Rural professionals have typically filled these roles but farm and farm business owners might also turn to a well-respected, trusted peer or business person from outside the farming sector altogether.
DairyNZ and the Institute of Directors have created a due diligence guide for prospective directors that can also be used as a framework for those thinking about taking on an advisory board role.
Farming business owners can use it too as an indication of what information they should give any prospective governor and as a prompt to remind them of what the important areas of a healthy, strong business are.
Understanding the ownership and management structures, how they’re separated and who owns what is important, particularly if the farm is run by a sharemilker or contract milker, because it relates to what exactly any financial reports relate to.
Arrangements for income payments from milk companies will vary depending on the management structure but can also vary depending on specific agreements between owners and the operators.
The farm’s previous performance should be reviewed, with prospective directors or advisers warned to ask about any previous litigations or breaches of regulations and in particular if any proceedings are pending.
An independent director has the same level of liability as a shareholding director so a detailed level of due diligence should be done before agreeing to take on the role. An advisory board member doesn’t have the same level of legal liability but should still carry out due diligence and not be shy about asking detailed questions.
It’s a good idea to ask questions to determine what level of experience the board already has with governance, if the farming business has a strategy, and how well it’s performing against the strategy and other business goals set by the board.
Understanding the financial performance of the farming business is essential, given director liability. Farm income volatility, the balance sheet situation and the farming business’ risk exposure can be complex and a prospective director or advisory board member should have permission to speak with the farm’s professional advisers, such as accountant, farm adviser or banker, to get a full and clear picture of the financial position.
As with fiduciary responsibilities, directors also have responsibilities under health and safety legislation.
Questions should be asked about whether the board has documented health and safety policies, if it understands the nature of the risks and hazards involved with day-to-day farming activities, if it has appropriate resources and processes to eliminate or manage the risks, and how the board monitors health and safety.
Prospective directors and advisory board members should visit the farm and see for themselves what policies and processes are in place. Any visit should also include an inspection of the infrastructure.
A director’s liability can extend to failures with environmental compliance so understanding environmental regulations both current and pending is important as is seeing the status of effluent management systems and irrigation equipment.
In family farming businesses understanding the family dynamics, and the farming business ownership structure is important especially when it comes to family trusts and how financial liabilities or personal guarantees are used or linked.
Farming syndicates, including equity partnerships, might have shareholders who are closely associated with the farming business’ day-to-day operation and land ownership or they could be businesses where there are numerous shareholders who are at arms’ length – professionally promoted and managed syndicates.
Due diligence is essential for both.
A prospective director or advisory board member should check equity partners’ values are aligned, as well as the due diligence checks that would be done if the business was a family-owned entity.
In some cases farming syndicates or equity partnerships operate under a limited liability partnership structure and in that case it’s essential the prospective director or advisory board member, as well as investors and general partners in the company, understand the provisions of Schedule 1 of the Limited Partnerships Act 2008.
Taking on a governance role will take a time commitment and it’s important to think about any conflicts of interest that could exist now or arise in the future.
Anyone asked to join a farming business board should consider their own motivation and whether they feel they could add value to the business.
They need to take into account the serious nature of what they’re taking on, the implications for their own liability – financially, professionally and personally.
Questions to ask yourself before you join a farming business board
• Do you possess the required generic attributes to perform well as a member of this company’s board?
• Do you have a comprehensive understanding of the role, duties and obligations of a company director?
• Do you understand the farming business and the underlying fundamentals that will make it profitable?
• Can you look at the company accounts and see what they mean in relation to the company’s financial position, performance and trends over recent years? Do you have an understanding of the company’s performance in relation to other businesses in the industry?
For more information go to:
• www.iod.org.nz
• www.iod.org.nz/Governance-Resources/Publications/Practice-guides/Farming-Directorships
• www.dairynz.co.nz/farm/business/governance/
