Does big pay bring big results?
Fonterra lacklustre under $35m CEO
Important governance issues have been raised in relation to both Fonterra and Foley Family Wines in recent weeks. The first is the resignation of Fonterra chief executive Theo Spierings.
Spierings joined Fonterra in September 2011 from Royal FrieslandCampina, a large Dutch dairy co-operative.
He wrote in his first Fonterra annual report: “Our strong roots here in New Zealand support our growth in the markets where we see opportunities, while our skills enable us to seize these chances quickly to grow volumes and value.”
Unfortunately, the value side of his aspirations hasn’t been achieved, with the notable exception of staff remuneration.
Between 2011 and 2017, Fonterra’s revenue fell by 3.2 per cent while its payment to New Zealand farmers declined by 7.5 per cent.
Meanwhile, the number of employees has risen 27.4 per cent, from 16,800 to 21,400, and staff remuneration by 26.9 per cent. In dollar terms, this resulted in a $764 million decline in annual payments to NZ farmers between 2011 and 2017, while Fonterra’s total staff remuneration increased by $417m in the same period.
Spierings has been a beneficiary of the latter, as indicated by the accompanying table. In his first six years, the co-op’s CEO received total remuneration of $28.6m, including $8.3m in the July 2017 year. These figures are based on an analysis of the employee remuneration tables in Fonterra’s financial statements.
It is reasonable to assume his total remuneration will be more than $35m for his seven-year stint, a huge figure considering the co-op’s lacklustre performance under his stewardship.
Spierings’ remuneration has also been relatively high on a global basis. US companies are now required to publish “CEO Pay Ratios” under the Dodd-Frank regulations of 2010. This figure compares a CEO’s compensation to the median remuneration of all company employees.
Fonterra doesn’t release a median remuneration figure but its average employee remuneration was estimated at $92,000 in 2016/17. This meant Spierings received 90 times more than the average Fonterra employee last year.
It is difficult to compare CEO pay ratios between countries, particularly between unlisted entities and listed entities that issue share options to executives. However, PayScale, the US-based website providing salary and compensation information, has calculated that the average US CEO-to-worker pay ratio is 70-to-1. This ratio does not include share-based compensation.
New Zealand dairy farmers can pay their CEO whatever they want but they should be aware that they are being extremely generous, even on a global basis.
Spierings told the Weekend Herald’s Jamie Gray last week that there had been hits and misses in his seven-year Fonterra tenure. He said that he underestimated the complications from investing in the China-listed Beingmate and acknowledged that Fonterra had been slow to recognise the potential of a2 Milk.
Fonterra had a great opportunity to take a position in a2 Milk after Freedom Foods and Dean Foods tried to acquire the alternative milk company in mid-2015. After the offer was rejected, Freedom Foods sold its 10.5 per cent stake for A$64m or A85c a share.
Fonterra could have purchased this holding, which is now worth about $900m. Alternatively, it could have made a full offer for a2 Milk at nearly $800m, which would probably have been successful. This compares with a2’s current market value of approximately $9 billion.
Meanwhile, the Fonterra Shareholders’ Fund unit price has been relatively flat since mid-2015.
Fonterra’s performance since 2011 indicates that highly paid CEOs do not necessarily create huge value for shareholders.
A2’s CEO Geoff Babidge has received total cash remuneration of $5.2m over the past six years compared with Spierings’ $28.6m.
Babidge’s cash pay ratio was only 5.5-to-one in 2016/17 compared with Spierings’ 90-to-one and Payscale’s US average of 70-to-one.
Fonterra and a2 have totally different business models but it is still worth comparing their profitability, staff numbers and employee remuneration.
The consensus Fonterra earnings before interest and taxes (ebit) forecast for the current year is $1.18b compared with a2’s consensus ebit forecast of $306m, roughly four-toone in favour of Fonterra.
However, most of the other Fonterra/a2 Milk ratios are totally different.
At the end of the 2017 financial year, Fonterra had 21,400 employees while a2 had only 153 staff. Fonterra’s total wage bill was $1.97b in 2016/17 compared with only $20m for a2, while 5245 Fonterra staff were paid more than $100,000 compared with only 44 at a2 (see table).
Fonterra will never become an a2 but NZ dairy farmers should be demanding a far better performance from their co-operative.
Perhaps the first place to start is Nassim Taleb’s latest book Skin in the Game.
Taleb, who also wrote The Black Swan and Antifragile, argues that you shouldn’t be in the game, if you don’t have skin in the game.
In terms of Fonterra and a2 this means shareholdings.
Geoff Babidge has had a material shareholding in a2 while Theo Spierings has had no shares in the diary co-op because only dairy farmers can own these shares. The Fonterra Shareholders’ Fund is not a particularly attractive alternative.
Fonterra needs to radically change its capital structure so that nonfarmers, particularly staff, can own shares.
Unless the co-op opens its shareholder base, it will continue to be run by employees with no skin in the game and who are only attracted to Fonterra because of the co-op’s hugely generous remuneration packages.
Foley Family Wines had its origin in Grove Mill Wine, which was incorporated in July 1986.
In 2002 the company changed its name from Grove Mill Wine to The New Zealand Wine Company and the following year listed on the NZAX, the NZX’s alternative market. Investor interest in the stock was limited with few shares traded on the NZAX.
In 2012, New Zealand Wine merged with Foley Family Wines, which owned the Vavasour, Goldwater Estate, Clifford Bay, Dashwood and Te Kairanga wine brands.
Following the merger, Bill Foley became the majority shareholder of the renamed NZAX-listed Foley Family Wines.
Foley is a successful American businessman, estimated to be worth $US600m ($833.1m) by Forbes, who purchased and resuscitated the insurance group Fidelity National Financial. He also has interests in US wineries, golf courses, restaurants, hotels and ski resorts.
Foley is also lead owner of the NHL’s Vegas Golden Knights, the new ice hockey franchise based in Las Vegas. The Golden Knights are having a fantastic first year and the NHL’s upcoming playoffs may be taking his attention away from business interests.
Foley Family Wines’ shareholders met in Blenheim on Wednesday, without the presence of their controlling US shareholder, to approve the purchase of Mt Difficulty Wines for $55m. This includes the Mt Difficulty and Roaring Meg brands, its property and winemaking facilities.
The acquisition proposal, which also includes a potential $20m equity raising, was approved by a clear majority.
New Zealand dairy farmers can pay their CEO whatever they want but they should be aware that they are being extremely generous, even on a global basis.
The $55m purchase price compares with Foley Family Wines’ current market value of $78m.
Unfortunately, the notice of meeting contained little information on the financial performance of Mt Difficulty or total sales volumes.
This means that minority shareholders had access to far less information than the majority shareholder as the notice of meeting stated that Mt Difficulty’s future maintainable earnings had been assessed “by a US based merger and acquisition specialist who is employed by Bill Foley”.
Although NZAX listing rules are less stringent than the main NZX listing rules, the overriding philosophy should be full disclosure with all shareholders having the same information.
The stock exchange should have insisted that Foley Family Wines release more information on Mt Difficulty Wines’ financial performance before this week’s important meeting.
Disclosure of interests: Brian
● Gaynor is an executive director of Milford Asset Management which holds shares in a2 Milk and Foley Family Wines on behalf of clients.