31 Jul 2018

Rod Oram: Fonterra needs change of culture under new board chair

From Nine To Noon, 11:07 am on 31 July 2018

Fonterra’s next chair will need to tackle poor performance and capital spending problems, business commentator Rod Oram says, by changing the co-op’s culture.

Fonterra milk truck

Photo: RNZ / Rebekah Parsons-King

He says the board has been silent on whether the interim chair - John Monaghan, who was appointed after John Wilson stepped down due to health reasons - is likely to continue in the role.

Rod Oram

Business commentator Rod Oram Photo: RNZ/Dru Faulkner

He told Nine to Noon’s Kathryn Ryan that among farmer shareholders he’s been speaking to, Mr Monaghan is considered “a loyal but limited version of Wilson”. 

“... who in turn was not quite the same chair in terms of forcefulness and strategy as Henry van der Heyden was before him. 

“So we’ve seen the chairmanship be passed down through three people, very much of a similar dairy farming background but with each step you’ve got less wider business experience, and less corporate governance experience and less skills to be able to do the job.” 

He says farmer-shareholders have come to expect the board chair to be closely involved in the running of the business, but that’s something which needs to change. 

“They are far too involved in the business, rather than working on the business.” 

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Fonterra's outgoing board chair, John Wilson.  Photo: Supplied / Fonterra

“It is very much the management’s role to devise and set a strategy, and then the board obviously to be engaged in that process and to buy into that process but then also to ensure that they’re keeping management’s feet to the fire. 

“That’s been one of the fundamental cultural problems as to why the board has been nowhere near as disciplined and rigorous enough about investments made and then about the performance of those investments.”

The effects of that have not been positive. 

“Fonterra having squandered, I argue - the numbers are debatable but I’m arguing - the best part of a billion dollars in recent years on very unwise investments badly managed. 

“Clearly you’ve seen that most spectacularly with BeingMate, but you could also point to the same things with the heavy investment in farming in China, but then in a number of other - albeit smaller - investments, but important ones for the development of Fonterra. 

He says the problems like the false contamination of infant formula that rocked the company revealed some desperately inadequate systems. It led to some improvements in revenue from value-added milk products like infant formula, but the balance between that and base commodity has remained fairly static.

“We’ve got a payout that has been largely driven by global market prices - with some enhancement from Fonterra’s capabilities - but [it is] this very flat dividend payout over time.

“At the same time capital has been a great deal more constrained because Fonterra can only increase capital by farmers increasing milk supply and needing to buy one new share for each kilogram of milk solids that they want processed each season. 

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Fonterra's capital-increasing potential appears limited by the lack of further available land for dairy farming.  Photo: RNZ Cosmo Kentish-Barnes

“We’ve reached peak cows. There’s going to be a very small increase but it’s going to be very minor.”

He says Nicola Shadbolt and Ashley Waugh are up for election of directorships at Fonterra and bring other skills to the boardroom table.

They would be possible replacements for chair, but Mr Oram said Peter McBride’s name keeps popping up for the position. 

Mr McBride was a dairy farmer for a time, but is now head of Kiwifruit company Zespri, “which has developed a very robust system for how it grows, processes, distributes and markets its kiwifruit”, Mr Oram says.
He says the key statistic pointing to Zespri’s success is that it supplies a third of the worldwide supply of kiwifruit - both in New Zealand and with partners overseas -  yet collects two thirds of the industry’s global revenue. 

He says that success comes despite the PSA disease, Chinese partners who were undertaking illegal practices, and having to manage a capital restructure which saw retired growers with shares backed out of the company’s organisational structure. 

“That’s the sort of issue that needs to be tackled in its own way by Fonterra too,” he said. 

Mr McBride has not said whether he’s running for the board. If he is - and is successful in being elected to it on 10 September, which is likely - he would have a fairly clear run for the chair role. 

Another part of the problem however, is that Mr Monaghan will meantime be in charge of appointing a new chief executive after that role was left vacant by Theo Spierings’ departure

Fonterra CEO Theo Spierings

Former Fonterra chief executive Theo Spierings Photo: RNZ / Dan Cook

“And I think that’s a very serious mistake,” Mr Oram says.

“You’ve got the old board culture and the people still running it making decisions about a CEO who is ... fundamentally important in the change of culture and strategy in the co-op.” 

“The selection process is well advanced, we don’t know who the frontrunners are.” 

Regardless of that race, the process of selecting the next chair is under way, with the result expected early November.