Fonterra coy on use of McKinsey & Co as external advisers in review of management performance

Monday 8th June 2015

Fonterra Cooperative Group won’t confirm consulting firm McKinsey & Co is participating in a review of management performance at the world’s largest dairy exporter, even though its shareholders' council has praised the appointment.

The review was referred to obliquely in April as part of an announcement that Fonterra management team member Jacqueline Chow was being appointed to a new role – chief operating officer, Velocity, in charge of driving the value add side of the business harder.

Following reports that McKinsey & Co is involved, Chow said “we do not discuss any of our commercial relationships in public.”

But when questioned on McKinsey & Co taking part in the review, Fonterra Shareholders’ Council chairman Ian Brown said that was already known and that it was a good idea to have an external party review management performance.

“You can get too close to things and need a fresh set of eyes to see what you’re not seeing,” he said.

Fonterra’s farmer suppliers have given management the message they want to see the value-add strategy deliver better results given the current low dairy prices and a forecast farmgate milk price payout for this season and next that will lead to many farmers having negative cash flow and could force some heavily indebted suppliers to foreclose on their farms. This season’s forecast payout is $4.40 per kilogram of milk solids and the opening forecast for the 2015/2016 season is $5.25 while Dairy NZ has said the break even point for farmers is $5.70.

The difference between this year’s payout and last year’s record $8.40 strips about $7 billion out of the economy.

Fonterra said today it is not commenting beyond the April statement which announced Chow would lead a team, including internal and external expertise, to work with Fonterra’s management to boost performance across the cooperative and deliver more cash to farmers.

That statement said everything was “in scope” and “we’re taking nothing off the table”. Progress made will be presented to farmers at Fonterra’s annual meeting in November, the statement said.

Fonterra used another team of external advisers in 2013 to review its handling of the botulism scare. The inquiry found a lack of senior oversight of crucial decisions and the need to address a “Fortress Fonterra” perception held by a high number of key stakeholders.

Last year McKinsey & Co, in a report commissioned by the Business Council of Australia , said while New Zealand’s dairy exports and milk production had boomed, Australia’s had lagged behind. It advised Australia to emulate New Zealand in overlooking competition concerns and create a dairy monopoly like Fonterra.

The firm was a key adviser on the New Zealand dairy industry’s move to establish a mega co-op 14 years ago and in 2002 it was also called in to review Fonterra’s disputed governance practices following a surprise board resignation.

Competition watchdog the Commerce Commission last week began a lengthy process that will look for evidence that Fonterra faces the competition its legislation was intended to ensure. If the review, required under the Dairy Industry Restructuring Act 2011, finds competition is insufficient, it could try to force more on Fonterra.

BusinessDesk.co.nz

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