Churning up the milk lake

Many believe rivalries on the Fonterra board are holding back New Zealand's biggest company. Agriculture editor PHILIPPA STEVENSON reports.

What's eating Mike Smith?

From the grassroots to the Government, debate raged this week over whether the independent Fonterra director's shock resignation was an admirable stand on principle or, as the Prime Minister saw it, a premature throw-in of the towel.

Mr Smith's declared reason for quitting - that Fonterra had governance problems and without change its performance could be sub-optimal - provided little insight into what was happening at New Zealand's $12 billion, biggest company.

Chairman John Roadley's single voluntary statement on Tuesday said little and was widely regarded as a whitewash.

He was slightly more forthcoming to the company's watchdog Shareholders Council, admitting Mr Smith's resignation was a setback and expressing his determination to overcome it.

The issue is regarded as a test for the 46-member council. Will it bare its teeth or trot quietly at the end of the Fonterra leash?

The council was reportedly going to hold an emergency meeting on Wednesday to discuss the issues and confront directors. But yesterday council chairman John Wilson said councillors would not gather next week at all.

The matter was urgent and pre-dated Mr Smith's resignation, he said, but had been worked on through all of January. He had a "degree of comfort" over the company's governance, which a council meeting now could not improve. One would be held after directors met for a two-day governance workshop on February 7 and 8.

Mr Roadley had given the council written assurances on governance matters and the relationship between the council and the company "had escalated to very satisfactory levels over the past few days", Mr Wilson said.

Farmers said this week that some councillors were so dissatisfied with the company's dismissive attitude to them that they doubted they would continue in the role.

"Sure, they [the problems] have probably been heightened by the unfortunate decision of Mike Smith to depart, but ... the organisation is well past transition and we've got a management in place that can assist the [council-company] interface," Mr Wilson said.

It was now up to the board, after its workshop, to deliver on Mr Roadley's assurances, which included addressing deficiencies in governance, communication between the council and company, and both sides' ability to act.

Concerns about size, make-up and skills of the board - issues flagged by director Mark Townshend, who is also threatening to quit - would be addressed at some stage but were "not life and death tomorrow", Mr Wilson said.

Rivalry between former Dairy Group and Kiwi directors now at Fonterra was "just not tolerable".

"It is entirely irresponsible for any director to have a mindset on what any of the legacy companies may or may not have thought about issues," he said. "They are elected as directors of Fonterra and they have to get on with the job."

Mr Wilson said he believed the issues were not standing in the way of Fonterra's international marketing effort.

But that was not the view of an industry insider, who said planned moves into the Australian market, including a joint venture with Nestle similar to the alliance with the giant global food company in South America, appeared to have foundered.

"They have not followed the strategy in Australia, and they've lost their way," said the source.

If the company has lost its way, or is just momentarily faltering under the pressure of merging its three constituent parties, the rest of the country will not hear it from an almost mute Fonterra.

As so often happens, it is left to those one or two steps removed from the dairy industry's centre to explain, speculate and comment on the furious activity beneath the surface of Fonterra's massive milk lake - 96 per cent of New Zealand's production.

There was consensus on just one issue: the old rivalry between the merged manufacturing companies, Dairy Group and Kiwi Dairies, is flourishing.

Then came a flurry of other claimed possible factors: Mr Smith was peeved he was obliged to give up his shareholding in Fonterra subsidiary RD1.com; the board was too dominated by farmers with too little experience of running a global marketer; Mr Roadley was taking time to settle into the chairman's role; chief executive Craig Norgate was - depending on whom you talked to - a cause of division among directors and staff, either too dictatorial or too inexperienced, or great at building a team and an outstanding manager.

The "Powdergate" illegal exporting scandal was universally regarded as a sideshow to the major circus. Fonterra's poor handling of it was a symptom of other wrongs, not a cause, said several commentators.

Mr Smith rejected the suggestion that the share sale contributed to his resignation. He had an issue with the process but not the outcome.

His concerns, too, centre on the size of the 13-member board, its composition and experience. The farmer directors are said to lack the skills to run a marketing body.

His resignation was an extreme measure to ensure the issue was debated by shareholders because 75 per cent of them have to approve changes to board composition.

Fonterra critic and shareholder councillor Malcolm Bailey rejected criticism of Mr Smith. "He is a professional and doesn't just chuck his toys easily," he said. "There is something really wrong."

But he was anxious that consultants McKinsey were reviewing the company's governance.

"I have no faith in McKinsey because they were instrumental in putting together what we have now," he said.

"We know that one of their key prerequisites for the single-company model was not met, and that was having a very strong level of external directors on the board. They rolled over and said that didn't matter. Now, they are supposedly going to be the experts to come in and sort it out."

Mr Wilson was more sanguine. "McKinseys are part of the review process ... and are assisting and facilitating the right outcomes around governance," he said. "The council has a large role to play ... as well as shareholders.

"Then it's up to the board to articulate what governance is and their aspirations are so that the shareholders can see it delivered."

Fonterra directors may be in some of the hottest seats in town, but Mr Norgate's is ablaze. The 36-year-old chief executive has become a lightning rod for industry anger and worry.

It has not helped that it was virtually a pre-merger condition by Kiwi, the company he previously headed, that Fonterra's chief executive be appointed from within New Zealand ranks.

It is suggested Mr Norgate's appointment could never be popular with the Dairy Group faction under any circumstances, no matter how good his qualifications, simply because he was from Kiwi.

Since then there has been the "did he, didn't he know" speculation surrounding the $50 million of illegal exports from Kiwi, and the anger and disappointment surrounding the dearth of Dairy Group executives gaining jobs in the new company, exacerbated by the hurtful - some say petty - removal of signs from Dairy Group's former Hamilton head office, Anchor House.

"It's actually been a Kiwi takeover, not a merger, and the Dairy Group people feel they have been shafted," said an observer.

But Mr Norgate has plenty of admirers, including industry moderate Murray Gough, much respected as a former top-performing Dairy Board chief executive and latterly a company director, including five years with Kiwi.

"I think he's potentially the best chief executive we've seen in this country in a very long time," he said of Mr Norgate.

Weekend Business has also been told that many experienced business people are willing to help the would-be flagship to become the "stellar" performer the country needs.

"They need to bury their pride and say we need some help," said one, "even for only two years."