The Odwalla Affair - Reassessing Corporate Social Responsibility
by Jon Entine
It turns out that Odwalla wasn't the paragon of social responsibility that everyone had thought. Indeed, it was found to be criminally negligent in causing the death of a young girl-and permanent injury of several other children-from E. coli poisoning. This brings up serious questions about what social responsibility really is, whether we are looking for it in the right places, and what we can do to encourage corporations to act in the public interest.
The fall from grace was breathtaking. At its peak of prosperity in 1996, Odwalla, the juice company based in Half Moon Bay, California, was touted as much for its ethical consciousness as for its growth prospects. In the autumn of that year, however, one child died and at least seventy others were injured after drinking Odwalla apple juice tainted by poisonous bacteria. Two years later, after pleading guilty to criminal charges of violating Federal food safety laws and paying $1.5 million, the largest fine ever assessed in a food case by the Food and Drug Administration,1 Odwalla is desperately searching for a suitor to save the company from extinction.
Before all this happened, investors captivated by Odwalla's "socially responsible" reputation had bid up its stock to a triple digit price-to-earnings multiple; today it is deep in red ink. Rather than a brand-marketing success story, it faces the dubious distinction that it "will forever be known as the careless producer of poisoned fruit juice."2
How did things go so wrong? Does the Odwalla case provide insight into how well-meaning executives can better align their socially responsible rhetoric with day-to-day operational challenges?
The Trap of "Good Intentions"
Odwalla produces great tasting juices-premium, and until recently, unpasteurized and fresh. It was run by executives who were not shy about noting their commitment to a more just society. Founder Greg Steltenpohl, who described himself as a former artist, would say that he was "learning to respect the fruit" squeezed to make his juices.3 Such New Age brand positioning helped propel Odwalla to a 30 percent annual growth rate. As with other "socially responsible" high flyers of the early 1990s, including Ben & Jerry's, Tom's of Maine, The Body Shop, and Stonyfield Farm, Odwalla relied upon sympathetic media coverage to burnish its brand.
Steltenpohl also understood how to energize support among the ìsocially responsible" investment community. At the 1996 annual gathering of the Social Investment Forum, a trade group that promotes companies purporting to be more ethical, Steltenpohl talked of his Zen-like approach to business. He was feted as a pioneer.
The buzz on Odwalla was based on the perceived intentions of the company. "We believe that this intense caring will translate into a superior product, giving Odwalla a distinct competitive advantage," read one report by the securities firm Adams, Harkness & Hill.4 "Respecting the fruit means inspecting it to ensure that it is of high quality before being pressed. It means treating the fruit like a living thing and handling it in the most gentle way possible. . . . We believe that no other juice company takes these steps to ensure the quality of its products."
Then reality intruded.
In October 1996, barely a month after this review, and within days of drinking her favorite apple juice, sixteen-month-old Anna Gimmestad's kidneys gave out, her brain became clogged with dead blood cells, her heart faltered, and she died. Her body collapsed because the juice had been contaminated with a strain of bacteria known as E. coli O157:H7.
For years, Odwalla had enjoyed the fruits of its socially responsible reputation. Now came the inevitable test of corporate character. What did the crisis reveal about the company's soul?
By all accounts, the entire company was genuinely shaken by the incident. But the future of Odwalla hung in the balance. It publicly labeled the poisonings a freak occurrence and pulled its juice off store shelves. Like most companies, it had digested the public relations lesson of the Tylenol incident: somberly proclaim "responsibility," whatever that means, and position the company as one of the victims.5 Odwalla immediately brushed aside any culpability, instead pleading guilty to the lesser crime of failing to anticipate the health dangers of unpasteurized apple juice.6
"We were advised through industry experts that we had a safe level," said Steltenpohl. "We didn't test for E. coli because we believed evidence showed it was not found at that acid level."
"Odwalla continuously upgraded its manufacturing process in the period leading up to the incident," added spokesperson Chris Gallagher. "We had a process that we believed wholly effective in producing safe, high-quality juices."7
In other words, Odwalla sidestepped the issue of what it should have known about the health dangers of unpasteurized juice-and when it should have known it. This classic PR positioning struck a sympathetic chord-temporarily-even among families of some victims. "I don't blame the company," said Christy Gimmestad, Anna's devastated mother.
