Fonterra hasn’t got message

Fonterra was sent a message last year when more than 50% of shareholders supported the remit put forward by Colin Armer and Greg Gent to cut the number of board members from 13 to nine.

Unfortunately the remit didn’t get the 75% support it needed and the board didn’t get the message.

It did come up with a proposal to drop a couple of directors but it is also proposing a more convoluted and less democratic method of selecting them which  Keith Woodford sees this as a Trojan horse:

Many farmers have been convinced by the call from former directors Colin Armer and Greg Gent that reducing the number of directors would be a step forward, and it aligns with a widely held view that something at Fonterra needs to change. But reducing director numbers in itself will achieve nothing of substance.

The reason that the proposal is a Trojan horse is that it lets in a revised director selection process that is fundamentally non democratic, and which take power away from farmer members.

Fonterra itself is a business with assets of $19 billion and equity of $7 billion. However, beneath this there are another set of land and cow assets that are owned by farmers that are worth – even at today’s discounted rates – more than $60 billion, with more than $30 billion of this is now owed to the banks. Why would farmers want to release their direct say in governance by relinquishing the power to select their directors?

It is now explicit as to how the director nomination and selection process will be managed. This process is complex with multiple steps, and effectively keeps farmer shareholders well away from the selection process. . . 

The board will select candidates. Shareholders will  be able to vote for them or, in what will in effect be a vote of no confidence in the board – against them.

Although the proposed process itself is now explicit, the operation thereof will be clouded in secrecy.

The only way for farmer shareholders to influence the choice of directors will be by rejecting the Boards own nominations. And then the process of finding an alternative director goes back behind closed doors.

The new proposal, if accepted by farmers, will in the long term do more to alienate members than any event since Fonterra’s formation. The danger is, that with farmers currently distracted by more immediate issues of cash flow and survival, the proposals will pass at the vote on June 10, simply because many farmers will have not engaged with the key issues.

The required approval of 75% of farmer votes is a stiff target. But it is feasible that it could be achieved off a low turnout. This is particularly the case if the larger corporate-type farmers vote in favour.

One has to ask, what has led the current Board to endorse these proposals. The support within the Board is supposedly unanimous, but is that simply because of ‘cabinet solidarity’?

We know that in the past a divided Board has chosen to present a united front under pressure from the majority. It would be interesting to see each Board member stand up and explain why he or she is supporting the change.

As a starting point, the proposal uses a common approach to choose both farmer and non-farmer directors, and in the process ignores the differences in situation.

Non-farmer directors are meant to be chosen for specific skill sets that are otherwise missing in the overall Board. This is best achieved by a private and confidential search, followed by tapping the desired people on the shoulder. Democracy is not the way to get the right people to fill those specific roles.

Under the revised proposals, it will be the nomination and selection committees that seek out both these non-farmer and also the farmer directors, but then the selected nominees will have to sell themselves to a series of public farmer meetings. Most potential non-farmer directors with the relevant expertise have a range of alternative options, and they will feel little need to allow their names to go forward into such a process. That is not the way these people operate.

As for the farmer directors, the claim is that it will reduce the internal politics. In terms of double speak I am reminded of George Orwell’s 1984.

The new proposed system will be totally closed door until just before final acceptance or rejection of nominees by farmers. It will depend on the nomination and selection committees, dominated by existing Fonterra Board-think plus nominated independent non-farmer business people, and where those with new or provocative thinking will struggle to get a guernsey.

The proposed process of director selection is highly complex with multiple stages.
First there will be a nominating committee of two Fonterra farmer directors and two non-farmer directors. There will also be two Shareholders Council observers on this Committee. . . 

Woodford describes the process then says:

Actually, there are comparable analogies from elsewhere. They are called communist party elections. Essentially, this is the process they follow of selection and then public endorsement and ‘election’ of the chosen ‘selected’ candidates.

There are multiple problems at Fonterra, and some of these are a consequence of bad historical decisions going back many years. They have come from weaknesses in leadership and weaknesses in diversity of thinking. I have written previously about those on multiple occasions.

However, none of the current proposals solve any of Fonterra’s current weaknesses. These proposals simply throw out the baby with the bathwater.

Hopefully, enough Fonterra farmers will clear their minds of current distractions to recognise that this is not the path forward.

Fonterra faces several challenges, none of which will be helped by the convoluted and anti-democratic procedure the board is proposing for director elections.

Thirteen is at least four people too many for an efficient and effective board.

Dropping a couple of farmer directors and having the rest selected in the secretive method proposed is not in the best interests of the co-operative or its shareholders.

2 Responses to Fonterra hasn’t got message

  1. Freddy says:

    Fonterra badly needs more or better international business experience in its board of directors, this we know, the company is spread right around the world and the pressure from this side must be huge so no cuts there.
    However the Chairman must come from the farmer/shareholder side and a good and capable chairman needs a term or two on the board to bed in, the reduction in the pool of talent available for chairman could be problematic so no cuts there. Looks like it’s more of a selection problem that numbers. The disconnect between farm gate and consumer plate, particularly with Fonterra shareholders, could be a major stumbling block.
    ( an opinion of an outsider looking in)

  2. Dave Kennedy says:

    This is a difficult situation to be in as there is almost no solution. Research supports the fact that smaller boards function better and as long as there is diversity in the smaller group it can make decisions in a more timely fashion. I was involved in the governance of a 50,000 member organisation that reduced the size of the governance group dramatically and it immediately resulted in higher quality decision and more robust discussions. It takes much longer to hear the opinions of a larger group and less time to debate the issues in depth. Achieving consensus is also much harder with a larger group.

    However there doesn’t appear to be a lot of trust in the current directors to operate in the interests of all farmers and it becomes problematic when a board becomes more of a representative body than a governing body as the tough decisions that need to be made don’t happen. When all interests have to be accommodated the bold but necessary decisions in the long term interests of the organisation aren’t made.

    I guess the question also needs to be asked whether Fonterra needs to be split into satellite companies that can concentrate better on different aspects of the industry without having to have a lumbering “one size fits all” approach that is open to risks. One mistake in one part of the organisation can destroy the whole and keeping the majority happy limits diversity.

    The choice of CEO can also be pivotal too as they define the culture and the day to day management and can provide useful advice to the board. If someone like Christopher Luxton from air NZ had been employed in this role Fonterra may have been in a different position. Sometimes employing someone with experience outside the industry but with a track record of success in global markets is useful.

    As with Freddy, I am an outsider looking in, but good governance tends to look similar across different organisations and sectors and I see Fonterra’s governance as riddled with distrust and frustration.

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