Examination of Witnesses (Questions 740
- 759)
WEDNESDAY 10 FEBRUARY 2010
MR MALCOLM
SMITH
Q740 Chairman:
Good afternoon and welcome to the final public evidence session
in the Committee's inquiry into the collapse of Dairy Farmers
of Britain. I would like formally to welcome Mr Malcolm Smith,
the former Chief Executive of Dairy Farmers of Britain. There
will be a vote at about 3.45pm and after the vote, if there are
any remaining questions, we will continue. Mr Smith, you were
not there all the time. You actually resigned in 2005 from Dairy
Farmers of Britain. Would you like to tell us why?
Mr Smith: I did not resign. I
was sacked.
Q741 Chairman:
Why were you sacked?
Mr Smith: That is an interesting
question. There was a disagreement between myself and the chairman
and some of the members of the board as to where the company was
going. I did not feel it was appropriate for it to carry on the
way it was and I told the chairman that and consequently he had
the board remove me.
Q742 Chairman:
We are going to talk to you in some detail, you will not be surprised
to know, about the events surrounding the purchase of Associated
Co-operative Creameries (ACC) and events afterwards. You have
just said that you were not satisfied about the way the company
was going. It had just been through what we were advised was the
achievement of one of its key strategic aims, which was to get
into processing, to acquire a bigger customer base, to acquire
a distribution service. According to the other directors who were
there when you were there, the business in their judgment was
clearly going in the right direction. Why did you feel it was
going in the wrong direction at the time you were fired?
Mr Smith: It is very complex.
I have listened carefully to what has been said. I have taken
the time to read the transcripts of what has been said to you.
If I may say, first of all, and I am not trying to grandstand,
I am here for one reason and that is not for me but for the farmers.
Personally I am very disappointed and very upset about what has
happened to some very nice people, many of whom I knew personally.
I got on extremely well with them. The reason I am here today
is because they have asked me to come, otherwise I would have
refused. I finished in 2005; we are now in 2010. What CEO can
be held responsible for something that happened four years after
he left?
Q743 Chairman:
For the record, may I repeat something you may have seen but of
which you might not have understood the significance. We are not
in the position of conducting a "whodunit"'; we are
not here to blame people, nor, as you say, to hold people to account.
The purpose of this inquiry is to understand why a very important
co-operatively based organisation went out of business with a
lot of pain and suffering for farmers who, from the evidence that
they were kind enough to send us, indicated very clearly that
they had set off with a great deal of hope and enthusiasm and
optimism about having a co-operative of which they were part,
which would, in the long term, enable them to control the way
that their milk was sold and hopefully give them an improved return.
The task of our inquiry is to gain an understanding as to what
went wrong. Was it because of fundamental business decision failures;
was there something wrong intrinsically with the co-operative
model; or were there other factors? Clearly within agriculture
the co-operative model is still favoured by many people. We want
to discover whether the model needs fixing or whether the demise
of Dairy Farmers was due to failures in the business decision
process. You are quite right, any business is complicated and
it would be improper for us to single out an individual in the
blame game. That is not what we are about. I hope that has reassured
you about what we are doing. We are not here to try and get you
to remember things that are somewhat distant but to help us to
gain an understanding of what went wrong. You are quite right,
part of the reason that you are here and the other directors were
summoned is that farmers made it very clear to us that they wanted
the Committee to talk to those people, not just the last chairman
who obviously, if you like, was the repository of some knowledge
at the time. We have listened carefully to the voices of farmers
and we have invited others, including you, to come and talk to
us. That is why you are here today in terms of pursuing that particular
agenda. To go back, so that again we can understand the strategic
context in which you left the business, perhaps you could answer
my question,
Mr Smith: I was not trying to
avoid your question. I was making one or two things quite clear
at the outset. I think basically what went wrong with Dairy Farmers
of Britain is not anything to do with the co-operative model particularly.
The co-operative model is very successful across the world, and
always will be, for farmers, and Fonterra is probably the best
example and there are many others. There are also some bad ones.
