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Powdergate Issue Brought To Closure

Friday 21 December 2001 For Immediate Release

“POWDERGATE’ ISSUE BROUGHT TO CLOSURE

WITH ACTIONS TAKEN BY FONTERRA BOARD

The Board of Directors of Fonterra has today announced the outcome of the Board’s governance and personnel investigation into allegations of improper conduct in the exporting of dairy products under the pre-Fonterra industry structure.

The key findings of the extensive investigation commissioned by the Board into the allegations are:

- No evidence of improper personal gain was found.

- There remained concerns about adherence to industry protocols to varying degrees right across the industry under the old structure.

- This conduct was undertaken by individuals with a view to maximising returns to the co-operative organisations competing under the old industry structure.

- Relevant third party and direct export supply chains originated in the early 1990s and were most active in the period from 1998 to early 2001.

- These arrangements were not unique to any of the Fonterra predecessor organisations.

- There were structural and competitive tensions within the historical industry structure that drove the desire to export on occasion around the fringes, rather than via the New Zealand Dairy Board.

- The actions in question concerned lower level personnel. Knowledge on the part of senior personnel was generally after the event and related to risk management action.

- There have been deficiencies in management practices including reporting systems, ensuring the prompt actioning of directives, and monitoring the competence and conduct of lower level personnel.

- Some of the individuals involved were company employees, whilst others were at relevant times either contractors or working for third parties, and thus beyond disciplinary action by Fonterra.

On the basis of the information presented by the investigating team, the following actions have been taken or sanctioned by the Board:

- The Board has strongly reaffirmed its confidence in the Chief Executive Officer, Craig Norgate. The Board is satisfied that Mr Norgate did not act improperly in relation to the matters investigated. It believes strongly that he is the right person to provide the vision and leadership required to realise the benefits arising from the creation of Fonterra. The Board considers it important to announce this finding in the interests of the company, staff and shareholders.

- It is confirmed that there has been a recent case of serious misconduct by an employee of Australasian Dairy Ingredients in Australia, which has resulted in the dismissal of the employee. Others in Australia involved in this case were beyond disciplinary action by Fonterra, as they were contractors. Due to restructuring as part of the wider rationalisation process by Fonterra, the Sydney-based ingredients business was closed, and relevant companies are in the process of liquidation. The Australian Quarantine Inspection Service is investigating related issues.

- An employee (ex NZ Dairy Group) is to be disciplined, but will continue with the company.

- With regard to the suspended employees, Mr Paul Marra and Mr Malcolm McCowan, before the Fonterra investigation was completed issues relating to the suspension of the employment relationships were referred to the Employment Relations Authority, who directed the parties to mediation. Pursuant to that process, the parties conferred a power of binding determination on Mr Kit Toogood QC. The order of Mr Toogood QC was sealed by the Mediation Service. While the terms of the order are confidential, the employment relationship has been terminated by resignation on a severance basis, with effect on 31 December 2001.

It is relevant to note that, as part of its post-merger integration process, the company has instituted a governance structure based on international best practice. This comprises:

- Code of Conduct - guidance on the expected personal conduct of all employees, directors and contractors

- Board Charter - protocols and rules of engagement for directors

- An active Audit Committee

- A global internal audit department with a team of 25 full-time staff focusing on the application of governance, control and risk management

- Corporate Policy based on the examples of other major companies with high corporate standards

- Compliance with the rules of the New Zealand Stock Exchange, following the recent issue of Capital Notes.

- Shareholders’ Council - providing additional governance and review of the directors, above that applying for almost any other company

The Chairman of Fonterra, Mr John Roadley, said the investigation commissioned by the Board has been very extensive and made considerable demands on the resources of the company. “It has had the full and unconditional backing of the Board,” Mr Roadley said. “We are at the point of closure, in the sense that the investigating team is satisfied that it has gathered sufficient information and formed a better picture of the matters under review. A sub-committee of the Board has reviewed information presented by the investigating team and presented its recommendations to the Board yesterday, and the Board has made decisions on that basis.

“The investigations have been impartial and thorough, and without fear or favour. Relevant issues have been explored. The actions taken by the Board represent the disciplinary steps it is appropriate to take in response to the investigation. Thus, they bring the company’s investigation of these allegations effectively to an end.”

