Tuesday, August 26, 2008

Maple Leaf Foods-Tainted Future

Maple Leaf Foods (TSE:MFI and MLFNF.PK) is facing a food processors worst nightmare. Their product has killed many people. Hard to argue with a death certificate. Investors are beating the price down as the untold costs of lawsuits climbs upwards off the charts.

The company is sanitizing their Toronto facility and it may be back in production within a day or so. We will see about that. They also have many other facilities so perhaps there is redundancy. The damage to the brand is incalculable. But it is a certainty that the damage is great. Consumers are expected to resist buying the Maple Leaf brand. The safety argument should not end up in a funeral home.

Some commentary concludes that it is very hard to manage against this sort of risk. But if you look back at Maple Leaf’s history almost two years ago they had another problem in another facility where they found syringes in the plant which necessitated another product recall. (See this blog on Nov 7 & 9, 2006)

While the current buzz is about product safety, investors should start looking at the governance process that allows this to occur. The board of directors surprisingly all have no experience in the food industry with the exception of the McCains from New Brunswick. So how could the rest of the directors be savvy as to the operating problems in this industry? What questions have they been asking? What assurances have they been relying on?

Can a company come back from this sort of problem? What costs have not been identified? The dividend cannot be looking good. The stock is trading near its 52 week low. Should this board of directors be leading the company? What changes will this board bring about to ensure problems of this magnitude do not re-occur. In any event the risk premium in this stock is very much higher than anyone truly comprehended.