Examination of Witnesses (Questions 522
- 539)
WEDNESDAY 6 JANUARY 2010
MR ANDREW
COOKSEY, MR
ROB KNIGHT
AND MR
PHILIP MOODY
Chairman: Good afternoon. I was going
to say ladies and gentlemen, but most of the audience is made
up of gentlemen. Could I welcome you to this further evidence
session in the Committee's inquiry into the demise of Dairy Farmers
of Britain. I hope the members of the public who have been kind
enough to join us this afternoon will understand that in this
formal and public part of its business the Committee would want
to open and reflect for a few moments on the very sad event which
occurred on Boxing Day, when David Taylor, who had been a Member
of this Committee since its inception in July 2001, very sadly
passed away. David, in every sense of the word, was an assiduous
attender at the meetings and had arguably one of the best attendance
records. His contribution, without a shadow of a doubt, was very,
very considerable indeed. As colleagues may know, I am retiring
from Parliament when the General Election comes, and so was David,
and I can remember having a number of conversations with him,
talking about his plans for the future, his hope to be further
involved in the National Forest—a matter near and dear to
him in his constituency area—to perhaps return to work in
the field of accountancy. All of a sudden, all of those plans
for both David and obviously for his family were very tragically
cut short. The tributes that were paid in the House earlier today
reflect the fact that on all sides of the political spectrum everybody
had a great deal of respect and, indeed, affection for David Taylor.
He was feisty; as far as witnesses were concerned on this Committee,
he was a bit like the proverbial bulldog, but in this case he
had teeth. If those before the Committee failed to give an answer,
he just carried on biting away at their ankles until finally he
got the truth from them. I received today a letter from the Secretary
of State for Defra, which I hope the Committee will not mind if
I just read out, but I think it does reflect the way in which
David's reputation was held. He says: "Dear Michael, I was
very distressed to learn about David Taylor. I liked and admired
him a great deal and I know he contributed a lot to the work of
your Committee. I find it very hard to believe that he is no longer
with us. He had such a thirst for life and a passion for his beliefs,
we will all miss him." I will miss him enormously as a good
friend, as somebody who had a wicked sense of humour, who was
always respectful, but he was his own man in every sense of the
word. Whilst he would work with the Committee, if there was ever
an issue upon which he disagreed, he would pursue it with his
own unique brand of relentlessness. He was a fantastic supporter
to the Committee. He often represented us on his own when he was
a rapporteur over our Rural Payments Agency inquiry and, indeed,
the work on flooding which he did with David Drew. He was loyal
and courteous and, above all, he was a delightful colleague and
companion to have on the Committee. Like many colleagues, I was
shocked and saddened to learn the news of his passing. The constituency
party in his constituency in Leicestershire have lost a remarkable
friend and representative and I put on record the Committee's
sincere appreciation in all the genuineness that one can say,
with words as our tools, for the work and contribution that David
Taylor made to this Committee from him joining it in July 2001.
It may well be that other colleagues would wish to make a brief
contribution, but I would be grateful if we could just keep a
moment's silence to reflect on the life and contribution and work
of David to this Committee and, indeed, to Parliament itself.
[A moment's silence followed.] If there are any colleagues who
would like to express their own thoughts, please catch my eye.
Mr Cox: Chairman, since I come from a
different political party from David, it is often thought that
those in different parties are prevented by that from mutual respect
and teamwork. Nothing could be further from the truth. David was
an outstandingly thoughtful and serious Member of this Committee,
with whom it was a privilege to serve and from whom it was a privilege
to learn.
Chairman: I will leave it to colleagues
to decide as to whether they want to participate in this particular
Division—I will not be. We will just wait until the Division
Bell concludes. Are there any other colleagues who wish to say
something at this juncture?
Miss McIntosh: I would just like to echo
what you said and I hope that we can send a copy of your comments
to his family.
Paddy Tipping: I knew David before he
came into Parliament and he narrowly lost the 1992 election in
North West Derbyshire, when he ran under the title, "Taylor
made for North West Leicestershire", and I think that is
a good epitaph for him throughout his time in the House.
