Friday, December 8, 2023

Fonterra watchdog checks itself

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Fourth-generation Waikato dairy farmer James Barron has been elected to one of the most difficult jobs in the dairy industry, that of chairman of the Fonterra Shareholders’ Council. His approach to the role and priority list were outlined to Hugh Stringleman.
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Criticism and misunderstanding of the Fonterra Shareholders’ Council are widespread and must be addressed in 2020, new chairman James Barron says.

A review of the roles and functions of the council will be done but he welcomed the failed attempt by Southland shareholder Tony Paterson to set up an independent review.

Paterson wanted a review to look at how the council can be a more effective cornerstone shareholder and whether there is a better model.

His resolution to the annual meeting attracted only 44% support from farmers, mainly because the council had already initiated its own review.

Barron said the objectives and mechanics of the two review proposals are similar and he is pleased Paterson’s group was concerned enough to get active.

“We hear a lot of frustration about the council, most of it stemming from the performance of the company. 

“Some farmers think the council could and should have prevented Fonterra’s losses over the past two years.”

The council-initiated review will be done by a steering group of council, board and shareholder representatives with an independent chairman.

It will develop terms of reference and report back before next year’s annual meeting.

Another priority for the council is the capital structure review to follow the strategy reset.

The council will be consulted when the board is ready with ideas, Barron said.

“In such an important matter the council will be involved and we will be encouraging all shareholders to be involved.”

His approach to the difficult role of council chairman will be to be himself, forthright and direct, and he will dedicate all the time and resources needed.

He milks 450 cows on 140ha on the Waihou River, south of Matamata, and with wife Holly, a lawyer. They have three children aged 8, 6 and 4.

After getting a commerce degree at Canterbury University and overseas travel, where he met Holly in Britain, they took over the dairy farm that has been in the family since 1933.

Farm staffing now enables him to take an off-farm industry role and the council is his first, whole-hearted venture.

A ward 8 councillor since 2016, Barron was elected chairman in a contested election just before the company annual meeting and there was no succession arranged by neighbouring ward 9 councillor Duncan Coull.

Barron said his predecessor has very strong values and was an exceptional chairman.

“Duncan had unwavering motivation and dedication to this role and left an enduring mark on the co-operative.”

In his chairman’s remarks in the FSC annual report Coull said decisions had been made establishing the groundwork for a new way forward for the co-operative.

“Unfortunately, the full fruits of that groundwork are yet to materialise into satisfactory financial results but I firmly believe we have started to lay solid foundations to continue building on.”

The annual report noted the significant disconnect between what shareholders and other stakeholders believe the council’s function are or should be and the functions set out in the constitution.

“It’s time for shareholders to reconsider what they require in terms of representation, who is best placed to provide it and how.”

Under the heading of capital structure and milk payments, the annual report said the council encouraged the board to make a full review of the milk payment and capital structures.

Farmers need clearer signals throughout the season on the value of their milk and the capacity adjustment might be giving a distorted message.

Competing processors are picking off the best suppliers in the most economic dairying heartlands and leaving Fonterra with the fringes and that needs to be addressed.

The FSC annual report said Fonterra’s share of NZ milk fell last year by 1% from 81.8% to 80.8%.

That was the only target set by the board under the heading of strategy that was achieved – all other six targets were missed.

They included a $7/kg milk price ($6.35 achieved), normalised earnings per share of 25c to 35c (17c), sales volume in consumer and foodservice of 5.7 billion litres of milk equivalent (4.9b) and a return on capital of 7.6% (5.8%).

“It is the council’s view that the key performance indicators need refreshing to reflect the new strategy and the measures of success that have been announced.

“The statement of intentions should be transparent to all stakeholders during the financial year it relates to, as opposed to reflection at the end of that year.”

The council also updated the key performance measures, a year on from the report it produced with Northington Partners in November 2018.

The average total shareholder return (change in share price plus dividends) since formation was 4.1% reflecting that $1 invested in Fonterra would be worth $2.08 now. Those numbers were 6.3% and $2.84 at the end of 2018 financial year.

Return on capital has averaged 5.6%, lower than the assessed benchmark of 6.8%-7.6%.

The value-add business has returned 0.6%,  less than ingredients, which was significantly below the 1.3% premium needed to justify the increased risk. 

“Fonterra has failed to deliver meaningful returns over and above the cost of capital since inception,” the council said.

“Milk growth was an impediment but is now largely historical. It is critical this is addressed to ensure continued supply of milk.”

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