Examination of Witnesses (Questions 540
- 559)
WEDNESDAY 6 JANUARY 2010
MR ANDREW
COOKSEY, MR
ROB KNIGHT
AND MR
PHILIP MOODY
Q540 Mr Williams:
You think that figure is accurate?
Mr Knight: It was whatever has
been printed into the accounts. I can remember that it was of
that sort of order. My remuneration package has always been a
"sticky" point, it has always been a source of lots
of commentary, but the straightforward answer to the question
was that I was employed right from the outset on a daily rate.
That daily rate was subject to remuneration approval, was subject
to board approval and was ultimately subject to council approval.
It was published each year in the annual accounts and when the
business found itself, in 2005, in the position that it did, it
asked me to work on a full-time basis, and after consideration,
I agreed.
Q541 Mr Williams:
The daily rate was as a non-executive chairman, in the first instance?
Mr Knight: The daily rate was
the daily rate they negotiated with me, it was just that it happened
to be then for a full-time period, for a period of time.
Q542 Mr Williams:
Could you tell us why Smith & Williamson was chosen to provide
financial and other advice for Dairy Farmers? How was that done?
Was it a beauty parade or did you go out for tender?
Mr Knight: Mr Moody has been involved
with the business right from before I joined it in 2002, in an
advisory capacity. Maybe you could qualify that from him later
on. When it came to looking at financial advice, Smith & Williamson
were not the only people that were involved in the financial advice
that was given around the ACC acquisition, there was a whole host
of different people that came in, ranging from Rabobank to other
agencies. Each year, when we looked at the financial advisers
that were needed for the business, then clearly we would look
and discuss it as a board. In many instances, Philip Moody, who
was a director of the business, left the board room whilst that
particular topic was being discussed, the audit committee also
discussed the appointment of advisers and the board then elected
to take some decisions on which way they wanted to go. I am very
confident that the governance process around the advisers was
fulsome—as the minutes of the business would indicate.
Q543 Mr Williams:
What was the range of advice that Smith & Williamson gave
to the company? Was it just financial or was it on other matters
as well?
Mr Moody: Perhaps I can answer
this question by giving you a much fuller understanding of the
involvement of Smith & Williamson in Dairy Farmers of Britain,
because I suspect that there may be a misunderstanding as to our
role. As a professional, I have spent probably 30 years of my
life working with farmer-controlled businesses, working with the
farming community and have served on the boards and, indeed, currently
serve on the boards of other farmer-controlled businesses. As
I am sure you will know, I am also a director of the English Farming
and Food Partnerships, a governor of the Royal Agricultural College
and am also currently a senior non-executive director of Openfield
Limited, so I have considerable experience in the sector.
Q544 Chairman:
Just for the record, could you give us a pen picture—what
did Smith & Williamson do?
Mr Moody: Smith & Williamson
is the eighth largest UK financial advisory business, in terms
of firms of accountants; you will be aware of the big four—Deloitte,
Ernst & Young, KPMG and PricewaterhouseCoopers. Then there
are the next four down, in terms of size, very much smaller businesses,
and Smith & Williamson would be one of those four. It has
two divisions within it. Roughly 50% of its business is involved
in investment management and in banking and has a UK banking licence,
and the other 50% of the business is what you would much more
readily understand as an accountancy practice. Within the accountancy
practice side of it, there are a number of different services:
there is an audit team, a tax team; and there is also a corporate
finance team. My role within Smith & Williamson is that I
am the head of that corporate finance team, and I have a team
of people working for me in various offices of Smith & Williamson.
It is a substantial business and the corporate finance team is
a relatively small part of that substantial business.
Q545 Mr Williams:
What was the range of advice, just financial or what was it?
