Fonterra's governance and the size of the board has been an issue since 2012. Photo / Bloomberg
Fonterra's governance and the size of the board has been an issue since 2012. Photo / Bloomberg
Dissidents want to trim the dairy giant's board -- is it just a bid to lift performance, or a sign of deeper political tensions?
Jamie Gray looks at the issues
Former Fonterra directors Colin Armer and Greg Gent are on a mission to trim the size of the co-operative's board.
And no, they say, it's not a matter of political sour grapes.
Armer was a contender for the chairman's job when the current chairman, John Wilson, was installed. He left the board soon after Wilson's appointment.
Gent was a deputy chairman and was in the frame for the top job when Fonterra's inaugural chairman, John Roadley, headed the board.
When Roadley stood down after the agreed one-year term, Sir Henry van der Heyden got the job.
"When it comes to Gent and Armer, you've got to wonder whether or not politics has reared its ugly head again," says Waikato farmer Garry Reymer, who himself had a tilt at the board last year.
But Armer is adamant the only thing he and Gent want is a better performance from the company - which is by far New Zealand's biggest exporter.
He says their moves are aimed at making Fonterra fitter and leaner.
Their remit to cut the board's size down to nine members from the current 13, which will be put to Wednesday's annual meeting, requires a 75 per cent majority to get through.
"We've had to come out of retirement to do this and it's not an easy thing to do," Armer says.
"No, it's not sour grapes.
"We are wanting to add value to the co-op - to put some building blocks in place to lift it to another level.
"That's probably our primary aim. We don't want to be destructive in any way," he says.
"We are not wanting to target any individuals but we think large groups of people are a lot less dynamic than a small, tightly knit group of people, so that's the guts of it."
" I can't say [Fonterra management] get it right all the time, but nobody ever does." - Waikato's Garry Reymer
Armer says there is evidence in the corporate world that small groups of people can be held more accountable for their actions and that their performance can be measured more easily.
Colin Armer. Photo / Supplied
"We are frustrated that the [Fonterra Shareholders'] Council and the board promised a review three years ago and it's been parked and deferred.
"Now, because of our remit, there is a whole lot of renewed enthusiasm for it," he says.
Soon after Armer and Gent put forward their remit in mid-October, Wilson said both the board and the Shareholders' Council were already working together to develop a discussion document on governance, to be put to shareholders meeting mid-way through next year.
"This is not something to be developed on the back of an envelope," Wilson said at the time.
Fonterra's governance and the size of the board has been an issue since 2012, but the false botulinum test that disrupted infant formula sales in 2013 and this year's 1080 scare had taken precedence over the issue, Wilson said.
"Those discussions were quite rightly put on hold until those issues were under control.
"More recently, driving payout has had to take centre stage," he said.
But Armer says change had been promised three years ago.
"In our view, that's millions of dollars being spent," he says.
"The constitution belongs to shareholders and it's up to them to change it.
"More importantly, it's a debate that's being had by Fonterra shareholders. They are thinking about it.
"It [the debate] has been elevated and we are very pleased about that."
Wilson is up for re-election as a director, but the whole governance issue -- and whether Fonterra is sufficiently "fleet of foot" -- is potentially more important, says one analyst.
"I think the play is to reduce the size of the board and to stack it from there," he says.
" The constitution belongs to shareholders and it's up to them to change it."- Former Fonterra directors Colin Armer
"It's much more of a longer-term thing than seeing John Wilson removed from his seat in the near term. For me, the governance thing, and how that evolves over the next six months, is more important for Fonterra in terms of whether it continues to head down the value-add strategy," says the analyst.
Former director Mark Townshend says if the size of the board is to be reduced, the way Fonterra elects its directors also needs to change.
"Today it is something of a raffle as to whether the constituency delivers the best quality available to the board table," he says.
"The facts are that 10,000 farmers geographically spread across the country will not be in a position to accurately assess who are the best candidates."
The Waikato's Garry Reymer says Fonterra has more than its fair share of critics.
"There are some pretty harsh critics out there -- but it's still such a young company," he says.
That view is mirrored by a former top executive, who argues that though it has been going since 2001, Fonterra is still "in its adolescent years" relative to its evolution, which was achieved through scores of mergers and acquisitions.
Reymer says the inaugural chief executive Craig Norgate and his successor, Andrew Ferrier, had bedded down systems and structures for Fonterra -- which was an amalgam of Kiwi Dairy, Dairy Group, and the Dairy Board.
