Frank Newman: Creaming it

A few weeks back Fonterra disclosed that its chief executive received remuneration of $8.3m in the year ended July 2017, making him New Zealand's highest paid chief executive. That payment includes base salary, bonuses and other benefits and works out to be about $4,150 an hour!

By way of comparison, the average hourly rate for a heavy truck driver is in the region of $20 to $25, and the average income in New Zealand is about $30 an hour. The Prime Minister receives about $460,000 a year, or $230 an hour, assuming an average working week which his is not.

As it happens Fonterra's CEO is not the only big earner at the company. There are 19 other executives earning between $1m and $2m, five earning between $2m and $3m a year and one earning $3.25m. The Company's directors are also doing very nicely. The chairman received $400,000 in the last financial year and the other directors in the region of $165,000.

These are big numbers. In my view the $8.3m payment is obscene, and I am surprised the company's farmer shareholders are not driving their tractors up the steps of the company's palatial head office in protest. This is not to say the CEO is not good at his job, but is anyone worth 138 times more than the average worker and 18 times more than the Prime Minister?

To be fair, Fonterra is no small operation. In the year to the end of July it made a profit of $745m (vs $834m last year). The total assets were $17.8 billion and total liabilities $10.6 billion, leaving shareholders equity of $7.2 billion. On the other hand, New Zealand Inc is no small enterprise and being Prime Minister comes with its own pressures and accountabilities  - every three years in particular! 

I personally don't think the CEO of any company is worth 18 times the Prime Minister (some may argue the PM is underpaid), but Fonterra is owned by farmer shareholders so the question is what they think about the big salaries, and whether they have any real say in the matter.

The theory is that the directors reflect the wishes of the owners. That may be the case in Fonterra. If it is, then it is probably the exception rather than the rule. Directors act in a fiduciary capacity on behalf of shareholders, which means they must act in the interests of the shareholders not their own interests.

What can happen in organisations is that a culture of escalating pay scales develops where a high payment given to one individual becomes the benchmark for pay rises to everyone. Without the owner and ultimate bill payer sitting around the table, there is much less of an imperative to question the reasonableness of pay rises.

The other factor Fonterra directors need to be mindful of is collateral damage. At the moment the company is going on a charm offensive to win over the hearts and minds of the public regarding the effect dairy farming is having on our waterways. That task will be harder if the public see Fonterra's bosses as fat cats that are creaming it.

Still on remuneration matters, evidence given in a case before the Environment Court involving a wastewater consent by the Horowhenua District Council (HDC) has some interesting insights into iwi consultation payments. Part of the evidence given by a senior staff member deals with the process the Council had to go through to obtain iwi consent - which is required under the Resource Management Act.

Here are some extracts.

"HDC sought to engage with Iwi to understand the cultural values and associations of the Project site...HDC considered it appropriate for…CIAs to be prepared [Cultural Impact Assessment].

HDC proposed to contribute $12,000 toward [the]costs of preparing of the CIA.

…Ngāti Whakatere sought to significantly expand the scope of the CIA…to cover assessment of any potential or probable effect of the project, not just those related to cultural matters. Ngāti Whakatere also sought a fee of $80,000 for the preparation of the CIA."

After protracted discussions, HDC agreed, "to contribute $30,000 (GST exclusive) toward the costs of the preparation of the CIA and an additional $15,000 (GST exclusive) to cover hui and travel costs associated with preparing the CIA."

When the final CIA report was delivered the "CIA concluded that treating, storing and irrigating treated wastewater…was overwhelmingly culturally offensive and unacceptable…because the cultural values and impacts were compromised."

The discussions continued and the HDC offered additional compensation in the form of the restoration a burial ground and a one-off funding payment for planting/improving the site.  Despite this, the matter remained unresolved and ended up before the court and the process became public. What is revealing is not only the size of the payments that councils are making to iwi so they can consult, but also the significant time delays that can arise in the consenting process.

There is a sad irony that nowadays iwi can profit from the RMA objection process, while other affected parties (like neighbours) must pay their own way in the consenting process, often to oppose adverse affects arising from the activities of others.

Frank Newman writes a weekly article for Property Plus.