Stephen Franks - The amalgamation/monolith structure of Fonterra was a mistake. But it is what we have and pulling it to bits now could compound the mistake.
The Fonterra monopoly came from a conjunction of dairy politics with the instincts of a leftist Clark Cabinet, at a time when they needed to rebuild trust with business. The Fonterra ‘capture the value chain’ slogans appealed to a Cabinet nurtured on coop=good/big battalions/commanding heights socialism. So they legislatively outflanked the Commerce Commission, relegated official reservations, and created the monolith.
The Herald has an excellent review of the reasoning and the outcomes by Tony Baldw, an official at key times. But his recommendations could be used to support those who’d like now to pull levers the other way, and impose new structures, equally well meant, equally sloganistic, and equally without knowing the future any more reliably.
I led the legal team working for the Dairy Board on the Globalco proposal that got killed by the Commerce Commission in 1999. As an MP I sat on the Select Committee that refined the Dairy Industry Reform Act after the deal to set up Fonterra.
My personal view had been that the stand-out best solution was to set up two competing coops, preserving the competitive challenge of their different cultures. But deliberately creating a cluster effect instead of a monolith was anathema to the coop fundamentalists of that era.
The McKinsey and Boston Consulting Group work focussed on the potential gains from size. In my opinion they were too influenced by what they thought was politically acheivable. They knew what Dairy Board people who were expected to win the internal political struggle wanted to hear. So the relative sophisticates of NZ Dairy Group from Hamilton were subordinated to the cult figures of Kiwi, gathered around Craig Norgate in Hawera. The latter seemed better at shed politics.
I am a strong believer that coops are a robust and sensible mechanism for collective farm gate marketing by and for farmers. I do not share the scepticism about the ability of farm leaders to become excellent directors. But I am deeply sceptical about the group think that emerges in any institution insulated from the constant reality challenge of genuine competition in its key operations. ‘
I am aware of no evidence that business is necessarily better when it is bigger, and especially when it gains monopoly power. Jeremy Moon’s business did not come out of the Wool Board. It was not an insight of raw material suppliers. Whittakers Chocolate is tiny by world standards but it is taking on Nestle and Cadbury and their big owners and winning in Australasia, apparently without the outside capital people believe Fonterra must have, and without legislative preference. But the rewards for that kind of entrepreneurship go to those whose unique skills and experience create the value. Farmers can’t buy that income stream just by recognising that it is a great source of value, and setting out to capture it.
Read the rest at StephenFrank.co.nz
The post Stephen Franks – The Big Fonterra Mistake appeared first on LawFuel New Zealand.