerge that involve fast food chains, thosesuspicions are confirmed, regardless of whether the chain was directlyinvolved or not. In the case of Husi, McDonalds and KFC were notdirectly to blame for Husi’s negligence, but the fact that they weresourcing meat from them does not contribute well to their public image.They have to go immediately into damage control. As one Chinesenetizen exclaimed, after hearing of the scandal:

“Itmade me sick… I’ve eaten so many McNuggets!” – Chinese netizen

It is likely these sentiments are felt among China’s many McDonaldsregulars. However, these fast food chains still enjoy a strong brandloyalty in China. As one customer stated during a meal at a KFC locationin Beijing:

“Today, you can't find 'clean' food anywhere [in China]. KFC's meat is notsafe, but supermarkets may also sell expired meat too. It doesn't matterto me. I'll still choose KFC to grab a bite to eat." – KFC customer in Beijing

Though this customer may be exaggerating in his analysis of the meatindustry in China, there is still the necessity for McDonalds, KFC, and therest of the brands affected by the scandal to respond appropriately.Their decision to stop sourcing meat from Husi was certainly prudent,especially due to the fact that there are so many domestic competitorsseeking market share. It was also the right course of action in terms ofrebuilding customer trust, repairing damage to their international brandimage, and showing that they respond to these kinds of situationsseriously and without excuses.

How did OSI, Husi’s parent company, respond?

The verdict, as described in the “SEEING” section above, was harsh. 10arrests, corporate fines, the suspension of business, and the terminationof employment for over 300 Husi factory works. OSI received the verdictafter 17 months of litigation. Interesting to note is the tone of theirofficial press releases before and after the verdict.

Before the verdict:

“We have confidence in China’s legal system and believe that the judicialauthority will come to a fair and reasonable judgment with full respect tothe facts and laws.” – OSI Press Release, September 30th, 2015

“OSI Group will continue to cooperate fully and in good faith with theauthorities. We support the government’s consistent application of thecountry’s food quality and safety laws.” – OSI Press Release, August 29th,2014

After the verdict:

“After seventeen months of legal proceedings, detainment of Husiemployees for as long as seventeen months, a harmful smear campaigndriven by state‐owned media, as well as the denial of entry of press andsenior OSI leaders to all court proceedings, the court of jurisdiction hasreached an unjust verdict. We have made every effort to follow firminstructions to silently cooperate on the advice it would lead to a fairconclusion. However, we can no longer accept injustices against ourpeople and our reputation.

Sensationalized media reports from Dragon TV led to a raid on theShanghai Husi plant in July 2014. Dragon TV made false and incompleteaccusations that ignored facts and Chinese law. After an actualinvestigation was completed, all authorities involved have recognizedthat this case has never been about food safety.

The verdict is inconsistent with the facts and evidence that werepresented in the court proceedings. Additionally, OSI will considerpursuing a suit against Dragon TV for its role in harming the reputationand business operations of the company through intentional falsificationof press reports.” – OSI Press Release, February 1st, 2016

The difference in tone certainly creates suspicion that an injustice was

done in this case. That OSI was seemingly compliant with the requestsof the Chinese authorities and transparent about the scandal on theirown website is evidence that their discontent is not unfounded.

It is absolutely inexcusable to sell expired meat, falsify expiration dates,and lie about a given products shelf life. However, if the sentimentsfrom the KFC customer above have any weight, are we not to besuspicious that the Chinese media, and perhaps even legal system as awhole, might be ignoring the condition of food safety in domesticcompanies in order to discount the integrity of foreign brands? Is itpossible that favoritism is being shown to local competitors at theexpense of their international counterparts?

Also in 2014, a similar food safety scandal was revealed at a Walmartlocation in Shenzhen. Chinese media responded with a flurry of reportsdiscussing the issue and exposing the Walmart brand to public criticism.Investigations were launched, both internal to Walmart and externallyfrom local authorities, only to find that the claims, which ranged fromcooking with long expired oil to selling worm-infested rice, wereunfounded and inconclusive. Even though the fallout was different fromthe Husi scandal, one wonders whether the almost exclusive attentionput on international competitors by the Chinese media is strategic andintentional.

DISCUSSION QUESTIONS

If you were the CEO of OSI Group, how would you respond to theShanghai Husi Food Company Ltd. scandal? What action would youtake? Do you think their reaction to the verdict is justified?

If you were the manager of Husi’s Shanghai operations, what would yourresponse be to the scandal? What do you think would be yourresponsibility? Would you be at fault?

Why do you think the scandal occurred in the first place? What mightcause a company to allow such behavior? What could be done to avoidit in the future?

If you were McDonalds or Yum! Brands, how would you respond? Doyou think their responses were enough? What else could they do, ifanything? What actions would you take to repair their brand image?

As a business leader or potential business leader, what do you think arethe important lessons to be taken away from this case?

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