Conclusions and recommendations
Background to the inquiry
1. We
welcome the provisions in the Co-operative and Community Benefit
Societies and Credit Unions Bill to apply the provisions of the
Company Directors Disqualification Act to industrial and provident
societies. If this Bill does not complete its passage through
Parliament and become law before the 2010 general election, we
urge the Government to pursue placing these provisions on the
statute book—either through a Government Bill or by supporting
the relevant Private Member's legislation—at the earliest
possible opportunity in the new Parliament. (Paragraph 4)
The aftermath of the purchase
2. The
way in which DFB went about pursuing its vertical integration
strategy was over-ambitious, given the relative youth of the business
and its financial constraints. This is clear in hindsight, but
should also have raised concerns at the time. The purchase of
ACC by DFB is indicative of the triumph of strategic ambition
over financial reality. Farmers' optimism about taking control
over their long-term future was a noble objective, but in this
case it was severely hampered by decisions that turned out poorly
in practice. (Paragraph 21)
The 2007 contract with the Co-operative Group
3. In
entering milk processing on a large scale with the purchase of
ACC, DFB was involving itself in a highly competitive sector alongside
major businesses such as Robert Wiseman Dairies who DFB must have
realised were likely to bid keenly to increase their market share.
DFB was held back from the start by being tied into a loss-making
contract that cost it millions and whose effect would make it
less certain that DFB would be able to retain the Co-operative
Group contract when it came up for renewal. (Paragraph 23)
The 2009 contract with the Co-operative Group
4. Although
it is reasonable to expect co-operatives to support each other
to some extent, we recognise that co-operatives' prime responsibility
should be to their own members. DFB lost the Co-operative Group
contract because it could not make competitive bids in the relevant
lots. (Paragraph 26)
The loss of confidence
5. We
agree with Mr Smith's analysis that "The real reason for
Dairy Farmers of Britain going into receivership was that as farmer
members lost confidence in us, our other suppliers lost confidence
in us and, most importantly, our customers lost confidence [...]"
(Paragraph 30)
6. By late 2008, DFB
was caught in a vicious circle in which lost confidence led to
resignations, which in turn led to a further loss of confidence
and more resignations. Its fate was not inevitable, but its continued
survival grew increasingly unlikely during the early months of
2009. (Paragraph 31)
The co-operative model
7. We
agree that DFB did not fail because it was a co-operative. However,
its failure draws attention to a number of ways in which UK dairy
co-operatives could be strengthened, if they are to be able to
compete successfully in the dairy sector. (Paragraph 32)
Capital raising
8. We
welcome the proposal in the draft Legislative Reform (Industrial
and Provident Societies and Credit Unions) Order 2010 to remove
the £20,000 limit on a member's maximum transferable shareholding
in a co-operative. This is a step in the right direction. However,
we urge Defra to set up a task force comprising the Financial
Services Authority, HM Treasury, members of the banking community
and industry representatives further to investigate ways to overcome
constraints on capitalising UK agricultural co-operatives. (Paragraph
38)
Tax treatment of contributions to co-operatives
9. Money
that is retained by agricultural co-operatives and only notionally
paid out to farmers should not be taxed at this stage. Instead
it should be taxed on withdrawal, in a way that is analogous to
the tax treatment of pensions income. We recommend that Defra
pursue this with the Treasury as a matter of urgency. It is unacceptable
to have a tax system that disincentivises investment in agricultural
co-operatives. (Paragraph 39)
Consolidation in the UK dairy market
10. Further
rationalisation in the UK dairy industry is not in our view an
inhibiting factor to competition. In the liquids market, intense
competition is provided at a retail level. The dairy industry
as a whole operates in a European and in some cases a global market.
Restricting consolidation in the UK makes it more difficult for
the UK dairy industry to compete with these other players on both
a European and global scale. (Paragraph 42)
Governance and accountability
11. In
pursuing a challenging vertical integration strategy, with limited
capital-raising ability, DFB's difficulties were compounded by
a governance structure that did not function as well as its members
were entitled to expect. (Paragraph 43)
The Board and the Executive Team
12. The
lack of executive directors on DFB's Board was a weakness and
should have been addressed, even if this meant a rule change.
