Editorial: Fonterra farmers deserve better

Theo Spierings at Fonterra's 2018 interim result press conference. Photo/Jason Oxenham

EDITORIAL:

Company executives often make headlines for the size of their pay packages and none more so than those at dairy giant Fonterra.

The revelation this week that former CEO Theo Spierings is in line for yet another payout in spite of Fonterra's huge financial losses should have farmers screaming blue murder.

Spierings, who has already collected the thick end of $40 million in salary and incentive payments from his seven-year stint that ended a year ago, has become a symbol for corporate largesse as Fonterra flounders in his wake.

And yet dairy farmers seem unusually quiet. There's been not a peep from the Shareholders Council, whose members may still be trying to digest the near billion-dollar asset write-down that Fonterra flagged this week – not to mention the expected $675m loss for the financial year just ended.

Dairy farmers are normally not shy of a protest.

They've taken tractors to Parliament to fight a fart tax, protested against private land access and even held up signs decrying the Prime Minister as a communist.

There's no doubt their own co-operative has failed them – through poor strategy and poor governance. Meanwhile, Fonterra continues to occupy its grandiose offices in Auckland, offices more suitable for a buoyant multinational enterprise, which Fonterra clearly demonstrates it is not.

Perhaps it's the relatively high farmgate milk price that's keeping farmers at bay. Maybe it's simply disbelief.

But one wonders how long it will be before farmers start rolling their utes down Fanshawe St to Fonterra HQ to express dissatisfaction over why their co-op is in such a sad state.

Of course Fonterra is not alone in outlandish executive pay.

CEO remuneration inside our top 10 listed companies has doubled over the last decade, even for some that are natural monopolies. While they normally earn their salary, unfortunately some are paid bonuses that simply don't line up with performance.

Incentivising CEOs with long-term rewards is common practice both here and around the world but global research increasingly suggests that in many cases it may do more harm than good.

There is an emerging consensus, at least in Western economies, that there is something deeply flawed about the current model of executive pay.

The main problem, studies show, is that executive pay has got to such levels that it crowds out other motivations for doing the job.

Fonterra's overabundance of mid-management, particularly involved in the investments now being written down, and reliance on third party consultants telling them how to do their job only compounds the problem.

Fonterra's problems run deep but it's the seeming inability to convert capital investment into earnings growth and poor track record in adding value that irks the most.

On top of that, earnings are inherently volatile and neither Fonterra nor the market can predict them.

Thankfully farmer returns are currently holding up, albeit without a forecast dividend.

But farmers deserve better and it's high time Fonterra stopped paying unwarranted bonuses rewarding failure rather than success.