Fonterra is New Zealand's biggest business and the world's sixth largest dairy company by revenue.
Fonterra’s board has rejected a claim that farmer-shareholder expectations over transparency and genuine consultation are not being met and need to be “significantly” improved.
The farmer-elected Fonterra Shareholders’ Council monitors the interests of the big co-operative’s nearly 8000 farmer-owners and makes the claim in its 2024 report.
“Our April 2024survey results again show that members consider transparency around decision-making and strategy is the most critical activity for strengthening and maintaining Fonterra’s co-operative spirit.
“While this year’s survey results evidence improvement, expectations are not being met for around half our co-op’s members regarding transparency and the genuineness of consultations.
Industry and market claims about a lack of reporting transparency dogged New Zealand’s biggest business for many years but it’s generally acknowledged there’s been a big improvement.
The council noted that in its discussions this year with Fonterra’s auditors KPMG, they had noted “a significant and positive change in Fonterra’s culture since their audit appointment in August 2019″.
But the council said it “had heard from members that they want more detail (on the potential divestment) than they have received” while acknowledging Fonterra needs to balance this against the commercial sensitivities.
The concern was raised in the annual report where the council compares how its yearly letter of expectations to the Fonterra board have been met or not met, and the board’s responses.
The board responded it did not agree with the council’s interpretation of the survey finding.
“While the board acknowledges the survey process undertaken by the council, given the representative limitations of the survey due to the small sample size of 887, the board combines the thematic survey feedback with the organisation’s other farmer insights.
“These insights are gathered across the year by the Farm Source team as part of quarterly and annual farmer surveys, through transactional and event surveys, Farm Dairy Assessment follow-ups, cease surveys and qualitative interactions (eg digital tool co-design). These interactions provide circa 5000 opportunities for feedback to be gathered which is incorporated into our strategic decision making and used to inform prioritisation of focus/ improvement areas.
“The survey result was that 50% of those surveyed rated transparency and genuineness of consultation either very high or high with a further 28% of respondents being neutral on this question, and 19% who rated this as either low or very low and thus their expectations are not being met.
“As noted in our response to last year’s letter of expectations, the board and management remain focused on operating with a culture of openness, honesty and transparency with the co-op’s farmer shareholders.”
The board goes on to outline its public statements this year regarding its “step change” in strategic direction, which included exploring consumer business divestment options. It noted that in 2021 it published its long-term strategy and 2030 performance targets, saying it had “been clear about our strategic choices and the performance targets ... and have reported against our performance targets as part of our financial results reporting”.
It also noted that in May this year when announcing the divestment potential study, it had withdrawn the financial targets, because they were based on a strategy that included the businesses in the exit scope.
The council raised other concerns about transparency.
“The strongest level of support in the 2024 survey questions was for Fonterra to improve margins by maximising processing and operational efficiency (96% support). In September 2023 Fonterra announced there would be reporting on two new efficiency metrics, on a six-monthly basis. This received positive feedback, with members looking forward to seeing progress,” the council said.
“However, at the first reporting cycle of FY24 interim results there was incomplete and opaque reporting. Whilst opex per kg/milksolids was reported in materials released to the NZX, it was not reported to co-op members at interim results meetings nor in the 2024 interim report.
“The second metric, gross profit per kgMS, was not reported against at all. At the time council reminded the board that members expect Fonterra to deliver on the commitments it makes or, where commitments are unable to be met, that a transparent explanation is provided.
“Of note, cash operating expenses per kgMS and core operations manufacturing costs per kgMS are different metrics to those announced in September 2023. This change was not made transparent when the results were presented to council.
“Whilst the rationale for making changes was explained in response to a follow-up question, council believes there should have been transparency of the changes, and the rationale for those changes, at the time the results were presented.
“Council notes that gross profit from core operations per kgMS has been reported in the materials released to the NZX.
“Our assessment of where there should be greater transparency extends more broadly across performance targets, how they are measured and actual performance against targets. The board sets out its key performance measures for Fonterra each year in its integrated scorecard.
“In council’s view the integrated scorecard targets, and achievement against them, should be presented to and discussed with co-op members at results meetings, and not just reported via inclusion in materials released to the NZX.”
The Fonterra board responded that its performance against targets was outlined in its FY24 financial reporting provided to farmer-shareholders.
In relation to efficiency metrics, the company said its FY24 interim results presentation slides provided to the NZX and all farmers included reporting on cash operating expense per kg milk solids.
In terms of gross profit per kgMS efficiency metric, the board said at the time of the interim results it advised this was a full year metric and that providing performance against this metric at the half year “would be both misleading and confusing”.
This had been communicated to the council and during farmer meetings.
The board agreed that transparency of Fonterra’s strategy, plans and value targets over a long-term horizon was important, along with communicating the strategy in an understandable way. For these reasons, it said, the revised strategy in September was accompanied by a set of financial targets and policy settings, alongside its intention to maintain the highest sustainable farmgate milk price.
The council said it still held the view it expressed to the board last year that there had not been adequate sharing of post-investment reviews.
Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the $26 billion dairy industry, agribusiness, exporting and the logistics sector and supply chains.