UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 227-iiiHouse of COMMONSMINUTES OF EVIDENCETAKEN BEFOREEnvironment, food and Rural Affairs Committee
DAIRY FARMERS OF
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This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.
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Transcribed by the Official Shorthand Writers to the Houses of Parliament: W B Gurney & Sons LLP, Hope House, Telephone Number: 020 7233 1935
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Oral Evidence
Taken before the Environment, Food and Rural Affairs Committee
on
Members present
Mr Michael Jack, in the Chair
Mr David Drew
Lynne Jones
David Lepper
Miss Anne McIntosh
Dan Rogerson
Mr Roger Williams
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Witness: Mr Malcolm Smith (former Chief Executive, Dairy Farmers of Britain), gave evidence.
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 3.45 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 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 FD, 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 broad 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 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.
Q760 Miss McIntosh: When you say "bad advice", you are saying that is where the advice came from?
Mr Smith: I think that Mr Moody's advice was at times very good and at times
dubious. I will give you a specific
example because you deserve that. In the
case of ACC, for example, when we were buying ACC, it was a very interesting
situation; we believed we were one bidder among three. I think Wiseman was sniffing around just to
find out what was going on but they were not really interested, in my opinion
anyway. The only other interested party
was First Milk and I knew John Duncan the CEO very well and we had a very
cordial relationship. I was trying to
get First Milk and Dairy Farmers of Britain together and that was ultimately
stopped. The fact is that I know they
bid a lot less than we did, and I made that known to the board at a
meeting. They were at least £7 million
below us. I said, "They have dropped
out, why don't we drop our bid?" Mr
Moody's view was, "Oh, we cannot be seen to be chipping because when we buy our
next company people will say we will chip at the last moment and nobody will
sell to us". Those were his exact words
- utter nonsense but never mind. Then,
worse than that, in the midst of the sale, in fact the sale was organised on
the part of ACC or the Co-op buyer, they brought this guy from Hillsdown, Guy
something or other; I have met him before.
He was a right smoothie and I had dealt with him before and, frankly, he
was just doing his best for the Co-op, and fine play. Moody prevented me from ever meeting him,
basically saying that Guy did not want me as part of those discussions. In other words, Moody got himself as the only
negotiator in the room, even though I had done as many deals in this sector as
he has. So that was interesting and I
was not happy about that and I told the Chairman. He said, "No, no, we have got to go in with
Mr Moody" - fair do's. In the middle of
the purchase it transpired that the Co-op had sold Country Life to Dairy
Crest. In the IM Country Life was
included in the sale, so Mark Strickland and I calculated what it was worth and
we said it was worth at least £6 million in terms of purchasing price because
of the PE ratio. We were told, "No, no,
look back at the IM, it was not in there or anything like that at all. We have got to go in at the same price" and
we did not even make a reduction when they sold Country Life. Country Life today is the
Q761 Miss McIntosh: For the record, what would you say it was worth?
Mr Smith: £6 million.
Q762 Miss McIntosh: What did it sell for?
Mr Smith: I do not know what it was sold for, a couple of million, I guess, £3 or £4 million. In terms of what it was worth to us ---
Q763 Chairman: That business was sold before ---
Mr Smith: It was in the IM (information memorandum) and in the middle of the sale, as we were going towards the point of buying the company, it was sold to Diary Crest, and Philip told us in a meeting, "Oh, by the way, they have sold Country Life". I said, "What? Can we just go back a little bit there?" because this was a brand and brands have value. Everything else in the company was pretty tawdry stuff, frankly, but that was a brand, and we were told, "It is worth nothing. We cannot chip the price". That is a fact because that actually took place.
Q764 Mr Williams: You have talked a little bit about the purchase of ACC. Perhaps you could briefly précis the strategy behind the purchase and what was the reasoning, as you saw it.
Mr Smith: Several things happened before we got ACC. For example, there was Project Robson, which
was the purchase of Dairy Crest's cheese assets, and we looked at trying to buy
them at first. My first strategy was to
try and buy Wiseman in conjunction with First Milk, which would have been the
right thing to do. It would have cost a
fortune but it was worth a fortune because it is the best assets in the
Q765 Mr Williams: That is a much more serious comment. The suggestion that he was putting his own interests before the interests of the company of which he was chairman is almost a more serious accusation than saying he paid himself too much money.
Mr Smith: I would say paying himself too much money was a symptom of the first problem, I agree.
Q766 Mr Williams: You have said that there was an interest in working with First Milk to make a purchase of Wiseman?
Mr Smith: Or at least a chunk of the shares.
