Examination of Witnesses (Questions 400
- 419)
WEDNESDAY 28 OCTOBER 2009
MR MICHAEL
OAKES
Q400 Chairman:
Did you anticipate getting a £4 million tax bill as a result
of this purchase?
Mr Oakes: No, we did not.
Q401 Chairman:
Does that say something about the quality of the due diligence?
Mr Oakes: That was something which
happened because the Co-op had moved things around within different
parts of the Co-operative Society. They had moved property around
from different parts in order for them to be able to sell the
business.
Q402 Chairman:
Is that not what due diligence is about: exploring every nook
and cranny to make certain you know what you are buying?
Mr Oakes: At the end of the day,
we did not pay the £4 million tax bill. We had to pay some
money for people's time in order to put a case as to why we should
not pay it. It was the Co-op's responsibility, not ours. We did
spend time working with the Co-op to argue with HMRC about who
was liable for that. Under due diligence everybody that bid for
it had to take it that what was said was true. There were guarantees
and warranties. Later on we did go back to the Co-operative Society
to say, "Actually, X factory was not quite what you said
it was. X contract was not quite what you said it was. There were
not as many of X, Y and Z as you said." There were potentially
at one point talks going on around a claim somewhere in the region
of £12 million to £18 million for things that we believed
were not what they said on the tin.
Q403 Chairman:
Were those ultimately settled to your advantage?
Mr Oakes: Unfortunately not. We
did get a price increase at one point from the Co-operative Society.
It was at a time when the market was moving up so we believed
we were due for a price rise. I think there was a sweetener there
at one point to try and put us back in our box. Ultimately, what
it came down to was: did we really want to take our biggest customer—because
they were our biggest customer at the time—to court over
what was a substantial amount of money but, in the bigger picture,
was it worth pursuing them for that and losing our biggest customer?
At the end of the day, when we renewed the contract the second
time—and it does hint at it in the receivers' report—all
those issues were put to bed. If was a bit of, "If you forget
those, you can have this." That is my cynical view. That
was the reality of the due diligence indications.
Q404 Chairman:
In hard reality, what you bought perhaps came as a little bit
of a disappointment compared with the optimistic tone of the due
diligence and the optimism of the board in buying the asset, because
you were going to acquire a customer base. The hard reality was
there was quite a lot of hidden cost in there which you did not
see.
Mr Oakes: There were some parts
of the business which were definitely not what we believed they
were. There were some contracts that came with the business which
were not what we thought they were.
Q405 Chairman:
When you started DFB, why did you think you could be successful,
bearing in mind the intense competition in the dairy sector? You
are up against massive competition like Arla, the very aggressive
business proposition of Wiseman. You come along as the smallest
of the remaining co-ops. Why did you think you were going to be
successful against that kind of background?
Mr Oakes: At the time, as I said
earlier, most producers were getting paid less than the cost of
production no matter who they supplied. There was a groundswell
coming out of the Curry Report and farmers needed to add value
and reconnect with the consumer. We believed in shortening the
supply chain and taking some of the processes. We all know processing
is not as simple as perhaps some people think it is and there
are quite a lot of costs there.
Q406 Chairman:
That is an aspiration. The question I was asking was far more
focused on the business end of it. To achieve that aspiration—we
have just had a discussion about a major investment that you made—you
were without the necessary processing and customer base in the
first instance. That is a fairly fundamental thing that you had
to do. Against the fact that you are in this highly competitive,
capital hungry world of dairy processing, ruthless as we have
exposed in terms of our questioning about price, what made you
think from a hard-nosed business point of view that you were going
to be successful?
Mr Oakes: We brought in the best
people we could find to help us do it. The board set the strategy
but we went out there and found the best executive team that we
perceived we could find and alongside us as farmers on the board
we also brought in retail experience on the board and processing
experience on the board. We tried to bring in the best people
we could in order to give us the best chance. It was never risk
free. There was always a risk.
Q407 Chairman:
The best led you into demise a relatively short time later.
Mr Oakes: Ultimately DFB ended
up where it did. That is for all to see. The industry changed
a lot on the way. The dedicated supply chains which you have heard
about from Tesco—Asda still have them; Arla still have them—all
the major retailers except the Co-op now have a dedicated supply
chain. That is on the back of the activity that the major co-ops
have invested in processing in a slightly different way. We went
down the liquid route. They tended to go down the commodity or
more of the cheese route. I perhaps personally underestimated
the fierce competition in that liquid market place. The ACC business
came with doorstep business as well. Whilst it is declining, it
was potentially quite profitable. Doorstep demand is declining
year on year but it is still a reasonably profitable business.
You were not taking on the other major processors head to head.
It was not really until we started to deal with Tesco and started
to really stand on some of our competitors' toes that they started
to fight back. I am not saying they did anything wrong because
they certainly did not. Business is business and they were not
going to take it lying down.
Q408 David Taylor:
You did spend about £100 million on ACC Lincoln and Bridgend
dairies expecting that the investment would be repaid by member
retentions and trading efficiency but in the four years that followed
not only did that £100 million not get paid; it was not even
half paid. Are those agencies, who gave you the best possible
advice to which you refer still around in agriculture, giving
that best possible advice?
Mr Oakes: Some are. Some are not.
Some have disappeared. Some of the people that we used as advisers
are no longer around. Some are.
