PARMALAT How the Milk Spilled

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Authors: Abdul Khader, Sanjib Datta,
Faculty Associate, Faculty Member
ICMR (IBS Center for Management Research).

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Thirdly, it exposed the peculiarities of the Italian business environment. Most of the companies in Italy were owned by families and things were kept within the trusted circle of a few insiders. This gave more scope to manipulate information and resources, and consequently allowed companies to behave unethically. The very fact that the Parmalat controversy was given nothing more than a few column inches in the local newspaper at Parma, while it was making headlines in reputed dailies around the world, led analysts to believe that most of the local people had known what was going on, but had not acknowledged it openly. "It was scandalous-a classic case of omerta,"⁴ said one Parma businessman, reacting to the newspaper's attitude.⁵

Some people also feared that the scandal would reflect badly on the country as a whole and that people would fear investing in Italy in the future. "There is a danger that Italy will be labeled as a country with no rules. Or where the laws are just there to be changed," said Tito Boeri, a professor of economics at the Bocconi University at Milan.⁶

The collapse of one of the major companies in Italy was also expected to have adverse consequences on the country's economy. Parmalat purchased about 8 percent of the entire milk production in the country and provided livelihood to about 30,000 people in Italy. So it is only to be expected that the country would be hit hard. The Italian economy minister, Giulio Tremonti was also reported to have said that the financial scandal would cost Italy about €11 billion in the fiscal 2003-04. That figure amounted to one percent of the country's gross domestic product (GDP) and was almost exactly equal to the amount that the government was hoping to save in order to cut its budget deficit from 2.5 percent of GDP to 2.2 percent in fiscal 2003-04. Therefore, the Italian government's eagerness to put the company back on its feet is also not surprising. In addition to passing an emergency decree, the government was also providing aid to Parmalat and was said to have requested the regulatory authorities in the European Union to waive the Union's rules on state aid to failing companies.

Not withstanding the specific issues of the case, Parmalat revealed the very disturbing trend that many global companies have of masking their true financial position in annual statements covering several bank accounts and global subsidiaries. It showed the apparent ease with which companies can deceive investors and regulatory authorities, all the while maintaining an image of goodness.

However, despite the seriousness of the issue and the bankruptcy of the company, many people were still confident that, unlike Enron (to which it was most often compared), Parmalat would live and recover. The company's basic business of milk processing was a healthy operation and still enjoyed the trust of people. This confidence was justified by the fact that, close on the heels of the scandal, Parmalat's figures showed that the sales of its long life milk in Italy were up 13.8 percent at the beginning of 2004. Parmalat's death would also cost Italy dear and this was another reason why people believed that the country's government would spare no effort in turning around the company. However, recovered or otherwise, it was unlikely that Parmalat would recapture its old glory in world markets.

4] Omerta means 'silence'. It was normally associated with the Sicilian Mafia.
5] Peter Gumbel, "Land of Bilk and Money", Fortune, January 26, 2004.
6] Sophie Arie, "Time For a Break in the Family Circle", Guardian, January 15, 2004.