BUS 560 Module 6 Governance and Accountability Example

The Board Never Heard the Word Listeria: Governance, Accountability and Oversight of Food Safety Risk

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MBA Program, Aspen University

BUS 560: Business Ethics

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Month Day, Year

The Board Never Heard the Word Listeria: Governance, Accountability and Oversight of Food Safety Risk

Willamette Creamery, a composite company in Salem, Oregon, makes premium ice cream sold in grocery stores across the West. It is privately held, with an eight-member board that includes three outside directors. Last summer, state health officials linked two hospitalizations to listeria in its products, and the company recalled four months of production at a cost of about $9 million, plus lost contracts. An investigation found that environmental swabs in the plant had tested positive for listeria eleven times over the previous eighteen months. The board learned of these results only after the recall. This paper examines why governance failed and what should change.

What Boards Are Expected to Oversee

Directors are not expected to manage daily operations, but they are expected to oversee the risks that could seriously harm the company and the people it serves. Shleifer and Vishny (1997) described corporate governance as the means by which those who finance a firm assure themselves of a return, but in practice boards are also where accountability for major risks rests. Courts and governance experts have increasingly emphasized that directors must make a good-faith effort to establish reporting systems for risks central to the business. For a food manufacturer, food safety is the most central risk of all; a single contamination can harm consumers and destroy the brand.

Where the Information Stopped

The table shows that information existed and moved, but stopped two levels below the board. No one was required to escalate repeated positives, and the board had never asked for food safety reports.

How Wrongdoing Comes to Light

Dyck et al. (2010) studied large U.S. corporate fraud cases and asked who first brought them to light. They found that detection came most often from employees, nonfinancial regulators and the media, while auditors and boards detected relatively few. Employees have the best information, but they often face costs for speaking up. The finding matters for Willamette: the people who knew about the positive tests were employees in the plant. A board that relies only on management's reports will hear about problems late, if at all.

Protecting Those Who Speak Up

Federal law protects some employees who report wrongdoing. The Sarbanes-Oxley Act, at 18 U.S.C. § 1514A, protects employees of publicly traded companies from retaliation for reporting fraud. Willamette is private, and food safety reports are governed by other protections under federal food safety law, but the principle applies: employees must believe they can report concerns without harm. Two quality technicians told investigators they worried about the repeated positives but did not believe raising them beyond the plant would be welcome.

Why Management Treated Positives as Routine

The plant manager's decision had an explanation. Environmental swabs in food plants sometimes test positive, and a single positive followed by cleaning and a clean retest is a normal part of a sanitation program. What made Willamette's results different was repetition: positives kept recurring in the same area near a freezer drain, a pattern that food safety experts treat as a sign of a harborage point that cleaning is not reaching. No one in the plant was responsible for looking at the pattern over time, and the monthly operations report summarized sanitation as complete without listing results.

The Cost of the Failure

The recall cost about $9 million directly, but the larger costs came afterward: two grocery chains suspended orders for six months, the company's insurer raised its premium, and the brand's sales remained below their previous level a year later. The board, which had focused on growth and margins, discovered that its most important asset, consumers' trust, had been exposed to a risk it never discussed.

Lessons From Other Food Companies

Food safety failures at other companies have shown the same pattern: problems known at the plant level that did not reach senior leaders or boards until consumers were harmed. Boards of food companies increasingly treat safety as a standing agenda item, with metrics such as pathogen test results, corrective actions and audit findings reported as routinely as sales.

Accountability

Responsibility is not equal. The plant manager made a judgment to treat repeated positives as routine and not to escalate; that judgment was the immediate failure. The chief executive bears responsibility for a reporting system that did not require food safety information. The directors bear responsibility for never asking how the company managed its most important risk. Holding only the plant manager accountable would leave the system unchanged. This paper is a learning example, and questions of legal liability for directors and officers would require counsel.

Reforms

Willamette's board should create a food safety and quality committee, chaired by an outside director with food science experience, which receives every positive pathogen test and corrective action directly from the quality manager each month. The quality manager should have a direct line to the committee chair, not only to plant management. The company should adopt an escalation rule: any second positive in the same zone within ninety days goes immediately to the chief executive and the committee chair. An anonymous reporting channel, reviewed by the committee, should be publicized to all plant employees. And the board should hold an annual session at the plant, meeting quality staff without management present.

Testing Whether It Works

The committee should test the system by asking, each quarter, for a sample of raw laboratory results and comparing them with what was reported, and by surveying plant employees on whether they would feel safe raising a food safety concern.

Conclusion

Willamette's board never heard the word listeria until it was too late, not because anyone hid it deliberately but because no system required it to travel upward. Evidence that employees, not boards, usually detect problems explains why direct channels matter. Reforms that bring safety information straight to a committee of the board, protect those who report and test the system regularly can close the gap that allowed eleven warnings to go unheard.

References

Dyck, A., Morse, A., & Zingales, L. (2010). Who blows the whistle on corporate fraud? Journal of Finance, 65(6), 2213-2253. https://doi.org/10.1111/j.1540-6261.2010.01614.x

Sarbanes-Oxley Act of 2002, 18 U.S.C. § 1514A (2002).

Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. Journal of Finance, 52(2), 737-783. https://doi.org/10.1111/j.1540-6261.1997.tb04820.x