Following the considerable destruction of wealth and the challenges facing Farmer Business Developments, independent consultants hired by the company have recommended a number of significant changes to the governance and business oversight. These changes will be put to a vote of shareholders at the AGM on Friday 24 June.

The main change is to reduce the number of people on the board from the current maximum 17 to 12 by 2020. It is also recommending a four-year term for all directors and a maximum age limit of 70.

To better understand how governance works at Farmer Business Development, it helps to look at how a director gets elected. The current board is nominated and appointed from three different groups; IFA, co-op representatives and shareholders. Currently, the IFA holds five seats, co-ops hold six and six for shareholders.

Under the new proposals, shareholder representation will be maintained at six while co-operative will reduce to four and IFA will reduce to two. Provision is also being made for up to two independent non-executive directors and, if used, the co-op directors will reduce from four to two. See table.

While these seem like straightforward proposals, shareholders may question why two bodies (namely IFA and the co-ops) which hold a combined 9% stake, will control 50% of the board.

Currently, the IFA has a 1% shareholding in Farmer Business developments, yet it controls 30% of the board (five out of 17 members). Even with the board reduction, it will control 17%.

However, many of the shareholder-nominated directors came from the IFA gene pool, which shareholders may say gives IFA significant influence over the board. For example, the chair, who is a shareholder nomination, is a former IFA president. The IFA has a major investment in FBD Holdings, worth in excess of €3m, and was valued at €9m less than two years ago. Its investment in Developments is much smaller – worth less than €2m based on net asset value.

The new memorandum and articles of association state that the president of the IFA shall, ex officio, be a director of the company (or may appoint someone in his place). It also says the IFA shall be entitled to, at any time, appoint or remove any person as a director of the company.

So, even though the IFA didn’t appoint a director initially, it can remove them – effectively giving them complete control of the board. Shareholders may question why the IFA, which owns 1%, may still be entitled to nominate any directors at all, never mind four in 2016 and two by 2020. They may also question why the IFA should have the right to remove any director and appoint a replacement. Similarly, with the co-ops, why should they be entitled to appoint any more than two people to become a director of the company, let alone six when they own only 8% of the shares?

Meanwhile, the other 91% of shareholders have only six seats and will in the future have 50% of the board. However, where the IFA and co-ops hold a combined 9%, they could, in theory, outvote them around the board table.

  • Why is the charitable FBD Trust, which has an 11% shareholding in the company, not getting an automatic right to nominate a board member?
  • It is proposing that the company can give any guarantee, indemnity, support or security for the liabilities of any associated company (ie FBD Holdings), regardless of the cost to Farmer Business Developments.
  • It is proposing to contribute to the ongoing pension liabilities of people who either are directors or were directors of the company. It is unclear after how long of service a director will be entitled to such.
  • It is proposing that at the discretion of the board, Farmer Business Developments can lend out money to another company or person without security or interest.
  • It is proposing that directors will still be allowed set their own remuneration level (even if that is relatively small) without external observation, transparency or information on such. Given all that has happened within the IFA between 2005 and 2015, why is a remuneration committee not being established?
  • It is proposing that a director does not require a shareholding in the company. This reflects the current status quo, where the majority (seven out of 16) of the current board have 2,000 shares or less (ie €1,600 investment at last traded prices). Should the directors not be encouraged to at least maintain a minimum shareholding?
  • It is proposing that a board member can continue to be a director or officer in another company, even if that is a related company. Does this not leave the door open for potential conflict of interest?
  • In the annual report, the chairman’s statement says the company is establishing a conflict of interest policy. While this is welcome, there still is no transparency around the director’s shareholding in FBD Holdings. Also, with the IFA holding a large stake themselves in Holdings, there could be a conflict of interest with the IFA nominating four to the board of Developments.
  • It is also proposed that one or more directors could take up an executive role from time to time. If this is the case, there needs to be more transparency around salary and expenses. No remuneration committee is in place and the directors can decide the salary and other benefits of this position even if it is one of themselves. There is no transparency as to how many meetings the directors attended each year and to the individual fees they claimed. While the total amount paid to directors is not large at €116,000, individual board member and chairman fees should be broken down in an era of transparency.