How should we define ‘world class governance’ for a farmer owned co-op dependant on sourcing milk, marketing it and returning value to the farmer owners? A simple way is to ask what results would we see if governance was world class.
A co-op dependant on milk supply, with world class governance, would surely enjoy loyalty from existing suppliers while also encouraging new supply in such a way that its chief executive could then focus on achieving and maintaining loyalty from our international customers – without the background noise. The combination of the two – satisfied owners and satisfied customers – would then not only deliver profit back to the farm, but result in enduring business growth.
It is unfortunate that we have recently been delivered a structure which achieves the opposite: it rewards disloyalty by farmer suppliers, encourages short term thinking and discourages new supply. Whereas we had loyal investors – farmers who had a long history of committing capital to the co-op for the long haul – Fonterra’s governors, against the wishes of a co-operative majority (which is historically 75% for good reason), instead sought traders to ‘discover value’.
All this was to ‘protect balance sheet risk’. So how does this equate with now using the balance sheet to prop up dividends? Or in simple language, paying out dividends where profits are not available to pay out, so instead dipping into equity to do so? Like the age-old farmer trick of hocking off a lifestyle block to free up cash for other uses. You can only do that so many times until your core business is completely compromised.
Above all, world class governance of Fonterra would achieve trust: the trust of farmer owners in whose long-term interests the board is working; the trust of the New Zealand public and the Government that Fonterra – whether a reluctant national champion or not – takes very seriously its position as a key driver of the New Zealand economy; and, finally, the trust of its customers.
In fact, listening to an inspiring presentation by Franz Keurentjes, a director of Holland’s Friesland Campina (FC), at a recent conference in Ireland, I heard him argue quite logically that FC seeks satisfaction of the customer first, more than the needs of producers specifically, because satisfied customers are the essential link to a farmer’s profit. There is a proviso here though: FC has a structure under which farmers have no reason to believe outside interests are influencing their board. The satisfied farmer would have no fear the board was influenced by anything other than the owners’ long term interests.
Contrary to what the recent media frenzy implied, I believe Fonterra’s chief executive acted very well to maintain trust in our product during the botulism scare. Unfortunately for him, a deterioration in trust of Fonterra within New Zealand – not internationally – during the past decade made his job very difficult . Historically taking the support of Kiwis for granted has been a mistake. The reporting of the botulism affair in Europe was much more balanced and logical, without the venom of upset New Zealanders. This served to amplify for me just how much work Fonterra has ahead to restore trust within New Zealand.
Recent disenfranchisement of existing farmer owners and potential new suppliers is testing farmer loyalty also. It was a huge mistake by Fonterra’s governors to take farmer loyalty for granted and treat farmer owners with the same sort arrogance that the recent botulism investigation identified. All of this can be solved. Fonterra cooperative is a champion. But its governors must recognise it keys strengths are its loyal customers reliably supplied with quality product from its loyal farmer owners – first and foremost.
World class governors would act in the long term interests of the owners, not the short term interest of owners of derivatives of the co-operative’s shares. The announcement that Fonterra will use the ‘strength of the balance sheet’ to prop up the dividend, is astounding. It suggests the governors are bending to pressure from a powerful few. I was incredulous that governors of a cooperative, charged with responsibility of farmer capital contributions, would do this. However, when the majority portion of the Fonterra shareholder fund is held by large international fund managers who expect an ‘acceptable’ dividend, the power of persuasion becomes believable.
Farmers must define world class governance for themselves before they choose to return incumbents to the board, ratify independent directors or vote for new candidates. The above is a reflection on my observation of companies and co-ops internationally that enjoy very long term success. Those companies fully understand their strengths and build on them.
• Leonie Guiney is a south Canterbury farmer and Fonterra shareholder.
