Examination of Witnesses (Questions 644
- 659)
WEDNESDAY 3 FEBRUARY 2010
MR STEPHEN
YATES
Q644 Chairman:
Good afternoon, ladies and gentlemen to the penultimate evidence
session on our inquiry into Dairy Farmers of Britain, and we welcome
once again Stephen Yates, who is the former Chairman of the Dairy
Farmers of Britain Members' Council. Mr Yates was very kind in
coming and talking to the Committee a little while ago when we
held a hearing in private, but he said some very important things
so we decided to ask him if he would be kind enough to come back
and say them in public, so here he is. It is not often, Mr Yates,
you get a double booking from this Committee, but it just shows
the popularity with the Committee to hear what you had to say.
I wonder if we could start with what I might call a mechanical
question: could you describe the role and the powers of the Members
Council for DFB?
Mr Yates: Yes, thank you, and
thank you for your welcome. The Members Council's basic functions
are governance functions, to represent the members. If I can start
with how we created a Members Council, the total litreage was
divided into 25 million litre blocks and that was known as a district.
It wasn't geographical, it wasn't by the number of farms, it was
by litres of milk and it could encompass any number of farms,
depending on the size of those farms. At the outset we had 82
such districts. Those districts then elected a District Chairman
once every three years and they did that on one vote for 200,000
litres per farmer. So that was the only form of proportional representation.
From that point on the District Chairman took forward the views
of that district. He took it to two forums. One was the Regional
Council, so that if the country was split up into eight regions
theirs would encompass 11 or 12 districts and they would meet,
probably, bi-monthly. They also went forward onto the main Members
Council, which met somewhere between four and six times a year
and it was one man, one vote on there. The Council elected its
own chair and vice-chair and its principal roles were the selection
and election of the board, the appointment of the auditors, the
authorising of any rule changes, the authorising of the business's
ability to borrow money and to spend that money if that sum involved—initially
£15 million was the ceiling, anything over that they had
to come to us for consent—and initially the board could
borrow up to £100 million. Two years after our formation
we raised the ceiling to £200 million.
Q645 Chairman:
I just wanted to look at that particular power because it was
certainly obviously on my list, the review of the limit. How did
you go about, as a Council, doing that? How often were you asked
to come to a decision as to whether the ceiling on borrowings
was correct for the company at the time?
Mr Yates: We were only asked once
to do so and we agreed to, and that was in the months leading
up to the acquisition of Associated Co-operative Creameries (ACC).
If you recall Philip Moody's evidence, he told you that they were
looking at three projects at that time. The Council weren't aware
of that. We knew they were looking at projects, but we didn't
know what they were. Moody told you one was in the same order
as the ACC acquisition and he used the figure £50-£60
million, and another one was substantially more, it was £200
million plus. So at that time when we asked we were given no details
for confidentiality reasons. You have to understand that the Council
was only brought into the loop of understanding on projects when
they were very, very close to being finalised.
Q646 Chairman:
Was one of those bigger projects anything to do with buying out
farmer members of Arla, because we found something in the sort
of dairy press which indicated that there had been some kind of
sniffing around that. It was not entirely clear what was being
suggested, but there was public mention of it in the dairy press.
Mr Yates: I can't answer that
question categorically because we weren't told. We were clearly
told what the second project was, the £50-£60 million
project. That was actually the potential purchase of the assets
of Dairy Crest that in fact First Milk went on to purchase, which
is the two cheese factories, and at that time we were clearly
told, "We've been in negotiations. We've dropped them. It's
too dear," and Malcolm Smith's words were, "At £60
million quid it's too dear. It'll come back on the market in two
or three years' time at £40 million." If I can go on
to say that the larger one—I suspect the Arla suggestion
was a red herring to keep people away from where it actually was.
We had constant discussions with Arla over the years about merging,
about this, about that, but in fact the target almost certainly
would have been Dairy Crest.
Q647 Chairman:
On the one occasion you were asked to review this, how did the
Council come to a decision that whatever number you said was the
number was the right number? What kind of advice did you have
access to?
Mr Yates: Mr Moody did to the
Council what he did to your Select Committee, with respect, sir.
He talked for an hour and a half to the Council and at the end
of it he'd bamboozled us into agreeing.[1]
What he told us none of us could probably remember to this day,
but it all sounded very fine and very noble, and we went down
that route. You have to remember that in the first year or two
of formation, if you imagine the first year of putting together
two very different organisations, the Milk Group and Zenith, the
very, very different cultures they came from, putting those together
was no easy task and so for the first 12 months we were scrambling
and getting the structures in place, and then we on the Council
under the chairmanship of the first Council chairman were very
heavily involved in training, in understanding our roles and developing
the functions of the Council.
Q648 Chairman:
But in that context, so that I am absolutely clear, you did not
as a council feel the need to go to an external advisor about,
if you like, what was the amount of borrowing that a business
like Dairy Farmers could actually absorb, stand and service? You
did not have any external advice on that?
