Lockhart said vast amounts of research had been done on effective board size, with eight the optimal number of directors.
Dr James Lockhart – board downsize a no brainer.
“There’s so much information out there on this that consultation with farmers over this issue could be done very succinctly and quickly,” he said.
There was no reason board size couldn’t be dealt with at the annual meeting, ahead of the governance and representation review being done by the board and Fonterra Shareholders’ Council.
“This move by Gent and Armer is driven by the question, ‘what can we actively do to enhance the performance of this company?’ I can’t see why the board wouldn’t embrace this and let’s look at this, it has some merit.
“Putting it off and including it in a wider review isn’t the response of a board who actively wants to engage.”
Lockhart said if the board of a large company was smaller than seven, eight or nine the opportunity to bring in a broader set of capabilities was limited.
But if it was larger, especially about 13, the risk to performance was higher.
“With a large board there’s a bigger risk we get what we can politely call free-riders – people who don’t contribute as much as everyone else.”
With the current board size and number of independent directors who bring commercial expertise, Lockhart said farmers should be asking what its farmer directors were doing and how much they were contributing.
“When you have a board of 13, including nine farmer directors, it looks as though the primary role of those farmer directors is one of representation as opposed to performance.
“The size of the board has compromised its primary role.”
Lockhart said it was common for co-operative boards to have an expectation from shareholder members that they would communicate directly with shareholders.
But the amount of time spent doing that had to be carefully managed if it wasn’t to compromise directors’ primary role.
Farmers needed a clear understanding of the board’s role, and some education about that was probably necessary, he said.
“The fact is Fonterra is already well set-up with its Fonterra Shareholders’ Council to ensure a representative function is fulfilled.”
While the roles of board and council were well defined, they hadn’t been well enough enacted, he said.
Wellington-based governance expert Richard Westlake also said the annual meeting was an appropriate place to take a resolution on reducing board size.
Because it was a constitutional matter, having shareholder approval for any change through the annual meeting vehicle was a sensible and transparent way of doing it.
At first glance a board of six farmer – elected directors and three independents was a good balance, although five and four could be more effective.
It was a big stretch for shareholders to go from nine to five, and six and three could be more palatable.
A board size in the high single-digits was seen as appropriate for effective decision-making although it would be smaller in a situation where a company had to make very rapid decisions.
‘With a large board there’s a bigger risk we get what we can politely call free-riders – people who don’t contribute as much as everyone else.’
Larger board sizes required a very effective chairman and there was the risk of an “in” and an “out” crowd developing where people were aligned in separate groups.
“It can be done but it’s a lot more work for the chairman,” Westlake said.
Apart from the fact that all the research pointed to an optimal board size of eight, and so there should be a reduction in the number of directors, there was also evidence the Fonterra board wasn’t performing to the level it should, Lockhart said.
Numerous incidents over the past few years where disclosure was perceived as being too slow was symptomatic of an organisation that wasn’t operating ahead of the debate but was often behind it.
“We have to get some crank in the engine room. Fonterra is too important to have any perception at all of under-performance,” Lockhart said.
A smaller board meant it was more apparent if a board member wasn’t performing, but farmer shareholders needed better information on which to elect their directors.
The candidate assessment panel had gone some way towards addressing that but there had still been some questionable anomalies with how some candidates had come out of the process, Lockhart said.
The process needed to be more transparent and there needed to be some measure for farmers to gauge the effectiveness of sitting directors.
The board undergoes an evaluation annually and an independently derived form of that evaluation should be made available to farmer shareholders.
A reduced board size would open up some questions over director election timings that could be addressed in the review proposed for next year.
“With a board of 13 you can get a level of churn of directors without putting too much additional pressure on the board’s performance because some of them (farmer-elected directors) are effectively back benchers.”
With a smaller board an annual election cycle could have a greater effect but that could be overcome by moving elections to every second year, he said.
