Fonterra’s governance and the Trojan horse

Fonterra’s latest proposal for company governance has done little more than re-arrange the deck chairs from last month’s controversial proposal, which I have written about previously.

Some things are now more explicit. This includes that it will be two farmer-director positions that will go. I see this reduction in director positions as being the Trojan horse.

Many farmers have been convinced by the call from former directors Colin Armer and Greg Gent that reducing the number of directors would be a step forward, and it aligns with a widely held view that something at Fonterra needs to change. But reducing director numbers in itself will achieve nothing of substance.

The reason that the proposal is a Trojan horse is that it lets in a revised director selection process that is fundamentally non democratic, and which takes power away from farmer members.

Fonterra itself is a business with assets of $19 billion and equity of $7 billion. However, beneath this there is another set of land and cow assets that are owned by farmers that are worth – even at today’s discounted rates – more than $60 billion, with more than $30 billion of this is now owed to the banks. Why would farmers want to release their direct say in governance by relinquishing the power to select their directors?

It is now explicit as to how the director nomination and selection process will be managed. This process is complex with multiple steps, and effectively keeps farmer shareholders well away from the selection process.

Although the proposed process itself is now explicit, the operation thereof will be clouded in secrecy.

The only way for farmer shareholders to influence the choice of directors will be by rejecting the Boards own nominations. And then the process of finding an alternative director goes back behind closed doors.

The new proposal, if accepted by farmers, will in the long term do more to alienate members than any event since Fonterra’s formation. The danger is, that with farmers currently distracted by more immediate issues of cash flow and survival, the proposals will pass at the vote on June 10, simply because many farmers will have not engaged with the key issues.

The required approval of 75% of farmer votes is a stiff target. But it is feasible that it could be achieved off a low turnout. This is particularly the case if the larger corporate-type farmers vote in favour.

One has to ask, what has led the current Board to endorse these proposals. The support within the Board is supposedly unanimous, but is that simply because of ‘cabinet solidarity’?

We know that in the past a divided Board has chosen to present a united front under pressure from the majority. It would be interesting to see each Board member stand up and explain why he or she is supporting the change.

As a starting point, the proposal uses a common approach to choose both farmer and non-farmer directors, and in the process ignores the differences in situation.

Non-farmer directors are meant to be chosen for specific skill sets that are otherwise missing in the overall Board. This is best achieved by a private and confidential search, followed by tapping the desired people on the shoulder. Democracy is not the way to get the right people to fill those specific roles.

Under the revised proposals, it will be the nomination and selection committees that seek out both these non-farmer and also the farmer directors, but then the selected nominees will have to sell themselves to a series of public farmer meetings. Most potential non-farmer directors with the relevant expertise have a range of alternative options, and they will feel little need to allow their names to go forward into such a process. That is not the way these people operate.

As for the farmer directors, the claim is that it will reduce the internal politics. In terms of double speak I am reminded of George Orwell’s 1984.

The new proposed system will be totally closed door until just before final acceptance or rejection of nominees by farmers. It will depend on the nomination and selection committees, dominated by existing Fonterra Board-think plus nominated independent non-farmer business people, and where those with new or provocative thinking will struggle to get a guernsey.

The proposed process of director selection is highly complex with multiple stages.
First there will be a nominating committee of two Fonterra farmer directors and two non-farmer directors. There will also be two Shareholders Council observers on this Committee.

This Nomination Committee and the Shareholders Council will then each appoint an independent business person to form a Selection Committee. This Selection Committee will then appoint a third business person as its Chair.

The Selection Committee then appoints a commercial search agency to do the hard work of finding candidates for the Board on its behalf. Fonterra farmers can self-nominate at this stage on a confidential basis for a farmer director position. The search agency will interview the candidates and form a long list.

At this stage the Selection Committee takes over to turn the long list into a short list.
And then it goes back to the Nominations Committee (of four Fonterra directors) to make the final selection. Hence, it will be these four Fonterra directors who decide which of their colleagues should be re-selected, and how much new blood to let in.

