Sitting on the board of the world’s second largest farmer-owned co-op, Prof Nicola Shadbolt has concerns: “The fundamentals around governance in co-ops have been forgotten.”

She believes co-ops such as Fonterra operate a unique business model with many strengths and should aim to never lose touch with fundamental co-operative values as they evolve.

She says, without exception, enduring success requires long-term ownership and control. “Good governance must ensure farmer ownership and control is not compromised,” says Shadbolt. She says farmers are a huge value on the board of co-ops and their value should not be underestimated. However, the issue is that there are people sitting around board tables who do not want milk price to move down. If they only talk about milk price or it takes up significant board meeting time, they are not doing their job as board members.

To address this, she says board members must look at the longer term. She says the board has to be really involved in the longer-term perspective and involved in the strategic direction. Short-term opportunism, for example current owners cashing in on value at the expense of future generations, can very quickly destabilise a co-operative.

The board must also challenge the senior management and the direction of the co-op. “There should be a healthy tension between management and shareholders,” according to Shadbolt.

She says that boards have a duty to maintain and develop co-ops for our children’s children. She also believes that a successful board team is most likely to be based around a board with a balanced and complementary set of skills.

She says independent non-executives are beneficial on boards but they should not be paid more than farmer members.

The professor of farm and agribusiness management at Massey University said board members have a huge commitment and it is a massive responsibility to a lot of people, including employees and farmers. Therefore, she believes they should be adequately compensated.

She says training is key to farmer members on boards but that this needs to come from them seeking the training and it should not be prescriptive.

Shadbolt was elected to the Fonterra board in 2009 and serves on the audit and finance committee. Last October, Fonterra’s farmer shareholders approved changes to the co-operative’s governance, including a smaller board and its representation model. The changes were aimed to get better information to farmers and increase focus on competencies and skills.

Market signals to farmers

She says one of the biggest challenges facing farmers is the volatility in dairy markets. She says it is of utmost importance to ensure that the market signals get back to farmers as quickly and efficiently as possible. If co-ops do not do this and pay a non-market price, it magnifies the problem.

The GDT auction is a tool to provide this market signal to farmers, according to Shadbolt. “One of the key benefits of the GDT is that it sends a signal to the world and it is farmers in other parts of the world who react by switching supply on or off.”

She argues that co-op supports that are evident in Ireland send the wrong signals to farmers. She compares it to trying to stop the tide coming in once it has turned. She says in volatile times like this, co-ops should not meddle in the market and should pay a market price.

“It is for this reason that Fonterra doesn’t offer milk price supports and supports farmers in other ways at times of low prices, for example by using its strong balance sheet to provide flexible finance to farmers.”

Prof Nicola Shadbolt will speak at the ASA conference in the Killashee House Hotel, Naas, Co Kildare, on Friday 8 September.

The Fonterra model

Fonterra focuses on governance in a way that promotes:

  • The interests of shareholders.
  • Transparency – giving shareholders and other stakeholders the information they need to assess performance.
  • Effective risk management – ensuring Fonterra meets its business objectives and legal requirements.
  • A good balance between the roles and functions of board and management team.
  • Communication with important stakeholders, including shareholders, employees, customers, farmers, governments, and the communities within which they work.
  • How the council operates

    The Fonterra shareholders’ council meets at least six times a year to conduct business, debate and determine policy, and receive updates on relevant co-op matters from members of the board and management.

    The council’s annual work programme is determined by its core functions set out in the Fonterra constitution and by topical issues of importance for Fonterra shareholders.

    Workstreams, including policy development, are considered and formulated by three committees – performance, co-operative culture, and governance and ethics – before recommendations are put to the full council for deliberation. Project teams are established as required to address specific issues.

    In addition to the three committees, both the council and board have representatives on the nominations committee and the governance development committee. Three shareholders’ councillors attend meetings of the co-operative relations committee.

    The council also engages with other key stakeholders on matters affecting Fonterra shareholders, and is supported by an executive team based in Auckland, New Zealand.