The Nestlé Infant Formula Controversy and a Strange Web of Subsequent Business Scandals Colin Boyd Journal of Business Ethics ISSN 0167-4544 Volume 106 Number 3 J Bus Ethics (2012) 106:283-293 DOI 10.1007/s10551-011-0995-6 1 23 Your article is protected by copyright and all rights are held exclusively by Springer Science+Business Media B.V.. This e-offprint is for personal use only and shall not be self- archived in electronic repositories. If you wish to self-archive your work, please use the accepted author’s version for posting to your own website or your institution’s repository. You may further deposit the accepted author’s version on a funder’s repository at a funder’s request, provided it is not made publicly available until 12 months after publication. 1 23 Author's personal copy J Bus Ethics (2012) 106:283–293 DOI 10.1007/s10551-011-0995-6 The Nestle´ Infant Formula Controversy and a Strange Web of Subsequent Business Scandals Colin Boyd Received: 25 April 2011 / Accepted: 7 August 2011 / Published online: 21 August 2011 Ó Springer Science+Business Media B.V. 2011 Abstract The marketing of infant formula in third-world Introduction countries in the 1970s by Nestle´ S.A. gave rise to a con- sumer boycott that came to be a widely taught case study in The field of Business Ethics relies on a relatively small the field of Business Ethics. This article extends that case core of well-known cases of corporate behavior to illustrate study by identifying three specific individuals who were the themes of the subject. Near the top of this list of associated with managing Nestle´’s response to that boycott. familiar names (e.g., the Ford Pinto, Tylenol, and Bhopal) It reveals their subsequent direct involvement in a number is Nestle´ S.A., the Swiss food conglomerate. Of all the of additional ‘‘classic’’ 1980s business scandals (some of business histories examined by students of ethics, Nestle´’s which ended with major criminal trials and the imprison- saga of controversy is perhaps one of most intriguing. ment of eminent business figures)—and describes tangen- In the late 1960s, Nestle´ was criticized by social activ- tial linkages to other business scandals of the time. The ists for its marketing of powdered milk formula for infants article discloses a behind-the-scenes pattern of business in less developed countries. The case became a cause villainy, adding both depth and breadth to previous ce´le`bre as Nestle´ became the victim of a well-organized accounts of these scandals. The article offers a conceptual boycott campaign. framework that goes beyond personal greed as an explan- The conflict has become a popular case study in the atory factor for such unethical behavior in the business business school curriculum because it demonstrates the world, suggesting the presence of personal and organiza- need that companies have to constantly preserve and tional networks of intrigue and opportunity. The linkages enhance their legitimacy in the public eye. The dis- between the scandals suggest an epidemiological process cussion of legitimacy leads quite naturally into a dis- with the plotters acting as ‘‘virus’’ carriers contaminating cussion of issue management, and the consequences of various corporate cultures. mismanaging a public issue (Post 1985 p. 127). Keywords Beech-Nut Á Drexel Burnham Á Although Nestle´ was the subject of the boycott, the infant Ernest Saunders Á Guinness Á Infant formula Á formula controversy may have initially been seen more as a Insider trading Á Nestle´ dispute over generic bad practices within the infant formula industry rather than as a focused attack on one particular firm, a perspective that Nestle´ itself may have wanted to engineer. The original publication that stimulated the boy- cott refers to an industry-wide pattern of marketing of infant formula. (Muller 1974) To begin with Nestle´ was illustrative of an overall malaise, and it is conceivable that if it had not C. Boyd (&) been the industry market leader then social activists might Department of Management and Marketing, Edwards School have initially focused their attacks on an alternative firm in of Business, University of Saskatchewan, 25 Campus Drive, Saskatoon, SK S7N 5A7, Canada the industry. Nestle´ was ‘‘the unwilling representative of the e-mail: [email protected] entire formula industry’’ (Frederick et al. 1992, p. 563). 