Mr Moody: Allow me to go on to
explain that. In some senses, it was advice and in some senses,
it was not advice, it was outsourced work, and that is why I need
to explain the context of the arrangement. At the time of the
merger of Dairy Farmers of Britain, I was acting as an adviser
to the Milk Group and when Dairy Farmers of Britain had been agreed
to be merged, facilitated by Rabobank, my firm was asked to come
along and project manage the creation of the merger on the terms
that had been agreed. That was the involvement with the business
that Mr Knight referred to. Following that process, I was then
not involved with the business until I was approached by Mr Knight
in July 2003. The reason that I was approached was that the board
had been charged by the membership with pursuing an acquisition-driven
strategy. It was perceived, therefore, that the board needed to
have corporate finance skills on its board and it also recognised
that it needed to have within its own company a resource of people
capable of prosecuting a corporate finance strategy. You may be
aware that a number of very well resourced PLCs in this country
will have their own employed mergers and acquisitions team. Clearly,
Dairy Farmers of Britain was not big enough to go out and employ
that kind of resource, so it was decided to invite me to join
the board and invite my team effectively to be an outsource of
that M&A project management capability that would be done
in-house in a larger business. It was always understood that because
of that involvement—we were, in fact, in those days, Solomon
Hare, which was subsequently acquired by Smith & Williamson—that
we could not act as independent advisers to the board because
that would be in clear conflict with my position as a board director.
For example, on the ACC acquisition, Smith & Williamson was
not the corporate finance adviser to Dairy Farmers of Britain,
it was the project manager that project managed the transaction
in line with the board instructions. On smaller acquisitions,
such as Lincoln and Golden Vale, yes, we did go ahead and advise
them because the transactions were of much less significance and
it was believed that there were fewer judgmental issues and more
process issues involved in those acquisitions. We never provided
any advice other than in relation to corporate finance work circulated
around the effective delivery of transactions.
Q546 Mr Williams:
Can you clarify that? When you said in terms of the acquisition
of Associated Co-operative Creameries, the project managers were
the advisers. Who were the project managers?
Mr Moody: We were the project
managers because we project managed it internally, so Smith &
Williamson project managed it on behalf of DFB, subject to the
decisions of the board and the board decisions were informed by
their advisers, and their advisers were independent advisers.
Smith & Williamson was not the lead corporate finance adviser
on the ACC acquisition.
Q547 Mr Williams:
So who were?
Mr Moody: Rabobank.
Q548 Chairman:
Rabobank were the lead corporate adviser on ACC?
Mr Moody: Correct.
Q549 Mr Williams:
It has been put to us that there was a conflict of interest between
you as your role as a director of DFB and you as a director of
Smith & Williamson. You explained that and you are happy with
that explanation?
Mr Moody: I think it is also helpful
for you to understand the corporate governance process that operated
around this, both inside Smith & Williamson and inside Dairy
Farmers of Britain. All of the services delivered by Smith &
Williamson were headed up by somebody other than me. The director
in Smith & Williamson, who headed up the delivery of services
to Dairy Farmers of Britain, was a corporate finance director
called Sarah Thompson, and she was in charge and responsible for
the delivery of all quality control. She directly reported to
the executive management of Dairy Farmers of Britain, not to me.
I operated separately as a director of the company. The decision
to engage Smith & Williamson was led by the executive team
and the fees that Smith & Williamson were paid were governed
by fee arrangements between Sarah Thompson and the executive team
and overviewed by the remuneration committee and board of Dairy
Farmers of Britain. I was not personally involved in either securing
work for Dairy Farmers of Britain or in delivery but, of course,
in my role as strategic director for Dairy Farmers of Britain,
I worked very closely with my team that were engaged to do work
for DFB.
Q550 Mr Williams:
Forgive me for being naive, but you were recruited onto the board
to give expertise in mergers and acquisitions and then you were
dealing with the company with which you were already a director.
These were Chinese walls? Surely, people looking at that from
outside would think, this it is all a bit strange, a bit difficult?
However, I am sure you were trying in every way to follow proper
governance, but in terms of the public and people like ourselves,
we are told it is not good enough to be perfect; you have got
to be seen to be perfect as well.
