Guy Trafford discusses the recent measures to shrink the size of Fonterra’s main board, as well as some grassroots opposition to the planned changes.
Fonterra’s AGM, a significant milestone in the dairy calendar, is rapidly approaching. On Thursday, November 9th, at 10.30am, at the Mt Hutt Memorial Hall in Methven. They have been much less volatile in recent years than they were in the preceding decade, when Fonterra was embroiled in a series of scandals.
Despite the present price decline, the overall tone of shareholders this year is one of acceptance that the reasons are beyond the Co-op’s control, and most seem to be content with how the ‘firm’ is run. That is not to argue that there are no complaints from the ranks.
Shareholders will have observed in the ‘Notice of AGM’ that at least one member disagrees with the Co-op management’s decision to put a proposal to reduce the number of directors from 11 to 9 before the meeting. The appointed-to-elected ratio falls from 7 elected to 4 appointed to 6 elected to 3 appointed. This is not the first time the number of directors has been cut (if successful), as it was dropped from 13 to 11 in two steps in 2016 and 2017.
The present board has been emphatic in its support for the planned cutbacks, as well as in voting against Richard Dampney’s proposal to lower the number of appointed directors even more while maintaining the elected number. He believes the appointed directors do not contribute enough to justify their participation (see page 15 of the Notice of AGM).
While there is evidence that bigger boards do not work as effectively as smaller boards, the Notice of AGM, in my opinion, does not do a very good job of giving information for shareholders to vote comfortably on. Vague comments like “this reduction strikes the right balance between a strong and diverse level of perspectives, skills, and experiences and manageable workloads while providing directors with the opportunity to participate in discussions and decisions to the best of their abilities” when a reduction in numbers could reduce access to elected or appointed members and increase workloads.
A look at the suggestions for what may be deemed a best practice model may offer some confidence that what the Board is recommending is a better approach. The Australian Institute of Company Directors provides some data on the usual number of board directors in Australia, broken down by company type:
8 to 12 directors in large publicly traded firms
6 to 8 directors for medium-sized publicly traded firms
Small publicly traded companies: 4 to 6 directors
This is consistent with other sources’ suggestions. However, there is no agreement on the ideal board size. Evidence suggests that during the previous several years, the Russell 3000 and S&P 100 corporations have averaged nine and twelve directors, respectively. In Italy, Spain, and the United Kingdom, the average is between 10 and 11 directors.
Fonterra was so close to the acknowledged standard for a major corporation both before and after the planned revisions. Being a Co-op adds another layer of complexity, and one commenter said that co-op directors often work closer to the company than non-co-op directors.
“There’s no doubt that the cooperative model presents some unique challenges for directors,” says Melina Morrison MAICD, CEO of the Business Council of Co-operatives and Mutuals (BCCM) in Australia. While directors’ duties are very similar to those of corporations, co-op members tend to participate in governance much more directly than typical shareholders and expect a larger say” and “Truly listening to members’ ideas and concerns is incredibly necessary for a true cooperative environment.”
In the case of Fonterra, the Fonterra Co-operative Council, an elected national body comprising 25 farmer shareholder representatives from wards, must assist ease at least some of the hurdles that would otherwise exist between the Board, Management, and Shareholders. It most likely also serves as a helpful training ground for prospective Directors to ‘cut their teeth’ with co-op management.
Greg Gent, a former Fonterra director, feels that lowering the size of the Board would assist to speed up decision making. He attempted to bring a similar resolution in the past, but the proposal failed to obtain the requisite support. It remains to be seen if shareholders would agree this time, since it needs a revision to the Constitution and a 75% approval vote.
With a minimum of 7 Board members obliged to attend every official meeting, a farmer shareholder majority will always be in command, maybe offering some confidence to farmers (if they are in agreement). This is a ‘upgrade’ over the old system, which only needed 6, thus appointed Board members (4) might theoretically exceed farmer elected members (4).
According to the New Zealand Herald, appointed director Clinton Dines and farmer director Leonie Guiney are among the directors who may be compelled to resign next year to make room for a nine-member board. This is probably because they are next on the rotation list, as determined by appointment times.
