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Norgate responds

By Vincent Heeringa

Saturday 1st June 2002

Text too small?
When Unlimited sought a response from Fonterra about Powdergate back in March, there was none. "We're talking to farmers first," it said. Fair enough. Now for the first time in public, chief executive Craig Norgate responds to Powdergate.

Unlimited: Did you know about Powdergate - that Kiwi Dairies was selling to [unauthorised customer] SPD directly and in such large amounts?

Norgate: No.

U: But the volumes were large - 9000 tonnes over two years. How could you not?

N: It isn't large by the size of the business. But also if you look when it was sold and the nature of it, it's not surprising [that I didn't know]. The majority was sold from January 2001 until the end of the season - after the announcement of GlobalCo - and essentially I was on leave from Kiwi, certainly I was not having anything to do with the day-to-day business. It was not a dissimilar situation the previous year when we were in the heart of the final stages of the merger. With that situation, the day-to-day involvement with the business was virtually non-existent. In any case, you wouldn't necessarily normally pick up that sort of stuff.

U: Why not?

N: Well, how it would come to light?

U: In the balance sheet. The 2001 deal was worth $39.5 million, a significant amount of revenue for any company.

N: As chairman of Food Solutions Group [the company selling to SPD] I only saw consolidated results. Their bottom line was tracking to budget; their revenue was down, but that was on an aggressive sales growth figure; and so there was nothing that popped out as a red flag that would cause you to look further. And then the company that was actually selling to SPD was a subsidiary.

U: Do you regret not picking it up?

N: Oh yeah, that's a no-brainer. From my point of view I guess I knew the industry had a history of these sort of things and we'd made it clear when we bought New Zealand Dairy Products that we were simply not going to be involved in it. That was part of the problem, I guess, that people knew where I'd drawn the line in the sand and for that reason some of the reporting was a little liberal shall we say, so that nothing did stick out. And there were a bunch of people that felt that they weren't doing anything any different to what was going on elsewhere. They felt justified.

U: Although the difference is, in my understanding, it is that it had always been in much smaller volumes and at a different end of the commodity business (a much lower end).

N: No, it wasn't a different end of the commodity business.

U: This was high-quality milk products, though.

N: No. You believe what you read in the media.

U: We are the media.

N: No, I mean there was a comment in the Herald for example that it was high quality product for low prices - they were wrong.

U: So the criticism that as chief executive you oversaw what appears to be illegal activity is not something that you countenance?

N: No, what you're talking about is something that is not dissimilar to fraud. Where you've got more than one person that is prepared to conspire to tell you something different to what is actually happening, and the only way you catch it is often by accident. And that is what happened in this case. You know, there was some product found in a warehouse on the other side of the world that caused some questions to be asked and as soon as those questions were asked I tore in to it as quickly as you would any issue like that.

U: Who were the executives that were held to account? We know that the two executives Paul Mara and Malcolm McCowan were suspended. But are they still suspended?

N: You'll have to refer to the press release about them.

U: Do they work for the company anymore?

N: No.

U: It is interesting that you use the word fraud because by all accounts it looks like fraud and yet we know the [Fraud Office] was interested but there was never any report or follow-up.

N: I didn't use that word fraud, I said circumstances were similar to what you might find with a fraud.

U: Okay. Why has there been no police investigation in to it?

N: There is nothing to answer from a criminal point of view. Having said that [MAF] is still investigating issues around it. [This has yet to be reported upon].

U: Have you been co-operating with MAF?

N: Yes.

U: How come they had to get a warrant to come and look at some documents?

N: You should talk to MAF about that. They didn't have to.

U: Why did MAF have to get a warrant? If they had asked, you would have let them?

N: Yes, and they freely acknowledge that.

U: So when you discovered it and started tearing in to it as you say, at what point would you have thought it was a criminal matter and did you have an obligation to ...

N: There was no suggestion it was a criminal matter.

U: Why not? If they are going around a statutory body like the Dairy Board would that not be a criminal matter?

N: No, they were selling to SPD. There was no evidence as to what SPD was actually doing with the product. There were legal opinions offered that there was nothing untoward and then ultimately it was handed over to MAF by the Dairy Board because they believed that there were questions to be answered, so that was the appropriate way for it to be handled.

U: They shouldn't have been selling to SPD is the point though isn't it?

N: Well from my point of view, they shouldn't have. From a point of view of these sorts of issues, relative to others around the world, they could be seen to be quite innocent.

U: You mean in the dairy world?

N: Not just the dairy world. SPD, for most of the people involved, were just another customer. There was no question at all. And the investigation that was conducted into Fonterra was designed to find out who knew what. That is, who knew they were more than just a customer.

U: When the KPMG and Deloitte report was put together, what were the findings of that?

N: I don't know.

U: Have you not read it? Why not?

N: Because it was report for the board and I guess I was conflicted so ...

U: How did you get some resolution in the matter though, as chief executive both of Kiwi and now Fonterra. You must have been involved in the completion of the matter. I mean what did you actually do?