For a time, this ìvictim defense" shifted attention to the never-never land of Odwalla's intentions.8 Well before the facts had been aired, Amy Domini, who is a friend of Steltenpohl's and helped orchestrate his appearance at the Social Investment Forumís conference just a month before the poisonings, stood by her man. "Odwalla has been compared to Johnson and Johnson (Tylenol) in rapid recall and voluntary assumption of blame, and the reporters give management high marks for action," she wrote.9 Odwalla and its public relations firm Edleman Worldwide were soon congratulating themselves.10
There is, of course, no comparison between Odwalla and Johnson and Johnson. Tylenol's manufacturer was the victim of a vigilante. In contrast, and by the juice maker's own admission, it was criminally culpable for negligent safety practices. As James L. Lock of Wichita State University wrote in a case study of the incident, ìOdwalla, Inc. abandoned its soul and negated their corporate mission statement-and it was a complete success." 11
But the initial ìsuccess" evaporated as more behind-the-scenes details became known. Odwalla tried but failed to walk a tightrope of cover-up while positioning itself as an earnest bungler. Its "victim" defense unraveled because of the efforts of an aggressive Seattle attorney who represented six of the victims, chagrined federal health and safety officials, and a reporting team at The New York Times.12
According to Federal investigators, Odwalla had significant deficiencies in its citrus-processing equipment. A year before the incident, the industry had been shaken by an outbreak of salmonella in juice served at Walt Disney World that sickened sixty children and adults. The poisoning offered proof that pathogens could survive in highly acidic products. Company documents indicate that the head of Odwalla's quality assurance, Dave Stevenson, who had recently been hired from Florida, responded by proposing to introduce a chlorine rinse as a crucial backstop against bad fruit. But he was overruled by senior executives who feared chlorine would leave an aftertaste. The company also steadfastly refused to pasteurize, claiming this process altered taste and was unnecessary, even though it had received complaints from customers who had become violently ill from bacterial poisoning.13 Executives decided to rely on acid wash, although the chemical supplier had informed Odwalla that it had killed deadly bacteria in only 8 percent of tests and should not be used without chlorine.14
By summer 1996, former company officials say production demands began to overshadow safety concerns. A contractor warned Odwalla that its citrus-processing equipment was so poorly maintained that it was breeding bacteria in "black rotten crud" and "inoculating every drop of juice you make." Reportedly encouraged by executives, managers brushed aside warnings from an inspector that a batch of apples was too rotten to use-some were decayed, one had a worm-without taking special precautions against contaminants. That batch turned out to be deadly.15
Beyond Good Intentions
Could Odwalla have handled this crisis more responsibly? From a post-poisoning, public relations perspective, the answer is probably "No." Out of ignorance, indifference, or recklessness, it had dealt itself a bad hand, but then played it pretty well. The company pulled suspicious product off shelves, although as any crisis advisor would have told them-and probably did-it had little choice. If it had been more honest off the bat in detailing its compromised safety procedures, the hit to its reputation could have been fatal. Only the most unforgiving critic would expect a company to commit public hara-kiri to atone for sins, no matter how deadly. It chose survival over candor.
For all its past problems, Odwalla seems on the way to upgrading its food handling standards. Whether it can salvage its brand reputation is an open question. It's now just one more niche marketer fighting for share in the ultra-competitive pasteurized juice market. It has been forced to jettison much of its once loyal workforce. In November 1998, it quietly announced the departure of Steltenpohl amid rumors the struggling company is on the block.
So what then can other businesses learn from the ethical conundrums that have consumed Odwalla? Is there a constructive role for brand marketing that relies on promoting the social values and intentions of a company?
By adding a socially responsible dimension to commodity products-shampoo, coffee, juice, toothpaste, ice cream, sneakers-entrepreneurs have discovered that they can increase prices and profits. In the same way that Volvo charges higher prices for its cars because it has convinced consumers that it makes safer vehicles, ìsocially responsible" firms can charge premium prices because consumers believe they are getting more than just a product or service-they willingly pay a bonus to the company for promoting more responsible business practices. A progressive image constitutes an economic asset that allows companies to charge a significant integrity premium for their products. ìIntegrity" becomes part of the brand. That's not to say that the socially responsible rhetoric is all smoke and mirrors, but many companies are richly rewarded far more for image marketing and good intentions than for the quality and value of their products or services.
