Product recall risk looms for South African companies, says AIG

At a seminar hosted by insurer AIG South Africa, Deon Binneman, an independent reputation advisor warned “Product recall is a business crisis and must be treated as such. It has the potential to affect your brand and reputation with all your stakeholders substantially—and can have a disastrous effect on the share price of listed companies as well.”

Fonterra, one of the world’s biggest exporters of dairy products is currently in the news for all the wrong reasons: whey products used in making infant formula have been found to be contaminated with bacteria that could cause botulism. China, still sensitive after the contamination of infant formula by melamine in the recent past, was the first to impose a ban, and other countries have followed suit.

The company has issued a recall of possibly contaminated product but faces criticism for delays in disclosing the contamination.

As Fonterra’s experience shows, Binneman notes, what a company does right at the beginning of a product recall crisis is vital. “Once, you may have had days to formulate your reaction but in today’s connected world, it’s nanoseconds. You absolutely have to have a plan for a product recall in place right from when you begin manufacturing it,” he says. “That plan has to be thoroughly tested, and the necessary authorisation to act already obtained—there isn’t time to call a board meeting when there’s an emergency.”

Binnemann argues that 63 percent of a company’s market value is tied up in intangibles like its brand name and reputation. A high-profile product recall can have a significant effect on these intangibles and thus on a company’s value. It’s vital that a company has thought through how to regain control of what is invariably an intense situation.

Eelco van Keimpema, Profit Centre Manager: Liabilities for AIG South Africa, says that in contrast to overseas, product recalls are not a hot topic in South Africa yet. “The Consumer Protection Act gives the legal framework for product recalls to become important,” he warns. “And many South African companies are already exporting to countries where product recall is a very real risk. That’s why we are introducing a comprehensive solution to help companies mitigate the substantial risks associated with a product recall.”

Van Keimpema says that expensive though the costs of a product recall might be, they are only the tip of the iceberg. Senior managers must be assigned to the process with grave consequences for their normal work, and often production lines have to be halted until the product is given a clean bill of health by authorities.

AIG’s cover is aimed at food, drink, cosmetics, pharmaceutical and tobacco companies, whose products are particularly susceptible to contamination. It includes crisis management and consulting from NSF, a leading player in the food safety arena.

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