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This article is written by Shraddha Vasanth, pursuing Diploma in Business Laws for In-House Counsels from LawSikho.

Introduction

In the last couple of years, the issue of ethical or unethical practices of businesses has received a lot of attention. Worldwide, there is a growing awareness about the unethical practices employed by companies and also a growing need to combat such practices. These have often taken the shape of protests by activists and consumers, boycotting of the products, ban on the products by regulators, the institution of several lawsuits etc. Companies embroiled in these controversies have lost several million on account of loss of sales, and in defending these cases as well as in paying penalties. 

Most companies have a formal code of business conduct that guides the company’s decisions. Additionally, the directors, top management and employees are also individually bound to adhere to the Code, in addition to the laws of the land. However, despite all these, companies still do indulge in unethical practices. The practices and the controversies surrounding Nestle are a case in point. 

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Nestle is one of the largest fast-moving consumer goods (FMCG) companies in the world with a history spanning over a century. Nestle was founded in 1906 by way of a merger between the Anglo-Swiss Milk Company and the Farine Lactée Henri Nestlé Company. It is headquartered in Vevey, Switzerland. The company operates in over 86 countries and employs more than 352,000 employees. Nestle ventured into India in 1912 when it began trading as the Nestle Anglo-Swiss Condensed Milk Company (Export) Limited, which was into importing and selling finished products in the Indian market. Nestle India Limited was incorporated in March 1959 and has grown exponentially since then; the company today operates 9 production facilities across India. Maggi, KitKat, Bar-one, Milky-bar, Milkmaid, Nestea, Nestle Milk, Nescafe are just some of the brands that Nestle owns in India and most of them have been favourites with the masses for decades.

So, it does come as a surprise to many that their favourite Maggi noodles or Cerelac or Nestle can be involved in unethical practices. This article analyses a few of such practices and violations of Nestle vis-à-vis the company’s code of business conduct. 

Business ethics and code of conduct

Ethics is a branch of philosophy that deals with systematizing, defending and recommending concepts of what is right and wrong, good and bad. It is derived from the Greek word ethos/ethikos that essentially means customs or habit that influences one’s decision making. Business ethics is a form of applied ethics that examines the moral and ethical problems that arise in a business. At a practical level, it boils down to organizational standards, principles, values and codes that govern the decisions of an individual and the institution. One such important document is the code of conduct of an organization. 

A code of conduct, variously called code of ethics or code of business conduct sets out the organization’s values that describe its role towards its stakeholders. It typically provides guidance when the company and its management are faced with difficult situations and dilemmas and shows them a path to do the right thing. There are also Employee Codes of Conduct that regulates the behaviour of employees by setting out the permissions and restrictions while carrying out their roles in the organization. Non-compliance or violation of this code generally amounts to misconduct, which is punishable. 

Nestle’s code of business conduct 

Nestle has laid down “Corporate Business Principles” which applies to all its employees, across all levels. These are principles that every employee is required to adhere to while dealing with the various stakeholders. The stakeholders include consumers, employees and the value chain of Nestle. The code lays down that the company is committed to doing business with high integrity and that the employees are bound to adhere to the same. The code also lays down data privacy policy, information technology channels and reaffirms that Nestle complies with all the laws and regulations. Briefly, the following aspects are covered in the code with respect to its stakeholders.

  • Consumers

The code assures the consumers that Nestle is guided by and follows all nutrition, health and wellness standards and also conforms to the quality assurance and product safety standards prescribed by the concerned authorities. The code also reiterates that the communication made to the consumers is reliable and enables them to make an informed decision and that these principles apply equally, across the world.

  • Employees

The code provides that the company provides proper working conditions, and health and safety conditions to all its employees. The code also assures the employees that the company promotes the inclusion of all communities and cultures and that it nurtures diversity.

  • Value chain

The code draws attention to Nestle’s Responsible Sourcing Standard and requires all its suppliers to comply with the same. This essentially endorses the commitment of the company towards sustainable living, environmental protection and sustainability, protection of biodiversity etc. It also reiterates that society, farmers and other people along the supply chain are treated fairly.

Additionally, Nestle India has framed a “Code of Business Conduct” (CBC) which complies with the Companies Act, 2013 and SEBI regulations. Briefly, the CBC re-emphasizes on;

  • Nestle’s commitment towards compliance with all applicable laws.
  • Avoidance of conflicts of interest by employees.
  • Restrictions on outside engagements on employees.
  • Fair hiring practices.
  • Prohibition on insider trading and antitrust practices by employees.
  • Protection of confidential information.
  • Prohibition on indulging in fraudulent activities, bribery and corruption.
  • The company’s commitment against discrimination and harassment of all forms. 
  • The code also specifies the mechanisms of reporting about non-compliances and misconduct; and seeking advice from the concerned departments when faced with dilemmas. 