Q767 Mr Williams: Or part of Wiseman's, but was there a deal possibly with Arla or Express?
Mr Smith: As you know, Arla is a co-op of their own. I met with some of the board of Arla with Rob at DFB, and that was a very interesting meeting. I did not think there was any chance at all of us doing a deal with them, and I did not think actually it was the right thing to do, and neither did anybody else, in fairness, and I think we were all right about that one. So we walked away from that. We looked at Milk Link. We did not see that that made a lot of sense at the time; it might have done but we did not really see it as being the right thing to do. Geographically and emotionally First Milk was the best mix and the best fit with our company, and it would have made one heck of a sized business. We even looked at the monopolies issues associated with it very closely and we could have actually met those requirements quite nicely. We did a lot of work on it because it was the right thing to do.
Q768 Mr Williams: Can you then describe the process that Dairy Farmers of Britain went through in the run-up to the purchase of ACC, and particularly the different roles of the board, the executive and the acquisition steering group? You have been through a number of these things.
Mr Smith: Basically what happened was that we were stopped from doing the
First Milk deal by whatever means, and I do not know so I am not going to
speculate. With regard to Dairy Crest,
they were not going to play ball by letting us have the brand and I was not
going to pay a lot of money for a lot of old creameries, which was what was
being offered, so I advised the board and everyone agreed that it was not
the right thing to do, So we walked
away, having spent over £1 million on due diligence and all the rest of it, and
I just said, "No, that is not going to work".
So we did not do that. That was
when ACC came into play. What happened
there was I got a whisper that it was up for sale, so myself and Mark
Strickland met with the financial director of that organisation. He met with us in
Q769 Mr Williams: You talk about spending £1 million on due diligence.
Mr Smith: Legal costs and the rest.
Q770 Mr Williams: Perhaps this is one thing we will come on to. There has been a criticism that vendor due diligence was part of the process and some people have been very critical of that. Perhaps you could tell us whether the whole process then was thorough and rigorous or as you would have liked to see it.
Mr Smith: To be honest, vendor due diligence is not that unusual, you
know. It certainly cuts out a lot of
time when you are trying to get an auction going for a company and everybody
gets to see the same stuff. You have got
to understand it is necessarily slanted towards the vendor because they are
paying for it, but you know that when you go into it. I have been involved with vendor due
diligence before. I am not frightened of
it. I do not believe it, but so
what? Knowing that you have a problem is
half way to solving it, is it not? We
actually went to see one or two of the facilities, the more critical ones, one
of which was Llandyrnog which was not a good place. When I went in to Diary Farmers, Lubborn was
losing £1.5 million a year on a £7 million turnover and we turned that
into a profit in 18 months. Nene Valley
Foods was losing not far off the same and we turned that into a profit in 18 months. So I was confident, taking the Co-op assets,
and we did not even own the land in many cases, we were renting the land, as
you may well know from your previous investigations, we could have done
something with it, particularly if we had started working with First Milk again
to use our combined buying power and move on from the ACC because ACC was a
stepping stone; it was not the end. We
tried to create a brand in
Q771 Lynne Jones: A few minutes ago you said that you thought you paid £7 million over and now you have just said £12 million.
Mr Smith: With the loss of Country Life and the fact that we could have dropped because we were the last bidder, add the two together, it is at least £12 million overpaid.
Q772 Chairman: Who was responsible for pulling together, if you like, your approach on ACC? Who actually took the responsibility of valuing what it was worth to Dairy Farmers so that you could then determine what you were going to pay for it?
Mr Smith: I think that Philip led that. He was not alone in it. I am not going to blame him entirely for that. I think our original valuation was based upon what we thought the opposition would pay. Look, how do you set a price for buying something? Forget about discounting cash flow, if you want to buy something, it is a question of what it is going to cost to buy it, and that is what I do for a living; I buy and sell companies, so I know, and I think that bit of it was not wrong. I think where we went wrong was when we realised it was too much we did not pull back and we were stopped from pulling back by somebody who had a vested interest in the deal being done. Let us not kid ourselves, Philip was not going to get paid if it did not get done. I am sorry to say it, but let us call a spade a spade.
Chairman: Do not apologise. You are here to say things to us to help us to understand what was going on.
Q773 Mr Williams: Can you tell us if you were a member of the acquisition steering group?
Mr Smith: I was, yes.
Q774 Mr Williams: You are basically saying that nobody along the line had enough information really to make that tough decision to pull out?
