Governance warning for Fonterra unit-holders
Investors without voting rights have extra reason to watch the directors, reports Andrea Fox.
With Fonterra's new unit trust fund poised to list on the NZX and ASX today, unit buyers have been advised to keep an eye on governance of the big dairy company.
Fund manager Harbour Asset Management has told clients in its advisory, Harbour Navigator, that since unit investors are not entitled to vote, they must keep a watching brief on the company.
The advisory said investor interest in the Fonterra Shareholders Fund, which lists today, had been unprecedented.
"Retail, farmer and global demand was very strong. That is why it is relevant to remember the key short-term drivers of this investment and valuation is not the milk price, but instead centres on Asian growth and Fonterra's ability to maintain a fast growth rate in the food services segment.
"Investors must also keep an eye on governance."
Harbour managing director Andrew Bascand said there were many structures like Fonterra's unit trust fund elsewhere in the world, but there had been none in New Zealand until now.
"We don't have the ability to vote at shareholder level so we are relying on the normal trust and due diligence of the directors of Fonterra who have sanctified and issued the units to us, to operate in the manner which all stakeholders are happy with."
Bascand said he expected the directors would do so, "because of the people involved and the structures put in place".
But he said that overseas, breakdowns in these sort of structures had caused the companies involved to "wobble badly".
Shares which don't vote fall to a substantial discount, he said.
Rupert Murdoch's NewsCorp, with its A and B shares, was an example.
But ironically, NewsCorp had turned out to be one of the best performers this year because, despite the turmoil and fallout around newspaper hacking scandals, governance had improved.
"When it was bad, [non-voteable] shares traded at a 15 per cent discount.
"When we value Fonterra we have to watch governance."
Governance of New Zealand's biggest company has been in the spotlight in recent weeks with some farmer-shareholders expressing concern over the board election of Waikato farmer John Wilson as chairman-elect to succeed Sir Henry van der Heyden, and van der Heyden's decision to stay on the board for a few more months after stepping down at next month's annual meeting.
There is also concern among Fonterra's 10,500 shareholders about a governance review currently under way and a suggestion that the number of farmer directors could be cut and the number of independent directors increased.
The board's scolding response to a farmer proposal - to change Fonterra's constitution to cement the number of farmer directors and, therefore, continued 100 per cent farmer control post-fund listing - has also caused friction.
Bascand said none of this was unusual, given Fonterra's history.
"If you look at the history of who has comprised the board through time, there's always been this tension.
"The tension persists today and it's probably healthy tension, but it needs watching."
Meanwhile, Fonterra last night confirmed the unit listings and a new market for trading of shares between farmers could be launched today after an Order in Council yesterday under section 109B of the Dairy Industry Restructuring Act 2001.
The order removed the act's requirement for Fonterra to issue and surrender co-operative shares to its farmer shareholders.
It also made Fonterra's offer of units by the unit trust fund, the Fonterra Shareholders Fund, unconditional.
The fund is intended to support the Fonterra Shareholders Market by providing a platform for Fonterra's farmer-shareholders to exchange shares for units, and vice versa. Outside investors will also be able to buy and sell units on the NZX main board and on the ASX.
The act was passed in September 2001 and provided for the formation of Fonterra and an accompanying regulatory framework for the New Zealand dairy industry.