Fonterra governance review raises questions of foreign farmer shareholders, director skills

Fonterra CEO Theo Spierings

Fonterra Cooperative Group has kicked off a review of governance by posing the question of whether a board stacked with farmers has the right skills to drive a global business and whether milk suppliers in other countries should be able to hold shares.

New Zealand's biggest exporter released a 13-page conversation starter ahead of farmer meetings this month, with the aim of having any changes to its structure put before shareholders for a vote in May.

The review follows calls last year by shareholders and former directors Colin Armer and Greg Gent to shrink the board and increase its calibre following the departure of experienced independent Ralph Norris, former chief executive of Commonwealth Bank of Australia. Auckland-based Fonterra hasn't changed its governance and representation arrangements since being set up 15 years ago although it undertook a full review in 2013.

Like overseas counterparts Arla Foods and FrieslandCampina, Fonterra has a cooperative structure that adds layers of farmer bodies and processes to its board, reflecting checks and balances put in place to protect the interests of its farmer shareholders but also increasing governance costs and complexity. By contrast executives at rival Nestle, the world's biggest food company by revenue, answer only to its 14-member board.

"The review work to date has confirmed that our governance and representation structures have served us well, but there is a real opportunity to further strengthen them," Fonterra said.

Stronger governance and representation were now needed to ensure Fonterra can meet goals including lifting the volume it collects to 30 billion litres of milk from five to six pools - both in New Zealand and in overseas markets - from 22 billion litres now, driving revenue to $35 billion over the next decade from $18.8 billion, it said. The company also aims to become the world's number one ingredients supplier, and to become the number one or number two consumer and food-service business in New Zealand, Australia, Sri Lanka, Malaysia, Chile, China, Brazil and Indonesia.

"An expanded milk pool gives us the flexibility to tailor our product mix and put farmers' milk into higher returning products," Fonterra said. "It also represents the necessary scale to maintain the relevance of our co-op in the international market."

Among "thought starters" in the document, Fonterra asks whether the role, focus and size of its board is appropriate for a modern cooperative, whether there is the right ratio of farmers to independent directors, and whether the company is attracting the best candidates, holding them to account and retiring them at the right intervals. Of the 14 skill sets it has identified for its board, only one relates to on-farm experience and a second relates to knowledge of what drives the farmgate milk price and earnings.

Other desirable traits listed are experience running a $1 billion-plus business, global experience, audit, financial and risk management skills, knowledge of manufacturing and the global commodities trade, experience at a senior level in consumer goods, a track record of commercial/value creation, experience on boards of other companies of similar size and complexity, and a background in the application of science to large global companies.

It poses similar questions for the Shareholders' Council - does it have the right focus; does its representation model "reflect the global nature of our business"; is the councilor selection process right. Fonterra also asks whether more can be done to develop the next generation of leaders within the company.

Fonterra said its goal of lifting milk supply will require it to double the pool of milk sourced outside New Zealand to about 10 billion litres - one third of its total. It is aiming to source milk overall from "five or six geographies by 2025".

"International farmers who supply Fonterra often speak of their envy at the long-term success and security we have achieved through our investment in the Co-op," Fonterra said. "Through governance and representation, how do we help farmers in key milk pools feel part of our Co-op - making it less likely for them to switch their supply?"

International competitors in those markets have access to year-round milk supply and it "makes good business sense to integrate our global milk pools with local production and domestic consumer or food-service markets". It says having 100 percent cooperative ownership is non-negotiable.

Fonterra Shareholders' Fund units, which are entitled to the dividends from the cooperative's shares, rose 0.2 percent to $5.93 on the NZX today and have fallen 5 percent over the past two years.

(BusinessDesk)


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Something happens to farmers when they put on suits and shiny shoes, one just has to look at the realities of the downward spiral that is the red meat sector contrasted with , the false positives the directors of Beef & lamb NZ trot out to justify their expenses, Koru Club memberships and the like. Wake up and smell the thorns?

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It is called "troughing" ; most groups seem to develop the tendency.

The fact remains that there are low-profile farmers in all agricultural sectors who are doing very well for themselves.
It is largely the cooperative groups that are failing to adapt to changing conditions, regardless of sector.

There is "strength in numbers" , right?
Or "we are all in the same boat"?

Just excuses for individual failures.

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Dead right Mr Brown, the real problem is; How do we hush the blithering ("strength in numbers", "we are all in the same boat""we are special" "we need special legislation" "we must unite and force the consumer to pay us more") of those farmers who want to drag every farmer down to their level.

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On second thoughts, the question should be, How do we stop Ministers of the Crown listening to, and acting on the "blithering"?
I believe the TPP deal will help, I hope so, 'coz any legislation favouring one business sector effectively steals from other sectors. That is a fact that really is self evident and the "passing" of DIRA demonstrated it.