Mr Smith: Oh, I think we had enough information because it was provided. I told them we were paying too much. I told the steering committee that in fact First Milk had walked away. I even told them that I knew what they had bid; although I did not really know, I had a damn good idea because I was mates with the CEO. Not putting too fine a point on it, we had a bit of a good guess at what that offer was, and we also knew Wiseman had walked away and they were not going to come back and buy it because Wiseman have got better assets than anything ACC ever had, far better assets. So we knew and I told the steering committee we could have chipped. Philip persuaded them not to chip and then when we lost Country Life, myself and Mark Strickland, who did a good job for us as FD, told them what we felt, that we should have dropped the price back, and the feeling was among the board that we should not drop the price.
Q775 Mr Williams: You said that you came to a view eventually not that the acquisition should not go ahead but should not go ahead at the price that it did go ahead. How strongly were you of that view on the acquisition group in your advice to the board?
Mr Smith: I just gave my view; I felt we could have dropped the price and I felt we should have dropped the price and the decision of the board, and it was a collective decision, or the acquisition committee, was that we were not going to do that.
Q776 Lynne Jones: Was there a vote?
Mr Smith: You know, I cannot remember, to tell you the truth. That is a terrible thing to admit but it was pretty obvious they were all going to follow Philip because he had got them all there. When I was not there board meetings were taking place at which another point of view was being put forward. I was not there.
Q777 Lynne Jones: You did not press for any kind of vote then, otherwise you would have remembered that, would you not?
Mr Smith: Well, we would have lost because it was obvious to a blind man what was going to happen.
Q778 Lynne Jones: Who is "we"?
Mr Smith: Myself and Mark Strickland, the FD.
Q779 Chairman: Help me to understand one thing. In terms of valuing it, you were quite right in saying, if you like, the formulaic approach does not always deliver the answer, it is what your gut tells you you can afford to pay, but in your business you would have known that you would have been buying X more litres worth of customer base; you would have been able to get some idea of the margin that would have been generated from that. You said that you had been to see some of the assets and some of that was not very good. The one thing you have not mentioned, which has come through in some of the evidence we have had, was in determining what the value was, nobody seemed to have really looked critically at what you would have to do, to quote your own words, to knock it into shape, and that might have meant rationalising the estate that you were buying, closing down creameries; it might have meant reinvesting in things to bring them up to speed, I do not know enough about what the mix was. Was that element taken into account in determining what the bid price would be?
Mr Smith: Not really, although we had a fair notion that there was going to be a fair chunk of money to be spent over the coming years. That bit of it I do not think was remiss by the board or the acquisition committee. I think we knew. We came into this with our eyes open. We were definitely misled in the case of Llandyrnog very much more than you would expect to be by vendor due diligence. We actually took a lot of time thinking about whether we would take action against the due diligence on Llandyrnog particularly and we were advised that we could not do that. I think that was probably good advice on that occasion. If you get caught, you get caught and we got caught on Llandrynog particularly.
Q780 Chairman: When you said you told the board of your views, did you produce, if you like, a formal paper saying, "Look, I am the CEO. I have looked at these assets. I have looked at the cash flow of this new business. I have looked at the extra business it is going to bring us. Here is my assessment of what I think it is worth"? Did you produce, if you like, formal costing paper on it?
Mr Smith: Not as such because, to be honest, I just went in to find out what we were going to be able to buy it at and they said to me, "Do you think you can turn it round at that?" I said, "Yes, given that when I have had a look at it, I will tell you whether I can or not", and I thought I could. I still think I could have done it.
Q781 Chairman: Do you think that the board were influenced by the fact that they appear to have put together ultimately a sort of consortium of banks who would have lent up to £100 million? In other words, was there any comfort derived from the fact that the banks would not have said yes to the lending, whatever it was they were in for, if they had not been convinced of the business case? Did that reinforce the board's view that somehow they were doing the right thing because "these banks had looked at it and they thought it was okay to lend us up to £100 million"?
Mr Smith: No. I had no part of it at all. In fact two of the banks walked away.
Q782 Chairman: That is true but, nonetheless, other banks formed a view that this was an investment or money that they could make available for an investment because the bank at the end of the day has got to answer the simple question: (a) are we going to get paid for the interest; and (b) are we going to get our money back?
Mr Smith: I do not think that had any part to play in that decision at all.
Q783 Chairman: So the main driver was the ambition of the business and the ambitions of certain individuals to pursue this almost at all costs?
Mr Smith: I think it would be a little bit unkind to say "at all costs". I think we pursued it at more cost than we might have been able to pursue it at, and I think for various curious reasons.
