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Current as of 09/12/16 06:39PM NZST
Jamie Gray is a business reporter for the NZ Herald

Fonterra - structure fit for the future?

As farmers face the prospect of even lower prices, they are being asked whether the dairy giant’s governance needs revision, writes Jamie Gray.
Fonterra is asking if a board stacked with farmers has the skills to run a global business. Photo / Christine Cornege
Fonterra is asking if a board stacked with farmers has the skills to run a global business. Photo / Christine Cornege

Fonterra chairman John Wilson could be forgiven for having a sense of deja vu.

As the co-operative finishes its first round of consultation with farmers over governance, he has, in a sense, been here before.

As Wilson explains it, the board was just about to go to farmers with a discussion document on governance and representation in 2013, when the whey protein scare hit.

"For me, I was relatively new in the chair at the time, Fonterra had just refreshed its strategy under Theo [Spierings] as chief executive officer," Wilson says.

A review of governance and the co-op's entire structure had been undertaken at that stage, and was about to be sent out to farmers for discussion.

"I was actually just signing off that work to go and start a conversation with our farmers on the day that we discovered the requirement for the precautionary recall," Wilson said.

As the co-op went into damage control, any possible revisions to the board's structure were off the agenda. Now, they're back on.

Fonterra's governance hit the headlines when a remit was put to last year's annual meeting seeking to reduce the board's size from the current 13 members to nine.

The proposal gained 54 per cent support - short of the 75 per cent required to change the co-operative's constitution - but enough to make the board take notice that farmers were in the mood for change.

The remit, put forward by former directors Colin Armer and Greg Gent, argued that a smaller board would make Fonterra more efficient and quicker at responding to changes in market conditions.

And in a discussion booklet early this month, Fonterra posed the question of whether a board stacked with farmers had the right skills to drive a global business.

The committee set up to look at governance is headed by Wilson and Ian Brown, a current member and former chairman of the Fonterra Shareholders Council.

Fonterra has not changed its governance and representation since it was set up 15 years ago. The popular wisdom is that it's time for an overhaul.

Like its overseas counterparts, such as Arla Foods and FrieslandCampina, Fonterra has a co-operative structure that adds layers of farmer bodies and processes to its board to protect the interests of its farmer shareholders.

By contrast, executives at rival Nestle, the world's biggest food company by revenue, answer only to its 14-member board.

Ian Brown. Photo / Christine Cornege
Ian Brown. Photo / Christine Cornege

We are not saying that it's broken. It's about how we make it more effective going forward.
Ian Brown

In its booklet, Fonterra asks if the role, focus and size of its board is appropriate for a modern co-operative. About 1000 farmers have turned up for shed meetings that aim to sound out their views, and Wilson and Brown say those farmers have so far given the issues a fair hearing.

In a co-op, directors tend to be appointed by a regional group of their peers. But, "the reality is that when you sit around that board table, you must act in the best interests of the company rather than take the representative view of your local community," says Wilson.

The review also covers the Fonterra Shareholders Council, which acts as a cornerstone shareholder and protector and guardian of the co-op's constitution.

"We are not saying that it's broken. It's about how we make it more effective going forward," says Brown, who was involved in the 2013 work.

Wilson says he would prefer a smaller board. "Yes, I think generally we would like to be a little bit smaller and in fact when Fonterra was formed, the view was that it would be a board of 11."

Brown says the discussion with farmers tends to be more about the capability of individual directors and their roles, rather than the board's size.

"There are those out there who think that [fewer members] would make Fonterra more nimble and able to react quicker as well," he says. "But when you see all the parts, and how they are all linked together, then that leads to the question as to what we need to adjust in this model.

"It's never been a discussion about five is better than six, or six is better than seven."

A draft proposal will be put to farmers in March or early April. After that, a proposal for a change in the constitution will be drawn up for a special meeting some time in May, to be finally sanctioned at the annual meeting later in the year.

Garry Reymer. Photo / Christine Cornege
Garry Reymer. Photo / Christine Cornege

The majority of farmers want Fonterra to sort out its governance and representation so that it can get on with the bigger issues.
Garry Reymer

As it stands, Fonterra is waiting for all the feedback from the shed meetings. Brown says those meetings have been constructive, despite increasingly dire global conditions for dairy.

The last GlobalDairyTrade auction, which registered the fourth successive price decline, raised fears the current price trough may last longer than previously thought.

Farmers should know by next month whether the current $4.15/kg farmgate milk price can be maintained. Private forecasters predict a cut to around $3.90-$4/kg, following on from last season's milk price of $4.40/kg. That compares with an estimated break-even point of $5.40/kg.

Farmers now face the prospect of two, or possibly three successive years of negative returns.

"Nobody likes the situation that we are in at the moment but we need to look further out as well, and governance is a big part of that," Brown says.

So far, Fonterra is taking a "softly, softly" approach to possible changes to its governance structure.

Farmers' opinions vary. Some are welcoming the opportunity to have their say on governance and representation, while others are disappointed the document does not give them more to sink their teeth into, says Waikato farmer and Fonterra supplier Garry Reymer.

"The majority of farmers want Fonterra to sort out its governance and representation so that it can get on with the bigger issues," Reymer says. "We need to put it behind us asap."

big issues

Board of 13

Responsible for leadership and direction of Fonterra

• Should it be smaller?

• Does it have right ratio of farmers to independent directors?

• Is the co-op attracting the best candidates?

Shareholders' Council

• Elected national body of farmer shareholders from 35 wards.

• Does the selection process need to change?

- NZ Herald

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