In the past few months alone, a host of socially responsible companies have encountered threats to their brand image for higher integrity: Levi Strauss savaged its U.S. workforce while announcing it is expanding operations in China, Starbucks struck a marketing deal with tobacco giant Philip Morris' Kraft division to distribute its coffee beans in supermarkets, and sneaker companies scrambled to respond to criticism over pay and safety standards at their overseas factories. Body Shop is shuttering stores and has paid out more than $50 million in settlements to disgruntled franchisees threatening fraud suits. Ben & Jerry's is trying to quell a rebellion among its workers, who are demanding union representation and upset about the closure of the company daycare facility, while Ben Cohen reels from the bankruptcy of Community Products Inc., his once-celebrated project to "save the rainforest through capitalism," which has collapsed in scandal.16
On closer scrutiny, many self-anointed progressive businesses are frequently a land of alchemy where promises are easy to make, workers are sometimes treated with indifference, and environmental "reforms" are frequently window dressing. "So many socially responsible companies have noble corporate philosophies," observes Jon Lickerman, head of social research at the Calvert Group, the largest ethical investment company in the United States, "but mistreat their own employees, vendors, and customers."17
As Odwalla has learned the hard way, corporate social responsibility is evidenced by actions taken before a crisis breaks out, not when scrambling to contain a brand-crushing screw-up. It's the organizational controls and the integrity of top executives and board members that ultimately define corporate culture. That's the real lesson of this fiasco.
What was going on inside Odwalla? Months or even years before the poisonings, there was more than enough reason to suspect that breakneck growth was straining safety controls. Though Odwalla has publicly acknowledged approximately 70 incidents, it submitted an affidavit in one suit admitting to more than 300 cases. Documents indicate that there had also been numerous outbreaks of listeria, which makes E. coli seem like tap water.18
According to a damning recent disclosure, the potential safety problems were apparent enough for the army to reject Odwallaës proposal to sell juices at military commissaries. Just four months before the E. coli poisonings, an Army inspector found unacceptably high bacterial counts in a sample and concluded that the risks of "deterioration or adulteration" posed too high a risk.19
The rejection would never have been known if not for an anonymous tip to Bill Marler, the Seattle lawyer who had filed five of the civil suits against Odwalla.20 He immediately subpoenaed the documents. In response, Odwalla claimed no knowledge of the Army's involvement and stated there were no documents. Not convinced, Marler filed a Freedom of Information Act inquiry. Bingo.
The hidden documents did not sit well with the plaintiffs or the presiding judge. Facing hearings on sanctions against Odwalla and its lawyers for obstruction of justice, the company suddenly settled-for the largest amount ever paid in a civil case involving food poisoning from fresh foods-and, remarkably, for more than the plaintiffs had demanded. "I can say it was very important for us to settle these cases with a positive atmosphere and constructive format of mediation," said Steltenpohl, who had resisted any settlement until the smoking gun surfaced.21
Rethinking Current Standards of Ethical Business
How do companies grow from enthusiastic if reckless adolescents to mature businesses with systems of accountability and governance?
The proliferation of ethical controversies among so-called "socially responsible" brands underscores the need for a new, more verifiable ethical paradigm. Professions of "good intentions" or "social responsibility" are not enough. It might be constructive to venture into territory that those who think of themselves as progressive business thinkers might call taboo-the writings of Milton Friedman, who is frequently caricatured as a "right-wing" capitalist. In a now classic analysis, Friedman endorsed a limited concept of socially responsible business. He concluded that businesses that act in the best interest of shareholders maximize the benefits to all stakeholders:
Friedman's cynicism about "trading for the public good" was a paraphrase of Adam Smith's argument that those who trade by the "invisible hand" may contribute more to the public weal than those who claim altruistic motives. Under this thesis, corporate social responsibility is fulfilled by the moral constraints of maintaining open competition, establishing a framework for the rule of law, avoiding deception, and exemplifying fair play.