Mr Yates: Part of the process
of creating Dairy Farmers of Britain—and through that period
I am talking about we had quite a bit of coaching from Rabobank,
we had a guy called Gert van Dijk from the Dutch Institute of
Co-operation, who used to attend most Council meetings and he
would talk us through various aspects of the business and how
we should handle it, and that sort of thing. In addition, we would
have had speakers. We had the Chairman of Dairy Farmers of America.
We had people trying to bring us up to speed in what questions
to ask.
Q649 Chairman:
You made an interesting point because obviously Mr Moody knew
everything there was to know and, you are quite right, he spoke
very eloquently in front of the Committee, but perhaps where we
have the advantage is that we can conduct a compare and contrast
operation between what one witness says about something and what
others say. You perhaps were not in such a privileged position
to be able to undertake that kind of exercise, but what I am just
trying to pin down is, however much you were being trained to
be aware of the importance of this kind of financial analysis
you, as the Council, were being asked to make a decision, which
was, "This is the level of borrowings which we feel comfortable
with," that Dairy Farmers of Britain can look after by the
various means at your disposal to raise that kind of money. Just
for the record, you said you were being coached by Rabobank, but
Rabobank at the beginning was one of a consortium of four banks
which were effectively part of the funding operation for Dairy
Farmers, were they not?
Mr Yates: No, that was subsequent,
that was when we were doing the ACC acquisition, but there are
two very separate divisions of Rabobank. There is the banking
arm and there is the advice and information arm. So we were talking
to their advisers.
Q650 Chairman:
But did they give you a written opinion?
Mr Yates: No, and we didn't ask
for it.
Q651 Chairman:
Why not?
Mr Yates: We've all got, as you
will understand—I've got a BA Honours Degree in hindsight
now! At that point in time, there was a huge wealth of information
coming and I have to say, in defence of some of the practices
that took place, this co-op was created in a surge of enthusiasm
to get into processing. So make no mistake about it, the Council
was pushing the board, "Get on with it." I told you
before when I came we had a clear vision and a clear strategy
and our end game was a top quartile milk price in three to five
years. We knew that members would not invest heavily without an
end game that produced a financial benefit on the farm, so we
pushed the board. I have to be honest, we pushed, "Get on
with it. Get us into liquid processing."
Q652 Chairman:
So with your newly acquired BA in hindsight, when you look at
the advantages and disadvantages of a governance model where there
is a council made up, if you like, of well-meaning members, some
of whom are trained, some of whom have some knowledge and some
just have a lot of interest, what do you think the advantages
and the disadvantages of the Council set up actually were?
Mr Yates: It was a very robust
body, I have to say. I'm sure that once we'd got past that initial
surge of enthusiasm and the Council got much more skilled in how
to question the board, and through the board the executive, it
was a very robust body, but was it the right mechanism? In the
beginning it was too large, for certain, 82 was an extraordinarily
difficult body to control. Eventually, we actually reduced it
twice, we cut it down to 62 and then I, in my tenure as chairman,
cut it down to 35. So the mass was a difficult situation to handle,
and indeed my predecessor as chairman, John Loftus, one of the
reasons I think we elected him was that we knew he was a strong
disciplinarian, and he was. He didn't suffer fools gladly and
he virtually made the training compulsory. Although we were all
free men, if you like, if you didn't do the training he felt your
collar and urged you to do it! With hindsight, well done to him,
because we all needed it. Most of us were raw off the farm, but
as a body I feel that certainly after that first year, 18 months,
I think it worked very well.
Q653 Miss McIntosh:
Just to follow up on what the Chairman was asking and your comment,
how did you get up to a grand figure of 82? You said you had advice
from the Dutch and I am very interested in the European model
for co-operatives, but how relevant was the advice from the Dutch
to what you were trying to do?
Mr Yates: Very relevant. We should
have listened harder and acted upon some of it, as we did. For
instance, the Dutch on all their co-operatives have a farmer chairman,
full stop, and he was very, very, very insistent we should have
a farmer chairman and was very upset when we didn't. But the Dutch
models are slightly different from ours. They have a board which
runs the business, which tends to be all exec, or non-exec, and
then they have what they call a farmers' supervisory board, so
it is a slightly different model from ours. As ever, we looked
at their model, brought it over here and changed it. We never
seem to be able to bring something over that's successful and
just use it, full stop, we have to change it and fiddle with it!
So that was the key difference as far as that was concerned, we
didn't have a farmer chairman.
Q654 Miss McIntosh:
How did you get up to 82?
Mr Yates: Because at that stage
we claimed to have two billion litres of milk divided by, whatever
it was, 25, and that's how it worked out. So it was just simply
a mathematical equation. For instance, to get down to the final
Council that I was chair of with 35, by then our litreage was
down to 1.2 billion litres, and we had upped the litreage to whatever,
35 million litres.
