Thursday, 26 May 2016 08:55

Between a rock and a hard place

Written by  Jacqueline Rowarth
Jacqueline Rowarth. Jacqueline Rowarth.

Fonterra shareholders are between a rock and a hard place. The dilemma is in governance and neither of the current possibilities appears to be without concerns.

The status quo is a board of 13 directors. Ex-directors Greg Gent and Colin Armer have suggested a board that size is too large to be efficient.

The proposed new selection/nomination panel process involves pre-selection of candidates for consideration. If a candidate isn't considered suitable by the 'independent selection panel', he or she won't be approved for consideration by the nomination committee. If the nomination committee doesn't approve candidates 'selected', another reduction in the field of candidates will occur. The field for consideration by farmer shareholders has the potential for substantial reduction between candidates putting themselves forward and actually being considered for election.

The selection panel is to comprise three 'independent' people: one appointed by the current board, one by the Shareholders' Council and the two appointees will then choose a third member. This process is a challenge in itself: it is difficult to imagine how anybody who knows enough about the dairy industry to be able to screen candidates will be 'independent'.

Of course, criteria have been put forward to assist in the screening process, but the list appears to indicate 'business as usual'. 'Understanding and empathy with the co-op' is a case in point. 'Proven track record of creating value for shareholders' is another. Current board members will be passed through the process whether shareholders think they are adding value or not.

This selection and nomination process is to be applied to independent directors as well as shareholder candidates, thereby removing some of the difference in perspective that is possible at the moment. Who will challenge the board on strategy and initiatives if everybody is selected on the basis of the same criteria? The independent directors were supposed to bring fresh thinking and new knowledge to the board, but if they have been through the same screening system as shareholder candidates, similarities will emerge.

Some attempt to ensure diversity has been proposed using a skills matrix but, again, the skills appear to be what the board considers it has and lacks. External consultants might be used to assess the skills, but how will they know what they are looking for?
Farmer shareholders have sufficient brains to be able to assess candidates.

They run complex businesses, and most are concerned about the way the co-op is being managed. Giving them a choice of status quo or pre-selection is a classic child management technique of restricted options. Do you choose to do your homework at the table or in the window seat? The homework gets done whichever is chosen.

If shareholders choose the status quo, Fonterra can state correctly that farmers were given a choice but didn't take it; yet at the last annual meeting 54% of shareholders voted for a change in the board structure.

The proposed alternative is complex, has the potential to filter out candidates, and removes the 'meet the candidate' road show. It is not clear that the resulting system will create a board with the skills, experience and knowledge Fonterra needs.

Greg Gent and Colin Armer have made the point that at 13 board members, factions are possible. They've suggested from experience that reducing the number of people will allow full engagement and contribution.

Current board members have warned that reducing the size of the board will increase the individual workload and so there will be fewer roadshows and opportunities for direct contact. But they have also said that being a member of more than one board is good for information and networking.

Being between a rock and a hard place means that the two options are unsatisfactory. A child might take the less bad option without realising the restrictions, but shareholders have noticed; they can and should make their feelings clear. The whole country needs and wants an improvement in Fonterra governance. Farmer shareholders deserve it.

• Jacqueline Rowarth is professor of agribusiness, The University of Waikato. She is also a Fonterra shareholder.

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