"Most of the talk has been utter hogwash," wrote Friedman. "The only entities who can have responsibilities are individuals; a business cannot have responsibilities. So the question is, do corporate executives, provided they stay within the law, have responsibilities in their business activities other than to make as much money for their stockholders as possible? And my answer to that is, no, they do not."23
This view has been misleadingly criticized as endorsing roguish corporate behavior in the service of enriching stockholders. Not true. Friedman acknowledges the ripple effects of a successful business such as increased community wealth, improved educational standards, and an improved environment-positive social consequences of business. He noted that when Henry Ford built the Model T, he realized that the long-term success of the automobile industry rested with creating a mass market for his products. Committed to making his new car affordable to even his own workers, Ford Motor paid wages twice the going rate. Although he was viciously criticized by the business community for such "generosity" and successfully sued by outraged stockholders, Ford proved prescient. He made enormous profits, the industry moved to his standards, and the automobile was transformed from a luxury to an affordable staple.24
Key to Friedman's beliefs-and integral to the concept of the integrity premium-is that doing good can add competitive value to products or services and should not merely reflect the idiosyncrasies of corporate executives. Otherwise it is mere executive vanity, an abrogation of responsibility in a public company. Friedman once described oil companies' television ads as "turning his stomach" for making it seem that their purpose was to preserve the environment. However, he noted that he would probably sue if they did not engage in such "nonsense" because otherwise they would endanger their competitiveness: Friedman makes the point that companies must profess social responsibility to appeal to the public-at-large, keep regulators at bay, and thus ensure profits.25
But Friedman goes beyond endorsing pure image marketing. He noted that if an energy company can demonstrate that the controversy surrounding the release of industrial effluents makes it difficult to recruit and retain employees, or offers the prospect of adverse publicity or litigation, then voluntary reduction or clean-up of the effluent makes business and ethical sense. If it could mitigate adverse consequences by modifying environmental practices, then it is compelled to act in its stakeholders' best interest by doing so. This linkage of social marketing to intrinsic product value offers the classic win-win scenario preached by ethical investing advocates.
Consumers are willing to pay extra for a Mercedes automobile or a Le Tourneau watch because its brand image-premium quality-is reflected in its performance. Many socially responsible icons, from Odwalla to Ben & Jerry's, continue to flounder because they have not delivered on their promise of integrity of operations and product. By becoming vehicles for the ambiguous and idiosyncratic social goals of their founders, they have frequently neglected their own stakeholders, particularly customers. That's a prescription for disaster.
Making Ethics Pay
Preaching is the easy part. How can companies-New Age entrepreneurs and established businesses alike-implement measures that will burnish the companies' image and their responsiveness to stakeholders? I suggest what I call the "ABC's of Ethical Business": Accountability, Basic stakeholder relations, and company Character.
Accountability is the internal system of checks and balances-what business ethicists have come to call "transparency." For companies to move from eager idealists to mature corporations that can weather the storms of economic uncertainty and competition, it is essential that they regularly assess their performance against a broad range of standards and not just financial criteria.
Consider the impact if consistent information on the social and financial behavior of public corporations were mandated to be provided by the Financial Accounting Standards Board or the Securities and Exchange Commission. The SEC is currently in the midst of a massive revision in regulations concerning the sale of securities to the public. Corporations might be required to report on a range of industry-specific nonfinancial measures such as environmental compliance and compensation standards. For instance, companies might be required to disclose the factors on which incentive compensation is based, how they are weighted, and what percentage of total compensation consists of incentive bonuses for top management. As a result, competing stakeholders, including investors and employees, would have a larger stake in the future of their company without threatening top management's ability to remain nimble. If experience is a guide, customers and workers pay back this commitment to empowerment with increased loyalty, further burnishing the company's brand identity. Transparency could be a part of the Annual Report or a supplemental Social Report instead of being buried in the Shareholder Proxy Statement, which almost no one reads.
The Association for Investment Management and Research, a professional group of investment advisers, annually presents Excellence for Corporate Reporting awards. This is an attempt to encourage companies to disclose more than the bare bones required in financial reporting. Winners have included social investment favorites such as Cummins Engines, Wal-Mart, and Schering-Plough, as well as companies involved in oil (Ashland Oil, Chevron, Mobil, Occidental Petroleum, Phillips Petroleum), mining (Placer Dome), forest products (Boise Cascade), waste management (Browning-Ferris Industries) and chemicals (Dexter). Many of these firms are anathema to "socially responsible" investors who use litmus-test social criteria.