123 Author's personal copy 284 C. Boyd The Nestle´ boycott evolved to be essentially impersonal, consultant to Nestle´ who had worked with Saunders and therefore. It came to be directed at Nestle as an evil col- Fu¨rer on the baby-milk case, and who had also been Beech- lective corporate entity rather than at specific named Nut’s attorney. managers as particular villains within Nestle´, individually After engineering a takeover of one Scotch whisky firm, responsible for Nestle´’s corporate actions. Saunders later consulted with Ward and Fu¨rer over the Even if there had been individual identifiable villains possibility of Guinness taking over the giant UK firm of within Nestle´’s senior management it was considered Distillers Ltd, the major player in the Scotch whisky unlikely that their unethical behavior would continue after industry. The takeover, which involved a share swap, the boycott because of the need for pragmatism: eventually succeeded and was the largest ever takeover in British business history at that time. However, as a result of The corporate culture at Nestle´ has been profoundly subsequent revelations by Ivan Boesky, the convicted affected by ten years of conflict and a seven year insider trader, Saunders was later jailed for stock manip- product boycott. Employee turnover and morale is ulation in the Guinness takeover of Distillers. Ward was known to have been affected, and management prosecuted for theft. attention to the boycott has cost the company dearly A major participant in the Guinness stock manipulation in terms of other business needs and decisions. One scheme was Bank Leu, a Swiss bank coincidentally chaired factor that encouraged the company to act to end the by Arthur Fu¨rer. The article further relates how Dennis boycott is that Nestle´’s new senior management has Levine, the disgraced insider trader from Drexel Burnham wanted to turn from this issue to other, more pressing Lambert, came to route all his illegal trades through Bank business problems (Post 1985, p. 124). Leu. This article explores the ethical conduct of Nestle´ and This set of scandals involves many of the most infamous some of the firm’s senior managers in those years follow- episodes in the history of business in the 1980s, some of ing the infant formula controversy. A priori, Nestle´ would which ended with major criminal trials and the imprison- be expected to seek and achieve a reputation of good ment of eminent business figures. At the core are three conduct in the aftermath of the controversy, if only to avoid individuals from Nestle´ who were involved in negotiating the glare of further adverse publicity. the end of the Nestle´ boycott. The article concludes with an Unfortunately, the history of Nestle´’s direct and indirect analysis of the possible causes of the clustering of this involvement in some major business scandals in the 1980s, constellation of business scandals around the Nestle´ Fu¨rer– as revealed below, suggests that some senior managers of Ward–Saunders nexus. A Venn diagram showing the the firm were irredeemably unethical. Nestle´’s role in relationships between these scandals is shown in Fig. 1. these further scandals leaves little doubt as to the historical The final section of this article examines a tangential origins of the infant formula scandal—Nestle´ had a con- phenomenon illustrated in the diagram, the predation of tinually defective culture at the most senior level of firms which themselves had suffered from scandals. Thus, management. the article describes further links to the Thalidomide This article attempts to extend our knowledge of the tragedy, the Bhopal disaster, and the Perrier product recall. Nestle´ infant formula controversy by naming specific unethical individuals within Nestle´. Their influence on Nestle´’s overall behavior has been previously overlooked, Ernest Saunders and the Infant Formula Controversy as if there were no one who had been behind the steering wheel causing Nestle´ to behave the way in which it did. Nestle´, the Swiss food conglomerate, was subject to con- The article opens with a brief review of the infant for- sumer boycotts in the 1970s because of its marketing of mula controversy, and then describes the recruitment of powdered milk formula for infants in less developed Ernest Saunders to Nestle´. He was put in charge of nego- countries. Free samples were distributed at maternity units, tiating the end of the Nestle´ consumer boycott. He became and by sales representatives dressed as quasi-medical per- head of a division of Nestle´ that then acquired the US baby sonnel. The criticism was that third-world mothers were food firm, Beech-Nut Nutrition. This firm was subse- being persuaded that infant formula was better for their quently fined for selling fake apple juice for babies, and its babies than breast milk. Once a mother switches to pow- senior executives sentenced to jail. dered milk and stops breast feeding her baby, her produc- The article describes how Ernest Saunders left Nestle´ to tion of milk ceases, and the supplier has a locked-in become head of the UK brewing firm Guinness, appointing customer. (For fuller descriptions of the infant formula his friend Arthur Fu¨rer, the Chairman and Managing controversy, see Murray 1981; Bucholz et al. 1985;Post Director of Nestle´, to be a director of Guinness. Another 1985; Mokhiber 1988; Kuhn and Shriver 1991; Frederick director he appointed was Tom Ward, a US legal et al.