Review of Fonterra Shareholders’ Council calls for big changes

The report of a review of the $3 million a year Fonterra Shareholders’ Council is in, prescribing several major changes including surrendering its access to confidential and material company information, changing its name, and reviewing its operating budget.

The report recommends the council stop calling itself “a cornerstone shareholder” and to avoid blurring representation and governance it should stop communicating board strategy and company operations to members.

However it also says the council needs “to more effectively hold the board to account”.

The year-long internal review follows shareholder unrest with the council’s performance and value for money, and will be a topic of discussion at the annual meeting next month of New Zealand’s biggest company, although the report has landed too late to formalise any changes into resolutions.

Separately, shareholders on November 5 will vote on three shareholder resolutions seeking a major shakeup of the council.

While the report is too late to be voted on next month, it suggests most of the 27 recommendations can be implemented within the current constitution.

Fonterra is a farmer-owned cooperative. The council, which currently has 25 farmer-elected members, was established in 2001 to be a watchdog of shareholder interests when Fonterra was created from an industry mega-merger under special enabling legislation.

Over that time it has cost more than $50m to operate and disquiet about its role and performance peaked with Fonterra’s disastrous financial results in 2018 and 2019, which wiped $4 billion off farmers’ balance sheets.

The council has also been criticised for acting outside its parameters, as a springboard for aspiring Fonterra directors with its governance programmes, further blurring the line between representation and governance.

One recommendation likely to raise eyebrows is that the chairman of the council be paid at a level to “symbolise the importance of representation to ensure the council chair role is not a stepping stone to election to the board”.

The chairman is currently paid $100,000 a year.

The review, headed by independent chairman James Buwalda, a former public service chief executive, followed calls at last year’s annual meeting for the council to be put under professional, outside scrutiny. The council’s compromise offer was an internal review.

The report recommends the council be renamed the Fonterra Co-operative Council, and that it should focus “sharply” on core functions of shareholder connection, accountability and guardianship.

The name change would better reflect the scope of the council’s role, representing members, including sharemilkers, as owners, investors, suppliers and members of the Fonterra community, says the report.

The council should be organised into three teams – connection, accountability and guardianship, it says.

In its accountability function, the council must ensure shareholders are fully informed of the company’s performance.

“It must hold the board to account.”

“This means seeking from the board explanation and responsibility for Fonterra’s strategy and performance.”

However, council access to confidential and material information should cease because it compromises the council’s “ability to be independently objective”.

The report says the council should as far as practicable draw on publicly available information and independent performance assessments.

It should seek independent analysis as required and meet with the board quarterly to seek an explanation of how well recent performance is meeting shareholder expectations, whether Fonterra is on track to meet strategic objectives and what new challenges the company is facing and addressing.

Councillors primary role must be to connect members to the cooperative, says the report.

It should review its operating budget in light of the review’s recommendations and move
with urgency to implement the change package.

Based on its understanding of farmer interests, the council should provide annually to the board a formal letter of members’ expectations, to which the board could respond with a statement of strategic intent.

The report recommends the council be given lead responsibility for guardianship of the cooperative philosophy and should be the primary channel for consultation when Fonterra is considering policy or operational changes that may affect members.

The current ward structure should be retained to ensure members can engage directly with their ward councillor.

The council should advocate publicly on members’ behalf on matters relating directly to their interest in the cooperative. Such matters may include government legislation and regulation and Fonterra farmers’ public image.