In recent years, rudimentary guidelines have evolved to measure social and environmental performance, including the CERES Principles, the chemical industry's Responsible Care, the Caux Principles, social responsibility issues in the TIAA-CREF Policy Statement on Corporate Governance, European Union Eco-Management and Audit Regulations, and ISO-14001.
Since ethics are not clear cut-this is the land of grays-it's critical that companies install internal mechanisms (boards, ethics officers, hot lines, and the like) to constantly assess problems. Companies are finding it prudent to appoint ethics officers and institute social and environmental reviews, if for no other reason than to protect themselves against liability concerns, which have increased significantly with the extension of the Sentencing Guidelines to organizations. The California Pension fund investment system (CalPERS), holding more than $100 billion in assets, is now demanding that companies with which it invests meet certain minimum standards of corporate governance.
By this measure alone, Odwalla would not have passed muster, since its board is composed almost entirely of business friends of founder Steltenpohl. For all its socially responsible rhetoric, Odwalla never put in place oversight -social reviews, hotlines, ombudsmen. The bottom-line reality is that companies cannot wait to screw up to address accountability. Nothing is more revealing of the good intentions of executives than their willingness to put the broader interests of the company ahead of their own vanity. That means putting in place limits on their own power, from strong internal ethics monitoring to independent boards.
Basic Stakeholder Relations means a move away from trendy social litmus tests to measures of actual impact on stakeholders. Archie Carroll, Professor of Business Ethics at the University of Georgia, laid out this thesis brilliantly in 1991 with his "pyramid of social responsibility."26 According to Carroll, the base of the pyramid is financial stability: the fundamental responsibility of a corporation-it's very reason for existence-is to be profitable. That profitability, he contends, rests on a corporationís ability to satisfy the sometimes competing demands of its stakeholders, from customers to employees to shareholders.
The next layer of the pyramid is legal compliance. But modern corporations, if they hope to survive in a world of ever-fiercer competition and shrinking profit margins, need to focus on how they can enhance their brand identity so as to inflate their profit margin. That comes through ethical actions beyond mere legal compliance-the kind Friedman suggests he would expect a company to take to embellish its reputation and competitiveness.
These three dimensions-economic, legal, and ethical-provide a base of savvy management that makes the peak of the pyramid possible: philanthropy. Even charity is dominated by strategic and brand-building considerations. Curtis Weeden, former Vice President for Philanthropy at Johnson and Johnson, contends in his book Corporate Social Investing that corporate philanthropy is an oxymoron. Almost none of it represents a quiet, no-strings-attached act of conscience. Rather, it serves to support corporate goals through other means. In the case of self-styled, socially responsible firms, it also embellishes their reputation and inflates the integrity premium-the price they can charge for their products.
As Carroll makes clear, social responsibility does not begin with good intentions but with stakeholder actions. This challenges the rhetoric of the social investment community that a companyís ethics are measured by its intentions and a rhetorical commitment to a vague, supposedly ìprogressive" social agenda. This belies the complexity of business and mocks the fundamental responsibility of business to create needed products and services. Companies need to be held accountable for product quality, treatment of employees, vendor relations, and their environmental impact as well as their impact on those who invest money in the company through stock purchases.
In other words, socially responsible business is serious business. Corporations perceived as ideological or cultural friends, as many have viewed Odwalla, should not be given a get-out-of-jail-free card purely for their inspired social rhetoric. And more traditional companies engaged in complex technologies such as natural resources, bio-engineering, or heavy manufacturing-the kind of industries that create high-paying jobs with substantial community benefits-should not be dismissed because they do not play the rhetoric game. These issues are gray, not black and white.
It's critical to move beyond the good/bad paradigm when judging corporations. We need to cultivate a level informational playing field so open debate and evaluation is possible. Social researchers or company executives who rely on simplistic positive/negative social screens belie the moral and practical complexity of the real world. In the absence of clear rationale, such criteria reflect not ethics but sentiment.
Character of management is the intangible that ultimately defines the ethics of a corporation. Ethics is not about identifying right from wrong-choices are rarely so clear-but making informed choices in morally ambiguous situations. No compliance standard, corporate board oversight committee, or internal ethical review can compensate for a rupture in personal ethics.
