corporate responsibility food

What horse meat and the banking crisis have in common

Over the last couple of weeks there’s been an unfolding food scandal in Britain and Europe after various ‘beef’ microwave meals and burgers were found to contain horse meat. It’s prompted a whole lot of debate about supply chains, the ethics of cheap meat, and the cultural taboos of eating (or not eating) horse. But it’s made me think about something else entirely – the banking crisis. The horse meat scandal and the financial crisis may look very different, but they share the same roots.

1. Corporations – publicly traded corporations are duty bound to maximise ‘shareholder value’, ie deliver the biggest possible return for investors. As a supermarket, you can increase profits by expanding, but also by paring costs and using your buying power to secure low prices from suppliers. The suppliers are all bidding for a slice of the supermarket action by also offering the cheapest prices they possibly can. It’s a race to the bottom – who can supply the absolute cheapest hamburger patty or microwave lasagna? If companies are incentivised to push their prices as low as possible, it’s hardly surprising that some start cutting corners.

In the banking crisis, we’re just talking about loans rather than meat. One bank offers a mortgage with no deposit, another trumps them with the 125% mortgage. Borrowing over the phone or the internet? Sure. Loans with no credit check? Okay then. The race to the bottom applies here too, a gush of easy credit to consumers and home owners, all growing the banks in the name of the shareholders. Like the supermarkets pushing one step too far in the search for cheap meat, so the banks pushed their lending beyond what could be repaid – because in the short term at least, it was profitable to do so.

2. Inadequate regulation – the second factor that the two scandals have in common is a regulator not being able to keep up with the market. Britain’s Trading Standards Agency and the Food Standards Agency have both got their investigations underway, but as the BBC’s Now Show put it, this is ‘closing the stable door after the horse has been bolted’. Policing every product on every shelf in the country is a mammoth task, as food networks are global and products are often ‘of more than one country’ as the labels put it. To make matters worse, these are times of austerity and budgets have been cut at organisations such as the Food Standards Agency. They are dismissed as quangos and red tape until the scandal happens, and then everyone wishes they were bigger and more powerful.

In banking, the regulator had similarly failed to keep pace with changes in how banking was done, how derivatives were constructed, and how banks were doing their accounting. When they did find irregularities, they often lacked the power to do anything. If they were given more power, it would have been seen as meddling, and making Britain uncompetitive.

3. Complexity – The third factor is the sheer complexity of our food systems in a global culture. When the horse meat was first detected, the race was on to track it back through the chain. Which factory produced the ready meals, who processed the meat, which abbatoir supplied it? Somewhere down the line a crime has occurred, but it’s very hard to know where. That raises the uncomfortable fact that much of the time, we just don’t know where our food comes from. We have to be content to say ‘it came from Tesco’ and hope for the best.

There was a similar phenomenon at work in the financial crisis, through mortgage backed securities. Mortgages were bundled up, sold on in tranches according to risk, and used to underpin a variety of derivatives. The credit rating agencies kept giving them triple A status, but as we now know, there was a great big slice of subprime lending in the mix that nobody knew was there. Bad lending practice in one country’s property boom could infect pensions and public accounts in another, tipping whole economies into uncertainty.

Food adulteration and banking crises aren’t the only symptoms of this combination of corporate rent-seeking, sleeping watchdogs and global complexity. You could probably make the same comments about the use of sweatshop labour in the fashion and electronics industry.

What can be done about it? There are different answers for each of those three aspects of the problem. There are other ways to set up companies that would neuter the corporate drive for profits above all else. Structures include employee ownership, cooperatives, B-Corps, and non-profits – here’s a list of ten alternative businesses.

On the regulation side, there’s a balance to strike. The last decade or so has seen a preference for ‘light touch’ supervision of corporate behaviour, and that hasn’t really worked very well. Better oversight doesn’t have to mean big government though. Some industries in Britain are self-regulated, using codes of conduct, shared standards, kitemarks and so on. Others are co-regulated, using industry bodies in partnership with a government organisation. Sometimes this works fine, like the Advertising Standards Agency. Sometimes it fails, like the Press Complaints Commission and the phone hacking scandal. Other sectors, particularly important ones like energy or education, have entirely government backed regulators. There is no one-size fits all solution.

However, the supermarkets have been a problem for a some time. Successive governments have looked into their behaviour and then failed to act, or have opted for voluntary codes of conduct that haven’t been respected. The government did appoint a long-expected ‘supermarket ombudsman‘ this year though, which is one hopeful sign.

As for complexity, you don’t have to go far to find arguments in favour of a more localised food network. Likewise with banks, there are distinct advantages to regional or local banks and some countries (like Germany or the US) still have them. There is a trade-off though. The reason companies source internationally is to secure low prices, and many things would be more expensive sourced locally.

Ultimately, that brings us into the equation too. If we didn’t buy cheap meat and take out easy loans, the companies wouldn’t be there to supply them. We can’t separate ourselves from the issue and blame the big corporations. Once again, we’re challenged to ask more questions about what we really need, and what makes life worthwhile. There is no simple fix for these sorts of things, it’s a matter of culture.