Q784 Chairman: We are going to talk about the bidding process in a moment. You made a comment that one of the targets you had examined was Wiseman. You also commented about the effectiveness and the efficiency of Wiseman as a company and you told us that it was probably one of the best dairy companies in Europe. That is a pretty star-studded series of headlines for a business, so you knew what you were up against. Bearing in mind that part of the reason for buying ACC, as I understand it, was to get involved with the Co-op's milk business, to become a supplier to them, and bearing in mind that there is a bidding process for contracts in the industry, a highly competitive activity, was any thought given, bearing in mind at some point in the future you were going to have to renew the contract with the Co-op, that you would be up against the most efficient, perhaps the most ruthless dairy company in Europe as a major competitor and that you, that is Dairy Farmers of Britain, with your enhanced capacity would be in their sights bidding for that business?
Mr Smith: We knew that and it is inevitable when you go into processing you know you are going to be up against the best. I knew the Wiseman brothers anyway personally, two very astute gentlemen and they had been kind enough to show me round some of their facilities before we bought ACC. I had gone to pick their brains, frankly, to see what it was we would have to compete with after we had done the ACC deal. I went into this with my eyes wide open because I had been used to being up against really high-class opposition all my working life. Frankly, myself and Mark and one or two of the board who were more thoughtful realised that the only way this was actually going to work was if somehow we got together with another co-op during a three-year period, a kind of three-year interregnum while we had the contract, when we could tidy the business up, join together with another co-op and somehow go after Wiseman again. That would have been the only way to do and that was one of the reasons that we entered into this process from my point of view. It was not my ideal solution; it was a solution. The farmers, the more thoughtful ones, realised it was not the end game; it was some way towards the end game. I was astonished to see what happened subsequently about some of the acquisitions that were made later which were just absolutely crazy. The fact is that this was a stepping-stone towards us joining with another co-op. That is all it really was in my view, and we were never going to be able to make it as a stand-alone processor because our opposition had better facilities.
The Committee suspended from
Chairman: We will move on to ask some questions about how the figure for ACC's valuation was arrived at.
Q785 David Lepper: In a way we have skirted around this point already. It seems to me there were three factors at play. One was that Dairy Farmers of Britain wanted an acquisition of that kind and maybe this was not the best available but it was there and it was available. That was one factor. Secondly, in determining what price you offered I guess there was the state of what was available, the equipment and the locations that were available from Associated Creameries. Thirdly, I have the impression, and I think you said it yourself, that there was the question of what would possible rival bidders be willing to offer. Did one of those factors play a major part or were they all part of the process of arriving at the bid that Dairy Famers of Britain were willing to put forward?
Mr Smith: We were given a bit of an indication by ACC about where they wanted us to be, because you tend to find that in an auction. Mind you, they always tip it higher, obviously. We did an analysis of the cash flow on the basis of the limited information we had.
Q786 David Lepper: Of their cash flow?
Mr Smith: Yes, the acquired cash flow, and we thought we could just about handle somewhere round about the 65 or 70 mark and we would get away without losing too much skin. The farmers were going to have to pay more than they should have had to pay for that company because it was one of the few that was for sale, particularly in liquid, and ACC knew that. It would have given us access to customers and ACC knew that as well. It gave us processing capacity which we did not currently have. All those factors were obviously relevant to the price they knew they could extract from us. It was worth a lot more to us as a co-op than it was ever worth to anybody like Wiseman who would not have wanted to buy it really. The only other potential real bidders were possibly Milk Link, but that was unlikely because they were fairly indebted having bought a lot of stuff from Glanbia prior to this, but mostly First Milk, who ultimately used their money in fact to do a much better thing, which was to buy shares in Wiseman.
Q787 David Lepper: One of the board members, Mr Oakes, said to us in his written evidence: "We believed there were two other serious competitors, both plcs, and the advice that we were given was that the price we bid at the end of the day was what it would take to acquire the factories." Were there two others?
Mr Smith: There were two other bids. I think Wiseman were in there just for the sake of it but First Milk were definitely involved; they were a co-op and not a plc as such. So I do not think that information was misleading at all.
Q788 David Lepper: Did you feel this about the price at the time or with hindsight?
Mr Smith: I knew at the time our price was full, and I found out that First Milk had withdrawn because they told me they had, and I advised the acquisition committee that we did not have to stay where we were, but Mr Moody made the point very strongly - it was always the same point - that he did not like to get involved in chipping a price because then you got a reputation as someone who would always drop the price at the last minute and that made you a less credible bidder.
Q789 David Lepper: Is that a general business rule? You told us you have been involved in this sort of thing a lot.