We live in a time when business transgressions inevitably find their way onto the pages of The Wall Street Journal. Companies are composed of human beings who are far from perfect; mistakes are built into life. A corporation might better be thought of as a extended family, at times a dysfunctional family, made up of stakeholders with competing and frequently conflicting interests. Although it may draw moral legitimacy from acts of social campaigning and philanthropy, it is defined by its operational ethic reaffirmed by the individuals in charge of executing the company's vision. Nothing reveals that more starkly than senior management's response to inevitable corporate miscues.
Mistakes are built into life; character is defined in the breach. There is no such thing as "business ethics," only ethics of individual business men and women.
1 Pam Belluck, "Juice Maker Pleads Guilty and Pays $1.5 million in Fatal Poising Case." New York Times, July 24, 1998.
2 "Rotten fruit, black crud and the end of Odwalla." Seattle Times editorial, January 16, 1998.
3 "Doing Due Diligence Domestically." Worth, May 1995.
4 Mathew W. Patsky, Kim Galle & Patricia Negron, "Healthy Returns: How Healthier Lifestyles Create Investment Opportunities." Adams, Harkness & Hill, Inc., September 23, 1996.
5 See K.M. Hearit, "Mistakes Were Made: Organizations, Apologia, and Crises of Social Legitimacy." Communication Studies, 46, Spring 1995, 1-13; W. L. Benoit & J.J. Lindsey, "Argument Strategies: Antidote to Tylenolís Poisoned Image." Journal of the American Forensic Association, 23, Spring 1995, 136-146.
6 S. Russell, "Odwalla Disputes Critical FDA Probe; Agency Found "Inadequate Testing." San Francisco Chronicle, November 26, 1996, B2.
7 Chris Gallagher, "Odwalla was Responsible in Wake of E. coli Tragedy," Seattle Times, February 4, 1998.
8 "Handling a Food Borne Crisis: Odwalla Case Provides Insight and Wake-Up Call to the Natural Foods Industry," Natural Foods Merchandiser, July 1997.
9 Amy Domini letter to the Social Investment Forum e-mail list, January 5, 1998.
10 K. Howe, "Odwalla Gets High Marks for Concern." San Francisco Chronicle, November 2, 1996, D.1; Edleman was awarded a Silver Anvil and Best of Show by the Public Relations Society of America in 1997 for handling the Odwalla crisis.
11 "Disaster Strikes: Crisis Management Communication at Odwalla, Inc." Feedback, Fall 1998, 8-17.
12 Christopher Drew & Pam Belluck, "Deadly Bacteria a New Threat to Fruit and Produce in the U.S.: Odwalla-A Costly Strategy, a Slump in Sales." New York Times, January 4, 1998, 1, 13.
13 Tim Klass, "Odwalla Aware of E-coli Before Outbreak: Court Papers Show Negligence." Associated Press, December 12, 1997.
14 This account is drawn from court documents summarized in part in the Drew & Belluck article.
15 Drew & Belluck.
16 Ed Welles, "Ben's Big Flop, Inc., September 1998.
17 Interview with the author, June 1994.
18 See King County Superior Court: Beverly vs. Odwalla 97-2-28347-7 and Berman vs. Odwalla 97-2-23109-6; US District Court Dimock vs. Odwalla C97-1405D, and Hiatt vs. Odwalla C97-1343WD.
19 George Raine, "Army Rejected Odwalla Before E Coli Outbreak." San Francisco Examiner, April 8, 1998.
20 Four of the five children, who ranged in age from four to seven, suffered severe blood and kidney damage which doctors believe is permanent.
21 "E. coli Claims Resolved: Odwalla to Pay Families of Poisoned Children." Dallas Morning News, May 27, 1998.
22 "Milton Friedman Responds." Business & Society Review, 5, 1984.
24 Ford raised the wages and reduced workers' hours while increasing production and cutting the price of the Model T from $950 to $290. Alan Brinkley, Richard N. Current, Frank Friedel & J. Harry Williams, American History: A Survey. Vol. 1, 8th Ed. New York: McGraw-Hill, 1991, 515-516.
25 "Milton Friedman Responds." Business & Society, 5, Spring 1976.
26 A. B. Carroll, ìThe Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders." Business Horizons, July/August 1991