Where do I start this contribution to the debate and discussion of governance in New Zealand? For it is not matter of lack of places or opportunities, but the observation that any commentator, researcher or practitioner is currently besieged with governance-related issues.
In the private sector these concern Feltex shareholders’ proposed class action against their former board; in the public sector they relate to ongoing mysteries surrounding the Hawkes Bay District Health Board; in the rural (and private) sector the proposed mega-merger of New Zealand’s large meat companies (number of participants currently unresolved); and, the blanket defence of an agency problem by leaders on both sides of the house – referring to ongoing international trips by soon-to-retire MPs.
Given the huge importance of the rural sector to New Zealand, despite well-publicised views that it is sunset industry, this column is devoted to meat industry mergers, acquisitions, motivations and the role of the board in such activities.
Cooperatives are able to suppress the spot market between producers (farmers) and first stage processors where the product is highly perishable, such as milk. However, cooperatives in the New Zealand meat industry have failed to suppress the spot market between farmers and meat companies for several reasons. These include the non-perishable nature of the product, except of course during feed shortages when livestock simply must be sold. Lambs and cattle can be kept on the farm for another month or more, and an alternate, more profitable distribution channel sought. Farmers’ aim being nothing more than maximising income.
But while spot markets are relatively low transaction cost mechanisms they are quite inappropriate for differentiated goods and services. However, given the current lack of differentiation upstream – who searches for specific supplier number or brand of meat at their local supermarket – producers and processors are more often, but not exclusively, confronted with competing on price rather than quality. Enough of agribusiness 101.
Why then did the board of PPCS persevere with its aggressive, and illegal, takeover of Richmond? In doing so it created not only large cooperative (that had some merit), but also one of the most indebted meat companies in the industry’s history (that did not). Who is being held to account for this folly? To be sure incumbent chairs of several meat companies have been voted off by their farmer supplier-shareholders. However, reliance on an industry-wide taskforce – chaired by the most able and suitably qualified Sir John Anderson – to turn the industry round looks like yet more folly.
A mega-merger will suppress the spot market between producers and processors as, to some limited extent did the acquisition of Richmond by PPCS. But where is the industry’s governance capability? Its marketing capability? Its capability in international business, and so on – where is the expertise in the sustained creation of wealth? While we have good farmers on these boards there appears to be distinct lack of language and cross-cultural communication skills, lack of strategic capability, lack of international marketing experience, lack of international business acumen, and lack of expertise in international finance.
My concern with the current mega-merger proposal is its focus on product acquisition, at the neglect of the international market. At time when our largest meat company has reduced sheep and beef farmers incomes to non-profitable levels through self-inflicted indebtedness, the industry searches for the same solution but on still larger scale.
So what is the role of the board in these strategic activities? Many of the incumbents provide little confidence, more so when we consider that about three-quarters of all mergers and acquisitions worldwide actually fail to add value. From the outset we have statistical chance of one in four; not especially great odds if you were putting at stake the future of the New Zealand sheep and beef industry. Odds that look worse when we consider the failings of some, but not all of the current players.
Does the board rely on management advice when it comes to mergers and acquisitions? Or does it take the responsibility itself, and assign tasks of analysis and synthesis to management? The spectrum of answers seems to be extraordinarily rich. We know that some boards are phantoms, or rubber-stampers. In the case of rubber-stamping board, officers are permitted to make all of the decisions, and the board ‘votes’ as the officers recommend on issues to be actioned.
At the other end of the spectrum are catalyst boards. These boards take the lead in establishing and modifying the company’s vision, objectives, strategy and policies. They are typically observed to have very active strategy committees. Recent acquisition behaviour in the New Zealand meat industry provides little confidence in the ability of boards to deliver on sustained wealth creation. That yet bigger meat companies are now the preferred remedy appears to be missing the point entirely.
James Lockhart is the associate pro vice-chancellor, executive education, at Massey University.
