Between the lines: Merit in plan for board of NZDG

It's no secret that politics were partly behind the collapse of merger talks between the country's largest milk producer, New Zealand Dairy Group, and the slightly smaller Kiwi Cooperative Dairies.

The dairy industry - arguably the most political business sector in New Zealand - has developed a nasty reputation for harbouring some of the country's more overweight egos.

The bickering of local body politicians and heavy-handed tactics are also said to be common practice across boardroom tables, inevitably weakening company performance.

In a move to tighten its commercial focus and reduce political posturing in the boardroom, Hamilton-based Dairy Group has put together a new governance proposal that will reduce the 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 from geographically-based wards, is suggested as the way to keep directors in touch with their shareholders, and vice versa.

The move would require 75 per cent support at a meeting on Thursday.

Not surprisingly, several farmer groups have condemned the structure, which they say would dilute their control over the company and alienate farmers by reducing the number of elected directors.

Even former Dairy Board chairman Sir Dryden Spring believes the separation of governance and representation would result in inadequate understanding and consideration of farmer concerns by directors.

But Dairy Group is doing the right thing. A board of 16 is large, clunky and compromises its ability to make effective business decisions.

A board is there to ensure shareholder wealth creation and its focus should be firmly attached to the marketplace, rather than supplier issues or whether John Smith's cow has a belly ache.

While some farmers are insulted by the company's desire to reduce elected directors, appointed directors also have the ability to bring fresh ideas to the table from specialist fields such as investment, law and finance.

Farmers will still get their say. Dairy Group's shareholder council will be an ideal forum for industry strategy and views to be debated. The council will also be responsible for signing off large business transactions.

The proposal is also in line with other companies around the world, especially within the dairy industry, which rarely maintain boards of 16 or more.

Dairy Group directors and executives shouldn't be surprised at the backlash against their proposal. Farmers are quite rightly cynical.

The same people who are promoting it are the ones who failed to put together a merger with Kiwi designed to lead to total integration of the industry and boost farmers' incomes.