 

14 comments

  1. I the logics doesn’t only apply to publicly traded companies. Some of the largest supermarket chains in Europe are the German Groups Aldi and Lidl and a few others, which are not publicly traded. The driver here mainly is customer chosen: customers want low prices. It is the no. 1 decisive factor. And if I buy a 1000 ml can of pea soup with sausages for 0.65 € I should not be surprised that something fishy is going on… Cost optimization happens on all levels and ranges from large corporations and government organizations to dentists and even family doctors. Banks here, too, may well play a role since they carefully look at your numbers before evaluating the risk you pose and then determine the interest you have to pay. Energy is another aspect, since there is little anyone can do about rising energy costs. Cost optimization on all levels seems to be the spirit of the time. And yet in the food sector, they still do exist, the alternatives – the local farmers markets, direct farm sales etc. Only it all costs much more. The real price.

    1. The market here is self correcting. The public want low prices. However they have now discovered that they aren’t getting what they thought they were getting. There has followed a huge slump in demand for cheap ready meals and massive loss of reputation from the supermarkets. Turns out people want low prices ad beef in their beef lasagne.

      Result is (without a massive set of new rules) that the evil supermarkets are testing their food to restore trust. This will cost more and will lead to higher prices which consumers can choose to pay for certainty. Some will move to ‘nice’ local butchers so they gain as well. Those who don’t mind horse will still be able to take their chances. Everyone a winner.

      All down to choice and markets with very little prodding from government.

        1. Crime will always be with us. It isn’t a market failure when they are dealing with the fraud. The French processing planet is going to find it very hard to win back custom if it can’t show it is reliable. Non market based food supply systems have fraud and much worse going on. What we have is far better than the alternatives, which is the key point.

      1. Well, well… who discovered the horse meet – and the medications in horse meet? The Market? And choice… feels a bit like some people have little choice about the products they buy, because they cannot afford the “nice local butcher” in the long run. Of course the nice local butcher is not much of a guarantee for anything either… we had a meet scandal nearby with a small butcher selling half rotten meat, not observing waiting times for medications, violating hygiene standards… it also was not exactly uncovered by “the market”.

        1. So what is your answer. Massive testing that will raise the prices in supermarkets to the unaffordable small butcher prices? State food distribution? As you say the non supermarket alternatives are no better hygiene-wise

  2. I’d come to much the same conclusions Jeremy. Consumer capitalism puts pressure on corporate supply chains to deliver lower prices. David Harvey in his RSA pitch says that capitalism outsources its problems but it also outsources responsibility to countries where social responsibility is under pressure from organised crime. Conditions which I’m all to familiar with from the experience of operating in Eastern Europe.

    Alternate company models are all very well. Ours for example is a progenitor of the B Corporation. But the model of adherence used is determined by pledge and not examination. The local Mid Counties coop removed beefburger products from its shelves, like any other supermarket. 3 feet from the notice they were promoting responsibly sourced cold water prawns. How can we be sure of any such claim now?

    A few weeks ago I learned that John Lewis visited a local factory which makes, office stationary products marked ‘Made in England’ on the carton. That was enough to satisfy them though most local people know that the product is actually manufactured in Asia. It had once based its packing system on local outworkers but the risk of this being the means of exploiting child labour in local families, sent the task overseas to exploit other people’s children who are presumably less important.

    Aside from food supply chains we have the situation where Walmart places such pressure on pricing that factory safely is neglected. in Pakistan many of the suppliers employees have perished or been injured in factory fires.

    There is a significant difference between our advocacy and the B corps apporach in the focus on developing local economies which removes supply chain complexity and the avoidance of law from the equation.

    No matter how much posturing we do, about sustainable brands there is still a lesson which has not been learned and as I realised recently it’s the same lesson which failed to be learned from the Peasant’s Revolution. We still think other people are of lesser value:

    http://www.p-ced.com/1/node/52

    .

    1. @Jeff: I am not sure if we think other people are of lesser value, but for most their plight is easily ignored when not seen. Good old repression mechanisms, “vital” lies…

  3. “The reason companies source internationally is to secure low prices, and many things would be more expensive sourced locally.”

    That isn’t the only reason. Locally sourced food is unreliable. Britain has seen a slump in its food output due to the terrible weather and flooding over the last year. If we relied on locally sourced food it wouldn’t just be more expensive, it would run out. The reason we don’t starve is that complex international food supply network allows us to source food from countries that have had good years. It takes time to build up supply networks so just relying on exports for bad times would be hard/expensive.

    Those lovely food speculators also help by bringing forward price rises allowing suppliers to adapt before things run out.

        1. Yeah – the lovely food speculators spare the developed nations from sending their troops to poor countries to take away their grains from them in a rather messy way (we prefer to reserve this type of action for oil). Instead you can say “Well – what can we do… it was just “The Market”. That’s how it is with the economy. Some eat. Some starve. The invisible hand decides. And when you leave it all to “market solutions” the same will apply in Europe again. Some will eat – and put grains in their SUV tanks. And some will starve and freeze in Winter and have their power cut off.

  4. Deutsche Bank recently announced after being heavily criticized for their massive involvement in food speculations that “there is no empirical evidence” that “the growing importance of agricultural financial products” (sic) influences food prices. That is a really interesting statement, because if we break it down and follow it to the root it means that according to an official Deutsche Bank statement supply and demand have no influence on pricing. Now that I call novel economic insight!

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