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But, but, but . . . . the DIRA HAD to be enacted . . . . because the "dairy industry" at that time was unsustainable.

Whereas now ....?

Ya gotta laugh . . . . don't ya?

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.......... or cry.
I really do feel for those young dairy farmers who became so heavily indebted on the back of the "hype".

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So Mr. Morrison was TPP a saintly process, or should ministers and their puppies have stood aside from that as well? Consider this little example as to the sanctity of due process;
. Who is the major beneficiary in the TTPA from a reduction of beef tariffs into Japan? (down from 38% to 9%). That wonderful NZ company Anzco !! Oh, that’s right they are 85% Japanese owned !. So the Japanese lower beef tariffs for NZ beef and the biggest beneficiary are the Japanese. Well bugger me. Oh it gets better; almost the day after Mike Petersen resigned as Chairman of B+L NZ he joined the board of Anzco. He then became our special agricultural trade envoy to advance NZ’s interests. But wait (like the TV commercials) there’s more: Mike Petersen also became the central TTPA agricultural negotiator on your behalf whilst lining the pockets of his Japanese friends as a Director of Anzco

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I fully endorse free trade between all people, all nations.To imply that NZ farming will not benefit from lower tariffs is ridiculous. Really!
The fact that Mr Peterson and others from the old producer boards are there for the ride surprises me not one bit.
These people can only ride the gravy trains (Producer Board, Beef & Lamb NZ) if NZ farmers grease the wheels.
A bit like MIE getting farmer money to write up a "solution" for the "meat industry".
This missive I've read and wish I had not. It truly is an example of how farmers money can be wasted by "experts"putting together thousands of words comprising of out an dated collective philosophy full of warm fuzzies and worn out cliches. A perfect example of how unearned increment is added to the cost of producing meat.

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All companies need an experienced diversified board of members who fully understand the company business.
After looking at the current Fonterra board I would question whether it has all the required disciplines covered like Manufacturing, Exporting, Research and Development, Marketing, Finance, Legal, Managing and over-seas operation etc. They certainly have farming experienced on their board.
Who on the board has had operational experience? Are there any board members who have been actively involved in running an overseas company?
I would suggest reviewing the board's capability and addressing any weaknesses is a priority for Fonterra.
Des Hunt

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Now is the time to get some competition at the farm gate. That will cause Fonterra directors to smarten up their acts.

It is as simple and easy as abolishing the "10% rule " , a rule which Fonterra has used to bully its farmers into not accepting better offers for their milk.

There 's no logistical problem with a farmer cancelling a daily pickup by Fonterra.
If another dairy company wants the day's milk at a higher price to the producer, then why should they not be able to buy it?

Because Fonterra does not like it?
Please!

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And what happens on the days when no dairy company wants the extra milk?? Are you seriously suggesting dairy companies can plan transport and processing of a highly perishable product on a daily basis with no guarantee of supply? And with all the variations in milk quality, volume and composition requirements between companies? You are so far off the planet it is flabbergasting.

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Clearly it is not me who is off the planet.

You seem to be unaware that Fonterra already does what you suggest is impossible.
All it takes is a text to Fonterra transport to cancel a pick -up from the farm , for any reason whatsoever . . . . blood in the milk , antibiotics etc. etc.

"dairy companies can plan transport and processing of a highly perishable product on a daily basis with no guarantee of supply?"

We are talking about a minute quantity becoming available to independents.
The issue is Fonterra's insistence that it has no milk for independents . That is the situation right now , and it occurred at one day's notice.

You need to get up to speed on reality ; clearly you are not an independent processor who has had their milk supply cut off without warning.

Methinks you do protest rather too loudly. :-)

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As a hands-on dairy farmer of 38 years, I am very much aware that milk collection can be cancelled for quality or force majeur reasons, and in this case we are talking a "minute quantity." This is completely different to having to supply to a competing processor on a long-term basis, and we are not talking about a "minute quantity" here.

There seems to be a view that Fonterra should supply independents even when there is limited supply for their own plants, and product optimisation is compromised.

The solution for the independents is to develop their own supply contracts over a reasonable timeframe and get out of Fonterra's hair.

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Methinks a structural reform will include it's operations and therefore a new set of financial statement categorisation to hide the mismanagement in FY2016.

Shouldn't the world's largest dairy exporter have seen the dairy price slump coming? Or were they drunk on their own kool-aid?

Time to break the co-operative apart into companies that make part of the business units in a functional way. Eg logistics services, point to point transportation, manufacturing processes etc. Having a whole bunch of smaller companies work together will make the industry more competitive, provide transparency, and have a faster pace of innovation. If you silo separate functions of Fonterra you could effectively contract services out to another company that could do better than the incumbents.

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