The Shareholders’ Council of New Zealand dairy co-operative Fonterra has said the performance targets set by the Fonterra board for the 2005/06 season were not good enough.
In its Annual Report to Shareholders, the council chairman John Monaghan said that the shareholders’ council did not endorse the board’s Statement of Intentions (SOI) for the 2005/06 season because the targets fell short of expectations and did not represent a significant lift in business performance.
“The board presented the council with a SOI targeting a payout of NZ$3.85 (US$2.47) per kg of milksolids (kgms) including value add returns of only 17 cents,” Monaghan said. “The council expected Fonterra to seek Total Shareholder Returns (TSR) in the top quartile of benchmark companies but the board targeted performance within the top half. Fonterra’s actual TSR for 2005/06 ranked in the bottom half of benchmark companies.”
While year-end value add returns did exceed the SOI target, the value add component of payout remains “a serious concern”, Monaghan said. “Value add returns again contributed less to payout than they did in Fonterra’s first year of operation,” he said. “The final payout of $4.10 per kgms also exceeded target but is the second lowest in the co-operative’s history.”
Monaghan acknowledged that putting Fonterra together was a significant undertaking but said the business appeared to be taking a long time to gain momentum. “After five years in operation, we expect a business in Fonterra’s position to have differentiated itself through superior performance,” he said. “The co-operative must deliver returns that outweigh alternatives to ensure it is the first choice for New Zealand dairy farmers. While annualised merger benefits of more than $300m were delivered ahead of schedule, Fonterra has too often appeared slow and reactive and growth opportunities have been lost. One can’t help feeling that our co-operative has lost some of the innovation, energy and entrepreneurial spirit that drove the merger.”
Fonterra’s chairman Henry van der Heyden said the Shareholders’ Council’s annual report recorded many of the issues confronting Fonterra during the past year but said the board was “confident that management has appropriate strategies and action plans in place to counter these issues”. He also pointed out that the Shareholders’ Council had endorsed the Fonterra Board of Directors’ Statement of Intentions for the current 2006/07 season.
Van der Heyden added that the board shared the view that the year ahead is an important period in Fonterra’s development. “Farmers are making it very clear that they expect Fonterra to pick up the pace on performance and lift its returns to farmers year on year,” he said.