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by Jon Entine

September/October 1998

Intoxicated by Success: How to Protect Your Company From Inevitable Corporate Screw-Ups

No ethical oversight can compensate for a rupture in personal ethics.

Although low-chemical-use farms make up 2 percent of United States crop acreage, that percentage is far higher in Calif. It's the fastest growing part of the grocery business and a critical part of our local economy. Nationwide, sales of organically-grown vegetables, dairy products, beef and poultry are growing 20 percent a year to $4 billion annually. That's why the Odwalla blow-up hit so hard.

In October 1996, one child died and 70 people were injured from bacteria-laced apple juice traced to Odwalla, which had promoted its products as fresh and healthy. The Calif. company had developed a strong brand identity and a fanatically loyal following producing unpasteurized fresh-squeezed juices. Founder Greg Steltenpohl was fond of saying that he was dedicated to a Zen-like "respect for the fruit." At the time of the crisis, Odwalla appeared to do everything right. It responded to what it called a freak occurrence by pulling the suspect juice and offering to pay medical expenses. The quick recall and its warm and fuzzy image prompted favorable comparisons with Johnson and Johnson for its handling of the Tylenol incident. "I don't blame the company," said Christy Gimmestad of Evans, Colo. after the death of her 16-month-old daughter after drinking her favorite juice.

That was then. Earlier this summer, Odwalla pleaded guilty to criminal charges of selling tainted apple juice. It paid a $1.5 million fine, the largest ever assessed in a food industry case by the Food and Drug Administration. Federal investigators now suggest that Odwalla had regularly accepted blemished fruit and ignored warnings by its own safety team. Moreover, as sales plummeted 90 percent, company officials maintained an inside/outside strategy: covering up company malfeasance while positioning Odwalla as a victim along with those who it had poisoned.

Growing Up Is Hard to Do

All businesses screw-up on occasion. The story behind the Odwalla fiasco serves as a reminder of what steps companies can take to minimize mistakes and handle inevitable crises. It's an especially important lesson for the fragile food industry here in Ventura and elsewhere.

For Odwalla, the test of its character came when company officials learned of the death of Anna Gimmestad. Within days of drinking apple juice, her kidneys gave out, her brain became clogged with dead blood cells, her heart faltered, and she died. Her juice had been contaminated with E. coli O157:H7 bacteria.

Investigators now contend that Odwalla had significant flaws in its safety procedures and citrus-processing equipment was so poorly maintained that it was breeding bacteria in "black rotten crud" and "inoculating every drop of juice." Before the outbreak, Odwalla had received letters from customers who become violently ill, but had not addressed the problem.

Resisting industry safety standards, Odwalla steadfastly refused to pasteurize its juices claiming it altered taste and was unnecessary. Yet, the year before the incident, the head of quality assurance, Dave Stevenson, who was aware of the dangers, proposed using chlorine rinse as a backstop against bad fruit. Senior executives who feared chlorine would leave an aftertaste overruled him. They decided to rely on acid wash although its chemical supplier had informed Odwalla that the wash had killed the E. coli in only 8 percent of tests and should not be used without chlorine.

By summer 1996, former company officials say production demands began to overshadow safety concerns. Safety managers were bullied. Reportedly encouraged by management, production managers brushed aside warnings from an inspector that a particular batch of apples was too rotten to use. Some were decayed, one had a worm, and special precautions against contaminants were not taken. That batch turned out to be deadly.

Since the incident, Odwalla has publicly accepted "responsibility" for the poisonings, although it continues to disingenuously portray itself as a victim. "We didn't test for E. coli because we believed evidence showed it was not found at that acid level," said founder Steltenpohl. In other words, Odwalla pleaded guilty to the lesser crime of ignorance and to not anticipating the health dangers of unpasteurized juice.

Accountability, Not 'Good Intentions'

Could Odwalla have done anything differently? In terms of its handling of the crisis, the answer is probably 'no.' It had dealt itself a bad hand but played it pretty well. If it had been more forthright, the public relations hit could have been debilitating. And for all its past problems, Odwalla seems on the way to upgrading its food handling standards. Whether it can salvage its brand reputation and resume growing is an open question.

What can other businesses learn from the blow-up? For all its talk of its socially responsible rhetoric, at the time of the poisoning Odwalla resembled a train loose on a downhill track. With pressure to meet production schedules, managers suspended good judgment and good manufacturing practices. Workers who voiced concerns were intimidated into silence.

That's what happens when a business has an insular culture without a clear system of corporate checks and balances. At the floor level, Odwalla had never put in place the internal oversight-- social reviews, ethical hotlines, ombudsmen and the like--that might keep operational excesses in check. Its board was comprised of business friends of its founder, even though companies with strong, independent boards have proven to have healthier corporate cultures and are more profitable.

The drooping bottom line for Odwalla is that after a screw-up, accountability is too late. Nothing is more revealing than management's willingness to put the broader interests of the company ahead of its own vanity. And no ethical oversight can compensate for a rupture in personal ethics. Mistakes are built into life; character is defined in the breach. In the end, there is no such thing as 'business ethics,' only ethics of individual business men and women. That's why the Odwalla saga is so troubling.

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