Here’s an alternative look at the Kellogg’s situation, which explains why I can’t call Kellogg’s to protest their dropping Michael Phelps’ endorsement contract.
• Kellogg’s was one of the first and earliest companies to preemptively remove products from the shelves because of the peanut contamination problem; they didn’t wait until somebody got sick or filed a lawsuit before they did the right thing by both their customers and their shareholders;
• They could have big exposures because of the peanut problem, in spite of their early preemptive actions and in spite of the fact they had little to do with the peanut contamination; besides consumers’ possible suits, shareholders could sue if they don’t think Kellogg’s did everything possible to mitigate risks to their investment;
• Kellogg’s stock chart looks a lot like the overall Dow Jones, which means their stock has taken a beating even though profitability has been solid. Investors will be very itchy about any missteps in this environment.
What should a company do when someone they’ve paid to endorse their product in order to improve their brand and in turn improve shareholder value fails to live up to their standards (and probably violated their contract)?
Illegal drug use, no matter how popular the drug, is not going to be an approved or acceptable behavior to which they will turn a blind eye since it could undermine their brand. The management and board of directors are required to act in the best interests of shareholders, to protect value by mitigating risks — and frankly, if Phelps is seen doing bong hits, what else have the managers/directors not seen that could be worse?
I think Kellogg’s is making good business decisions. They are taking the right move and looking into making peanut butter; they already have food safety mastered, might as well reduce the possibility of problems in their other products with some other firm’s potential contamination problems. Given the current circumstances I’d certainly feel better if my kid was eating Kellogg’s brand peanut butter in his school lunch instead of a mysterious, unnamed peanut butter. So why should Kellogg’s continue to spend endorsement money on a person who likely violated his contract with them and could pose a threat to their brand, when they could spend the money on safer peanut butter production?
(Maybe because we’ve seen so very little risk mitigation in the banking industry we don’t know what it looks like anymore.)
We’ve had to have conversations here at home about Phelps this week; it’s not at all pleasant to have to explain to a grade-schooler how this particular illegal drug use is okay but other illegal drug use isn’t, or why marijuana is different from alcohol in the eyes of the law and with regards to use by sports celebrities. It’s not been an easy week having to explain to a kid why baseball star Alex Rodriguez was cheating and Olympic swimming champ Michael Phelps wasn’t, and what was wrong about both of their choices (actively cheating at a sport, versus violating a contract by using a questionably illegal drug).
And I really don’t look forward to explaining to my kid why people are protesting about the company that made what look like good choices for shareholders and consumers’ safety.
(No, I don’t own Kellogg’s stock, in case you were wondering. We don’t buy Kellogg’s branded products often, but we did have their Austin’s brand peanut butter crackers in the cupboard when they issued a voluntary recall.)