Saturday, November 17, 2012

Less Farmer Appointed Fonterra Directors May Be A Good Thing

After the passing of Trading Among Farmers, there is now two parties involved with Fonterra. The farmer shareholders and the outside investors. It has been written about everywhere that farmers fear they will lose control of their Co-op. I completely understand that fear and I agree with them.
The argument is that farmers can not lose control because they have the voting rights. This seems a valid argument, but the farmers who are anti TAF point out that the influence of the outside investors will mean that decisions will be made that are not in the best interest of farmers but that of the investors. But surely, what is good for the investors is good for the farmers too. 

Farmers concerns are further raised when it appears there will be 3 directors appointed by the outside investors and 2 farmer appointed directors of the Fonterra Shareholders Fund management company. Fonterra are also conducting a governance review where one option is to reduce farmer elected Fonterra directors from 9 to 8 and decrease non farmer directors from 4 to 5.

We need to remember that Trading Among Farmers only passed by a narrow margin.

With all this going on we hear from the Wall Street Journal that Fonterra are in discussions with the Chinese who would like to buy $100 Million units in the new Fonterra fund. Fonterra are not commenting, which probably means its true. If this is the case it would be very poor judgement from the board to allow this to happen. Even before TAF has been implemented. Everyone knows that there are fears from farmers that they will lose control of their Co-op to outsiders. Even if this fear is unfounded, it is unwise for Fonterra to be talking to overseas buyers at this point in time, especially when so many New Zealand investors are going to miss out getting their hands on the Fonterra units.

This is the weakness of TAF which had been talked about. We now have two sides, the farmers and the investors, which is fine if they have the same goals.

But I feel the farmers goal is now to retain control, anything that comes out from the board in the future will be scrutinised by farmers from the perspective of "is this going to jeopardise our control of Fonterra". This attitude is a defensive inward looking view and is not ideal for growing Fonterra to be money machine for the farmers & investors.

I see future directors being elected purely for their "protect the farmers control" stance. Not because they are best at running Fonterra.

In this context, some farmers are: 
calling for a farmer-director majority on the board to be enshrined in the constitution and for farmer directors only to elect the chairman, who must be a farmer.
I can see why they want to do this, so farmers don't lose their co-op. But the question needs to be asked; do farmers have a place on the board of Fonterra? I mean what do farmers know about running the 3rd or 4th largest dairy company in the world? The chairman should be a person with experience at running a major organisation, not a farmer. 

I don't mean that in a derogatory way, its just that farming and running a multinational business are totally different things.

Boeing don't have pilots running the company and Methven don't have plumbers running the company just as Icebreaker don't have sheep farmers on its board.

I know Fonterra is a Co-op and that makes things a bit different because the farmer shareholders are in control.

The point I'm making is that, maybe the farmers control is holding them back. Maybe the people who appeal to farmers are not necessarily the best people to take Fonterra in to higher value branded products.

When election time arrives, I read the profiles in the farming magazines, which are there for farmers to decide who to vote for. They all basically say the same thing;  "I own a farm in XYZ province & I understand farming" or " I've been involved with the dairy trade for decades" or  "I have farming interests in South America & Timbuktu" & "I'll ensure we work to give you the highest payout we can" or "I will stick up for farmers and work to fix the "perception" problems of the dairy industry".

Which all sounds good to a farmer, but is has nothing to do with developing a high growth branded company.

So while TAF may get farmers upset and uncomfortable, maybe the input from the outside investors is going to be a good thing. 

The investors get their return from the dividend portion of the payout, at the moment that is not very high. They will want to see a higher margin business. Maybe we will see some exciting board appointments from the outside investors. Maybe these appointments will slowly begin to influence the board.

Maybe the inclusion of the outside investors will change things fundamentally and the farmers do have less influence on the board.

That could be just what Fonterra needs to move to the next level.

Maybe the farmers need to get out of their own way in order to see their co-op fly.

Of course, no Fonterra farmer shareholder is going to agree that sentiment.

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