N: It was handled by a committee under the chairmanship of one of the independent directors. The report then went to the board, the board agreed on the action. I still don't know to this day exactly what that action was.

U: You don't know? But these were your employees.

N: Yeah, but I was a bit conflicted in that there were fingers pointed at me. So I was outside the process the whole time.

U: The timing itself was interesting too because, as we understand it, the problem came to light in April and it wasn't until September that there was some action taken.

N: That is not correct. The problem came to light in late May, early June. The investigation commenced immediately. So there were a series of investigations if you like, one conducted by Kiwi and then the Dairy Board, which resolved in it going to MAF.

There was another one. There was an investigation as to whether it impacted on the merger economics. That took place until about September. This report was satisfied that there was no material impact on valuation and it was only after that that the Fonterra investigation began in terms of governance and responsibility issues. So there was no delays, it was a continuous process.

[There was also a KPMG/Deloitte report done in conjunction with private investigator John Hughes.]

U: How do you respond to the criticism that the reason it did not become public - even though it was known internally for so long - was because of fears it might effect the merger?

N: I'm not sure when it first became public, but it was well known within the industry. If it became public by leaking, which I suspect it did eventually, it was well known for some months, so I don't believe that was a factor.

U: So the merger had enough logic in its own right not to be affected?

N: Absolutely. I mean this is a relatively immaterial matter. We took it seriously, and I personally take it bloody seriously, but it was enormously immaterial compared to what we are talking about in terms of the scope of Fonterra.

U: Nevertheless it did create an impression amongst the public and amongst your shareholders that your execs, maybe you, were involved in some kind of dodgy deal and the company has been very quiet - in fact unresponsive. I think this is probably the first time you have spoken publicly.

N: It wasn't appropriate for me to speak, full-stop, until the matter was concluded.

U: Because?

N: Because part of the investigation was in to whether I had done that or not. Nothing frustrated me more than to get up in the morning and read the paper and not be able to tell my side of the story.

U: Who was telling you not to say anything?

N: Well, you will never find a circumstance like this where it is appropriate for a person in my position to comment.

U: Even though you had already explained to the Board your situation?

N: No, I hadn't.

U: They didn't give you an opportunity?

N: They got the opportunity to hear it through the investigators' reports.

U: Did that frustrate you?

N: Yeah, absolutely.

U: Do you feel like they should have given you the chance?

N: I wouldn't want to comment on that process. It dragged on far, far longer than anyone had expected and put everyone in a very difficult position.

U: I think the media understands the need for a media silence during the process of an investigation like this but we have never seen any reports. None have been released. We don't know the contents of any nor the conclusions that were drawn from them. Why is it that the company has been so quiet about it?

N: I don't think you'll ever find a privately owned organisation that would make that sort of thing available. It would leave the directors open to get sued themselves if they did.

U: Yeah, it's private but it's a co-op as well isn't it?

N: It is a private company owned by private shareholders.

U: So have the owners seen the John Hughes report?

N: No, and nor would you find a company of this size in a similar situation handing out a report like that.

U: We reported a comment from chairman John Roadly saying he hoped when the report came out he could stand and look his shareholders in the eye.

N: And that is exactly what he did.

U: And has that report been given to shareholders?

N: He stood up and looked the shareholders in the eye in a round of meetings in February.

U: Yes, and that's excellent. But has the report been given to shareholders?

N: No. It contains other orders that were sealed - I mean you will never ever find a report of this nature that is released to shareholders. It never would be nor legally could be

U: Why not?

N: Well, use a bit of common sense here. You've got a situation where it contains references to orders that have been sealed in court. You will never find that a report like this has [made it into public hands]. If you show me one then I'll answer your question.

U: What have you learnt from the exercise, and have you changed anything in your style of management? Have you built any new systems in here at Fonterra?

N: We are still at the stage of building up the systems. We picked up the Dairy Board systems at the base of that because the merged entity is a global company so those are the most relevant. The reality from my point of view is that I'd be less inclined to trust some of the things that I'd been told - it doesn't go a lot further than that.

U: What are you doing to address the uncertainty that your shareholders have felt as a result of this and, I guess, also the public? What are some of the practical things you have been doing to win their respect and confidence?

N: Well, if you think about shareholders, it's about performance. I guess what we can point to there is that there are three key components we are anxious to focus on for the first six months of the merger. One is to ensure that we didn't drop the ball in terms of existing business, that we did still pick up the milk and process it and sell it. And that has categorically been achieved.

The second area is actually the [change] process itself, which is substantially behind us now.

The third area is the outstanding new talent in the organisation, which is a story that needs telling at some stage. For example, a new guy that arrived from Denmark two days ago has bought a house and two cars and his family is settled in and he is ready and eager to work. So we've brought in some very good new talent and kept the best of the old talent as well, so our capability as an organisation within the industry has stepped up quite dramatically.

Vincent Heeringa

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