BEST PRACTICE Fonterra’s Model of good corporate governance

Fonterra’s critics predicted that 1+1+1 – the merger of New Zealand Dairy Board, New Zealand Dairy Group and Kiwi Co-op Dairies – would not equal three. Based on super-mergers elsewhere, drug companies excepted, the scepticism was well founded. Could producer board and two competing dairy companies be stitched together into group that was greater than the sum of its constituent parts?
The answer three years down the track is guarded “yes”, though period of exceptionally strong commodity prices – nothing to do with the governance or management of Fonterra – has gilded the group’s initial performance. The jury is, however, still out on whether the super-merger will work in the long term.
What can’t be disputed is the success of Fonterra’s process of corporate governance. Relations between the group and its 13,000 supplier-shareholders have never been better. The tension between suppliers and directors that plagued the Te Rapa-based New Zealand Dairy Group, the largest party to the merger, has all but disappeared. The Fonterra constitution, which separates governance and representation by the creation of shareholders’ council, is one reason.
The other is the extraordinary Henry van der Heyden, who took over the $190,000-a-year job as Fonterra chairman from the autocratic John Roadley in September 2002. Since then, the impish 46-year-old has transformed corporate governance from compliance issue into crusade with the passion of tele-evangelist.”The separation of governance and representation [through the creation of the shareholders’ council] gave us the ability to govern,” he says. “The performance output of the organisation and governance is very similar to other commercial organisations.”
Van der Heyden concedes that Fonterra’s cooperative character provided directors with challenge. Were they there to represent shareholders or to add value to the group? “As the industry evolved, the lines between governance and representation blurred,” he explains.
The shareholders’ council changed that, reassuring suppliers that their rights and interests would be protected while giving the board freer hand to act in the overall interests of the group.
As result, Fonterra’s 13-man board – cumbersome in corporate terms – contains four outside directors. The remaining nine are elected by suppliers. This not only introduced an element of independence into board decision-making but also satisfies wider corporate governance demands from market regulators and the investment community.
Van der Heyden views the appointment of outside directors as practical rather than politically correct. “If you aspire to become global business you need directors to govern that complexity of business. It is difficult to find that experience in shareholder base.”

Keep it transparent
Transparency is also important. Van der Heyden would not consider having an executive or farmer-director as chairman of the audit committee. “The way we carry out our day-to-day functions as Fonterra directors is the same as if we were directors of other companies.”
Van der Heyden looks and acts more like an entrepreneur than dairy company chairman. Yet his dairying credentials are impeccable. The son of Dutch dairy farmer immigrants, he started farming as sharemilker in the Putaruru/Tokoroa area where he bought 90-hectare farm in 1985, expanding it to 110 hectares, carrying 320 cows. He and his brother then acquired three more dairy farms and dry stock holding and now manage about 1200 cows. He’s married with four teenage children. One of his sons is sharemilker.
In 1992 van der Heyden became New Zealand Dairy Group director and took over as chairman in 1999. He grew into the role quickly and learned from that experience, in particular he understood the need to separate governance and representation.
Under the Fonterra constitution, the shareholders’ council – elected by the suppliers on ward basis – is the first port of call for range of issues that would normally take up directors’ time. In the absence of market to value shares in the group, the council appoints valuer to establish fair value for the shares and also the milk commissioner to arbitrate in disputes between supplier-shareholders and Fonterra. The council, with minimum of 45 members, works with the board, monitoring issues that affect suppliers and fostering “interaction between supplier-shareholders and the company” through the board’s shareholder management committee. One of its key tasks is to ensure the group’s cooperative nature is not compromised. From governance perspective, the council’s constitutional role protects directors from getting embroiled in representation and supply issues – common problem for dairy companies of old – allowing them to focus on the strategy and direction of the group.
In the past dairy company directors, more often than not the chairmen, could expect telephone calls from suppliers at all hours on issues ranging from farm politics to the behaviour and foibles of field staff. Van der Heyden has received less than 10 such calls in the past year.This is not because he refuses to take them – he is more accessible than most company chairmen – but because Fonterra’s corporate structure provides an efficient sounding board for suppliers’ queries and concerns.

Governance defined
Corporate governance, which Fonterra defines as the “operation between shareholders, directors and management of the company, as set out in the constitution, formal policies of the company and the general law”, takes pride of place, organisationally speaking.
Van der Heyden estimates that he spends up to two days week talking to farmers about the direction of the company, including market and payout trends. Desk work at Fonterra’s Auckland head office takes another day, as does overseas travel. He spends what is left of his time with family and on his private farming interests. Much of his Fonterra time could be loosely described as corporate governance though van der Heyden calls it “relationship-building with joint-venture partners and shareholders”. But he is under no illusion about what the directors’ primary role is: “We are there to create value.”
Shareholders’ council chairman Tony O’Boyle, who steps down in May, believes van der Heyden has achieved the right balance.
“Henry’s door is always open. We can strike up dialogue at any time and any place,” he says. “I talk to Henry couple of times week and we have had two face-to-face meetings in the last fortnight.”
The shareholders’ council deals mainly with ownership issues while Fonterra’s field service staff handle issues such as milking grading.
O’Boyle thinks Fonterra’s system of corporate governance has wider applications in businesses that become too large and complex to be managed by the owners alone. “It has applications in Maori trusts. I can see it developing,” he says enthusiastically.
Van der Heyden also considers the corporate governance system is capable of being adopted by others. “There has been lot of interest in our model. But it is still early days yet.”

Shareholders’ Council
It is unlikely many listed companies would incorporate shareholders’ council in their constitutions but there is strong feeling among investors, as evidenced in New Zealand Herald survey of chief executives published in March, that corporate governance should be strengthened.That view is shared by Securities Commission chairman Jane Diplock, though she concedes that corporate governance practices in New Zealand are “by and large good”.
“Good corporate governance should increase confidence in boards and management, and attract support from investors and other stakeholders,” she wrote in the Commission’s Report on Corporate Governance submitted to the Government in February. “Ultimately it should make business more productive, competitive and financially sustainable.”
The commission has formulated nine principles for good corporate governance, providing accompanying guide

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