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Council Releases Annual Review Of Fonterra

11 September 2006

Shareholders’ Council Releases Annual Review Of Fonterra

The Fonterra Shareholders’ Council says the performance targets set by the Fonterra Board for the 2005/06 season were not good enough.

In the Council’s Annual Report to Shareholders released this week, Chairman John Monaghan said that the Shareholders’ Council did not endorse the Board of Directors’ 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 $3.85 per kilogram of milksolids (kgms) including value add returns of only 17 cents.

“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.

“Year end value add returns did exceed the SOI target but at 25 cents per kgms, the value add component of payout remains a serious concern. Value add returns again contributed less to payout than they did in Fonterra’s first year of operation. The final payout of $4.10 per kgms also exceeded target but is the second lowest in the co-operative’s history.

“After five years in operation, we expect a business in Fonterra’s position to have differentiated itself through superior performance. The co-operative must deliver returns that outweigh alternatives to ensure it is the first choice for New Zealand dairy farmers.”
Mr Monaghan said putting Fonterra together was a significant undertaking but the business appeared to be taking a long time to gain momentum.

“While annualised merger benefits of more than $300 million 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.”

He said the Council has been encouraged by the commercial disciplines evident in the business throughout the past season.

“Fonterra’s business planning and budgeting process for the new season has been more rigorous.

We are watching closely to see how Fonterra’s results measure up against farmers’ expectations and the level of investment they have in the co-operative.

“The challenge Fonterra faces is finding the right balance between the short-term pressure of delivering a competitive payout while ensuring there are funds for future investment and growth.”

The Council monitors Fonterra’s performance and operations and represents shareholders’ interests in the co-operative. Council’s Annual Report includes a review of Fonterra’s performance for 2005/06 and a summary of Council’s operations for the season. Mr Monaghan said co-operative succession has been a major focus for the Council this season.

“With Council and Board working together on the Candidate Assessment Panel and the Governance Development Committee, Fonterra has taken big steps forward in addressing succession concerns.”

A proposal to increase the number of Council wards from 25 to 35 and move to one Councillor per ward will be voted on by shareholders at Fonterra’s Annual Meeting on 11 October 2006 in Invercargill.


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