Aaron Forde’s unexpected resignation as chair of Ornua no doubt raised a few eyebrows this week. However, for those following the rumblings at board level over the past six months, it may not come as such a surprise.

After six years at the helm of Ireland’s largest dairy exporter, Forde steps down as chair at a time when Ornua’s business is going from strength to strength. Only last month it celebrated Kerrygold’s success of becoming Ireland’s first billion euro brand.

Despite these successes, tensions have been high around the board table

In April it reported a €40m profit for 2018 – up 15% year-on-year – while sales tipped over the €2bn mark. However, despite these successes, tensions have been high around the board table, where the co-op’s governance structures have come into question. This week’s switching of chairs looks like the first steps to improving the governance.

However, in order to understand the relevance of this week’s developments, it is important first to understand the co-op’s founding principles, its history, and its ownership structure. Ornua, formerly known as the Irish Dairy Board, was established by the Dairy Produce Marketing Act in 1961. It replaced the earlier Butter Marketing Committee.

A year later Tony O’Reilly the then CEO created the iconic Kerrygold brand – now the second most important butter brand in the US

It was created by the industry and Government to centralise the overseas marketing of Irish dairy products to achieve economies of scale and greater brand recognition. A year later Tony O’Reilly the then CEO created the iconic Kerrygold brand – now the second most important butter brand in the US.

It is owned by the farmer owned co-ops including Glanbia, Dairygold, Lakeland, Aurivo, North Cork, Tipperary, Carbery/West Cork and Arrabawn. Kerry plc went its own way a number of years back.

Over the years, the industry has evolved. Ornua, while still the largest exporter of Irish dairy products, now only handles around half of Irish dairy exports. The other half is sold directly by the individual co-ops that sit around the board table along with Kerry Group plc. For the best part of 60 years, many would argue that the model has served the Irish dairy industry very well and if a member wanted to no longer trade there was a precedent of how to exit.

Changes afoot

So when Ornua cancelled its November board meeting last year it signalled that things were not so rosy around the board table. Around that time it was agreed that an independent review of governance structures would take place. No timeline was outlined for its findings.

The catalyst for all of this was the extensively reported announcement by Glanbia last autumn that it was launching its own consumer brand, Truly Grass Fed, into the US market.

There was nothing entirely new in what Glanbia was proposing

While Glanbia said its initial focus was to be on cheese, its intentions to move into butter were deemed a much bigger threat to some around the board table in a strategically important growth market for the Kerrygold brand.

While Glanbia, which happens to hold more than a 25% stake in Ornua, had its own business reasons for entering the market, it opened a Pandora’s box of governance concerns along with the actual role of Ornua and its members.

There was nothing entirely new in what Glanbia was proposing (at a high level). After all, many of Ornua’s members had been selling products in markets alongside Ornua for years. But this move by Glanbia seemed to sail too close to the core of the business for many around the table.

Glanbia has argued the case that this is no different to the situation where cheese from members is sold alongside Ornua’s brands in the UK, or fat-filled powders are sold alongside Ornua’s in north African markets.

The Truly Grass Fed debate also raised questions of Ornua’s role within the industry. After all, Ornua has become much more like a plc than a co-op in recent years, particularly as it expanded through acquisitions in a bid to develop routes to market around the world.

It also raised the question of what member co-ops want Ornua to be – a bank which provides a large proportion of the industry’s working capital? A place to offload product in times of low prices? Or a route to value-add through the Kerrygold brand?

So, given all the complexities and politics that sit around the board of Ornua, is it any surprise that a review of governance structures would recommend an independent chair as being far more appropriate?

Move to appoint an independent chair

The Ornua statement this week stated that as chair Aaron Forde recommended the appointment of an independent director to oversee the board. Given that there is only one independent director on the Ornua board, this saw Denis Cregan take up this role as chair.

In 2015, Cregan became the first independent director of Ornua in its almost 60-year history.

At the time it was an interesting appointment. While he was no stranger to the dairy industry and had extensive experience in the sector as an ex-director of Kerry Group plc, this was a company that left Ornua to go its own way in the early 1990s.

No doubt he has plenty of board experience and will add greatly to the success of Ornua. He is a former chair of the IAWS spin out, One51, now IPL Plastics, which listed on the Toronto stock exchange last year. He is also chair of Kerry Airport.

Transformational change

So as Cregan takes to the helm, the rest of the board is made up solely of non-executive directors. These represent the supplier members to Ornua (the processing co-ops) and farming organisations.

The number of seats held by a co-op member is determined by the level of trading with the co-op. Today it is the CEOs of the co-ops in the main that sit around the table. Both Glanbia and Dairygold hold two seats (the CEO and the chair), each reflecting their trading levels with Ornua.

It is interesting that since the foundation of the organisation, IFA, ICOS, and ICMSA have held a right of nomination to the Ornua board and currently each hold a seat.

While the board is appointed every four years, the chair and vice-chair are elected annually by the board. Nominees for chair are proposed and seconded and they are then listed on a nominee ballot and a vote is held to elect a chair. All board members are eligible for election.

Pat Sheahan, CEO of North Cork, was elected vice chair in June last year and re-elected at Tuesday’s board meeting.

Something tells me that this is only the start of something that could be transformative not only for Ornua but for the dairy sector.