Nestle’s code of conduct is thus, comprehensive and in line with the best practices on human rights, labour rights, regulatory compliances and sustainability. However, time and again, there have been several lapses and ethical failures, which are in turn violations of the applicable laws. Some of such breaches are briefly given below:  

Ethical failures and legal violations

In India 

  1. Nestle India was found to be in contravention of the Infant Milk Substitutes, Feeding Bottles and Infant Foods (Regulation of Production, Supply and Distribution) Act, 1992 (the IMS Act) for conducting clinical trials on 75 premature babies in hospitals for substitution of breast milk [2019].
  2. High levels of lead and monosodium glutamate (MSG) was found in Maggi in Uttar Pradesh. This was very high compared to the standards prescribed by the Food Safety and Standards Authority of India (FSSAI). This led to multiple protests and was eventually boycotted by consumers and banned by the government. However, subsequent tests confirmed that the product was safe for human consumption and the sale was subsequently permitted. [2015].
  3. The company has constantly been under the scanner for incorrect marketing of its baby milk formulas. The company had claimed and advertised that its baby milk formulas as being inspired by human breast milk. This was objected to by the World Health Organization (WHO). Moreover, the marketing on nutritional information was different in different countries and so were the nutritional values different for different countries. This episode was not just a violation of marketing ethics but also a violation of nutritional and health standards and discrimination against third world countries.
  4. Additionally, the company was criticized for contamination in formula milk products such as Cerelac, Lactogen and Nan-Pro 3.
  5. Nestle had also manufactured a new ‘Cold’ formula and claimed that it reduces diarrhoea, aids in brain and eye development, which was another instance of false advertising by the company. 

Around the world 

  1. In June 2021, Nestle’s products scored below 3.5 on the Australian Health Rating. Subsequently, the company admitted that 60% of its products in the food and beverages segment were unhealthy. However, it must be noted that these products are advertised as being healthy. 
  2. Nestle had added some Genetically Modified Organisms (GMO) in food products sold in Brazil and the public was not informed of the same. The product was banned after the Brazilian Institute of Consumer Defence won a suit in 1998. It was however permitted to be consumed later but with a warning about the impact of such products.
  3. The food industry is known to employ children in manufacture, and Nestle is no exception. It was reported that the company had employed child labour in Ivory Coast at their cocoa fields at extremely low salaries. Some of the children were trafficked from their homes in other West African countries and were also ill-treated and made to work in unhealthy working conditions, with no proper food.
  4. The company was also held responsible for denying workers their basic right of forming unions. 
  5. In poverty-stricken countries in Africa, Asia and Latin America, infant milk formula was supplied in hospitals at the time of childbirth, which increased the dependency of the child on the milk formula, making it difficult for parents to purchase the product. In a bid to use the formula, mothers diluted it, often with contaminated water and this, in turn, led to various diseases in infants.
  6. Nestle was also involved in the illegal extraction of groundwater in Brazil and the United States. The company drew excessive underground water in several areas, which led to severe water depletion and drought. The water, thus sourced, was packaged in bottles and sold, leaving no source of natural drinking water for the residents, which in turn, compelled them to buy water from Nestle.

Brief analysis

These instances clearly violate various principles embodied in the CBC as well as duties towards the stakeholders. The code affirms Nestle’s commitment to nutrition and product safety, which have been compromised in products such as Maggi, infant milk products like Cerelac, Nan-Pro etc. The false claims and concealment of relevant facts about the products in the advertisement of infant milk formula, cold formula etc. breach the duty of the company towards its consumers. 

The practice of employment of child labour, ill-treatment, objection towards setting up of trade unions stands in breach of the principles of the code with respect to employees. It is also a violation of human rights principles, the International Labour Organization (ILO) declaration and Organization for Economic Co-operation and Development (OECD) Guidelines, that the code affirms its allegiance to. These practices are also discriminatory as many of these breaches have occurred in third world countries as compared to the developed countries. 

Instances such as illegal extraction of groundwater, sourcing of cocoa using child labour etc. are in breach of the company’s commitment to responsible sourcing and environmental sustainability.  All of the above instances have been of a severe nature and are clearly violative of the laws; which as a consequence also breaches the company’s commitment to compliance with applicable laws. 

