Thursday, 30 July 2015

Fonterra - what went wrong?

Fonterra has not performed well, either objectively or in comparison to expectations at the time it was formed. Higher value branded products were supposed to provide farmers with a natural hedge against the vagaries of commodity dairy prices but that just hasn't happened in almost 15 years of trying.

Why not? That's what Fonterra's farmer-shareholders need to know, because you can't fix something until you know what's broken. There are really only two potential explanations.

One is that Fonterra is/was capital constrained. Sure, we could drop US$100m on San Lu in 2005 and $500m on Darfield in 2012 and $750m on Beingmate in 2015. And yes it's true that we pulled in $500m from the IPO in 2012, but we need much more capital to deliver on the original dream/vision. If this is true, we need to hear it loud and clear from the management and board. And since they haven't told us it's true, I'm going to assume it's not.

The only other explanation is that we had enough money but spent it on the wrong stuff. Mistakes happen as all farmers know. But when they keep happening year after year (x15), something is seriously wrong. Brian Gaynor's recent analysis hints at the underlying problem by comparing Fonterra's consumer revenue with the number of staff earning more than $100k per annum.

All those extra thousands of well-paid people have not translated into higher value-added revenues. Again we have to ask: why not?

In my view it is quite likely that Fonterra has fallen victim to managerialism, an elitist doctrine that constrains shareholder power by ensuring that "managers, not owners, ... get the final say in corporate decisions". Three facts support this view.

  1. The flow of information between Fonterra and its owners is almost entirely one-way. Farmer-owners are told/sold stuff by managers but we are rarely, if ever, asked for our views on the company's direction, major decisions or methods of operation except where required by the constitution.
  2. TAF was designed to make capital management easier for managers and harder for farmer-owners. Time-smoothing flexibility over the share standard was always under Fonterra's control but managers preferred TAF and were able to push it through.
  3. The head count of highly paid staff has ballooned without a commensurate increase in value-added revenues.
The imminent staff cull is way overdue and when you look at the above chart, 500 jobs (averaging $114k each) doesn't seem a lot compared to the previous blowout in well paid staff.  But if you think the cull might undermine the managerialism hypothesis, you'll be interested to hear how the CEO described the role McKinsey played in it:
"...hard-nosed outside consultants who have given what Spierings dubs a private equity view of the company and supported management to make some tough calls."
Got that? We pay Mr Spierings quite a lot of money each year, but he still needs to pay lots of extra do$h to managerialist mates before he can sack members of his own (manager) class.


  1. Hi, I have read post about Fonterra farmers. Thanks to share.

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  2. Thought-provoking post. I'd add that the managerialism was a predictable X-inefficiency outcome of legislatively creating a (near) monopoly. I wonder if that aspect will be covered (adequately or at all) in the CC's DIRA review?

  3. That's a fair point Donal. But I can't see it getting into the CC's terms of reference because that review is more about farm gate competition/regulation in NZ, whereas the problem here is poor performance in competitive markets internationally.