Fonterra to review governance structure

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.

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"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.

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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 per cent cooperative ownership is non-negotiable.

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