It is important for members of the Executive Team to be represented
on the Board in farmer-owned co-operatives, as in other businesses.
(Paragraph 45)
Farmer directors
13. Farmer
directors have a valuable part to play on the Boards of farmer-owned
businesses, although we are not convinced that they need necessarily
make up the majority of the directors. It is vital that both they,
and the non-farmer directors, receive regular and appropriate
training—from both internal and external sources. The annual
reports of agricultural co-operatives should contain a section
detailing what steps have been taken to ensure that farmer directors
are properly trained and supported for the important job they
undertake. (Paragraph 49)
Specific concerns
14. The
perception of a conflict of interest can cause damage, even if
the individual concerned is satisfied that they have behaved responsibly.
For this reason, we believe that advice and assistance, including
project management, is best provided by companies and individuals
that have no other connection with the directors of the business
to which they are providing the service. (Paragraph 55)
The Members Council
15. The
presumption should be that the Board will actively share information
with the Members Council unless it is prevented from doing so
by the need to preserve commercial confidentiality. It is hard
to see how a Members Council could be in a position to approve
changes to the ceiling on borrowing if it did not feel that it
could ask detailed questions about banking arrangements. (Paragraph
60)
Communication with members
16. We
recognise that it is difficult to strike a balance between providing
an accurate picture of the state of a co-operative to its members
and not revealing commercially sensitive information. However,
we consider that the Board of DFB failed to strike this balance
and that DFB members did not receive the quality of information
that they were entitled to expect. This breakdown in communication
encouraged speculation about the future of DFB and can only have
contributed to the business's difficulties. (Paragraph 63)
Registration and regulation
17. Documents
filed by industrial and provident societies should be as easily
obtainable as documents filed by companies. We urge the Financial
Services Authority to improve the way in which it makes such documents
available to the public. (Paragraph 64)
18. The Financial
Services Authority has an important role to play in relation to
the effective functioning of industrial and provident societies.
We welcome the fact that it is developing codes of practice to
clarify what is expected of industrial and provident societies.
(Paragraph 67)
19. We look forward
to reading the conclusions of the group on the co-operative model
to which the Financial Services Authority and Defra are contributing.
The code of practice developed by this group should aim to create
the best possible environment for decision taking whilst providing
maximum protection for members' interests. Attention should be
paid in the code of practice to the information requirements of
structures such as Members Councils and of ordinary members if
they are to be able to act as a check and balance mechanism on
decision making by the Board. (Paragraph 68)
Auditing
20. DFB's
decision to adopt some of the auditing standards that apply to
listed companies was a move in the right direction. As the case
of DFB illustrates, applying these standards cannot prevent the
collapse of a business, but it is another way of ensuring that
industrial and provident societies are subject to more rigorous
evaluation. We recommend that agricultural co-operatives voluntarily
adopt such standards wherever possible. (Paragraph 71)
IPSs and insolvency legislation
21. We
recommend that the Government amend the Insolvency Act 1986 and
the Enterprise Act 2002 to ensure that insolvency appointments
over industrial and provident societies—and the conduct
of the ensuing insolvency—are made on the same basis and
governed by the same rules as insolvency appointments over limited
companies. (Paragraph 88)
22. We urge the Government
to clarify how the Pension Protection Fund, created under the
Pensions Act 2004, applies to industrial and provident societies.