These instances contravene laws such as the Food and Safety Standards Act, 2006 (FSS Act) and the rules and regulations framed thereunder in India. These laws provide for the standards of safety that need to be adhered to in case of food products, their appropriate packaging, labelling as well as the correct information of ingredients used, health benefits and a warning in case it is injurious to health. The product has to also be advertised fairly without making any misrepresentation concerning the need or usefulness of the products. The penalties under the FSS Act range between Rs. 1 lakh to Rs. 10 lakhs for various offences such as unsafe food, food containing extraneous matter, publishing of false information, misleading advertisement etc. In addition, these acts also violate the Indian Consumer Protection Act, 1986, under which, misleading advertisements can attract imprisonment for a term of up to 2 years and a penalty of Rs. 10 lakhs in case of the first offence; there are additional penalties for subsequent violations. 

As far as international laws are concerned, the instances stand in violation of similar food standards, anti-child labour laws, human rights laws and environmental laws of respective countries. They are also violative of ILO and OECD principles. On account of these, there have been several instances where Nestle was fined or involved in lawsuits like Maggi and bottled water, seeking damages. But these instances are also of the code of conduct of the company, which then brings us to the question – is the code of conduct a legal document?

Legal validity of the code of conduct

Whether the Code of conduct is a legal document is an interesting question, as though not directly mandated under any specific legislation, the Companies Act, 2013 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 do mention adherence to the company’s Code of Conduct by the directors, including independent directors. These provisions are briefly explained below.

Companies Act, 2013

  1. Section 149(8) read with Schedule IV mandate certain companies to have a code for independent directors. The Schedule also specifies the duties of independent directors, one of which includes reporting concerns about any unethical behaviour, frauds, or any violation of the company’s code of conduct or ethics policy. [Part III (11)].
  2. The Schedule also mandates issuance of an Appointment Letter to the independent directors, which shall, inter-alia contain the Code of Business Ethics that the company expects its directors and employees to comply with. 

SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR)

  1. Regulation 17(5) mandates the board of directors of listed entities to lay down a code of conduct for all board members, independent directors and senior management.
  2. Regulation 26(3) mandates all board members, independent directors and senior management to affirm their compliance with the code of conduct on an annual basis. 
  3. Regulation 46 requires the company to host the code of conduct of the directors on the company’s website.
  4. Regulation 17(8) read with Schedule II mandate the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) to provide a Compliance Certificate to the board. This forms part of the company’s Corporate Governance Report. The CEO and the CFO, in the report, are required to certify that there were no activities that were fraudulent, illegal or violative of the entity’s code of conduct. 

The management of the company is the responsibility of the board of directors and the senior management. The directors also owe a fiduciary duty towards the company and shareholders. Thus, the onus of adherence to the company’s ethics code or the code of conduct primarily and ultimately falls on the shoulders of the directors. Any violation of the code invariably leads to legal contraventions, for which the directors will be held responsible. The concept of ‘officer in default’ under the Companies Act, makes the whole-time directors and key managerial personnel (i.e., the Managing Director, CEO, CFO, Company Secretary) statutorily liable for such failures. 

In addition to the above, the Industrial Establishments (Standing Orders) Act, 1946 mandates the laying down of standing orders by certain companies that regulate the terms of employment of different categories of employees/ workmen. 

The Industrial Establishments (Standing Orders) Act, 1946  

  1. Section 3(2) read with the Schedule provides the details that should be incorporated in the company’s standing orders. This inter-alia includes termination or suspension of employees on account of misconduct and acts or omissions which constitute misconduct. Generally, violation of the company’s code of conduct or ethics leads to misconduct, for which the employee can be suspended or even terminated.
  2. As a matter of practice, the business code of conduct or employee code of conduct are referenced in the employment agreement and also included in the employee handbook; thereby making it legally mandatory for the employees to adhere to the code. Violation of the code thus becomes a breach of employment contract for which the employer can avail legal remedies. 

Conclusion

The name Nestle invokes nostalgia in most Indians, as products made by the company have been hugely popular; as most of us relate to these products since childhood. However, the malpractices are equally disturbing. Post the Maggi controversy in India, the company, which was thought of as a closed company, has been more transparent about its activities. The company has also been consistently innovating and introducing new products. While some lessons have been learnt, there is a lot left to be done, and the most recent instance of Nestle accepting its own products as unhealthy is a case in point!

The business environment today is complex, and the pressures to sustain and grow are palpable. However, with increasing awareness and the shifting role of corporations as social organizations and laws and regulations becoming more stringent, companies are expected to do business ethically. And this involves not just focusing on the letter of the law but also the spirit, which is captured in the code of conduct. 

References

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