Q655 David Lepper:
I was unable to attend some of the earlier sessions of this inquiry,
so you will forgive me if I ask something which may well have
been dealt with then. It is my ignorance, perhaps. At any stage
in the formation of Dairy Farmers of Britain was a form of governance
other than the co-operative or industrial and provident society
model considered? Would other models have been more appropriate?
Were they considered?
Mr Yates: From the Council's point
of view, the interim board came to us and said, "This is
the model you're going to follow," full stop. It wasn't a
decision of the Council. When Zenith and the Milk Group were talking
of coming together we created an interim board which was part
theirs, part ours, and they set the rules, they set the constitution,
in negotiation primarily with Rabobank and with the Dutch Institute
of Co-operation. So we were not involved in that. Did the board
consider any other models? I don't know, is the honest answer,
but certainly from the ethos of the Milk Group I would expect
them to have done so.
Q656 Mr Williams:
I think you said that the Council had access to the executive
team through the board. Did you have any direct access to the
executive team?
Mr Yates: Yes, is the answer to
that, but part of the training that we did in roles and responsibility,
and governance, talked at length about who does what. Now, the
board employed the senior executives. They were in effect their
line managers, they answered to them, and therefore in open council
sessions we would talk with executives, they would make presentations
to us, but in no sense would we grill them. We grilled the board,
if you like, and it tended to be in council sessions. The morning
would be executive presentations on various aspects of the business
and it may be the executive's perspective on a proposed move,
and in the afternoon we would have a board session where we could,
as I say, go into some more detail with the board. But the chairman
of the Council and the chairman of the board were very insistent
that we did not, as a council, interrogate executives. That was
not deemed to be proper, but on a personal basis, as Chairman
of the Council, I did of course have access to them, but once
again most times I would do it through the chair and if I had
a problem I would always approach the chair of the board and say,
"Could I talk to the chief exec about this?" So the
protocols were pretty strong. I would imagine I'd be fairly confident
in saying they were the same protocols that are in the other main
dairy co-operatives. The executives can't be answerable to everybody,
otherwise they'll never get anything done, and if you allow farmers
to do it, the farmers take over and they'll question every aspect
of the business and they expect the chief executive to know. So
there were some very strong protocols that we respected and which
were there for a purpose so that you could get on with the business
of the Council.
Q657 Mr Williams:
Just to remind us, the board had a majority of farmer members
but there were some non-executive directors who were not farmers,
but the farmers were in the majority were they not?
Mr Yates: Yes. Mr Knight got a
bit confused when he was talking to you about what the board was
and wasn't. It started off as an interim board, as I've said,
and when we elected a board proper it was five farmer directors
and three non-farmer directors. The five farmer directors were
selected. The Council instigated an interview process where anybody
could be nominated, but they had to go through an interview process,
and from that interview process the interviewing panel, which
was chaired independently of the Council, made a recommendation
to Council of who should be voted for. Now, the Council did not
have to follow that recommendation, but it did every time. So
from amongst the membership of the large, I think first time round
probably 20, 25 people put their names forward and from that five
were elected, and can I be clear at this point Mr Knight tried
to give you the impression they were five farmers fresh off the
tractor. Nonsense! Three of them were already with board level
experience. John Grantchester, Michael Arlington and Robert Clarke
all had board experience, some of it fairly extensive, so there
were actually only two new boys on the block, two completely new
boys.
Q658 Chairman:
These were paid appointments?
Mr Yates: These are directors,
farmer directors employed in exactly the same terms as the other
non-execs, at that time £20,000 a year plus some extra days
at £400 a day. Can I just go to say the non-exec directors
at that stage were gifted to us by the interim board, of which
Rob Knight was one and there were two others. We had no say in
that, other than to formally elect them, and I think that is a
key point for the future. Never again would I sit on a council
that took the board's recommendation for a non-exec director as
openly as we did.
Q659 Chairman:
Can I just cut in for a second? Would you care to comment on a
point which was raised in our evidence session with Mr Moody about
a possible conflict of interest, because he was a non-executive
director, there because of his financial expertise but his company
was providing services on a paid for basis professionally and
he did not seem to be too troubled about that and, in fairness,
did provide the Committee with details of what was involved, but
in terms of having a wholly uninvolved independent financially
qualified non-executive director who could provide challenge,
I think there was a feeling when we probed that that might be
a problem. Did you ever think about that?
Mr Yates: The Council constantly
challenged that. Certainly in my tenure as chairman we constantly
challenged his impartiality, constantly, and indeed I took some
persuading by the chair of the board to agree to Mr Moody's re-election
for his second term of office. We were very uncomfortable with
that and we had twigged by then that Mr Moody talked a lot and
delivered very little. We had one member of the board who shared
those concerns and I will be unequivocal: if we weren't where
we are today with the collapse of DFB he would not have got another
term, that is certain, because the Council was tired of the reassurance
that it got, which never satisfied it on that point.
1 For Mr Moody's response to Mr Yate's ansswer to
this and subsequent questions please see Evs 132-138. Back
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