People with pensions with DFB should not lose out because it is
an industrial and provident society. The Government must also
update the Industrial and Provident Societies Act 1965 to simplify
and improve the exit routes from an industrial and provident society
receivership. (Paragraph 89)
Finding new buyers
23. There
is a balance to be struck between achieving long-term relationships
in the dairy supply chain and allowing farmers sufficient flexibility
to change buyers if something goes wrong. A clause which allows
farmers to terminate their contract with a month's notice in the
event of their buyer going into receivership is sensible. Contracts
which allow farmers greater flexibility to switch to another buyer
in the event that an agreement cannot be reached on the milk price
seem like a good way of strengthening the position of farmers
in theory. However, we remain to be convinced about how they would
work in practice. We recommend that Defra put this issue forward
for discussion at the Dairy Supply Chain Forum, which it chairs,
and that Defra commission a report within the next 12 months detailing
ways in which contracts between farmers and buyers could be improved
to ensure that both parties are treated fairly, particularly in
times of distress. (Paragraph 95)
Facilitating discussion and co-operation
24. Defra
orchestrated a positive response to the collapse of DFB. We commend
the swift and effective action it took to facilitate co-operation
and disseminate information. (Paragraph 98)
Nitrate Vulnerable Zones
25. We
recognise the sense in Defra's argument that it has to show the
European Commission that the UK has committed itself to the NVZs
Action Programme, but we regret that it did not at least approach
the Commission to see how it would regard a further extension
to the slurry storage requirements, given the difficult financial
situation in which a substantial number of UK dairy farmers found
themselves after the collapse of DFB. (Paragraph 101)
Her Majesty's Revenue and Customs
26. We
accept that there are constraints on HMRC's ability to use the
taxation system to mitigate the financial losses suffered by former
DFB members. However, we urge HMRC, in liaison with the receivers,
to reconsider whether the appropriate value of the shares that
resulted from the March 2009 debt for equity swap is in fact zero.
We regret that HMRC decided that income tax relief was not available
in relation to the loss of these shares and urge it to reconsider
this position. HMRC should report its stance on this matter as
soon as possible to the Financial Secretary to the Treasury. (Paragraph
106)
Welsh Assembly Government and single farm payments
27. We
commend the Welsh Assembly Government for making early single
payments to former DFB members in Wales. The Rural Payments Agency
failed former DFB members in England by being unable to make the
same commitment. We continue to take a strong interest in the
Rural Payments Agency and it is likely that our successor Committee
will want to return to this subject. (Paragraph 108)
Conclusion
28. DFB
did not fail because it was a co-operative. However, dairy co-operatives
in the UK are comparatively young and there is much to be learnt
from older, larger co-operatives in Europe and elsewhere. Defra
should produce a report within the next 12 months examining governance
and capital-raising arrangements in these co-operatives, together
with the legislative framework that applies, and exploring the
lessons these countries offer for dairy co-operatives in the UK.
(Paragraph 109)
29. No single factor—not
even the purchase of ACC in and of itself—caused DFB's demise
and its problems were not unique: the majority of them could affect
any business. DFB experienced some bad luck. More significantly,
it suffered from over-ambition, a shortage of capital and, at
various points during its existence, poor governance and poor
communication. In its final year, it lost the confidence of its
members and its customers. Hindsight certainly makes it easier
to begin to understand what happened at DFB, but, as we have made
clear, some of the issues we have discussed in our report should
have caused concern at the time. Ultimately, DFB's members were
badly let down. We have suggested some steps which we believe
may reduce the chances of other farmers suffering a similar fate.
(Paragraph 110)
30. As the Department
responsible for agriculture, Defra should be offering advice and
assistance to support the growth of agricultural co-operatives.
First, Defra must pursue the matter of the taxation of members'
contributions to co-operatives with the Treasury. It is manifestly
unfair that farmers should have to pay tax on money that is only
notionally allocated to them and that is actually invested in
their co-operative. Secondly, Defra must co-ordinate the key players
to devise solutions for overcoming the constraints on the capitalisation
of agricultural co-operatives. The Legislative Reform Order that
is currently before Parliament should be regarded as the beginning
of this process, rather than a solution by itself. Thirdly, Defra
should work with the Financial Services Authority to ensure that
issues affecting agricultural co-operatives in particular are
taken into account when developing best practice guidance for
industrial and provident societies. (Paragraph 111)
31. Clearly the immediate
impact of the failure of DFB was a further questioning of confidence
in the dairy industry. Defra must recognise this in its work
to ensure that the dairy industry has a positive future that reflects
the natural advantage of the grass-growing areas of the UK for
producing milk. (Paragraph 112)
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