Wow! If this isn’t the ultimate in networks and internal politics, then it must come very close.

From here, the full Board and the Shareholders Council give their tick of approval (but supposedly without knowing who has not made the grade, as that is meant to be confidential). Alternatively they can give the selections a cross, in which case the process is repeated.

Finally, farmers are presented with a list of candidates, with one candidate for each position. The names of unsuccessful nominees from earlier in the process still remain confidential. Farmers then give a tick or a cross. If they give a collective cross, then the process once again repeats itself.

Actually, there are comparable analogies from elsewhere. They are called communist party elections. Essentially, this is the process they follow of selection and then public endorsement and ‘election’ of the chosen ‘selected’ candidates.

There are multiple problems at Fonterra, and some of these are a consequence of bad historical decisions going back many years. They have come from weaknesses in leadership and weaknesses in diversity of thinking. I have written previously about those on multiple occasions.

However, none of the current proposals solve any of Fonterra’s current weaknesses. These proposals simply throw out the baby with the bathwater.

Hopefully, enough Fonterra farmers will clear their minds of current distractions to recognise that this is not the path forward.

About Keith Woodford

Keith Woodford is an independent consultant, based in New Zealand, who works internationally on agri-food systems and rural development projects. He holds honorary positions as Professor of Agri-Food Systems at Lincoln University, New Zealand, and as Senior Research Fellow at the Contemporary China Research Centre at Victoria University, Wellington.
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9 Responses to Fonterra’s governance and the Trojan horse

  1. Owen says:

    Maybe it is carefully aimed at ensuring rejection. Put up something unacceptable that will allow the Board to say they have discharged their obligation to shareholders. No directors go. A case of turkeys not voting for an early Xmas.

    • Leonard Scott says:

      Have had same thought. Like the idea of more intense identification of required skills and trying to find suitable candidates into a short list Board can even endorse them but allow farmers to put up candidates from outside the process as well and then have a vote.

  2. Pingback: Fonterra hasn’t got message | Homepaddock

  3. GregvP says:

    Keith, your description of the process reminded me of fourteenth century Venice ( A well-tried recipe for stagnation and decline.

  4. Tom Walker says:

    I hope your theory is correct Owen, (about turkeys and Xmas) otherwise we have to face the reality that the board is so out of touch with us farmer shareholders that they could offer up such nonsense.

    Like Keith says about the board`s ”offering”,this was the type of ”democracy” that operated in the Soviet Union!

  5. John says:

    Rearranging Fonterra’s board is rearranging the deck chairs on Titanic. When I studied the profile of the farmer directors on the board there was not one board member that would qualify to sit on the board of a multi national company the size of Fonterra. To go further with in the co-ops’ membership it is probable that there is no farmer with the required knowledge and experience and never has been since the birth of Fonterra. This latest performance is all smoke and mirrors and the problem is still the “same old, same old” and farmers will be no better off. All that is required is for farmers to vote no.

  6. Alanna says:

    There are always many reasons for the state of How, Why and Who is administrating this company. Yes going back through the legislation which now encompasses the function of all of these facts. No were is there any farmer independent analysis board/system in place for any of these matters to be disclosed to any farmer shareholder.? Why have many of these shareholder have no idea of the permit issued by the Financial Markets Authority for the Insider Trading Fonterra Co-operative Group Limited ( Exemption Notice 2014) never been disclosed.?

  7. Neil says:

    Keith Woodford is right. This proposal is the ultimate in insider control and in effect a Coup directed against the owners. The ultimate power in any democratic situation is to be able to throw the beggars out. The proposal attempts to take all power from the owners. How the shareholders Council could ever have approved it absolutely it as astonishing and shows they are not the guardians of cooperative rights they claim to be. SImply a North Korean system.

  8. Pingback: Back to the drawing board for Fonterra governance | Posts from Keith Woodford

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