Mr Williams: I think we would all like
to be associated with the Chairman's comments and I do not think
the Chairman has overstated anything in his opinion, because that
really reflected David's character and his sincerity and loyalty.
I did an inquiry with him, visiting the Rural Payments Agency
in Reading, almost at the beginning of the time that I was a Member
of this Committee and he was very supportive, but he was also
very appreciative of other people's opinions and took them into
consideration. He was extraordinarily generous as well.
Dr Strang: David was an exceptionally
hardworking and effective Member of Parliament, I feel, in the
Committee but generally. He was a really nice guy to be with;
a tremendous sense of humour.
Lynne Jones: I must say that I really
cannot believe that David is no longer with us and that he will
not be walking through that door. It was such a shock to learn
of his sudden death, of which I learnt early because my assistant
who works for me, her partner works for David. We will miss him
greatly and I am sure that his constituents will too, because
I know he was very highly regarded as a constituency Member of
Parliament, as well as an excellent contributor to the work of
this Committee.
Q522 Chairman:
I thank colleagues for those words. As Anne McIntosh suggests,
and as I was going to do, we will send an official copy of the
record of the Committee to David's widow, Pam. I will write formally
on behalf of the Committee to her and hope that when she reads
what we have said it will give her some comfort and a genuine
appreciation of the way that David was so highly regarded by his
colleagues. I thank our witnesses and members of the public for
their patience, but I am sure you will appreciate that it was
only right that we proceeded in that manner to record our thoughts
at this sad time with David passing on. I would like to move on
to the formal evidence session that we are about to do and thank
Rob Knight, the former Chairman of Dairy Farmers of Britain, Philip
Moody, the former board member of DFB, and Mr Andrew Cooksey,
the former Chief Executive of the company, for coming to join
us. Gentlemen, I am grateful to you for your kindness in giving
your time. May I just reiterate something that I said at the outset
of this inquiry and just reflect for a moment or two as to why
you are here. What we said was that we were not on a witch hunt.
We were not trying to pin the blame for the demise of Dairy Farmers
of Britain on any one individual. However, the inquiry is designed
to try and understand what went wrong with a very important part
of the dairy industry, an important co-operative within UK agriculture.
One of the things we are seeking answers to is whether there should
be any fundamental changes made to the way in which the governance
structure and other matters connected with the operation of co-operatives
should be altered in the light of the lessons that are learned
from Dairy Farmers. Gentlemen, you will be unsurprised to learn
that in terms of the evidence that the Committee has received
and, indeed, comments made from within the farming community,
that there are a number of searching questions that people were
hopeful that we could get on the record, and you may well be able
to provide certain information, which on reflection, the Committee
would be interested in hearing. Let me start by putting this question
to you. We are obviously aware of the governance structure of
Dairy Farmers. You had a board of directors, which effectively
comprised farmers and non-executives, and effectively as the executive
directors—two of you at least—you were the servants
of that structure. You provided them with the information and
the input to enable crucial decisions about the future of DFB
to be made. Perhaps you could describe for me, for the time you
three were there, about how you saw in those times the relationship
between the board and the executive team; how did it operate?
Did it operate amicably with good flows of information? Give me
a pen picture of how it worked.
Mr Knight: Thank you for that
question and thank you for your welcome and introduction. We are
delighted to be here. As Chairman of the board, obviously I worked
very closely with both these gentlemen and with the board, but
particularly with Andrew Cooksey, who was Chief Executive. It
is important to note that the governance, the rules of Dairy Farmers
of Britain were very clear in the way that the board was constructed,
in that there had to be a majority of farmer directors—not
less than six farmer directors—within the constitution of
the business, and always the farmer directors had to be in the
majority. Therefore, towards the end of Dairy Farmers of Britain's
life, the board of directors comprised six farmer directors—in
actuality, it was five because one resigned but that is just a
matter of detail—and four non-farmer directors; four non-executive
directors in modern parlance. Each of those directors brought
to the table some specific range of skills, albeit finance, retail
and, particularly when we acquired Associated Co-operative Creameries
(ACC), engineering skills. Therefore, in a reasonable question
as to why were the executive not board members, the reason they
were not is because it was not actually provided for within the
constitution or the rules of the business. We endeavoured to work
our way around that and had an extremely close working relationship
with the executive. I would say on behalf of the board, and certainly
as Andrew Cooksey is sitting here he can answer from his perspective,
the relationship with the executive team was excellent. It was
professional, courteous, friendly and testing, in exactly the
same way that you would expect any board to test that of its executive.