Where they have gone wrong has been I think in the failure of
the board of directors and of the governance of the company. I
was very proud of the company. We turned round two of the major
loss-making companies with our best result. We had bought the
company we had tried to buy. We paid far too much money for it,
and I can go into that and why that happened. I think I can give
you some quite good insight into that because I know all abut
what happened. We could still resolve the situation. We had done
the numbers. Mark Strickland, the Finance Director, and I had
a clear understanding of where we wanted to go, and in fact the
farmers who have spoken to me were confident that we could do
it, and I know we could have done it. We were stopped from doing
what would have been the most effective course of action with
the company and that really was the beginning of the point when
I started to worry about the motives of some of the individuals
on the board, and I still do worry about their motives. I cannot
tell you what their motives were; that is only supposition. I
know the individuals and I am very concerned about them and I
just feel that they were not being stopped from a personal agenda.
The problem with Dairy Farmers of Britain was that the executives
were not on the board. I have been a CEO for a lot of years and
I have never not been on the board. I am going to make one very
startling and sad admission to you. When I joined the company
I was under the impression I was going to be on the board. I was
given that impression and when I joined I was told that I was
not. I would not have joined if that was the case, but I did not
walk away from it because I was very worried about the chairman,
whose knowledge and experience did not span the requirements of
the task. I could have worked with him because actually he was
not a bad chairman, in fairness, and I learnt a lot from him.
I have to tell you that and that is an honest opinion of someone
who gave me the sack. It was not all bad. The fact that I was
not on the board was a major and fundamental reason why the company
went down.
Q744 Chairman:
Just refresh my memory: what did you do before you became the
Chief Executive of DFB?
Mr Smith: I was CEO of Grampian
Country Food Group, Chicken Division, and I was on the main board
of a £1.4 billion turnover business. In my own part of the
business I employed 10,000 people with a £600 million turnover.
I had been doing that for some years, so I had a lot of experience
of running businesses and acquisitions. I had made five acquisitions.
That is why they headhunted me; they knew that I knew what I was
doing in the sector they were involved in. I knew a lot about
agriculture; I had been in it for 20 years; and I did what I was
sent there to do.
Q745 Chairman:
As a member of DFB's executive team, and the point you made is
very relevant that you were not on the board, how would you describe
the relationship between the executive team and the board, because
it was a rather odd relationship that you were not one and the
same in the same organisation?
Mr Smith: I have got to start
at the beginning. When I joined the company, they had just formed
a new company from the Milk Group and Zenith and they were two
very different companies. When I arrived there were two CEOs—I
did not know that either—and I was one of them. So I went
about sacking the other one quickly because he was incompetent,
and fortunately the board agreed with me; that was why they brought
me in, and so he went. He was not an incompetent man; he was just
incompetent at the job he was doing. That is not the same thing
at all. So we cleared that one up. Then I knocked heads together
and I moved everybody around because in one part of the office
there was the Milk Group and in another part there was Zenith
and they did not talk. I explained to them that if they did not
start to work together as a team then they would not be on the
team. That was not a threat; it was just a statement because the
farmers' livelihoods were at risk. Once they realised I meant
it and that I was not prepared to accept anything less than yes
for an answer, everything went really well. There were very few
people left. They realised that I was not a nasty person; I was
just trying to make money for the farmers. In fact, I found the
whole atmosphere with the executives very harmonious. The previous
chairman, David Stern, was a very interesting character. He ran
his own business and I liked him a lot actually; he was a proper
businessman, and a bit of a gentleman too. When Rob Knight came
in I had one or two serious doubts when I first met him. I said
to George Risley, the non-executive director who brought me in,
"Are you sure you want this guy as chairman because I am
not sure I want to work for him?" He said, "We would
rather you came. We can always get another chairman". I thought,
"That's good because we will have to". Then what happened
was that basically, when I discovered I was not on the board,
it was made rather tricky for me. The farmer directors were a
pretty good bunch in general, pretty incompetent in some ways,
did not know how to run a fish and chip shop, to put it crudely,
to use language that Steve Yates when he spoke to you, and I watched
his webcast with some amusement—very little truth in it
but a lot of amusement. The fact is that these people were given
a task of reining in someone who had worked for the Mars Corporation,
quite a business individual, quite bright, in fairness, and by
no means a fool in any way, shape or form, and he set about doing
things the way he wanted to do them. He came in as a non-exec
chairman and immediately asked me to try and get him on the bonus
scheme. Yes, he wanted to go on the bonus scheme. I said, "Hang
on; you had better talk to the remuneration committee about that
because it is nothing to do with me". He tried to get his
wage put up, and that had nothing to do with me either, and I
would have nothing to do with it. Then he tried to get an office
so that he could work five days a week, at our office. I said,
"Hang on, are you not a non-exec chairman as opposed to an
exec chairman?" He seemed to be confused about the two. I
was not but he was.
