Beech Nut Case Study on Ethics

Beech-Nut a distributor of apple juice in the competitive baby food industry started purchasing apple juice concentrate from a supplier called Universal Juice Company in 1977. There should have been questions at that time because Universal Juice sold its product at around 25 percent below the market value for apple juice. John Lavery the vice president of operations received his first indication in 1978 that the apple juice concentrate from Universal might be adulterated but ignored the warnings from Dr. Jerome LiCari, Beech-Nuts director of research (Starr, 1989).

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Then in 1979, outside laboratory tests and an unsolicited report from a Swiss laboratory determined that the apple juice was adulterated (Starr, 1989). With each repeated occasion no action was taken by Beech-Nut until in June 1982 when private investigator, Andrew Rosenzweig, who had been hired by the Apple Processors Trade Association, provided proof that the apple juice was an adulterated concentrate (Answers. com, 2009). Beech-Nut terminated their relationship with Universal when it was informed that it would be included in the lawsuit against Universal for distributing adulterated concentrate.

The decision and action taken by Lars Hoyvald, the CEO of Beech-Nut has had ramifications immediately and several years later. Thomas H. Roche an Assistant United States Attorney stated the action Hoyvald took was a case of corporate greed and irresponsibility (Buder, 1988). In consideration of Hoyvald’s actions the following questions will be discussed: 1. If a recall would have required closing down the company, is avoiding a recall a risk worth taking? 2. If the apple juice is safe was the public harmed in any way? What about foreign countries? Beech-Nut 3 3. Is Hoyvald’s conduct representative of a CEO?

Was he doing his job in difficult circumstances and what Nestle expected of him? 4. Should Nestle have kept the two executives on the payroll and paid their legal expenses? When Hoyvald was questioned why he did not act more decisively, he stated that a recall would ultimately cause the closing of Beech-Nut (Boatright, 2007). Would have avoiding a recall been a risk worth taking? In the perspective of Beech-Nut the answer to this question is yes because Beech-Nut willingly and intentionally distributed the phony apple juice since 1978 (Buder, 1986). When Nestle purchased Beech-Nut in 1978,

Beech-Nut’s director of research and development, Jerome LiCari, went to senior management to warn them of problems with the concentrate, which further testing had again proven to be suspect (Answers. com, 2009). Niels Hoyvald became CEO of Beech-Nut in April 1981 and knew in January 1981 while he was senior vice president in charge of marketing that the apple juice was adulterated (Buder, 1988). The point I’m making is if the truth is exposed Beech-Nut will be implicated in intentionally distributing adulterated apple juice so the company might as well take a chance on covering up.

Beech-Nut had been in financial trouble and Nestle was expecting a $7 million dollar profit. The cost to Beech-Nut for the recall is $750,000 more for each year for a different supplier and $3. 5 million for the recall. The employees at Beech-Nut would have lost their jobs and at that time United States was just coming out of a recession. Conducting the recall would be restoring public trust in Beech-Nut by the people, and the state and federal investigators. In Beech-Nut’s perspective the monetary cost would outweigh the benefit of gaining public trust.

Therefore looking at only what was known at the time by Beech-Nut I can understand their rationale for choosing to cover up the phony apple juice scam. It would have been different if they only found out that the apple juice was adulterated in June 1982 then a recall would have been cost effective. Then they would only be liable for 3. 5 million. Beechnut knew that when the truth came out that they would be liable for more than just 3. 5 million because they had actively and intentionally deceived the public since 1978.

The final cost to Beech-Nut for the deception and cover up was $140,000 for investigation cost to the Food and Drug Administration, $2. 5 million to retailers, a $5 million cash refund for consumers and a $2. 1 million fine to the Federal Government (Buder, 1988). This is a total of $9,740,000 which is a significant difference from $3. 5 million. The second question addresses whether the public was harmed in any way and if foreign countries were harmed by the adulterated apple juice. My response is a resounding yes. The public, which includes the consumer, retailer and competitor, were all harmed by the deception of Beech-Nut.

First, the consumers paid too much for a phony apple juice that was made from a cocktail of beet sugar, cane sugar syrup, corn syrup and water (Buder, 1988). The court agreed with this assertion by requiring Beech-Nut to pay $5 million in cash refund to consumers. Thomas Roche, the lead Government prosecutor likened the actions of Beech-Nut to “a hand reaching out from the store shelf and taking money out of the pockets of consumers (Buder, 1988). Secondly, the code of morality and ethics was violated by deceiving people about the content of the apple drink and leading people to believe the drink had the nutritional value of apple juice.