The terms of reference for the investigation were to ascertain whether dairy produce had been exported by Kiwi or New Zealand Dairy Group without an export permit, or was supplied to purchasers in New Zealand who intended to export it, and whether Kiwi Co-operative Dairies or New Zealand Dairy Group knew or could reasonably be expected to have known that the purchaser intended to export the produce. The terms of reference specified the gathering and reporting of relevant details, documents, processes and relationships. The investigation was not designed to ascertain how authorities may determine matters. The Ministry of Agriculture and Forestry is undertaking an inquiry with that focus.

The investigation has been carried out by a team comprising Mr John Hughes, a private investigator and former CIB senior detective; and professional staff from the leading chartered accountancy firms KPMG and Deloitte Touche Tohmatsu, led in each case by a senior partner. The Board has also had the benefit of legal advice from Russell McVeagh and KPMG Legal in considering the appropriate action to take in light of the findings from the investigation team.

The process for the investigation has conformed to accepted practice, comprising:

- the gathering and examination of information,

- questioning of people involved in, or with knowledge of, the events under examination

- collation and cross-checking, on a continuous basis, of information received and statements given

- formation and testing of hypotheses arising from the process

- continual dialogue with the company, through its Chief Internal Auditor and the chairman of the Audit, Finance and Risk Committee, for the purpose of facilitating the investigation.

Mr Roadley said the process had involved hundreds of hours of investigatory time and interviews, and the examination of more than 100,000 e-mails spanning several years, along with a huge volume of documents. More than 30 individuals have been interviewed and, in many cases, re-interviewed. The investigation has been conducted following due process. “The investigation has been fully resourced. There have been no short cuts,” he said.

“The company will continue to co-operate fully with enquiries by the Ministry of Agriculture and Forestry and any other regulatory authorities, but is not in a position to comment on those enquiries.

“At the outset, I said that I required from the investigations the ability to stand before any shareholder, any official from any government in the world, any joint venture partner, any employee and any customer, and say that Fonterra, its Board and its executives practice high standards of integrity, consistent at all times with our newly-adopted Code of Conduct.

“I also said that in a business with 20,000 employees operating in 120 countries around the world, issues will arise from time to time. Our integrity is measured by how we respond to them in order not to compromise the high standards we have set throughout our business. The thoroughness of the investigations, and the consideration given to these matters by the Board, meet this standard.

“It is appropriate to put the conduct in question into its proper perspective.

“The first critical point is that it was past conduct. It took place under the legislative regime that governed the pre-merger industry, and it reflected a reaction to the competitive tensions and imperatives driving the industry at that time. In that era, the commercial imperative was to outperform rival New Zealand dairy co-operatives by any reasonable means. Under pressure, the definition of “reasonable’ was stretched, as it sometimes is. The industry has now moved by virtue of the creation of Fonterra, and the commercial imperative is different - we are no longer fighting and competing with each other; we are united as an industry and competing on the global stage.

“The second critical point is that the conduct in question represented a very minor proportion of the business done by the industry in total. The findings of the investigation do not support any contention that such conduct was widespread. The shipments identified by the investigators had no material impact on the relative valuations of the companies subsequently merged into Fonterra.

“To a significant extent, the focus on these matters over recent months, and the commentary by some parties, have reflected tensions arising inevitably from the merger of three large entities in one industry. Some of the associated commentary has been ill-considered and just plain wrong, or based on out-of-date rivalries and conflicts. We must put this behind us so that the industry can go forward with the right focus and resolve. Farmers cannot afford to have their interests undermined by infighting. Moreover, there is nothing to be gained personally, professionally or commercially from any further pursuit of the old sectional agendas.

“Speaking from the perspective of the Board’s responsibilities, we are delighted that we will now be able to redirect all our attention to the opportunities and aspirations that led New Zealand’s dairy farmers to vote for the creation of Fonterra just five months ago. It’s regrettable that attention on these matters has detracted from the progress being made in the business - especially as we meet the challenges of a record peak season and an uncertain international dairy market.

“Happily, while these investigations have been under way, the vast majority of our 20,000 employees have remained focused on making money for our shareholders. Our operations have continued to perform well and management has been working hard to capture new opportunities in the international market.”

END


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