The regularity of the dialogue between the executive team and
the board was fulsome. The board would officially have one board
meeting per month, but often there would be two. There would be
a number of sub-committees, of which the executive were always
present and always provided information for the board. Outside
of the meeting schedule there would be regular contact, in fact,
I would go so far as to say, often daily contact, between myself
and certainly Andrew and key members of his executive team, the
finance director in particular. That happened throughout the life
of Dairy Farmers of Britain.
Q523 Chairman:
You mentioned that the board were supplied with copious quantities
of information. You are a group of executives, you work closely
together, you are in touch with the fine detail of the business
almost on a minute-by-minute basis, did you have absolute transparency
with the board or, in the nicest sense, did you have inevitably
to edit or paraphrase some of the information that was passed
on to them?
Mr Cooksey: I can answer that.
The executive team's responsibility was to produce clear and careful
information to the board, so we would produce a full management
account pack that detailed all aspects of the business performance.
That would be reviewed but we would précis and provide
a written report to the board.
Q524 Chairman:
In that management pack, for example, were the board involved
in the setting of the annual budget for DFB, both from the sales
and the financial point of view?
Mr Cooksey: The executive would
bring together a budget, we would present it to the board and
the board would either approve it or not approve it, as the case
may be. In any normal corporate governance process that budget
would be scrutinised. It is a £600 million business, highly
complex in its structure—2,800 employees operating from
11 manufacturing sites and 44 depots—a complex budget to
bring together; you will always have to summarise it and present
it in a summarised form, but with no lack of ability to access
any form of detail on the back of that.
Q525 Chairman:
What form of independent advice could the board have turned to
if they had wanted to have another critical eye looking at the
fruits of your labours in terms of the setting of the budget for
each financial year?
Mr Knight: I will try to answer
the question but I will come back because there is a lot of detail
that we want to give to you to help. There was one other governance
committee that is terribly important within the framework of this
particular discussion. When we acquired the assets and business
of Associated Co-operative Creameries then, in truth, what happened
to the business was that the business had about 150 souls in the
business, that was it, it was a milk brokerage co-operative; and
then the next day we had 2,200 employees and a business of £600
million and all of the complexity, technology assets and all of
that, which you can imagine goes with a business of that size.
There were some issues and challenges in that in terms of communication
with both the membership and also ensuring that the governance
of the company could be kept at the highest level when, in truth,
the board structure was that six of the directors had come from
the farming community and they were passionate and committed and
did an absolutely brilliant job to the best of their abilities.
We were faced with a situation of saying, how do you distil some
of this information down and give the board the trust that it
has gone through, the rigour and the necessary scrutiny of detail
that they would require. With the board's approval a separate
committee called "the finance committee" was set up,
which was comprised of Andrew Cooksey, Chief Executive, the Finance
Director, Philip Moody, who is a lifelong financial professional,
and one of the advisers to the board, who was a banking adviser,
so we applied a second level of scrutiny to some of the questions
that you have raised.
Q526 Chairman:
Mr Moody, tell me, as a member of the board, as such, you have
maintained a dignified silence in terms of the questions that
I have asked. Would you care to comment on any of the issues that
I have raised so far?
