Historic rivalries blamed for Fonterra tensions

By PHILIPPA STEVENSON

The clash of individuals and cultures on the Fonterra board is blamed for tensions which led to a director's surprise resignation.

McKinsey consultants New Zealand principal Andrew Grant said yesterday that Fonterra directors were experiencing the legacy of years of rivalry among the dairy giant's constituent partners.

"There is still Kiwi, Dairy Group, Dairy Board stuff - people from very different teams learning to work together [to] build the same frame of reference. It just takes time."

McKinsey has been a key adviser on the dairy industry's move to establish the mega co-op, and some of its international consultants were called in before Christmas to review Fonterra's disputed governance practices.

Independent director Mike Smith, who resigned on Friday, spelled out concerns over governance to the board last month. This week he said he feared that without boardroom changes Fonterra would not reach its potential.

Mr Grant described Fonterra's problems as "relatively minor" considering the global scale of the business and the challenge of merging the three organisations.

Company critics have suggested that the personal and cultural differences plaguing the board could not be overcome during the term of the present directors, but Mr Grant said old dogs could learn new tricks.

"I'd say to a management team generally that you always need new genetics. There are always some genetics that can't change, and there are always some old dogs that surprise you significantly in how far they move."

McKinsey's pre-merger conditions on governance still held, he said. They included that the company have a farmer chairman, a majority of farmer directors but a significant proportion of independent members.

The ratio of farmers to independent directors, 10 to three before Mr Smith's resignation, was being examined in McKinsey's review, he added.

Fonterra's governance practices had already been established but "there's clearly some refinement needed to get those right".

The board's difficulties were not dramatic.

"Now is a time for perspective, cool heads ... A lot has been achieved and in the natural birthing process of something of this scale you have to continue to refine."

Mr Grant said boards needed "as much software as hardware" to work effectively. Hardware included timetables and meetings while software was the interaction between people, including how they contributed and gained knowledge.

Fonterra's boardroom problems had not affected the company's first 100 days - a period consultants hold is critical for capitalising on a mood for change after a merger.

"The 100 days we would say is much more around bedding down the performance culture, making sure you've got the right systems, [and] measures in place, that you are building the executive team appropriately, that you are getting done the deals that need to be done [and] that you're protecting revenue," Mr Grant said.

"Given the context, it's been a pretty good 100 days."

There was more to do, and the pressure to ensure performance pressure had to continue.

"The irony is that the high-performing organisations carry more of these tensions than fat, dumb and happy organisations."

An example was Team NZ, which he said was "winning every other day and trying to tear themselves apart every second day".

McKinsey's review, to be presented to next month's two-day board workshop, involved seeking the views of leading international institutions on good governance, said Mr Grant.

National's agriculture spokesman, Gavan Herlihy, said his worst fears about the marriage of the two cultures of Kiwi and Dairy Group were coming to fruition.

He had been a supporter of having two rival companies because of doubts that their cultures could ever be compatible.

Agriculture Minister Jim Sutton said yesterday that difficulties were predicted.

"I'm not surprised there's a few sparks flying. I'd be really worried if I thought they weren't addressing the issue, but all the indications are they are addressing the issues."