Wednesday, July 6, 2022

Co-op structure holds fascination

Co-operative structures have long interested former PriceWaterhouseCoopers (PwC) chair John Shewan, who now chairs the Fonterra Shareholders’ Fund Management Company, which manages the Fonterra Shareholders’ Fund (FSF).

As a boy and teenager Shewan worked in a co-op managed by his father. At PwC he took a special interest in ownership structures where concerns about ownership and control have to be balanced against concerns to raise capital.

He lists the late Sir Ron Trotter, chief executive of Wright Stephenson and Co, and then the Challenge Corporation, among the people who have influenced him and his thinking about agricultural matters.

The late Rob Muldoon, an interventionist National Party finance minister and Prime Minister, was an influence too. He taught the young Shewan how to recognise bad public policy.

“You get a lot of scars on the way and I readily admit to changing my own perspective on a number of things,” Shewan said. “But I think it has given me a good understanding of the agricultural sector.”

He identifies with and understands the farmers’ demand that they retain control and ownership of Fonterra.

“I absolutely respect that, and it is ingrained in this structure [the fund he is chairing].”

Shewan, 57, was born in Wanganui where he grew up with cooperatives. His father was general manager of Farm Products Cooperative, one of a group of farm co-ops around the country involved with grain, poultry and dairying.

“It is a bit like I’ve come full circle with this new role, because I recall as a kid in the early 1960s working on the trucks, going out to farms and collecting stuff, and my school holiday jobs for about 10 years were working with that particular cooperative.

“So I’ve always had an interest in cooperatives and farming matters and I’ve learned a lot from those days.

“I can certainly identify with the challenges that farmers face. I’ve grown up with a huge respect for that sector and the huge contribution they make to New Zealand.”

He had always thought that while it might be nice to think the country’s future lay in high-tech, “the reality is that our future primarily is in the primary sector. That’s our competitive advantage and I’ve always believed that”.

Academic career

Shewan shifted to Wellington around 1973 to study accountancy at Victoria University. He has been there ever since, other than about three years working in the US. His studies took him beyond pure accounting and he became involved heavily in policy, particularly tax policy. In more recent years, he extended his interests to a broader array of policy areas.

Armed with his degree, he spent about a year lecturing and intended staying in the university environment. But he while was giving a lecture one day a man from the agricultural sector demanded “How can you say all this stuff? You’ve never worked a real day in your life in the real world”.

“I took that quite seriously and decided I had to get down to the real world to get some business experience.”

He didn’t intend staying more than a couple of years, because he enjoyed university teaching and was going to return to it. He ended up staying 35 years at PwC, 29 of them as a partner.

“And so I overshot a little bit.”

Now he has retired from that job he has a more diverse range of responsibilities including (besides the shareholders fund job) teaching back at the university as an adjunct professor.

He first started working at PwC in the late 1970s, when NZ had agricultural subsidies. He saw them removed in the 1980s and he saw the trauma this caused, “but I learned a lot from that”.

“I suppose it was around that time I began to take a real interest in ownership structures, essentially of privately owned businesses in NZ.

“I’ve always had an interest in how to achieve a result where you respect the wishes of the owners who wanted to remain in control while you also deal with the challenge of having to have permanent capital on your balance sheet and access to finance to expand your operations and to go to the next level.”

He had worked with a number of industries over the years, Shewan said – the electricity industry, for example, with many issues around ownership of large companies.

He was impressed with the distinctive structure Fonterra has developed to deal with its challenges.

“I think it addresses very skilfully the tension between wanting to reserve ownership and control with farmers, which is clearly pivotal, while also dealing with the need to protect the balance sheet from volatility from capital washing in and out. I think it’s a very clever structure.”

He has an interest, too, in the impact of public policy on consumer behaviour and on business and investor behaviour.

“Living through the Muldoon era, I certainly witnessed first-hand what bad policy can do and the signals it sends,” he said. “We had all those incentives to rush off and artificially inflate the level of livestock at March 31 and all that. I found it very sobering.”

Mention of Muldoon triggered recollections of the strong influence of Trotter.