Mr Moody: I would be very happy
to, Chairman. My role as a director, in a corporate governance
sense, revolved around participation primarily not only in the
boardroom but in two sub-committees that I sat, one of which was,
as the chairman has said, was the finance committee. The purpose
of the finance committee was to give the financial information
coming before the board a level of detailed scrutiny so that in
turn we could report to the board what we regarded as being the
key elements upon which the board needed to reflect. The finance
committee had no powers, it was simply a review and a corporate
governance based committee. That finance committee met every month,
before the board meeting, it produced minutes which were circulated
to all board members, it was chaired by a farmer director and
the formal members of that committee were myself, an individual
called Mr Norman Coward, who was an adviser to the board and formerly
a senior banker within HSBC and formerly a director of one of
the companies that was a predecessor to Dairy Farmers of Britain.
Mr Knight was in attendance at most of those meetings, but he
was not formally a member of that committee. The chief executive
and the finance director attended every single finance committee
meeting.[1]
Q527 Chairman:
Just so that I can understand the detail, this finance committee
was in place as part of the governance structure ahead of the
purchase of ACC?
Mr Moody: No. It was put in place
as a consequence of the acquisition of ACC. Prior to ACC being
acquired, Dairy Farmers of Britain was a relatively small and
simple business. It was primarily a milk brokerage, although it
did own some processing businesses but they themselves, certainly
by comparison to ACC, were very much smaller businesses and very
much easier to understand.
Q528 Chairman:
We are going to come on obviously and talk about the ACC situation
in more detail a little bit later on in our questioning but so
that I understand the mechanism, the actual governance structure
was the board, supported by the executive group, that was the
decision-making body, which effectively digested the proposal
and ultimate execution of the decision to purchase ACC. The body
that you have just described came along as a consequence of that.
Mr Moody: That is correct, and
I would just say that the management accounts were presented and
interrogated by that finance committee each month, the budget
was presented in its draft form, usually in two or three iterations
of its draft form before it reached its final form that went before
the board. That committee frequently asked for further information
on particular aspects of either the financial performance or the
budget on which it felt it needed further explanation.
Q529 Chairman:
But to be absolutely clear, the body you have described did not
exist until ACC became part of DFB.
Mr Moody: Correct.
Q530 Paddy Tipping:
I am interested in the role of farmer directors. Clearly, they
brought a lot to the company but in a sense it was new territory
for them and I wondered what training was available for them.
Mr Knight: It was absolutely new
territory for them. Let us look first and foremost at the election
process. The election process of the farmer directors was a council-controlled
mechanism completely. As chairman of the board, I had no influence
whatsoever in that particular process and in many respects they
were given to me by the council, for all the right reasons and
for the reasons that were in the constitution as it was set up.
Of course, the council tried within all of their powers to select
the ones who they believed would be the right calibre of individuals
for the business. The next challenge for us was that immediately
they were appointed, they were then in such a significant position
of governance of the company and had to get up to speed very quickly.
The reality was at the end of the day these gentlemen and ladies,
in one instance, were professional farmers and were part-time
directors. But the specific answer to your question is that first
and foremost they all had quite an extensive induction programme.
I was quite keen on that. It was an absolute necessity and the
induction programme consisted of time spent with me, with the
executive team, with whatever agencies were deemed to be necessary
after discussion with the new director, particularly a lot of
time spent with the non-farmer directors who were on the board.
As I mentioned, I tried to balance the board with areas of specific
expertise that were necessary for the running of the business
that we had then; finance, engineering, retail, marketing. Probably
in reality on an eight-weekly basis, I would sit down with each
of the directors and talk about progress and areas that they were
feeling confident about or less confident about. To give you a
practical example, if they had been in a board meeting and heard
quite a lot of jargon about mergers and acquisitions that really
was passing them by, to ask questions and to raise red flags so
that we could handle that particular part of it. In terms of agencies,
we used various agencies en bloc, for example, Plunkett, EWFP,
when it was appropriate, and so forth, regular study tours to
overseas operators, I can think of a couple of directors who went
to the States, some went to Belgium, to Holland, to see sister
businesses. At boards, we would have as and when necessary training
for legal training on competition law, for example, when that
law changed; unemployment law when that law changed, and at the
year end, we would sit down and do a 360o appraisal mechanism
to get feedback from other directors, get feedback from themselves
and look to put some improvements into practice. I have huge admiration
for the farmer directors, huge admiration for the way that they
balanced the efforts of what they were having to do on farms—some
of them before a board meeting had been up at four o'clock in
the morning milking and having to provide relief service—so,
huge admiration for the challenge that they had taken on and,
within the limitations of their working life, what they achieved.