Q746 Lynne Jones:
Did you have a non-exec CEO and non-exec chairman?
Mr Smith: No, I was the CEO; that
was it, full stop, that was my role. He was trying to become the
exec chairman, which would have meant that he went across my bows.
I have not been used to that situation. Having worked in large
companies most of my life, you do not get an exec chairman dealing
with a pretty hands-on CEO, which is what I am, because it does
not work—everybody gets confused. A good board could have
sorted that out pretty quickly, in my view, and the chairman was
not a bad chairman in many ways; in fact, as a chairman I learnt
from him, but he was not being reined in and no one was reining
him in. I was not on the board to say, "Hang on, I am not
having it" when everybody was there, and when I was not there
I did not know what was being said because I was not there.
Q747 Chairman:
Help me to understand a bit more clearly about the relationship
between the board and the executive team in practical terms. You
have given us an insight into a chairman; the job of the chairman
is to provide leadership and strategic overview and direction
to a board of directors. The impression I get is that instead
of perhaps following the collective's ambitions, people had their
own ambitions and agendas. Normally if you have a board that is
comprised of executive and non-executive, there is what I call
a bit of creative tension between the two as the non-executives
probe the executives about what it is they are doing. The impression
you have given is that sort of probing, interaction, was missing
from the board of DFB. What were the channels of communication
between the board and the executive, the two groups?
Mr Smith: At the main board meeting
I was present and so was Mark Strickland and so was Martin Armstrong,
the guy in charge of logistics, and we were questioned in the
board meeting, but, generally speaking, the connection between
the board and the executive was between me and the Chairman. There
was a little bit with the non-execs but not much.
Q748 Chairman:
In terms of the day-to-day communication, and I suppose what I
am grasping to try to understand it is how did the board set its
agenda because obviously the board has to be informed by the executives
about what is going on; they are the principal source of information
in a company because that is what they do, day in and day out.
Did you as an executive group determine what was reported to the
board or did the board initiate a reporting structure?
Mr Smith: There was never any
follow-up in reporting to the board. I have got a very clear view
about transparency and I did not need to be told that by anybody
on the board and I just told them it like it was. The board were
pretty well informed about what was going on at all times, except
if there was a real issue of confidentiality, in which case, fair
do's, there had be a degree of a veil of secrecy in some instances
for a period of time, and that did happen. There was a very clear
agenda in terms of what was on the board. I agreed the agenda
with the chairman. I put forward an agenda to him for each board
meeting personally, like I used to do at Grampian, and basically
he either accepted it, in most cases, or he added something to
it, most of which was quite sensible actually.
Q749 Chairman:
When the board was actually meeting, in other words, you had got
the farmer directors and the non-executives sitting round the
table, I presume that the executive directors were in attendance?
Mr Smith: Of course, yes.
Q750 Chairman:
When you were around the board table, the chairman obviously drove
the agenda in the meeting but did he regularly bring in the executive
directors to give advice?
Mr Smith: Yes, in fact it was
quite well done. Each of the exec directors made his own presentation
about his own section of the business to the board himself and
gave a pretty full explanation of what was going on too.
Q751 Chairman:
So around the board table you were there but you did not actually
have any responsibility ultimately for the decisions, if you like,
made round the board table, you had no statutory power in that
respect?