"It wasn't until [current chief executive] Theo Spierings came along that we started to get a proper strategy going -- thinking about who we are, what we are and what we want to deliver to the market," Reymer says. "I don't think the governance is bad and I don't think the management is bad. I can't say that they get it right all the time, but nobody ever does."
What's next?
• Monday: Results expected in vote for chairman and directors. • Wednesday: Fonterra annual meeting- shareholders vote on bid to trim board.
Top man likely to survive discontent
Fonterra chairman John Wilson will soon know his future. Photo / Alan Gibson
Fonterra chairman John Wilson will know by Monday whether he still has a job.
Voting, by mail or the internet, began on October 30 and a result is expected well before the dairy co-operative's annual meeting is held on Wednesday.
The subterranean world of farm politics can be difficult to read, but Wilson is expected to be re-elected, although perhaps with a reduced majority thanks to farmer discontent about low farmgate milk prices.
"I think that he will fly in, but there is a campaign against him, make no mistake about that," says one farming source.
"I'm guessing that John is going to suffer from how farmers are feeling, but he's still going to get in, but perhaps with a reduced majority."
Farming contacts say there is always talk of possible departures around annual meeting time.
"Yes, there is a groundswell of people who are not happy with him [Wilson], but there is no obvious replacement," says Federated Farmers' Waikato president Chris Lewis -- who supplies a Fonterra competitor.
Current Fonterra directors Blue Read and Nicola Shadbolt, who also retire by rotation, are up for re-election.
Wilson has had a roller coaster ride at the top of New Zealand's biggest company since he took over from Sir Henry van der Heyden late in 2012.
After less than a year at the helm, he was in the hot seat when news broke that some product may have been contaminated by a botulism-causing bacteria. Then came boom and bust for dairy prices.
During Wilson's short tenure, the farmgate milk price -- pumped up by demand from China -- hit a record $8.40 a kg in 2013/14 before slumping to $4.40 a kg last season.
Fonterra's forecast for 2015/6 is only a little better -- $4.60 a kg -- well below the $5.30 estimated average cost of production.
Even that will depend on prices recovering from levels achieved in recent GlobalDairyTrade auctions.
The co-op will review its forecast in early December, but the market signals -- going on the latest three auctions - point to more weakness.
Wilson this year has taken some flak for a poorer-than-expected first half performance and increases in chief executive Theo Spierings' salary. Spierings' total earnings for the year to July 31 were at least $4.93 million - up about $770,000 from the previous year.
The company has faced other challenges, on top of the the extreme volatility in the commodities trade.
Both of the past two seasons have been record years for production.
This year, as low prices start to bite, production is expected to come off by at least 5 per cent. But over the past five years production has gone up by about 26 per cent - equivalent to the entire production of Belarus.
Under its enabling legislation, Fonterra can't turn away milk from its members. That means it has had to invest well over $2 billion in new plant - stainless steel - to cope with the tidal wave of milk being delivered by its tankers. That extra capital spending has put some stress on the balance sheet.
Fonterra last year invested in more than 50 separate capital and enhancement projects around the country, aimed at optimising collection, processing, transport and manufacturing. With the extra capacity available this year, it has avoided these costs - estimated at $50 million to $70 million.
While milk prices still look dismal, the company this week said business transformation plans are starting to gain traction.
In the current year, said Wilson, the company was heading for its highest ever earnings before interest and tax (Ebit).
"While it is tough on farm due to low global milk prices, farmers will welcome the ongoing improvement in Fonterra's performance delivering increased returns," Wilson said. "This year will see record Ebit and leverage will drop quickly as well," Wilson told the Herald.
Federated Farmers dairy chairman Andrew Hoggard says though it is a concern that GlobalDairyTrade prices have fallen for three sales in a row, Fonterra's update "does give a little morale booster".
An improved financial performance from Fonterra over the first quarter is serving to at least partly counterbalance a decline in global dairy prices, but the milk price is the thing that is front and centre in farmers' minds.
And that key figure, the farmgate milk price, still looks bleak going on the latest GlobalDairyTrade auction.
Forsyth Barr analyst James Bascand says Fonterra's update showed it made inroads into lowering its capital expenditure and operating expenses.
"It is good to see some execution from management on the working capital side of things ," he says. "But I still have some reservations as to how much is cyclical versus structural."