Q531 Paddy Tipping:
I think you told us that you met the farmer directors on an eight-weekly
basis, roughly. Was it a formal evaluation? What was the nature
of the chat?
Mr Knight: Sometimes yes and sometimes
no, is the honest answer to your question. The vice-chairman and
I would talk, probably daily, certainly meet up once a week, and
we would discuss areas that were pertinent to the running of the
business, pertinent to the farmers, things that were coming up
in the board meeting, what the farmers' views were, because within
the board their specific area of expertise both backwards and
forwards out from the board and back into the board was the information
of the issues that were affecting the membership. It could be
hygiene factors, it could be transportation factors, it could
be seasonality, all sorts of areas. Also, they took great personal
care in chairing some of the district meetings and trying to pass
some of the messages that were in the business down to the grassroots
farmer level. That was the specific area of real unique contribution
within the board; also, within the board room, looking at the
decisions that we had to make and putting an absolute farmer member
perspective into the board that would counteract and balance some
of the debates that were coming in from the business level.
Q532 Paddy Tipping:
Was it a process in which you were saying, how is X doing, how
are they growing, what more do they need to do? Was it as full
an answer as that?
Mr Knight: At the year end, yes,
absolutely. At the year end, I would ask them to measure themselves
on the areas of performance: did they believe they were up to
speed on X, Y and Z; how did they believe they coped on that particular
area; what did they believe their strengths and weaknesses were;
what did they like or not like about me and the way that I was
handling them? A complete 360o feedback. I did not want it ever
just to be an annual event, and I do not think it was. It was
an ongoing dialogue with directors and that did start to establish
itself so that we could have that freedom. That is the best that
I can answer it.
Q533 Chairman:
Could I turn to you for a moment, Mr Moody. We have just heard
from Mr Knight that a number of visits were paid to other co-operatives—in
fact, the United States was cited as one example. Obviously, as
a non-executive director of the company, working with the farmer
directors, you would have had very close discussions with your
fellow board members. What lessons were brought back? What did
people learn from going out with the company?
Mr Moody: It is a very interesting
question and I think that perhaps it would be helpful if I gave
some context around which the merger that created Dairy Farmers
of Britain was given because that is really where the contact
certainly with Dutch and other continental co-operatives started.
If I may, let me give you that background and then lead on to
answer your questions, which will put the answers into context
for you. You are aware, I am sure, that Dairy Farmers of Britain
was formed out of the merger of two other farmer-controlled businesses,
the Milk Group and Zenith Milk. At the time that the Dairy Farmers
of Britain merger was being contemplated, dairy farmers were going
through a particularly desperate time; milk prices were at an
all-time low and many farmers were finding it very difficult to
even manage to break even, let alone earn profits, and the industry
was under very great stress and pressure. Consequently, there
was a very strong sense that farmers needed to do something to
take destiny into their own hands to try and create a longer-term
sustainable future. At that time, the boards of these two businesses
were approached by a consultancy based in Holland that had considerable
experience of working with European co-operatives; European co-operatives
that had been established for many years, had been able to build
up substantial capital and assets over those years and which had
used those assets to acquire processing businesses and were successful
processing vertically integrated businesses, particularly in the
dairy sector. They encouraged these two boards to combine to form
a new generation UK co-operative that was formed on the same lines,
on the same basis, as some of these European co-operatives to
pursue a vertical integration strategy within the UK dairy industry.
