Sep 28, 2008

Rod Oram Rips Into Fonterra

Some quotes from Canon Oram this morning. We can't see this will be going down well with a dairy sector already in a bad mood this morning because of a time change designed to meet the needs of the townies.

FONTERRA'S NAIVETE in China came through loud and clear at its press conference this week. Responsibility for that, and the tragedy it triggered, comes back to the co-op's management and board. And to its shareholders for the corporate culture they promote.

It was clear from their comments Fonterra had next-to-no idea of what was going on in Sanlu, the large Chinese dairy company in which it has a 43% stake. Its links to its $200m investment ran only to three directors on the board and a handful of technicians. Only one spoke Mandarin.

Fonterra's inadequate management systems have left a widening trail of human and financial disaster. With its year-end results this week Fonterra wrote off $139 million of its investment in Sanlu, reflecting the cost of the product recall and the demise of the Sanlu brand.

All this is nothing less than a serious failure of Fonterra's management and governance. The root causes go back to its history and culture. Farmers had always kept their co-ops and the Dairy Board on a very short rope, with adverse consequences for finance and governance.

With such cost-conscious shareholders, the businesses always had to invest piecemeal. This resulted in patchwork of less than-ideal international holdings that Fonterra, created in 2001 by the mega-merger of the co-ops and the Dairy Board, is still trying to meld into a coherent global entity.

Shareholders' penny-pinching only makes management's job harder. It's obvious, for example, Fonterra should have devoted much more management resource to Sanlu to enable deep and functional relatuionahsips to develop.

Governance is the dairy industry's other great weakness. Farmers have always believed in excessive control of their co-ops. This resulted in bloody, highly personalised and dysfunctional politics in the old days of multiple co-ops and the Dairy Board.

Since the creation of Fonterra, the culture has got a little better. Farmers have at least accepted a few non-farmer directors who bring skills they lack. But the board is still far too short of people with deep international experience.

Moreover, the board fails at least three other good governance tests: van der Heyden and some of the other farmer-directors are far more intimately involved in the running of the business than they should be, blurring the division of labour between board and management; Ferrier is not on the board even though a chief executive should be; and risk assessment is woeful, judging by China.

Here endeth the Lesson