Fonterra drives idea of big overhaul

Fonterra is questioning whether the board has too many farmers.

Fonterra Co-operative 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 after the departure of experienced independent Ralph Norris, former chief executive of Commonwealth Bank of Australia. Auckland-based Fonterra has not 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 co-operative 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.

Among "thought starters" in the document, Fonterra asks whether the role, focus and size of its board is appropriate for a modern co-operative, 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.

Fonterra says having 100 per cent co-operative ownership is non-negotiable.

Fonterra Shareholders' Fund units rose 0.2 per cent to $5.93 on the NZX yesterday and have fallen 5 per cent over the past two years. NZME