Apple juice has a significant concentration of phenolics, which protects against diseases, vitamins and boron that promotes healthy bones (Parks, 2005). People primarily buy juices for the nutritional value; otherwise they would purchase a flavored drink. Thirdly, the retailers, who distributed the apple drink would have overpaid Beech-Nut and incur a dishonorable reputation for selling the drink. The courts agreed with this assertion because they rewarded the retailers $2. 5 million. Finally, the competitors would be competing in a dishonest and uneven playing field.

They probably lost market share and profits as a result of this deception from Beech-Nut. Whether foreign consumers were harmed is dependent upon Beech-Nut disclosing the apple drink is adulterated. If this information was not transparent to the consumer then they were harmed by the violation of the code of ethics and morality. As asserted above, being deceived is a violation of trust and just because a monetary value cannot be affixed to deception it is still harmful. The question of whether there is monetary value to the deception is whether the reduced prices reflected the market value for adulterated beverage.

This cannot be determined by the case study hence I concluded that Beech-Nut still benefited monetarily from the greatly price reduced apple juice. If this is the case the harm is both monetarily and ethically to the foreign consumers and retailers. The third question states that Hoyvald believed what he was doing was expected of him as president of Beech-Nut. Mr. Hoyvald stated that he first learned of the situation on June 25, 1982 and then sought and acted upon the legal advice of a number of lawyers (Buder, 1988). The subsequent actions taken by Hoyvald were not representative of an ethical, honest corporate leader.

Instead of ordering a recall of the bogus apple juice, he continued to sell the product and engaged in a cover up. This cover up was done to stall the attempts of Federal and New York State Investigators from seizing the remaining products and ordering a recall. It appears that Hoyvald’s main concern was to make money for Beech-Nut. Defrauding and misleading the Beech-Nut 6 Public isn’t the type of values and conduct I would expect from a corporate leader during difficult circumstances. In making a decision, Hoyvald needed to consider all stakeholders not just Beech-Nut’s interests.

The question about whether Hoyvald was doing what his corporate superior at Nestle expected of him is dependent upon their knowledge of the adulterated apple juice. If we assume that Nestle did not know about the adulterated apple juice then I would say that Hoyvald was not doing what they expected. Careful consideration must be made between public trust and profitability. Nestle, I believe understands that the public trust of a company that provides baby food is very instrumental for sales and it takes a long time to build that creditability. The brand name of Beech-Nut is worth much more than the cost of a recall of $3. million. The response that Hoyvald gives his superior at Nestle seems to indicate that he was honoring their wishes because he states “the recall has now been completed, and due to our many delays, we were only faced with having to destroy approximately 20,000 cases” (Boatright, 2007). I would interpret this response as meaning that Nestle was supported of the stall tactics and deception. This is why I believe that Nestle supported putting Lavery and Hoyvald on paid leave and paying for their defense because they were involved with stalling the recall.

The next question addresses the cost-benefit view to determine if Nestle should retain the two executives on the payroll and pay their legal expenses? A cost-benefit analysis considers only using monetary units to measure the benefits and drawbacks of various alternatives (Boatright, 2007). Using strictly a cost-benefit or utilitarian view the answer to this question would be no. There is no monetary benefit for supporting Lavery and Hoyvald. Beech-Nut made the decision to place the two executives on paid leave and pay their defense costs for Beech-Nut 7 on monetary reasons. They probably ended up costing the company several hundred thousands of dollars for their paid leave and millions for their defense. In conclusion, the action that Beech-Nut took by ignoring the director of research, Jerome LiCari ended up costing the company over 10 million dollars. When you compare this with a savings of 750,000 per year for probably 3 years, it turns out to be a very costly decision. Hoyvald was probably doing what Nestle expected of him by saving the company money in the short term.

But ultimately the actions he took in the cover up and stalling government officers probably resulted in their determination to prosecute the case. This case is an excellent example of where deception and dishonesty do not pay off in the long term References Boatright, J (2007). Ethics and the conduct of business. Upper Saddle River, New Jersey: Pearson Education Inc. Buder, L (1988 Feb 18). 2 former executives of beech-nut guilty in phony juice case. Retrieved January 20, 2009, from The New York Times Web site: http://query. nytimes. com/gst/fullpage. html

Gordon, A (1988 June 17). How beech-nut succumbed to fake apple of temptation. Retrieved January 20, 2009, from The Library Your Document Web site: http://www. algordon. com/writing/page15/how_beech-nut_succumbed_06-12-1988 Parks, J (2005). Boron in the environment. Retrieved January 20, 2009, from Wikipedia Web site: http://en. wikipedia. org/wiki/Apple_juice Starr, K W (1989 October). Write of certiorari to the United States Court of Appeals for Second Circuit. Retrieved January 20, 2009, from No 89-216 Web site: http//www. usdoj. gov/osg/briefs/1989/sg890454