Fonterra board size in focus in first governance overhaul since inception

UPDATED April 14 2016: Fonterra proposals aim to ‘depoliticise’ board

Fonterra's [NZX: FSF] board and shareholders' council successfully opposed a remit to shrink its board at last year's annual meeting and the outcome of this week's first-ever governance overhaul may hold that line while proposing other changes to ensure the best spread of boardroom skills.

New Zealand's biggest exporter is scheduled to release a set of proposals to refresh its governance structures – both at board and shareholders' council level – on Thursday, with the aim of putting any proposed changes to its structure before shareholders for a vote in May. Auckland-based Fonterra hasn't changed its governance and representation arrangements since being set up 15 years ago although it undertook a full review in 2013.

A majority of Fonterra's farmer-shareholders supported a proposal to reduce the board to nine from 13 at the annual meeting last October but the vote fell short of the 75% needed, including a requirement for 50% support of the shareholders' council, which echoed the board's view that a better option was to make any changes under a governance review already under way. A booklet issued on February 1 posed questions of whether the board was the right size and had the right collection of skills, raised the same issues about the shareholders' council and asked whether more needed to be done to nurture the next generation of leaders.

"I'm pretty happy with the status quo. I don't see a major change coming," said Wayne Langford, a farmer in Golden Bay and vice-chairman of Federated Farmers' dairy industry group. "The review has been very good for helping farmers understand the structures within Fonterra."

Langford unsuccessfully stood for the council last year and says he would like to see the council "step up" in terms of addressing issues with Fonterra's board but he was supportive of the current board size and said existing selection processes tended to weed out unsuitable candidates. The remit on shrinking the board had been timely in as much as it came as dairy prices were plunging and some farmers were looking around for someone to blame, he said.

But shareholders and former Fonterra directors Colin Armer and Greg Gent, who drove the calls for a reduced board, say tweaks to governance won't cut it.

"Tweaks don't solve very much at all when people want substantive change," Mr Gent said. "Our No 1 goal would be to get a single-digit number of directors. A small board means there is no room for passengers. More urgent is that we need a massive change to the Fonterra council. It was set up to provide a constructive challenge to the board but that's not what they do."

Gent described the council as being "like a parliament in size" although it was "probably failing to attract a big cross section of farmers". Others were blunter but wouldn't put their names to comments such as that council membership was "a junket" and councillors were more likely to agree with the board than challenge it.

Fonterra's February booklet listed 14 areas of skill needed on its board, including experience running a $1 billion-plus business; global experience; audit, financial and risk management skills; knowledge of manufacturing and the global commodities trade; experience at a senior level in consumer goods; a track record of commercial/value creation. It posed similar questions for the Shareholders' Council: Does it have the right focus; does its representation model "reflect the global nature of our business"; is the councillor selection process right?

Rural Equities chairman David Cushing says a $1 billion-plus business needs "outstanding directors" while retaining the right balance of farmers and independent directors appointed for their business acumen. The right mix was probably slightly fewer farmers.

"Changes are required and absolutely there is room for improvement," he said. "We would have thought that was a pretty common call around farmers." Fonterra had committed a lot of capital in developing its own dairy farms in China and in a minority stake in a Chinese distribution company, Beingmate Baby & Child Food Co, the wisdom of which would become clearer over time. But Cushing said he preferred the Synlait Milk model, where Chinese capital was invested in a New Zealand business, he said.

Fonterra wants to strengthen its governance and representation to ensure it can meet goals including lifting the volume it collects to 30 billion litres of milk both in New Zealand and in overseas markets from 22 billion litres now, and driving revenue to $35 billion over the next decade from $18.8 billion. It also wants to become the world's No 1 ingredients supplier, and the No 1 or 2 consumer and food service business in New Zealand, Australia, Sri Lanka, Malaysia, Chile, China, Brazil and Indonesia.

Federated Farmers dairy industry chairman Andrew Hoggard said it was a challenge to draw the right skills from a pool of farmers but that was offset by the need to preserve farmer representation.

"This is a co-op, so it is about having that touchstone to farming reality," he said. "It would be very easy to lose track of what the core responsibility of the co-op is all about – a decent milk price and a good return on what we produce."

Hoggard said a common complaint among farmers was that the councillors were "just yes men" and he cited guidance released by Fonterra on palm kernel last year – something that had a bearing on shareholders' on-farm activities – where the council wasn't consulted.

"But they do ask hard questions and do a good job. You can have robust debate about change behind the scenes," he said. Councillors sometimes felt they didn't have the freedom to say what they liked in public because the media latched onto to it as evidence of "rift at Fonterra."

(BusinessDesk)