The boards of those two companies found that an attractive prospect;
they found that an effective means to try and address some of
the concerns that were inherent in the industry at the time, so
Dairy Farmers of Britain was conceived. In the merger document
that was sent to the members of those two co-operatives asking
them to vote in favour of the merger and, indeed, at the many
meetings of members of those two co-operatives, it was very much
presented to them that the strategy was to try and copy the European
model. In fact, one such European co-operative, namely Campina,
was specifically referred to and summarised in the circular document
that went to the farmer members to support the creation of Dairy
Farmers of Britain. The visits that took place after the formation
of Dairy Farmers of Britain by the board directors were following
on a policy of then really trying to get closer to these European
co-operatives and to understand much more closely how they conducted
their business and how they were effective in the establishment
of vertical integration strategies.
Q534 Chairman:
That is very helpful. Can you refresh my memory as to how big
an enterprise Campina was at that time?
Mr Moody: I do not have the numbers
in my head, but a very substantial business and one of the major
European dairy processors.
Q535 Chairman:
The reason I ask that question is that if the model that was put
to the founding two co-ops and their members was of a very substantial
nature and visits and advice was given, again I am interested
because of what subsequently occurred, as to what impressions
might have been gained by members because, as you rightly pointed
out, the industry was in a perilous financial state, you had two
small co-ops that were going to come together to form one large—or
larger—co-op, but within an industry where even the "new"
co-op, Dairy Farmers of Britain, was still a relatively small
player. I think I remember looking at some comparative figures,
not for Campina but for Arla, which indicated that it was a €6
billion turnover business, compared with your post-ACC of about
£500-600 million turnover. If we wind the clock back, what
we are talking about is an example of a big business being presented
as, "This is where you could be", to a very small business
which had yet to develop. I was interested as to what lessons
particularly the farmer members and the non-executives derived
from the comparison between effectively a financial minnow in
the world of European co-operatives and the big fish that had
already got there. What was the impression?
Mr Moody: I think, Chairman, you
have anticipated well one of the major lessons that was learned
by the directors when they visited these businesses post the merger
of the two to create DFB because one of the lessons that was learned
was the sheer scale of those businesses compared to their ambition,
as distinct to the scale of Dairy Farmers of Britain compared
to its ambition. If I were to anticipate a question you may or
may not be intending to ask later about what lessons can be drawn
out of this whole thing, one of the lessons is to try and set
anticipation and expectation at realistic levels because Dairy
Farmers of Britain was always challenged in terms of having the
financial resources to enable it to be able to effectively carry
out what was a huge task in terms of its strategy.
Chairman: Part of the reason, Mr Moody,
that I asked that is the evidence which I read, and, indeed, some
of the comments we have heard, reflected the underlying optimism
of dairy farmers who accepted that it would be a long, hard road
and that they would have to put their own hands in their pockets
at a very difficult time, but in forming the new enlarged co-operative,
they went forward with almost unreserved optimism that somehow
it would be better than what they already had, and I think that
was reflected in your answer.
Q536 Mr Williams:
Mr Knight, I think it was in 2005, the chief executive left the
company and you took over a position of combining the chief executive's
role with the chairman's role, to become the executive chairman.
What was the reasoning behind that decision? Was it something
that the board discussed?
Mr Knight: Taking the last point
first, it was absolutely what the board discussed, and the reason
that I took up that challenge, for a shortish period of time,
being executive chairman and chief executive, was absolutely at
the board's request in order to do that. When we bought ACC and
when we started to look at the issues we were facing with ACC
and the different skill sets which we would need to control a
business of that sort of size, that was when we decided to modify
and change the people that were in the business at the time, and
the DAT, and to the best of my knowledge and recollection that
was done absolutely amicably. For a short period of time, I combined
both posts.
Q537 Mr Williams:
In terms of governance, it is not recommended really, is it?
Mr Knight: This is why it was
for a short period of time.
Q538 Mr Williams:
How long was it, roughly?
Mr Knight: I have to draw on my
recollection: nine months to a year, perhaps.
Q539 Mr Williams:
Only we have been told that the remuneration that you received
during that period of time, 2005-2006, was in the region of £400,000.
Mr Knight: It probably was, yes.
1 Subsequently amended by witness to read: The chief
executive and the finance director attended the overwhelming majority
of finance committee meetings. Back
|