Mr Moody: Absolutely. If you understand
the work that was being undertaken, if I had not been with Smith
& Williamson but I had been an individual who was recruited
to work directly for Dairy Farmers of Britain as a strategic acquisitions
director, the first thing I would have done is to have gone to
my chief executive and said that I needed a resource of people
to prosecute the strategic objectives of this company. I therefore
need permission to be able to go and recruit X number of people
to provide the information and to provide the support and resource
that I need to deliver the strategy. Dairy Farmers of Britain
chose not to go down that course. Instead, they chose to outsource
on a project-by-project basis that work to a team that I could
work within my role as a director. Part of the reason that I was
invited to join the board of Dairy Farmers of Britain was because
I had that resource available that could be used to help Dairy
Farmers of Britain progress its strategic ambitions, and that
was always part of the arrangement from the outset. In terms of
using Smith & Williamson, it was almost an implied assumption
of me joining the board that Smith & Williamson would be used—provided,
of course, that they provided an appropriate level of service
and, of course, provided that their fees were competitive and
good value for money for members. That is where the engagement
of the separate engagement director and the involvement with the
executive came into play in making sure that those arrangements
were properly and appropriately governed. Clearly, it would have
been a conflict for me to have sought to negotiate fee levels.
Q551 Mr Cox:
Suppose, as a director on the board, you had come to the conclusion,
quietly, reflecting upon it in the watches of the night, that
the policy of the board hitherto was fundamentally misconceived,
and that an expansion-driven policy in an area of a commodity
like liquid milk was probably not the way forward. By this time,
your own firm had been recruited on a very lucrative contract
to work precisely to advance the policy that you had concluded—on
my postulation—was fundamentally wrong. That would have
placed you, would it not, in a pretty awkward conflict of interest?
Mr Moody: Not at all. My duty
would have been completely clear.
Q552 Mr Cox:
That is what your duty would have been, but to the perception
of the public you would have had a very powerful economic incentive
not to reach the conclusion that the policy currently being pursued
by the board was wrong.
Mr Moody: Personally or corporately?
Q553 Mr Cox:
Well, you were a member of a firm that was clearly going to do
well. Were you a partner in it?
Mr Moody: I was a fixed share
partner.
Q554 Mr Cox:
Therefore, there is no real difference, is there? If your firm
does well, you do well.
Mr Moody: No, I am sorry. I was
a fixed share partner. What that meant was that my personal remuneration
was not influenced by one penny as a result of the fees paid to
my firm.
Q555 Mr Cox:
If one looks at the examples where conflicts of interest have
been held, even employment for a firm that will do well out of
a particular contract or situation has been held in the past to
amount to a potential conflict of interest. My colleague, Mr Williams,
said that to the perception of the public you would have been
seen to have—even if only for your employer or your fixed
share holding in Smith & Williamson—a direct conflict
of interest, would you not?
Mr Moody: I am not denying that
there was a conflict. What I am saying is that the role of my
firm was completely transparent; it was well governed in terms
of its corporate finance process.
Q556 Mr Cox:
How could you perform your functions as a member of the board?
You were obliged to do your utter best to make conclusions and
reach decisions about the way forward for the co-operative. And
yet, if you decided to arrest, if you had decided to be the voice
on the board saying, "This policy is wrong", you would
have thereby been cutting off your own firm in which you held
a fixed share from a very lucrative source of work. Correct?
Mr Moody: First of all, Dairy
Farmers of Britain clearly paid significant fees to Smith &
Williamson.
Q557 Mr Cox:
How much, do we know?
Mr Moody: We know exactly, yes.
Q558 Mr Cox:
How much was it?
Mr Moody: If you will allow me
to consult my notes, I will tell you, but it was openly disclosed
in the audited accounts. Dairy Farmers of Britain, whilst it was
a valued client of the firm, was not of such a size that it was
material to the performance of Smith & Williamson as a whole.
Q559 Mr Cox:
I am not sure that is particularly relevant. What was the figure?
You have it to hand?
Mr Moody: I will do, if you give
me a moment. I will look it up; I have the notes here. Let me
continue to answer the question before I do that. I am completely
satisfied in my own mind that my judgment in acting as a director
of Dairy Farmers of Britain was not at any time impaired by the
conflict to which you allude. I am also completely confident that
all of the work that my firm did was sufficiently open, visible
and transparent to the senior members of the executive team and
to the whole board that if I had behaved in the way in which you
have hypothesised, that would have been open and obvious to my
colleagues very quickly, and I would invite Mr Knight and Mr Cooksey
to comment on that. Whilst I accept the premise of your question,
I can assure you that at no time were my views inside the boardroom
in any way compromised. I would say, in reality, quite the reverse.
It put me in a position of a greater level of knowledge to enable
me to base my opinions within the boardroom.
| 
