Farmers' role in plcs must be examined

The efforts by farmer-shareholders in Golden Vale Co-op to have their new co-op chairman installed as chairman of Golden Vale plc failed at last week's annual meeting. Institutional proxies ensured the plc chairman, Mr Pat McKenna, retained his position. But it has highlighted once again not just the divisions within Golden Vale, but also the question of farmer control over the workings of public limited companies in general.

Is it appropriate that farmers should be in the majority on plc boards, even in cases where the co-op from which the plc emerged no longer has a controlling stake?

Currently there are three such companies on the market - Glanbia, Kerry, and the third, Golden Vale, where the co-op has no share-holding at all, although about 40 per cent of the shares are held individually by members of Golden Vale Co-op.

In each case, farmers are in an overwhelming majority, although in only one case - Kerry - are there plans to reduce the farmer representation on the plc board to a minority. There is a compelling case for Glanbia and Golden Vale to follow suit and substantially reduce the number of farmers on the board.

Otherwise, Mr Ned Sullivan and Mr Jim Murphy will find it increasingly difficult to persuade institutional investors that the board is controlled by a majority whose first priority is maximising the earnings, not maximising the price the plc pays its farmer-suppliers for their milk.

There is speculation that the managing director of Golden Vale, Mr Murphy, favours a board restructuring that would substantially reduce the number of farmer-directors, especially in the light of stock exchange guidelines which make it clear that non-executive directors should be free of a business relationship with the company. It is arguable that a farmer who sells his milk to the company has such a business relationship.

Relationships between Golden Vale Co-op, which controls the milk pool, and Golden Vale plc, which is the production and marketing unit, have been poor for years, and much of the bitterness that surrounded the dismissal of the former managing director has not yet dissipated.

There is a strong and vocal lobby within Golden Vale that believes the main priority should be to pay the maximum possible price for a gallon of milk - even if this comes at the expense of Golden Vale's non-farmer shareholders.

A plc simply cannot entertain such favourable treatment for one of its constituents and if farmers believe that milk price is the be-all and end-all, then they should have kept Golden Vale as a co-op rather than going public - with all the responsibilities that a stock market listing entails.

Dairygold has shown the benefits to farmers of remaining a co-op, where Mr Denis Lucey, without the worry of keeping outside shareholders happy, has been able to support the price he pays farmers for milk. That approach is perfectly in order, for as long as Dairygold stays a co-op.

So far, Dairygold has shown no inclination to convert to a plc, and it is difficult to see the farmers of north Cork forsaking the benefits of a co-op for the doubtful benefits of a stock market listing, where potential institutional investors are likely to be doubtful about supporting a plc that would be effectively controlled by farmers through their co-op.

The reopening of the divisions in Golden Vale is unfortunate, to say the least. Mr Murphy has done an admirable job in re-directing a dairy company going nowhere and with an overwhelming dependence on commodity dairy products.

A more market-focused approach has been put in place and Golden Vale has successfully diversified into value-added foods through its Rye Valley acquisition. It will be difficult to maintain and accelerate that diversification if Mr Murphy has to deal with a vocal rump of shareholders who have different priorities.

Mr Denis Brosnan of Kerry has done other dairy processors few favours by maintaining the Kerry milk price at 103p for the rest of the year. That price for the main raw material for its dairy operations is not justifiable, based on the economics of the dairy business.

But with Irish dairying accounting for a fraction of Kerry's business and with massive cash flow from its international food ingredients business, Mr Brosnan can afford to indulge his farmer-shareholders without upsetting his institutional shareholders unduly. Others do not enjoy that luxury.

This commentator will no doubt be accused by farming interests of simply reflecting the "townie stockbroker" view of the dairy industry and being ignorant of the social role agriculture plays in the rural economy. But at some stage, economic realities have to apply. Put simply, paying over the top for milk means that other shareholders suffer.

And as long as farmers dominate the dairy plc boards, there will be a suspicion that they will be willing to allow the non-farmer shareholders to suffer if it means maintaining their own incomes through the milk price. As long as that suspicion is there, dairy companies will themselves suffer in the market.

It's time for some mature thinking.