Guy Trafford reviews the new moves to reduce the size of the main Fonterra board, and some grass-roots reaction to the proposed changes.

A major notable date on the dairy calendar is approaching, that of Fonterra‘s AGM. To be held at the Mt Hutt Memorial Hall in Methven at 10.30am on Thursday, 9th November. In recent years they have been considerably less volatile than the previous decade when Fonterra was facing controversy on a multitude of fronts.

This year, despite the current downturn in prices the general tenor of shareholders is largely that of acceptance that the causes are beyond the Co-op’s making and most appear to be satisfied with how the ‘firm’ is being managed. That is not to say there are no grumbles coming from the ranks however.

Shareholders will have already seen in the ‘Notice of AGM’ that at least one member disagrees with the Co-op management’s decision to bring before the meeting a request to downsize the number of directors from 11 down to 9. The ratio of appointed versus elected goes from 7 elected and 4 appointed to 6 elected and 3 appointed.  This is not the first time the number of directors has been reduced (if successful) when it went from 13 directors down to 11 in two jumps through 2016 and 2017.

The current board have been unequivocal in their support for the proposed reductions and in voting against Richard Dampney’s proposal which was to reduce the number of appointed directors further but maintain the elected number. He feels the appointed directors do not contribute enough to warrant their inclusion (see page 15 of Notice of AGM).

While there may be evidence that larger boards do not function as well as smaller boards, in my view the Notice of AGM does not do a particularly adequate job providing information for shareholders to confidently vote on. Vague comments such as “this reduction strikes the right balance between a strong and diverse level of perspectives, skills and experiences and manageable workloads while providing directors the opportunity to participate in discussions and decisions to the best of their abilities” – when an argument could be made that a reduction in numbers could reduce access to elected of appointed members and increase workloads.

A look at the recommendations to what could be considered a best practice model could provide some reassurance that what the Board are proposing may be an improved model. The Australian Institute of Company Directors gives us some indication of typical numbers of board directors, by type of corporation, in Australia:

• Large listed companies: 8 to 12 directors
• Medium-size listed companies: 6 to 8 directors
• Small listed companies: 4 to 6 directors

This fits within the recommendations from other sources. However, there is no consensus on optimal board size. Evidence shows over the last few years Russell 3000 and S&P 100 companies have averaged around nine and 12 directors, respectively. The average in Italy, Spain, and the United Kingdom is narrower, between 10 and 11 directors.

So, both before and after the proposed changes Fonterra was sitting pretty close to the accepted norm for a large company. Being a Co-op does provide an additional measure of complexity and there was one comment that co-op directors generally work closer to the business than in non-co-op models.

Melina Morrison MAICD, CEO of the Business Council of Co-operatives and Mutuals (BCCM) in Australia says, “For directors, there’s no doubt that the cooperative model presents some unique challenges. While directors’ duties are very similar to those for corporations, co-op members tend to participate in governance much more directly than typical shareholders and expect a bigger say” and “Truly listening to the ideas and concerns of members is incredibly necessary for a true cooperative environment”.

In the case of Fonterra having the Fonterra Co-operative Council  which is an elected national body of 25 farmer shareholder representative from ‘wards’ must help alleviate at least some of the barriers that would normally exist between the Board and Management and Shareholders. It probably also acts as a useful training ground for the aspiring Directors to ‘cut their teeth’ with the running of a co-op.

A former Fonterra director Greg Gent believes that reducing the size of the Board will help in speeding up the decision making process and tried in the past to introduce a similar motion but the remit failed to receive the necessary support. Whether shareholders will agree this time remains to be seen and as it requires a change to the Constitution  and a 75% support vote is required.

With a minimum of 7 Board members required to be in attendance for any formal meeting to be conducted it does mean that a farmer shareholder majority will always be in ascendence, perhaps providing some reassurance to farmers (assuming they are in agreement). This is an ‘improvement’ on the previous system which (only) required 6 and so, in theory at least, appointed Board members (4) could outnumber farmer elected members.

The New Zealand Herald last month named appointed director Clinton Dines and farmer director Leonie Guiney as one of the directors who could be forced to leave next year to allow for a nine-member board. This is presumably as they are next on the rotation list dictated by time of appointments.