Fonterra shareholders flex muscles over board
New Zealand’s largest company, Fonterra, does not seem to be able to catch a break in 2018. Already this year, the dairy cooperative has acknowledged crippling problems in its Chinese subsidiary and seen the exit of its long-running chairman and chief executive.
In recent days, it dropped a central part of the former management’s strategy – to maximise milk volumes – and confirmed that assets will need to be sold in order to reduce debt and avoid a creditrating downgrade. All the while, it has endured heavy criticism from NZ First at the same time as the Government reviews the legislation which allows it to operate with such a huge market share.
As if the company did not have enough on its plate, a quirk of its voting system means it will soon face yet another director election, just after the last one closed.
When the results of Fonterra’s board elections were announced ahead of its annual shareholder meeting last Thursday, there were two notable developments. The one that naturally gained the most attention was the election of Leonie Guiney, a dairy farmer from Fairlie, in Canterbury.
Guiney was also a director on Fonterra’s board from 2014 to 2017, but her term ended in controversial circumstances. After clashing over the troubled Chinese business and raising questions over the chairman’s influence on management, she failed to gain endorsement from an independent selection panel, by which time it was too late to nominate herself. She was off the board and had to wait at least a year to return.
Guiney’s plight would have almost certainly captured little public attention had Fonterra not taken highly unusual legal action to gag her from speaking to the media, suggesting she was leaking confidential information, which she firmly rejected.
It was hardly a surprise that, when chairman John Wilson quit for health reasons, his replacement, John Monaghan, quickly opted to settle the case against Guiney, issuing a short statement saying the company had covered her legal costs.
The decision by Fonterra’s thousands of farmer shareholders to return her, over several other candidates who were recommended by the selection panel, sets up a potentially awkward series of board meetings. Guiney arguably holds a stronger mandate than the other directors, who are said to have been dismissive of her input. At a time when Fonterra’s direction is already under review, shareholders have backed a candidate who openly opposed the prevailing mood of the board.
But Guiney’s appointment was only part of the surprise from the director elections. There is also the unusual matter of who else will join her on the board, or rather, who will not.
Fonterra had three board positions available in the 2018 election, and five candidates. But when the results were announced, only two were named: Guiney, and Peter McBride, who will soon step down as chairman of kiwifruit company Zespri.
The nature of the elections – shareholders were allowed to vote for three candidates but could vote for fewer – and the requirement that any candidate get the support of at least 50 per cent of the votes cast, meant the other three candidates missed out. They included Ashley Waugh, an incumbent director, as well as Ma¯ ori Television chairman Jamie Tuuta. Both were endorsed by the company’s independent selection panel.
While the 50 per cent threshold is intuitively attractive, the way the votes were likely to have been distributed (Fonterra has not released any figures on the results) meant in an election with five candidates for three positions there was always a distinct possibility that insufficient candidates would reach the threshold.
Fonterra is now preparing to hold another election for the empty seat, probably early in 2019. The voting system which led to the extra election was meant to be reviewed eventually, but not that quickly. For a company the size of Fonterra, the cost of another election may be small, but it will still hardly be welcome to one under pressure to reduce debt.
In an ironic twist, Fonterra’s board can co-opt another director, until a new election is undertaken. But those who missed out in the original election are not eligible to stand in the special election. This after two of the three candidates recommended by Fonterra’s approval process were not wanted by shareholders, but one who was clearly offside with the prevailing mood of the board was elected.
Given that context, board members might wonder whether any director they choose will have more of a mandate to represent Fonterra’s owners than the empty chair that director will replace.
A quirk of Fonterra’s voting system means it will soon face yet another director election, just after the last one closed.