“He was my first major client in 1978 when he was the chief executive of the Challenge group, including Wrightson.

“And I remember Ron to saying to me about 1980, as Muldoon  was introducing more and more incentives, that all of Wrightson’s South Island grain silos qualified for hugely generous investment allowances.

“He was telling me this was all wrong – they were going to spend this money anyway, and so had got subsidies for something they intended doing. It made no sense.

“And it was one of those very telling lines that made me realise, well, governments can get it wrong and when they get it wrong the damage they do and the distortions they create are huge and have a very long tail on them.

“And so it proved to be, and so I owe a lot to Ron.”

Shewan said he owed a lot to Wrightson too, because one of his roles was visiting virtually every branch.

“And you learn a lot from the earthy approach of rural managers and I enjoyed those days a lot.”

Shewan often reflects that Muldoon did the agricultural sector a favour, too.

“He went out on such an extreme that inevitably it had to blow up, but it blew up quite quickly in the early 1980s, and that meant extreme measures had to be taken.

“And not everyone will agree with what Roger Douglas said or did, but what is true is that people who said farming could not survive without government subsidies. Well that simply transpired to be wrong.

“And we actually ended up with the most efficient, productive and competitive agricultural sector in the developed world.

“So maybe we owe a debt of gratitude to Muldoon in that sense.

“It certainly shaped my thinking.”

Company role

So what does Shewan’s job as chair of the FSF Management Company involve?

In effect, he said, he was also chairman of the FSF, a central component of trading among farmers (TAF). The board is the interface between the Fonterra co-op and the investors. It has a wide role of statutory responsibilities for the fund’s activities and management, including obligations to the NZX and the Financial Markets Authority (FMA).

It also is required to ensure adherence to its contractual obligations to Fonterra, to the investors in the fund and to other stakeholders. It does not have an operational role.

It is not the fund’s role to become involved in Fonterra’s business and it won’t be engaged in trading activities.

“We will clearly be taking a close interest in Fonterra, because Fonterra’s success will determine the success of the units in the fund,” Shewan said. “But we don’t have any operational role or responsibilities.

“Our role specifically is to monitor the performance of the fund, how the economic rights are going, what they are valued at, and this in turn impacts on the value of investors’ units.

“And we want to make sure that everything set out in the prospectus, in terms of the objectives of the fund, are satisfied.

“Secondly we monitor compliance with the regulatory requirements, and they are quite extensive.

“Thirdly we monitor compliance with the various compliance documents that govern the fund. We’ve got a series of contracts that govern our fund, things like the unit trust deed, our management agreement with Fonterra and so on.”

Shewan chairs a board of five, with the other directors being Pip Dunphy and Kim Ellis, who are both independent, and Sir Ralph Norris and Jim van der Poel, who are both Fonterra directors.

There are no employees, as “We effectively outsource the functions we need undertaken for us through a combination of Fonterra and third-party providers”.

The board has no voting rights in Fonterra, which Shewan said was pivotal to farmer control and ownership. The fund is consulted on the appointment of independent directors to Fonterra, but doesn’t have a final say.

Any disagreement about an appointment has to be reported to Fonterra’s shareholders, the farmers.

“It’s quite a narrow role,” Shewan said. “But it’s critical to the functioning of TAF.”

The board will probably have four meetings/year and an annual meeting for investors. But it will be flexible and it’s early days. If it needs more meetings, it will hold more meetings.

“Let’s not shoehorn ourselves into a particular framework. We will see what’s required.”

Shewan said the novel structure was breaking new ground. As far as he was aware it had not been implemented anywhere else before.

“We understand there already has been interest from other parts of the globe in this structure,” he said. “It could be something other co-ops look at.”

And how he will know if it has been a success?

Two factors will determine this. One is whether farmers are saying – in 12 months, two years, five years and 10 years – it was a great development in the life of the co-op (“and I would hope they are saying yes – that to me will reflect success”).

Second, he hopes investors in the FSF similarly are saying the venture has been a success. Those investors comprise institutions and retail investors. Shewan said he was pleased to see the quality of some offshore institutional interest and hopes in a few years they will say they are pleased with their investment.

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