Last of the gumboot greenhorns

As the dairy industry continues a tortuous path to a new era, PHILIPPA STEVENSON talks to key player Henry Van Der Heyden.

New Zealand Dairy Group chairman Henry Van Der Heyden believes he will be the last of the dairy industry greenhorn directors - straight from the cow shed to the board room.

The time for such shock elevations has "absolutely" passed, he said. But as a product of the once standard course to company leadership he was reluctant to describe it as an industry weakness.

"There are some positive things to come out of that but I don't think you will see it again - when we take someone straight out of their gumboots into a shiny suit and black shoes and put them at the board table."

In 1992, as a 34-year-old, Mr Van Der Heyden did just that, describing as "enormous" the transition from milking a few hundred cows to being jointly responsible for the billions of dollars turned over by New Zealand Dairy Group, the country's biggest dairy company.

Until then he had never been to a company meeting of any sort, and the tale is told that it took some wardrobe advice from then chairman John Storey to get him into that shiny suit and black shoes.

"I didn't say much for the first year," he recalled.

Other shocks have followed. In the middle of tense merger negotiations with Kiwi Dairies last October, then Dairy Group chairman Doug Leeder resigned over an affair with a staff member and the relatively unknown Mr Van Der Heyden was thrust into the seat.

Only a few months before, the company had also got a new chief executive.

In the seven months he has been at the helm of the $2.4 billion company, the merger with Kiwi failed, throwing New Zealand's major industry back into agonising debate on how to reshape itself, and Dairy Group began its own controversial structural changes.

It has proposed reducing the size of its board from 16 to 10, with seven farmer directors elected nationally rather than on the present ward basis, and three outside directors appointed to ensure adequate expertise, instead of the present two.

A 24-member shareholders' council, elected on a geographically-based ward basis, is suggested as the way to keep directors in touch with their shareholders, and vice versa.

At the same time, Dairy Group, which represents 58 per cent of the industry and thus owns the same amount of the exporting Dairy Board, intends to consolidate the board's accounts into its own books.

The changes in governance structure mirror those suggested for the proposed mega co-op which, after the Dairy Group-Kiwi merger, was to have integrated most manufacturing companies with the Dairy Board. Coupled with the accounting move, they have aroused suspicion among Dairy Group shareholders, and in the wider industry, that the Hamilton-based company is intent on taking over the board and its global marketing network, and perhaps leaving Kiwi and others in its wake.

Mr Van Der Heyden denied the suggestions. The bookkeeping is just a technical matter, a "non-event, not a major issue at all" which has been forced on the company because it owns more than 50 per cent of the board and legally is required to consolidate the subsidiary on to its books. It will appear as "very low key notes" in the annual report, he said.

Mr Van Der Heyden believes there are only two structural options the industry should consider - the mega co-op, known as MergeCo, or another option suggested by industry consultants, McKinsey and Co.

Labelled as option three, it would have one processing/marketing company incorporating what is now the Dairy Board's international ingredient product marketing network, while another company would be a manufacturer with a more limited trading arm. The two companies would jointly own the consumer product marketer, known now as the Dairy Board's subsidiary, New Zealand Milk.

Mr Van Der Heyden said there was little to pick between the benefits of the two options but insufficient work had been done to quantify the risks of option three compared to those involved with the mega co-op.

The consultants had told the industry that to avert the major risks of moving to MergeCo it had to meet eight crucial conditions in relation to its governance, performance measurement and organisation.

"McKinseys were very clear. If you compromise on any one of these eight pre-conditions [then] MergeCo is not the preferred option," he said.

According to the McKinsey report, over a 10-year period, option three would perform better than MergeCo, resulting in a business with a net present value of $300 million more than the mega co-op.

But the "huge" downside, said the report, was that the structure could evolve into two competing companies, vertically integrated from manufacturing to market, which after 10 years would have a net present value $2 billion less than MergeCo.

Mr Van Der Heyden believed the likelihood of that happening, and the two companies splitting their jointly-owned, global consumer marketing company was "almost zero. The ownership structure will be by percentage shareholding. Would that shareholding split? I don't think so. If it did the shareholders would lose out on a huge amount of money," he said.

"What would tend to happen is that one shareholder would sell its shareholding but [I believe] the business will stay complete."

Just how the two major companies, the Dairy Board and up to five small companies could evolve into option three, and what the risks were in doing so, was unknown, Mr Van Der Heyden said.

Kiwi and Dairy Group have begun talks on the issue. "We need to sit down and evaluate where we are, and how we get to [option three]. All we've done so far is define the terms of reference of the work that needs to be done."

Once option three's risks were known, they will be compared to those of MergeCo, Mr Van Der Heyden said.

He acknowledged farmer frustration at being shut out of the discussion. The industry had acted under pressure from political considerations and the need to meet the tight September 1 deadline.

"Looking back, if you'd had the information out there in a lot more balanced way, I think the industry would have appreciated it. We could have made progress quicker because it is frustrating to get so far and be analysing not the benefits, but the risks. We should have done that to start with. Then we would have something a lot more robust and not had this vacuum of information which has frustrated farmers."

It was fair to ask why a summarised version of the McKinsey report had not been seen by farmers, he said, "but I wasn't in the chair then."

* Next Monday, new Kiwi Dairies chairman Greg Gent.