Q409 David Taylor:
We will move on to the governance of DFB. I do not know whether
you were necessarily present when Lord Grantchester, who is here
in the public gallery today, told us quite clearly that he did
not feel that the governance structure of DFB was to blame for
the problems experienced by the business. The structure that you
have, representative democracy, is that you have farmer members,
of which you are one; elected members from their district under
the members' council, of which you are one; and the members' council
then electing people to serve on the board of directors, of which
you are one. You are well placed to have had a close opportunity
over a seven-year period to pass comment on the governance structure.
I know this may be a retrospective analysis but do you agree there
were weaknesses and, if so, what were the most significant ones?
Mr Oakes: The board set the strategy
and the executive went off and did the work. As a whole, that
is no different than any PLC. The difference is, for me as a farmer
on the board, because the business is owned by the suppliers in
effect, we did get involved as farmers on the board with the members
facing issues. It was the board with the executive that interacted
with the council. There was a slightly different role than there
would be in a PLC because your suppliers are your owners in effect
and you are on the board representing them, or they perceive you
are there to represent them. I do not think that is a weakness.
That is quite a strength because you are there with the executive.
In here I am a dairy farmer and I want my farm to succeed as well
as my neighbour's farm. If you look at who was left at the end
of DFB, it was the farmers who were still there, trying to put
it right. There is some strength in that. We invested a lot of
money in training the council. They worked with the Plunkett and
the FFP to help them understand any advice on accounting and other
governance structures. We also had a scholarship programme where
we were training young, keen council members who were working
with Plunkett and the FFP again to look at the best co-ops and
PLCs throughout Europe mostly so that there would be young, keen
people to come and kick me off the board. We wanted young, keen
people. Initially, we had to pick the board from the council we
had. Two of us, of which I was one—David Wilkinson was the
other—did not have any non-exec experience when we first
got on to the board. We have since both gained quite a lot in
various places but that potentially on day one was a slight weakness.
We made that up by making sure we were surrounded by other people
with plenty of experience.
Q410 David Taylor:
What weaknesses do you think, on reflection, the governance structure
had?
Mr Oakes: I think it was very
difficult in the last six or eight months. You wanted to tell
the membership as much as you can about where the business was.
It is their business. You feel they have a right to know but there
is confidential information and there is commercial information
there. Getting that balance right is quite difficult. Members
felt they should have known we had the problems we had but if
you are a PLC you would issue a statement, then get on and put
it right. You would have members on the phone every night almost
asking you what the issues were. That is not a weakness. It could
be a strength but it is a difficulty.
Q411 David Taylor:
You felt compromised by the position that you were in really?
Mr Oakes: It was not an easy position
to be in.
Q412 David Taylor:
Did you get much personal stick from the members' council or members
of it?
Mr Oakes: The whole board was
very accessible. The council could access the board very easily.
Q413 David Taylor:
How much of your time typically, prior to the final collapse period,
was involved with board activities?
Mr Oakes: Probably a week a month
when the business was in a steady state. In the last eight or
nine months it was considerably more.
Q414 David Taylor:
You said quite clearly that the board made out the strategy and
you expected the executive to go and deliver it. What was the
trajectory, if you like, of the relationship between the board
and the executive team? At some point it must have been a tense
relationship perhaps?
Mr Oakes: It was a challenging
relationship. We got rid of one chief executive relatively soon
after we had taken over ACC. We did change other senior executives.
The board changed as well because we were challenging ourselves.
They were having to report to us and we expected them to deliver.
If they did not, they would have to account for why not.
Q415 David Taylor:
Were you one of the few who were on the board throughout its life?
Mr Oakes: No. The four of us who
were there at the end were there at the beginning.
Q416 David Taylor:
Four out of?
Mr Oakes: There were six farmer
directors at one point and four non-execs who were not farmers.
Q417 Chairman:
You were talking about communication. If my memory serves me correctly,
I think one of the reasons why the Co-op got nervous about you
as a supplier was a comment in the press. They were reading about
some of the difficulties that you were gradually encountering.
I understand that the dairy industry is the victim of quite a
lot of personal news letters, the blogosphere and all the rest
of it. Did you ever monitor what people were saying about your
business?
Mr Oakes: We were using Pinsent
Mason to advise the board over the last eight or nine months,
just to make sure that we were always in the right place as a
board, making sure we were looking after all the stakeholders
in effect. An interesting comment was from one of their senior
partners. He had been involved in lots of businesses in a similar
position to ours and had never seen a business with so much noise
around it and so much activity.
Q418 Chairman:
I am not an expert on these things but I gather that there are
a number of privately posted internet news letters which, if you
like, put information out. If it is not factually based, sometimes
people add their own version of it. With that growing noise and
the fact that ultimately it contributed to the demise of your
business with the Co-op, did that not tell you something about
the degree of communication that you were having within your business
and that it seemed to be being substituted by other people who
might have been making it up as they went along?
Mr Oakes: It was very difficult.
You either got on and tried to put the business right for the
membership or you could have spent seven days a week trying to
address what the commentators were saying. There were fora; there
were websites. There was a whole host of things which would have
been a full time job for somebody to address. You would probably
have never won the battle.
Q419 Chairman:
You did not feel the need to deal with that with more direct communication
with the membership?
Mr Oakes: We did but as PwC were
imposed on us by the bank and as the board were put in handcuffs
in effect, to a certain degree, the bank were very nervous about
what we said to the membership. If we had said anything which
would have caused them to lose money, they made it quite clear
what the consequences personally for us would be. You are trying
to manage a customer base. You are trying to manage suppliers
who are also your owners and the membership. At the same time
the credit insurers pick up the news and one of them decides he
is getting nervous and moves. That hits the press. It just builds
and builds but ultimately you are still in a position where you
are trying to find a way through it.
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