Mr Smith: I had no statutory power,
but I was told specifically at the outset that I was there to
find processing facilities for the farmers as an outlet for their
milk, and I agreed with that principle and I still do. I think
it was a good idea. I was given the task of putting a strategy
document to the board. The chairman is not a strategist in this
particular case. Most often the chairman is, but very often what
you will find is that there is a collaboration between the chairman
and the CEO in most major companies; between the two of them they
work out their strategy, they agree it with the board, and then
it is the CEO's sole responsibility to drive the strategy which
has been agreed by the board.
Q752 Chairman:
Let me ask you this question. Let us turn it round the other way.
If you had been on the board what would have been the difference?
Mr Smith: I would have had a lot
more to say about the chairman's budget and I would have had a
lot more to say about the price that was ultimately paid for ACC,
and I was not very happy about that at all. Whether I would have
swung the day, I do not know because I would have been one among
many on the board, so fair do's, I would not have been the only
voice. I would have hoped they would have listened, but I did
try and tell them and I was overruled, the only time, on the ACC
purchase.
Q753 Miss McIntosh:
Who set the budget? Presumably there was a finance director as
well?
Mr Smith: The finance director
set the budget for what I will call the operations of the business,
but there was a very curious situation where the chairman set
the budget for the board. The board budget was getting a bit out
of hand, particularly his own part of it and one other member
of the board who took an awful lot of money out of that company.
Q754 Chairman:
Are you talking about Mr Moody?
Mr Smith: That is indeed the person
I am talking about. He did very well out of all this, and can
you blame him? I guess not because nobody stopped him.
Q755 Chairman:
Were you happy about Mr Moody? He told us when he came to see
us that he was asked to become a non-executive director because
his company provided professional services for the business and
that because he understood the type of business he was in, it
was a good idea to have him on the non-executive part, notwithstanding
the fact that the company he was part of, Smith and Williams I
understand, provided on a paid for basis services to the company.
Was that a healthy situation?
Mr Smith: It was shameful and
I made that point to the chairman, as indeed did the finance director.
Q756 Chairman:
Was that ever put explicitly to the board?
Mr Smith: No. It was put to board
members individually.
Q757 Mr Williams:
You say there was a board budget and part of that was the chairman's
budget and part of it was this other director, Mr Moody, as I
understand it?
Mr Smith: The chairman set the
board budget and then Mark Strickland and I set the budget for
the operations, everything outwith the board.
Q758 Mr Williams:
You were critical of the board budget because you thought perhaps
the returns that people were getting were beyond the contribution
they were making, but was that a reason why the business failed
or was that just what you saw to be mismanagement of the resources
that were available to the board?
Mr Smith: That is a very subtle
point you have made there, and it is a very good one. Personally,
it does not matter what the board were paid. If they were doing
a great job, they could have been paid £10 million a year;
it would not bother me. I have been used to people getting £1
million bonuses in companies I worked in, but that is because
they put in £50 million on the bottom line of the company
so who cares? It is all about returns, is it not? If somebody
is doing a great job, it does not matter what they get paid, bankers
notwithstanding. The reality is I have to say my view was that
the board budget was out of hand and it was a symptom of a lack
of control of elements within the board. It was a symptom of a
disease. It did not really matter; it was a symptom of a major
disease, and it said to me that there was something desperately
wrong within the board, and there was, but that is not what brought
it down; it is not what brought the company down at all. It is
almost insignificant. However, the advice we got was bad.
Q759 Miss McIntosh:
From?
Mr Smith: It was not just one
individual. Really the object of the exercise here is to find
out if there is a way of stopping this happening again, is it
not? There are bad people in the world, are there not? I have
not met many of them but I have met a couple. The reality is that
laws are meant to keep bad people in check because there will
always be bad people. I do not think there was anybody specifically
bad on the board of DFB, I really do not believe that. I think
there were some people with some ulterior motives and they were
allowed to get away with it. I do not know how, but they were.
I have got to be honest, I think the chairman is one of them and
I think Mr Moody is the other. Let us name names; let us not muck
about.
|
