Co-Op Shareholders Left to Company Law Remedies

Tuesday 22 Jan 2002 Stephen Franks Press Releases -- Commerce

It is now up to shareholders to make sure their Fonterra giant is not becoming the monster-mistake feared by its critics says ACT Commerce Spokesman Stephen Franks.

"Some company law rights might help, if the shareholders choose to use them. For the assistance of the Shareholders' Council (or ordinary shareholders if the Council does not act) I have drafted the kind of enquiry that I believe Mr Smith's resignation now warrants. I was amazed to hear today that the Shareholder Council knew no more about Mr Smith's resignation than they could get from the news media.

"Dairy farmers cannot expect any traditional rescue from politicians. Agriculture Minister Jim Sutton has made his attitude clear. He thinks it is enough for the Board to be having a "two day workshop next month to discuss governance". In my experience a Board having governance workshops has fatally lost the plot. Management has already inherited the initiative. No amount of work shopping and facilitators and advisers and spin from Fonterra's massive PR machine will restore confidence, until shareholders know exactly what lies behind the tension.

"Mr Sutton says, "New Zealand is very bad at big companies. Mostly they stuff up". If that's what he thinks why did he force through an exemption from commerce law to create this big company? Why did he give farmers only one choice - to put all their eggs in one flimsy paper bag as it was setting out in the competitive rain?

"Government has effectively washed its hands of this industry while sending Fonterra off with a capital structure it knew was bound to allow management to dominate.

"I hope that these untested company law remedies will be of some assistance," Stephen Franks said.

ATTACHED: DRAFT LETTER WITH QUESTIONS

For Letterhead of Fonterra Shareholder

Draft

Board of Directors

Fonterra Limited

As a shareholder I write to exercise my rights under section 178 of the Companies Act to information held by the company. I understand that the section was intended for just the kind of circumstance we Fonterra shareholders are now in.

I request information which will fully and fairly explain to me why an experienced director such as Mr PM Smith would state publicly that he is "unhappy with the governance" of the company. I am aware of the Board convention that directors do not disclose details of Boardroom disputes, and I consider that Mr Smith has acted properly in referring to the general nature of concerns rather than the particular issues from which they emerged. What I now need to know, as a shareholder warned of the general nature of the problem, is:

1. Whether the governance concerns have been particularised by Mr Smith and if so what particular governance principles he considers to have been contravened.

2. Which directors have taken what positions on these matters? I need to know to cast an informed vote at the next directors' election.

3. Whether the governance concerns relate to relationships within the Board or between the Chairman of the Board and other directors, or between the Board and management.

4. If Mr Smith's governance concerns are about issues within the Board do they relate to:

a) The allocation of responsibilities among committees or among committee members? or

b) Differential supply of information within the Board, or

c) Compliance with proper procedure within the Board, or

d) Responsibility or authority delegations or the boundaries of delegations or authorities, or

e) Concerns that the directors have provided other directors with insufficient, inaccurate or misleading information, or

f) Concerns that the Board has not sought adequate information or exercised due diligence on significant issues,

g) Concerns about conflicts of interest or failures to adequately protect the company from conflicts of interest whether by Board members or advisers to the Board,

h) KPMG and its investigation of Powdergate. If so does it involve its role as auditor and the argument that the detection and disclosure of Powdergate transactions should have been expected of the auditors before they were specifically tasked with the investigation,

i) Debate about the adequacy of Board scrutiny of substantial investments or other decisions made by management, particularly the risk analysis of ventures such as joint ventures with Nestle and major overseas acquisitions?

5. If Mr Smith's concerns are connected with the governance/management interface and the effectiveness of Board monitoring and supervision of management:

a) What are the delegated authority levels for management?

b) Are there concerns about the adequacy or veracity of management reporting or advice to the Board or Board committees?

c) Can they be summarised as "the Board is being led by the nose by management and is not adequately challenging management or requiring proper disciplined risk analysis or other justification of management proposals"? If that is not a correct statement what would be a correct statement of the concerns of Mr Smith.

d) Do any of the concerns relate to doubts about the probity of management or any management in particular? If so how have those matters been investigated and resolved bearing in mind:

i. section 130(2) of the Companies Act which limits the effectiveness of a Board delegation of responsibility unless the Board "believed on reasonable grounds at all times before the exercise of the power that the delegate would exercise the power in conformity with the duties imposed on directors ...", and

ii. the invalidation under section 138 of a director's reliance on information or advice from others if the director has any knowledge that such reliance is unwarranted or that the employee concerned is not reliable and competent in relation to the matters concerned?

As a co-operative shareholder I am very aware of the experience of losses by major New Zealand companies. Fletcher Challenge with its UK paper investment, Air New Zealand with the Ansett investment, and Brierley Investments Limited with a variety of overseas investments, suffered losses attributed by some to inadequate due diligence and/or undue reliance by a Board on a dominant chief executive.

I believe the Companies Act provision for the supply of information to shareholders was designed for circumstances just such as this. I look forward to your prompt reply.

Yours sincerely

For more information visit ACT online at http://www.act.org.nz or contact the ACT Parliamentary Office at act@parliament.govt.nz.

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