Stephen Ward: Good reasons for fee rise

Oh to be a fly on the wall at next month's Fonterra board meeting as directors discuss whether to accept a 7 per cent fees rise.

The increase was approved by just under 60 per cent of votes at the co-op's recent AGM.

But - at a time when suppliers are facing a lower payout and the threat of even less due to a strong dollar and higher costs - it's very easy to understand why some dairy farmers want directors to give a resounding "no" to the rise.

"Why should directors get more when we're being squeezed, particularly the nine farmer-elected directors who are themselves Fonterra suppliers? This is a co-op after all," they might think.

However, while symbolic gestures demonstrating "solidarity" can be very worth while, a "no" has the potential to backfire.

The more choppy straits dairying finds itself sailing in at present, plus a range of other challenging factors for Fonterra, are actually valid reasons why the increases should go through.

The co-op has been criticised for its returns last season from value-added activities, such as branded consumer products, and it is under strong pressure to deliver far more value-added earnings this season. It admits activities in Australia - where the co-op has invested $1 billion - are unsatisfactory, while a joint venture with Nestle in South America is also underperforming.

Now, perhaps more than ever, New Zealand's largest company needs a very firm set of directors' hands on the tiller of this $13 billion super tanker as it navigates the treacherous waters of international trade.

Many of the directors - none of whom appear to need the extra fees desperately - are said to put a significant amount of time into Fonterra each week, particularly the farmer-elected ones.

If the co-op is to attract and retain able and experienced hands on that tiller, fees need to reflect the time and effort involved, and the "market value" of that time and effort. The reality is that even the most altruistically inclined will be wary of making a major effort if there's not an adequate financial reward as part of the package of professional and personal payoffs.

Fees for directors in big Australian companies are said to be significantly higher than at Fonterra, and it is argued by the remuneration committee that the 7 per cent is justified on the grounds that it is helping the co-op's fees catch up.

Recently appointed Australian-based independent directors Ralph Waters and John Ballard had both pointed out the higher fees available across the ditch. They're not the sort of people you want to lose from a board because they're feeling under-appreciated.

A 7 per cent rise at Fonterra would add up to about $105,000 extra in fees spread among 13 directors. That is about $9.30 a supplier, based on shareholder numbers last season, or the price of a couple of drinks at the pub.

If that bit more helps to attract and retain the calibre of people needed to govern effectively the country's most significant business, it is probably not such a bad deal.

But, in turn, farmers will be justified in resenting directors who take a fee hike in the current climate yet fail to put in additional effort. The board, collectively, will need to demonstrate clearly the added bang it is delivering for the extra bucks. The best way to do that is through strong and visible governance, and ensuring the highest possible performance from the company for the benefit of all shareholders.


Spin-outs

The troubles confronting Fonterra have potential to play into the hands of rivals and others who might gain from farmer disenchantment with the co-op.

For example, Waikato's Open Country Cheese has seen supplier numbers grow from 26 last season to more than 100.

At least some of the interest in switching to supply Open Country - particularly from outside its home region - stems from dissatisfaction with Fonterra's performance. While Open Country's payout has been lower than Fonterra's, switching to Open Country allows farmers to unlock capital tied up in Fonterra shares.

And Open Country director Geoff Taylor - speaking with his Dairy Equity hat on - says warnings about the strong dollar cutting Fonterra's payout have led to an increase in the number of inquiries about Dairy Equity's swap scheme.


Sound-off

AgResearch's chairman, Rick Christie, sounded off in the Crown Research Institute's annual report about how New Zealand needed to give more credit to farmers and scientists.

"It is time we saw our farmers and scientists in terms of the benefits they bring to New Zealand rather than as environmental pariahs or the perpetrators of genetic risks.

"Five generations of New Zealanders owe most of their national wealth to these two groups but they hardly feature on the list of national priorities and attract little media attention."

The issues Christie raises are not just about how the nation can give farmers and scientists more brownie points. For example, status and acknowledgment play a key part in attracting and retaining staff and in the allocation of resources.

One of the key challenges for the rural and scientific sectors is to get better at telling their stories in a compelling way - and to the right people, at the right time.


Compulsion concern

National's associate agriculture spokesman, Nathan Guy, says he's been getting negative feedback from farmers over the idea of compulsory insurance cover for natural disasters.

Last month, a Ministry of Agriculture and Forestry discussion paper proposed - among other options - compulsory sector insurance levies or private policies to cover damage to those parts of farmers' and growers' on-farm infrastructure which cannot now be insured.

The paper sensibly warned that a production-based insurance levy could see low-risk producers subsidise high-risk ones, and noted that private insurance compulsion could involve insurance with very high premiums.

Guy said feedback from farmers was that they opposed compulsion.

"They don't want to be told by the Government what they should or shouldn't be doing."

He was not convinced some form of compulsory insurance was the best way of ensuring all aspects of farming operations swung back into operation as quickly as possible.

As this column has noted, a cost-benefit analysis of compulsion is needed to aid the discussion. Loading extra cost on to farmers without some practical benefit would be foolish, particularly if there is any whiff of unfairness about how farmers bear that cost.