Personal Costs of Outbreaks Now Extend to Boards of Directors
Updated: Aug 16, 2019
Food recall discussions and reports often cite the excessive costs – averaging $10M in direct costs alone. But less often cited are the indirect and personal costs, resources, and time.
Take Blue Bell Creameries as an example: The Listeria outbreak occurred in early 2015, but more than four years later, litigation is still ongoing. Not only has it impacted a group we’ve not previously seen involved: the Board of Directors, the latest lawsuit was brought not by an impacted consumer, but by a stockholder.
To provide a bit of history, as detailed in the Marchand v. Barnhill case of Jun 18, 2019, at the Supreme Court of the State of Delaware: The outbreak, which led to three deaths, caused a recall of all Blue Bell products, production shutdown at all its plants, lay off of over a third of its workforce, and stockholder loss due to the liquidity crisis by which the company was forced to accept a dilutive private equity investment.
Based on that, a stockholder sued two key executives and the Board of Directors for breach of fiduciary duties, that is, “their duties of care and loyalty by knowingly disregarding contamination risks and failing to oversee the safety of Blue Bell's food-making operations” under precedent set by In re Caremark International Inc. Derivative Litigation (Caremark), which discusses a director's duty of care in the oversight context.
Though initially dismissed by Delaware’s Court of Chancery for failure to “plead demand futility” and provide facts to support the Caremark claim, the state Supreme Court reversed that decision and remanded the case for further proceedings.
As discussed in the case, Blue Bell is a monoline company that makes only a single product (ice cream), so it can only thrive if its consumers enjoy its products and consider them safe to eat. Thus “one of Blue Bell's central compliance issues is food safety.” But, as alleged in the complaint, “Blue Bell's board had no committee overseeing food safety, no full board-level process to address food safety issues, and no protocol by which the board was expected to be advised of food safety reports and developments”; and “particular facts supporting an inference that during a crucial period when yellow and red flags about food safety were presented to management, there was no equivalent reporting to the board and the board was not presented with any material information about food safety.” Thus inferring that the directors consciously failed "to attempt to assure a reasonable information and reporting system exist[ed]."
The plaintiff also produced books and records showing that prior to the outbreak there was:
No board committee that addressed food safety.
No regular process or protocols that required management to keep the board apprised of food safety compliance practices, risks, or reports.
No schedule for the board to consider food safety risks on a regular basis.
No evidence in board minutes of management disclosure of red (or yellow) flag reports it received during the period leading up to the three deaths.
Some favorable food safety information reported to the board by management, but no important reports that presented a much different picture.
No suggestion of any regular board meeting discussion of food safety issues.
Counter to that, the defense claimed that Blue Bell management regularly reported to them on "operational issues," and the company had to meet FDA and state regulatory requirements for food safety, had employee safety practice manuals, commissioned audits, and was inspected regularly by the government regularly inspected Blue Bell's facilities, and Blue Bell management got the results. However, the court stated that “The fact that Blue Bell nominally complied with FDA regulations does not imply that the board implemented a system to monitor food safety at the board level.”
Thus, the state Supreme Court found that “In sum, the complaint supports an inference that no system of board-level compliance monitoring and reporting existed at Blue Bell. Although Caremark is a tough standard for plaintiffs to meet, the plaintiff has met it here. When a plaintiff can plead an inference that a board has undertaken no efforts to make sure it is informed of a compliance issue intrinsically critical to the company's business operation, then that supports an inference that the board has not made the good faith effort that Caremark requires.”
In reporting on the case, it is interesting to note that Food Safety News included a blueprint for food and beverage industry boards to avoid exposure under Caremark claims which, it states “remain difficult to plead and prosecute.” Why is this so interesting? … Because Food Safety News was founded by leading foodborne illness attorney Bill Marler, which gives this “blueprint” incalculable weight that I would highly recommend you consider:
Form a board committee addressing food safety.
Adopt processes and protocols requiring management to keep the board apprised of food safety compliance practices, risks, or reports.
Establish a regular schedule (quarterly or biannually) for the board to consider food safety compliance and risks.
Approve resolutions requiring full disclosure by management to the board of all material food safety threats.
Implement an anonymous food safety reporting system with board visibility to reports raising significant food safety concerns.
Document board food safety compliance discussions, committee meetings, and board efforts in board resolutions and board meeting minutes.
The purpose of writing this newsletter is to suggest that those reading it ask their leadership how food safety is being represented at the Board of Directors level. Many food companies have a process whereby food safety issues are reported to the Board. But is this enough? Is the Board truly knowledgeable enough to ask the right questions and to push the food safety agenda hard? Just because the VP of Food Safety reports to the Board that “All is under control” does that mean the Board has done its due diligence?
Need assistance? Give TAG a call today. We can be the difference between a recall and its risks costing you everything … or never happening at all.
About The Acheson Group (TAG)
Led by Former FDA Associate Commissioner for Foods Dr. David Acheson, TAG is a food safety consulting group that provides guidance and expertise worldwide for companies throughout the food supply chain. With in-depth industry knowledge combined with real-world experience, TAG's team of food safety experts help companies more effectively mitigate risk, improve operational efficiencies, and ensure regulatory and standards compliance. www.AchesonGroup.com