Duty To Disclose: The Failure of Food Companies to Disclose Risks of Genetically Engineered Crops to Shareholders

8/19/2004

Executive Summary

Scientists in the United States and abroad continue to raise serious concerns about the environmental and human health risks associated with growing and consuming genetically engineered crops. As a result, genetically engineered foods may pose financial risks to the food companies buying and selling genetically engineered crops. Even though the Securities and Exchange Commission (“SEC”) requires companies to disclose to shareholders any “material” facts that might affect business operations, most food companies have failed to alert their shareholders to the liabilities associated with genetically engineered ingredients.

Genetically engineered crops pose largely unexplored threats to human health and the environment. On the food safety side, scientists have sounded the alarm about potential allergenicity of some genetically engineered ingredients. Scientists are also concerned with the possibility of heightened toxicity levels, increasing antibiotic resistance, immune suppression, elevated cancer risks, and nutritional loss. Yet the Food and Drug Administration still refuses to make human safety testing of genetically engineered foods mandatory. In addition, environmental risks include the creation of “superweeds,” genetic cross contamination, adverse effects on non-target and beneficial species, increased pesticide use, and harmful soil contamination.

The risks inherent in genetically engineering the food supply have already cost the food industry financially. In 2000, Kraft-manufactured Taco Bell taco shells were discovered to contain StarLink corn, a variety of genetically engineered corn not approved for human consumption. The Food and Drug Administration officially recalled the Taco Bell taco shells; in response, Kraft recalled 636,000 cases of contaminated product, at an estimated cost of $10 million dollars in lost revenue. The StarLink contamination episode ultimately will cost the food industry billions of dollars.

In the wake of Enron and other catastrophic financial market failures, shareholders are demanding greater transparency and enforcement of SEC regulations. One area that is of particular concern is whether companies are disclosing to their shareholders and the public all information that will have a material impact on business operations. Despite the StarLink debacle and scientific evidence raising real concerns about the human and environmental safety of genetically engineered crops, the food industry has done little to alert its shareholders to potential liabilities.

In the United States, any publicly traded company registered with the Securities and Exchange Commission must disclose information that is “reasonably likely” to have an impact on business operations. To determine the extent to which food companies are disclosing the risks associated with genetically engineered foods, U.S. PIRG Education Fund examined the financial reporting documents of the 35 largest publicly traded food companies in the United States and found:

- Ninety-five (95) percent of the top publicly traded processed food companies completely ignore the genetically engineered foods issue in their annual reports to shareholders.

- Only two companies—Kraft Foods and Interstate Bakeries—mention genetically engineered food as a potential liability in their annual reports to shareholders.

- Not one company elaborated on or gave an analysis of the risks involved with genetically engineered ingredients in their annual reports to shareholders. While Kraft and Interstate Bakeries’ declarations are a good beginning, these financial documents do not discuss ways to mitigate harm, avoid future liabilities, and address future profitability.

The U.S. food industry is at a crossroads. Currently, genetically engineered ingredients offer no financial or commercial benefits to the food industry, nor are consumers clamoring for genetically modified products. In fact, surveys and polls show just the opposite.

U.S. PIRG Education Fund recommends that companies in the processed food industry:

- Remove the risk of liability related to genetically engineered food by demanding that their suppliers, manufacturers, raw goods producers, and farmers not use genetically engineered materials.

- Fully disclose to shareholders the use of and potential liabilities associated with genetically engineered ingredients.

- Label all products that contain genetically engineered ingredients so that consumers are fully informed of what they are purchasing.

U.S. PIRG Education Fund recommends that the SEC:

- Enforce the duty of public companies to disclose to shareholders the potential liability from using genetically engineered ingredients.

- Hold CEOs and CFOs responsible for material omissions in companies’ annual reports, in compliance with the Sarbanes- Oxley Act of 2002.