Shareholders' leader: Fonterra's future in farmer-owners' hands now

Fonterra Shareholders' Council chairman Duncan Coull.

The future of Fonterra as a farmer-owned heavyweight is at a critical point, says shareholders' leader Duncan Coull.

In a frank interview with the Herald, the Fonterra Shareholders' Council chairman said with national milk growth stalling and competition for milk heating up, it was a "critical time" for New Zealand's biggest company in the context of its 10,000 farmer-owners.

"Ultimately I see this as an issue not for Fonterra, but for Fonterra farmers," said Coull, who signalled he would step down this year after three years in the job.

"Farmers will determine milk capacity in New Zealand – no one else. Farmers really need to start making some choices around what they want their industry to look like over the next 10, 15, 25 years and what legacy they want to leave their future families.

"History would suggest if we continue on the current path, while you could argue [competition] it's incremental at the moment, there will be a tipping point. We've seen it in Britain, we've seen it in Australia. Farmers will lose control and it won't be the fault of others, it will be the fault of farmers."

When Fonterra was created in 2001 from an industry merger under enabling legislation, it had 96 per cent of the raw milk market in New Zealand. Emerging privately and foreign-owned manufacturing competition has reduced that to 82 per cent today, and new industry figures due out next month are expected to push this lower.

Taranaki-born Coull, a Waikato farmer who was elected to the council eight years ago as King Country dairy farmers' representative, is a passionate co-operative supporter and credited with helping move the council on from its "dairy politics" days to a more orderly, considered watchdog of Fonterra farmers' interests.

However, under his watch the council's muted public statements, particularly during Fonterra's recent headline-grabbing issues, have given the public impression the $3 million-a year council is more the lapdog of the Fonterra board than a watchdog.

Coull disputes this, saying it illustrates one of the biggest issues for the 25-member council: lack of understanding, even among shareholders, of its true, constitutional role.

Councillors are not second tier governors of Fonterra, he says.

It's taken years to get across the message the council represents the voice of farmer-shareholders and needs to behave in a way that adds value for shareholders.

"We have a clear role to play which is set out in Fonterra's constitution – the guardianship of the co-operative ethos…we are the gateway for that, to seeing we remain true to purpose and true to who are as a co-operative and holding the board to account across that.

"We'll be strong when we need to be strong but I see no value in being a reactive organisation. We need to be ahead of the bad news and part of the conversation early which means having robust conversations behind closed doors with the board."

Coull, who's paid about $100,000 a year for what he says is a fulltime job, agrees the council was "quite muted" in its public statement about Fonterra's grim half-year financial results recently, but "very firm and very direct" a week later in its letter to shareholders.

Fonterra posted an ebit loss of $176m, driven by the payment of $196m to French company Danone in court-ordered restitution for the product recall over Fonterra's false botulism containment scare, and a $433m impairment on the company's 18.8 per cent stake investment in troubled Chinese company Beingmate. This included $28m for Fonterra's share of Beingmate's losses for the six months.

Normalised ebit, excluding these one-off costs of $458m, was down 25 per cent on the comparable period in 2017.

On the council's "constrained" public reaction to the results, Coull said it reflected the entity's role as a value creator.

"If we went out there and said this is an absolute disaster and Fonterra's about to fall apart, what would that have done to the balance sheets of our farmers? And the share price?"

Besides, he says, it's not the council's role to communicate with the wider public despite Fonterra being a creature of legislation and a cornerstone of the economy.

"The council's role is set out clearly in the Fonterra constitution. We are responsible to shareholders and they elect us."

Coull said answering to New Zealand was the job of Fonterra's board and management.

The council had sent a very clear message to the board: "[We said] there's no point in Fonterra having any relevance in the world if they cannot be relevant in our own world, the New Zealand economy."

Fonterra executives when delivering the cooperative's latest financial results. / Jason Oxenham.

In his interim result response letter to shareholders, Coull said the latest Beingmate impairment of assets and resulting loss was "an unacceptable situation and one that needs serious and immediate attention if confidence is to be restored…".

The past six months of publicity have been "quite uncomfortable", says Coull.

"But that's fine, that's why we're here. In all of this I've seen a positive and that's the strong interaction from our shareholders. It tells me our co-operative is alive and well."

Asked if the board respects the council, Coull says the relationship has "developed and matured somewhat".

"To the extent that when decisions are made on certain aspects of the business that affect our farmers, the board and management are coming to council for a view."
But he's not sure that "genuine respect" has always existed.

On another recent headline, Fonterra's gagging injunction against former director and shareholder Leonie Guiney, Coull would not be drawn, other than saying the situation was "really unfortunate" and "unique". Guiney, who left the board last year, has subsequently filed a defence and intends to sue the board for defamation.

In a bid to restore confidence in the co-operative, the council has commissioned an independent report on whether its farmer-shareholders are better off today by being part of Fonterra than they were before it was formed 17 years ago, and where the company has allocated capital and how well it has been used.

Terms of reference are being drawn up now and a professional firm hired for the work.
The study is to be completed by the end of this financial year, says Coull.

But the study won't look at Fonterra's investment capabilities.

While there's genuine concern about Fonterra's performance as the national champion it was promoted as, there's also "some political motivation" behind it, says Coull.

"That's why we need to do this piece of work because there's a lot of misinformation around. I saw financial commentators trying to compare interim results with full-year results. Sorry but that's Financial 101. There's no correlation between the balance sheet at interim and at full year [because of the seasonality of the business]. It's quite irresponsible."

Coull says shareholders need to be given some confidence the company is "on track".

But he questions the zeal with which it is being criticised for its overseas investments.

"The dairy industry exports 96 per cent of what it produces and it will always be in that position. At some point we had to broaden our horizons and go outside the Commonwealth for sales.

"I've been to Sri Lanka which the [then] Dairy Board went into in 1978. Back in those days that would've been a scary proposition. Now we have a business in Sri Lanka which has 60 per cent of market share in that country with a population of 26 million. Chile is an another example.

"Is it acceptable that parts of the China strategy are not working? No, it's not.
"I get asked about accountability. But until the board makes a decision that it's no longer in Beingmate, the accountability is ongoing.

"They've got to stick with this and they've got to turn this thing round pure and simple."