The name is Parmalat. Literally, the milk of Parma. Elegant Parma, known as the little Paris of Italy, is in the heart of Italys Food Valley and, by ironic coincidence, has just been chosen to be the centre for the European Food Standards Agency.
Currently Italys largest milk producer, Parmalat was, it seemed, one of Europes most successful food companies. Now its name will be remembered in economic textbooks for being amongst the biggest European corporate frauds ever. It is the first Italian corporate crash with genuine international implications.
As the evidence is gathered, it seems that the Italian food company has crashed with the loss of between 10 and 14 billion. This is one measure of an incredible story: it is about a titanic collapse occurring in a middle sized European financial centre that hosts only half-a-dozen true multinational companies; it is about a food company which operates in a cash-generative industrial sector going bust for lack of cash; it is about a social crisis at a very delicate juncture for the Italian milk farmers that is affecting tens of thousands of other farmers in developing countries in Africa and Latin America where Parmalat operates. It is also a story of false accounting coming into the open shortly after the Berlusconi Government relaxes sanctions on corporate accountability.
It is not alone. Other international public companies have gone too personal and out of control. This currently seems to be the case, for example, with Conrad Blacks Hollinger International, which publishes Britains Telegraph newspapers, with its Canadian, American and UK ramifications.
Enron alla parmigiana
But Italys Parmalat disaster poses two questions, one for Italy itself and one for the world of globalised capitalism. Some foreign commentators have termed the scandal Enron alla parmigiana. But as Wolfgang Munchau has pointed out in the Financial Times (29 December 2003), there is not much to laugh about as Parmalats losses are close to equalling 1% of Italys Gross Domestic Product. This makes it, in comparative terms, a much more significant collapse with respect to its home economy, than Enrons was for the USA. Is there something wrong with Italys corporate and governing culture which has permitted this?
Second, Italys Prime Minister, Silvio Berlusconi, is also the countrys richest entrepreneur. He has famously blurred the distinction between his personal media interests and the deployment of government time and legislation. So much so that President Carlo Azeglio Ciampi has just refused to sign a Bill that would permit the prime minister to retain his near monopoly over his countrys media.
Berlusconi presented himself as someone who knew how to run a big business and therefore knew best how to run a country. But the Parmalat crash raises once again the question of whether big businessmen in Italy are able to abide by the rules of good governance.
It is an important point as Parmalat has once more raised doubts in the international financial community about the capacity of top Italian entrepreneurs to play by the rules of modern global capitalism rules needed to gain the trust of investors.
The Italian government has, at least, taken two important steps: redrafting the bankruptcy law in order to make it swifter, and giving more teeth to Consob, the watchdog of Italian financial markets, in terms of sanctions and a wider reach. But from today onwards it will be an uphill struggle, and the financial world will be watching very closely.
The Parmalat example
Based in Collecchio, near Parma, Parmalat, has grown since the early sixties from a small family concern linked to the dairy farm cooperatives of the affluent countryside of the Emilia-Romagna region into one of the top 20 global food companies (one which, in the words of its own website, changed the way the world saw milk). In 2002 it had a turnover of 7.6 billion, declared profits of 613 million, and had 36,000 employees working in 139 plants in 30 countries. Few middle-sized Italian companies were able to become world champions so fast. It is true that Parmalat surprised many by expanding so quickly from what was a low margin business. But its move into more profitable areas such as sophisticated dairy products, ready-to-eat snacks and fruit juices was seen as a sound driver of growth.
It is still difficult to understand what went wrong. But from the first indications it seems that the pace of expansion (about 50 acquisitions since 1990, when Parmalat listed in the Milan stock exchange) was too demanding, especially for a company that probably was never profitable.
Who is to blame?
There are two theories to explain Parmalats failure. According to one, Calisto Tanzi, the founder and the force behind the expansion, is a serial cheater, a corporate Pinocchio. This Jekyll and Hyde theory sees Tanzi as a regular church-goer, a man close to the now defunct Democratic Christian party, who defined himself as driven by human solidarity and hard work, who all the while and from the start was hiding his malficence and cheating.
According to others the habit of cooking books, which according to the admission of Parmalats chief financial officer, Fausto Tonna, goes back only 15 years, began when its expansion became too rapid to manage. In other words Parmalat was an honest, fast-growing company led by a hard-working man, which was then innocently caught up in a dangerous game.
What looks pretty sure is that no matter when Tanzi started cheating, he became a crook at the helm of a public company that had social and economic duties to its employees, creditors and stockholders. This is the belief of the Italian prosecutors who arrested him in an elegant street in the centre of Milan on Saturday 27 December under suspicion of criminal association to defraud. The bold move of the prosecutors, who proved they could apply a law that still has teeth when it comes to a fraud, is encouraging. But there is still a long way to go before a conclusion to this sad story.
Italys shaky faith
The Italian dimension of the crash is obviously important. A shocking incident has caught many banks, tens of thousands of employees and farmers, stockholders and bondholders. The average Italian did not have much faith in the virtues of capitalism, which is seen variously (and sometimes simultaneously) as a lottery, a titanic game played by ruthless tycoons who do not abide the rules, a free market systematically tampered by Government intervention, and a field where i furbi, the canny ones, always find a way out.
These sentiments play into the hands of those who argue that free market capitalism is a force of evil. Moreover, the crash comes at an important juncture, when Italians were starting to have confidence in new financial instruments such as corporate bonds. What more reliable than a big food group? That confidence today lies in tatters.
The international dimension
The international dimension of the Parmalat crash is as important. Its most interesting aspect may be the role of big world financial institutions such as Bankamerica, Citigroup, Merrill Lynch, Deutsche Bank and others that were involved to varying degrees in helping Parmalat issue bonds. Did they have no knowledge of its offshore companies with amazing names such as Via Lattea (Milky way) or Buconero (Black-hole) which closer scrutiny suggests may have been purely instruments of deceit? Not to speak of the august audit companies, such as Grant Thornton and Deloitte, that have shown what seem to have been shortcomings in overseeing Parmalat accounts.
International investment funds are furious about the melt-down of shares and bonds they had in their portfolios and they are now preparing for legal action. As billions of euros have vanished in few days it is going to be a nasty battle. Paradoxically this could be a good thing, if Italian top managers and entrepreneurs finally learn that in a global world irresponsible behaviour has consequences that they cannot escape from. Gone are the times when things could be patched up through State aid, political intervention or the help of friends of friends.
Investigations are beginning. What seems certain is that the conjunction between an Italian provincial fraudster and the uncontrolled world of global markets has had the effect of a financial nuclear explosion.
It is as if Calisto Tanzi and his relatives turned inside out the famous injunction of Sonys founder Akio Morita to think global, act local. Instead, they apparently tried to involve as many people around the world as possible into their family fraud.
But the world is full of provincial fraudsters. Will they take the Italian lesson to mean that they can indeed make gigantic fortunes, but need to do so with greater care? Or will the world of international capitalism learn to protect itself rigorously from dishonesty and insist that national governments everywhere shake off the culture which produces captains of industry whose flamboyance and big egos hide the behaviour of fraudsters