Dialogue: Industry too fond of shooting messenger

By TONY BALDWIN*

Successful organisations welcome new ideas. Inquiry into possible better approaches is encouraged. Criticism is seen as helpful. People focus on the merits of the message, rather than instinctively shooting the messenger.

Sadly, our dairy leaders tend to be instinctive messenger-shooters.

This is exactly how Fonterra chairman John Roadley reacted to widely expressed concerns about the resignation this year of board member Mike Smith.

Roadley dismissed the critics as nay-sayers who like to knock tall poppies and throw stones in glass houses.

Having the confidence to encourage people to challenge and criticise is necessary for an organisation to adapt successfully to constant change. In business, it is a case of adapt or die.

Dairy farmers have had a strong culture of exploring new ideas to increase production. But this openness to innovation is rarely seen when it comes to governance in dairy co-op boardrooms. And this is the industry's biggest Achilles heel.

Fonterra was a marriage of convenience. Neither spouse - NZ Dairy and Kiwi - really wanted the other. They did not have a common vision or a shared philosophy. Not surprisingly, the two parties are finding consummation difficult, if not impossible. Self-interested marriage counsellors, such as McKinsey & Co, are ogling their every bodily motion, offering words of encouragement to the reluctant couple, at considerable cost.

And like many high-profile couples, the two frustrated parties have tried to snuff out speculation of their weak relationship by issuing public statements asserting their marital happiness.

The facade will continue as long as people want to believe it. In the dairy industry, 14,000 farmers want to believe it. But this is square-peg-into-round-hole stuff.

Rather cynically, many influential people supported Fonterra because they saw it as the only path away from the old single desk producer board structure.

These heavy-hitters know Fonterra will seriously under-perform in some key areas. But they believed it was better to follow this rather clumsy and costly transition path than risk a continuation of the old system.

So why did we settle for a structure that international experience has shown can't deliver its goals? In a nutshell, lack of leadership; self-interested politicians kow-towing to a wall of highly defensive farmer preconceptions.

Leadership means showing people the place they need to be, but cannot see. It is not about pointing grandly to a way-point as it comes into view for the crowd, as Roadley is doing now in saying he wants more business directors at his board table.

Most dairy leaders feel safer following than leading. Our politicians have chosen to follow suit.

This lack of vision and courage goes to the heart of why our economy has underperformed over the years.

We are an economy still in transition, struggling to find out how best to use our limited resources to generate wealth from the rest of the world.

Since 1972, when Britain entered the European Community, meeting consumer demand has been much more important than simply producing stuff.

But our dairy export industry has remained production-driven.

Government regulation for the past 80 years has insulated dairy farmers from overseas demand. Versatility and adaptation to buyer needs are not, therefore, among the dairy industry's natural strengths.

Yes, the Dairy Board has boosted export sales. But the real question is, what return did it achieve on all the resources used? Real increases in wealth count, not raw sales.

Despite recent high export prices, net returns on total assets in the dairy industry for the past 30 years are likely to have been relatively low. Looking at the big picture, Fonterra is dairying's response to the challenge of operating in a more consumer-driven world. The main winners are the niche dairy exporters, who are now free to expand their businesses.

But for the vast majority of farmers, Fonterra is simply the closest thing they could get to the status quo, where a small handful of people manage all dairy exports and farmers are left to produce as much milk as they can.

So while political rhetoric trumpets Fonterra as a flagship for the Government's innovative economy, it is in substance a powerful demonstration of our dairy sector seeking to avoid change - a rather defiant leaderless culture imprisoned by fear of the unfamiliar and a high dependence on not-so-independent consultants.

Dairy leaders were warned in strong terms that a single mega co-op would create serious inefficiency problems. McKinsey found that two competing exporters would be better than one unless the problems inherent in a near-monopoly could be overcome.

But the industry's godfathers favoured a single mega co-op. In a heroic and client-friendly leap of logic, McKinsey concluded in 1999 that the problems of weak accountability in a near-monopoly co-op could be overcome. To many people, this is like kidding yourself that human technology can beat nature's most powerful forces.

Even if it was possible, the technological safeguards much vaunted by McKinsey do not seem to exist at Fonterra, although the consultancy's boss, Andrew Grant, assured farmers before last year's merger vote that they were.

Either Grant has information farmers lack or he has watered down his non-negotiable preconditions. I fear the latter. So do others who have reviewed McKinsey's 1999 report.

The urgent task now is to implement disciplines and performance pressures similar to those that drive Fonterra's competitors. These changes will require Fonterra's constitution to be amended.

The burning question is whether Roadley has the leadership ability to do what needs to be done.

* Tony Baldwin was leader of the Producer Board Reform Team 1999 and policy adviser in the Department of the Prime Minister and Cabinet 1991-98.