Parmalat's Downfall

By: Mary Anne Winslow
Submitted: 2007-01-17 16:25:23
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It seemed, for a while, that Europe was insusceptible to the wide sweep of scandals that sweep most successful businesses. However, Italian company Parmalat disproved that theory in the latest embarrassment reported a 5 million dollar account that was not only fraudulent but did not exist. This huge disgrace outweighs the other scandals that have swept the US, Enron, WorldCom, Tyco, etc. Parmalat started as a family business producing salami,that branched out to be the champion of Italy’s economy and business world.

Calisto Tanzi dropped out of college when his father died, and came to run the families small preserved meats business. Early on, Tanzi decided that the future of the company would be in dairy, and began a rapid expansion when he was one of the first to aggressively adopt new ultra high temperature pasteurization and packaging technology that would allow milk to have a shelf life of over six months without refrigeration. Parmalat expanded overseas and into other food markets besides dairy, and by the 1990’s owned companies in over 30 countries and employed over 36,000 employees.

Tanzi never outgrew the style of the provincial business owner, and managed the company with a parochial nature. The hometown business hero kept much of the hometown culture from which he expanded, some of which has been to the company’s detriment. As the business grew, most of the senior staff were the locals that he had started with in Parma. While loyalty is an admirable trait, when a local company becomes a giant multinational corporation, it is important and advisable to have some seasoned international management. Keeping the business linked to friends and family was an important trait for parochial Italian culture, but spelled disaster as Tanzi sought to rapidly expand. The roots of the scandal may not be exactly the unabashed greed often associated with such massive scandal, but may be more rooted in a man who got out of his league, and refused to relinquish some control to, or seek advice from those with more experience dealing with a multinational corporation and with rapid expansion of a business. Ironically, a Tanzi niece suggested that he needed to start running Parmalat less like a family firm and more like a global enterprise, and get proper managers in to deal with the myriad of operations now in place in the huge firm. However, Tanzi ignored her advice, and kept tight control of the ever expanding and ever more complicated enterprise, staying with family and longtime local associates.

Despite the advice of a niece, it was this parochial (perhaps universal) desire to find a place in the empire for his children that also narrowed the spectrum of expertise available to advise the growth of Parmalat. His son, Stefano, was the chief executive for a period, and made chairman of the soccer club Parma A.C. His daughter, Fransesca was in charge of the family’s privately controlled travel and tourism business, Parmatour. It appears that up to $2-3 billion in diverted funds went to help shore up the struggling Parmatour, and attempted to cover such actions through accounting fraud.

This cronyism was a contributing factor, not only in the limitations of management to handle multinational expansion, but also in some of the easy money that financed it. The close knit Parma culture allowed for situations in which some of Tanzi’s close associates were placed in charge of local banks, which in turn would make significant loans to Parmalat without the close scrutiny that might be associated with a process made at arms length. This easy money and lack of seasoned advice from experienced international managers familiar with the challenges of rapid global expansion set the stage a man like Tanzi, and a company like Parmalat, to get in over his head and find the far flung empire quickly spiraling out of control, and then being overwhelmed and ill-equipped to try to address the situation before it reached unmanageable proportions.

Bankers who were suspicious steered clear of Parmalat. They saw signs of trouble as the rapidly expanding company came to the markets time and time again to raise more cash. The company issued around $8 billion in bonds between 1993 and 2003. Some more astute analysts (or less blinded by potential fees) found this desire for more and more debt amidst tremendous stockpiles of cash on the books as a warning sign that things were not as rosy at Parmalat as the books might suggest. When questioned about the need for so much additional debt while flush with cash, the reply from Parmalat’s chief financial officer, Fausto Tonna (one of the longtime Tanzi associates thrust from small time Parma to running the finances of a global dairy giant), was that the company was on an acquisition spree and needed the cash, and that its liquid assets were already being put to good use and earning good returns.

Some of the blame for the lack of integrity and diligence on the part of auditors and accountants may lie in the regulatory environment that Parmalat operated in. Italy’s Prime Minister Silvio Berlusconi, a billionaire businessman, only last year reduced false accounting from a felony to a misdemeanor. Many have long viewed Italy as less than rigorous in the realm of corporate governance, and the Parmalat scandal only reinforces those views. In response, the Italian government has been falling over itself in proposing new, stricter policies and oversight to help prevent such activities from happening again. One of Italy’s policies already in place that failed the test it was designed for, was the requirement to rotate auditors after four years. This proved inconsequential because the major accounts in question were subsidiary accounts that continued to be audited by the same firm, Grant Thornton.

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