"[Without changes] it will be suboptimal - it won't fulfil its potential."
He declined to detail his concerns, which he described as "generic", but he had spelled them out to a full board meeting in December.
He said he was not quitting in a moment of pique but had reflected "long and hard over the holiday break".
It was now up to the 12 remaining directors "to choose whether to deal with [the concerns] or not.
"I don't sense there is the urgency or the climate for change among enough of the directors to effect change".
The Herald understands Mr Smith is not the only board member concerned with how Fonterra has handled things in its first year.
An overseas consultant is believed to have conducted a review of governance over the summer.
Fonterra chairman John Roadley said yesterday that Mr Smith's departure had not been "totally expected", but because his unease was well known, "it wasn't a complete bombshell".
"Some of the things we've done to get it off the ground, he hasn't been that happy about ... and he's evaluated his circumstances and decided he's better off out of it."
Fonterra critic and shareholder councillor Malcolm Bailey said the resignation of the highly regarded Mr Smith could be viewed only with alarm. Mr Smith was not a "yes-man". "We've got to find out what is going on.
"The key to Fonterra is governance and the management of the business - nothing else matters."
Fonterra shareholders council chairman John Wilson said losing a director of Mr Smith's calibre was "a major and a bit of a blow".
The resignation had come out of the blue, and for Mr Smith to cite concerns over governance was extremely serious.
Mr Wilson said he had recently been discussing governance issues with Mr Roadley and the council's resolve to act proactively on matters would now be firmer than ever.
Farmer shareholders had everything on the line with Fonterra, from their farm values and share capital to cashflow and their homes.
Mr Roadley said forming Fonterra had been traumatic and he confirmed there had been "quite a lot of anguish among various individuals going back a whole year".
Bringing together three organisations - Kiwi, Dairy Group and the Dairy Board - had created a lot of tension.
"We've got the show on the road, we've got a big chunk of the business case synergy gains in the bag and there's the odd individual bruised and battered by the process.
"If they feel as if they can't continue to support it, well, they are probably better to move on."
The directors meet next month in what is understood to be a two-day workshop on governance, including the relationship between board and executives.
Mr Smith, a former Lion Nathan director with more than 25 years' experience as a director of public companies, was on a Fonterra board sub-committee that directed an inquiry into the $50 million "Powdergate" exporting scandal.
He served on the Dairy Group board and was a facilitator in talks with Kiwi when they were bogged down in Fonterra negotiations.
His directorships include RD1.com (chairman), Auckland International Airport, The Lion Foundation (chairman), Taylors Group, Tru-Test, UnitedNetworks and Wrightson.
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