Wednesday, June 15, 2016

Brian Gaynor: Rural co-ops lack market savvy at board table


Fonterra and others won’t become great by focusing on farmers.

A number of recent developments highlight concerns about the corporate governance of rural-based companies. These concerns have led to the requisitioning of special shareholder meetings at Silver Fern Farms (SFF) and Fonterra Co-operative while Murray Goulburn Co-operative shareholders in Australia are also threatening to call an extraordinary meeting.

These meetings suggest that a number of farmer-controlled companies haven’t established corporate governance structures that will enable them to be successful global consumer-oriented companies instead of relying on low-price commodity markets.

The SFF story goes back to last year when shareholders were asked to approve a resolution whereby Shanghai Maling acquired a 50 per cent interest in New Zealand’s largest livestock processing company. This would be through the purchase of $261 million of new SFF shares. The old and new structures are outlined in the accompanying diagram.
Silver Fern Farms pre purchase vs post purchase ownership structures with Shanghai Maling
Source: NZ Herald

The proposal was approved by 82.22 per cent of SFF’s voting shareholders even though there were a large number of concerns regarding the transaction. These included:
  • Under the agreement SFF would have 10 directors, five appointed by the co-operative and five by the Chinese shareholder. A lesser number of directors would probably be more effective.
  • There would be two “co-chairpersons”, one appointed by the co-op and one by Shanghai Maling. This is an unusual arrangement that can lead to potential problems.
  • The Shanghai Maling co-chairperson would have the casting vote in a number of situations, including the approval of the annual business plan, the annual budget, annual financial statements, dividend policies, the appointment and dismissal of the CEO and the CEO’s remuneration.
The notice of meeting stated that “the Casting Vote Matters will apply when the board has been unable to achieve a majority of directors supporting one of these matters. The Casting Vote Matters are necessary to allow Shanghai Maling to consolidate its investment for accounting purposes under the … reporting standards applicable in China”.

The casting vote arrangement effectively disenfranchised the co-operative’s 16,000 shareholders in terms of the issues listed above.

A group of 80 shareholders, holding more than 5 per cent of SFF, have requisitioned a special meeting in early July to challenge last year’s decision to allow Shanghai Maling to acquire 50 per cent of the company.

The dissident shareholders argue that last year’s decision was under an ordinary resolution, requiring only a 50 per cent majority, whereas the Shanghai Maling transaction should have been approved under a special resolution, requiring a 75 per cent approval of shareholders that vote.

They argue that the transaction “has not been properly approved to date and the manner in which it has been pursued by the Company strongly suggests that it is not in shareholders’ best interests”.

The shareholders’ special resolution is unique as it asks: “That the shareholders of Silver Fern Farms Limited (the Company) hereby approve the proposed partnership of the Company with Shanghai Maling and the restructure described in the Notice of Meeting and Shareholder Information Pack dated 28 September 2015 by way of this special resolution of shareholders.”

The dissident shareholders are recommending that shareholders vote against their resolution and if 25.01 per cent of votes cast are negative then the proposed partnership with Shanghai Maling will not proceed.

Their “Statement in opposition to the special resolution” is a carefully worded 23-page condemnation of the SFF board, which has five farmer directors, three non-farmer directors and a farmer chairman.

The meeting will be a huge challenge for farmer shareholders because they usually support the existing board even if this course of action is not in their best interests.

There were two clear messages from Fonterra’s 36-page notice of special meeting, which was held in Hamilton yesterday. These are that the co-operative must remain 100 per cent farmer-owned and controlled and it is vitally important that there is “a strong connection between the farm and boardroom”.

There was no mention in the notice of meeting of a need to create a strong link between the boardroom and the co-op’s customers.

In a major surprise, shareholders rejected changes to the constitution that would have meant the following:
  • A reduction in the size of the Fonterra board from 13 to 11 directors with seven farmer directors instead of nine prior to this week’s meeting.
  • The chairman must continue to be a farmer.
  • The eligibility requirement for a farmer director would be updated to accommodate changing farm ownership structures, including limited partnerships. Nevertheless, farmer directors must continue to have on-farm dairy knowledge, having run a dairy operation as a member of the dairy co-operative.
The rejection of the special resolution at yesterday’s meeting, where 36.3 per cent of the votes cast were against the motion, shows that a large number of the co-op’s shareholders do not want a reduction in the number of farmer directors from nine to seven.

The notice of meeting gave a clear insight into Fonterra – mainly its focus on farmers rather than customers. Farmers were mentioned 200 times in the notice of meeting, customers only once and staff and employees don’t receive any mention in the 36-page document. “Customer” was only used in the context that Fonterra doesn’t want high-profile director elections because they can be “played out in the media and picked up by our customers”.

Fonterra is 100 per cent farmer-owned and farmer shareholders can run their company whatever way they wish. However, there is far too much emphasis on the farmer, rather than the co-op’s customers, and this will be to the detriment of the farming sector over the longer term.

Almost all of the world’s great companies are customer-focused and it is highly unlikely that Fonterra will become a great company until it enthusiastically adopts this trait.

Fonterra, which is our largest dairy exporter, and Silver Fern Farms, our largest meat exporter, have 21 directors between them at present, 14 of whom are farmers. Only three of the 21 directors have extensive experience in the global consumer food sector.

It is extremely unlikely that the two companies will become highly successful global companies until they appoint directors with more international consumer expertise.

Murray Goulburn Co-Operative, Australia’s largest dairy food company, listed on the ASX in July 2015. The listing was through a security called MG Unit Trust, which issued units to the public at A$2.10 each. MG Unit Trust is a similar structure to the Fonterra Shareholders’ Fund.

The MG units reached a high of $2.95 in December 2015.

On April 27 the company announced a major profit and milk price downgrade and its unit price slumped 42 per cent, from A$2.14 to A$1.24.

The co-op is now the subject of an investigation by ASIC, the Australian regulator. It also faces potential class actions and farmer shareholders are rallying numbers to call an extraordinary general meeting to remove chairman Philip Tracy and a number of other directors.

Farmers are extremely angry that former managing director Gary Helou, who stepped down on April 27, had signalled a price of between A$5.50 and $6.00 per kilo of milk solids compared with the revised April forecast in the A$4.75-$5.00 per kilo range.

Murray Goulburn’s directors cannot be held responsible for the huge profit and milk price downgrade but questions need to be asked whether the board had the right blend of customer and market expertise to challenge the forecasts of Helou and his management team.

According to the Murray Goulburn website, seven of the co-op’s nine directors are dairy farmers. Only one of the two non-farmer directors could be considered to have significant market and consumer goods experience.

When will our rural companies realise that they need more market and consumer expertise at the board table. 

Brian Gaynor is an investment analyst and the Executive Director of Milford Asset Management. 

1 comment:

paul scott said...

@"The Casting Vote Matters are necessary to allow Shanghai Maling to consolidate its investment for accounting purposes under the … reporting standards applicable in China”.

That's like saying ""We are a peaceful religion, gobbldyspook,speak, and the video of the sheople with their throats cut is an illusion. And anyway we are populated at 50% and you ain't seen nothing yet