Mr Smith: My old chairman in Grampian did much the same in many ways and to my despair on occasions, but if you are known to be a chipper and a malicious chipper, in other words you go in and you offer a price which you know you are going to chip later, then you get known for that, but I do not agree that it would have been illogical for us to drop the price, and in particular especially when they sold Country Life out from under our feet. It would have been totally logical to drop the price because there was a very justifiable reason for doing that. Unfortunately, I had been prevented from being a party to the negotiations with the ACC selling agent by Mr Moody for reasons which are difficult to understand, particularly as I had a lot of experience and the board accepted that position. I was not allowed to go into those negotiations, which I would have liked very dearly to have been involved in.
Q790 David Lepper: So there was quite important information that you were not privy to, both factual information and strategic?
Mr Smith: I was not present at the actual negotiations between ourselves and the agent for ACC. I suspect that we had a version of what was said from Mr Moody which may or may not have been totally and completely the truth.
Q791 David Lepper: The Chairman has already referred to the group of four banks that you started out with: Rabobank, HSBC, Barclays and RBS. Then Rabobank and Royal Bank of Scotland dropped out. I am naïve in these matters, but I would have thought that would have been a sign to the board that there was something ---
Mr Smith: Rabobank have a reputation for dropping out, unfortunately. That would be quite normal. They talk a good story but when it comes to getting money on the table they are not good at it. That is a fact. I have dealt with Rabobank before. They are an extraordinarily good bank, a AAA bank, one of the few banks to get through the disaster, and they did it by extremely prudent lending, but they were always keen to talk the deal up and at the last moment when you had to give the money, then it was difficult to get it. I have had experience of that in Grampian as well, by the way. In fact, we went back to Rabobank and did them for the fees. The chairman met, and I was with him, the MD of our own bank, UK, and said that we felt we were being unreasonably and unfairly dealt with actually because we were led to believe that the money was coming and then all of a sudden it did not at the last minute which cost us a lot of money, and they filed charges of £400,000 for advisory fees. In fairness to the chairman, he did a good job. I cannot fault him on that. Together the two of us went and we got a reduction, a very significant reduction, from Rabobank. That is another example that the chairman was not all bad.
Q792 David Lepper: What about the Royal Bank of Scotland situation? Did that have an impact?
Mr Smith: Not really. HSBC was always our ace in the hole because Steve Dalwood was their agricultural adviser and he was very well known. He and Philip Moody had done deals together. I must confess, I found Steve Irwin to be quite a smart guy. I dealt with him and I was quite impressed with him. Barclays basically were not too keen on a deal in the end because they did not feel there was enough in it for them and I did not blame them for falling by the wayside at the last minute, and that was when we were in Crewkerne. That day was the fateful day we decided we would ask the farmers for a penny contribution and that came from David Wilkinson; he was the deputy chairman.
Q793 David Lepper: Tell us about the significance of the penny contribution.
Mr Smith: We were going to go for a halfpenny contribution and the only way that HSBC would back us was if we got a penny contribution from the farmers and we all thought that was going to be the end of that, and I certainly did. We were near Lubborn across the road in a conference room and everybody was feeling a bit depressed about it, including me, I have to say. Even though I felt we could have got it cheaper, I still felt it was a shame to have got so far. David Wilkinson at that point said, "Let us go with the farmers and ask them for a penny contribution". That is what we did and they accepted it. That is the only way we got the deal.
Q794 David Lepper: You also had to have, did you not, a loan from the Co-operative Group?
Mr Smith: There was a top-up of about £12 or £13 million I think in the end from the Co-Op, which was the first one that was repaid. That was like vendor finance.
Q795 David Lepper: So not an unusual arrangement?
Mr Smith: To be fair, it was a bit unusual but not totally. It is not the first time it has ever happened in the history of man. It just indicated to us all that the Co-op knew they were getting a good deal.
Q796 David Lepper: Did their involvement with the loan come at the price of the board agreeing to a particular price for ACC?
Mr Smith: Yes.
Q797 David Lepper: So it was contingent upon it?
Mr Smith: It was contingent upon us paying an excessive price for the company, and in fact you could almost say that the bid they gave us was equivalent to what we were overpaying them.
Q798 David Lepper: You say that was the first part of the three phases.
Mr Smith: Yes, that was the deal. The only way they would lend us the money was if they got it back first.
Q799 David Lepper: None of these arrangements that we have heard about - the involvement, then the non-involvement of the two banks, the involvement of the Co-operative Group so close to the company or the co-op you were acquiring - were unusual in this kind of business?
Mr Smith: Well, let me put it this way. This was a bit of an unusual deal all round. It was the first time a co-op had ever done a deal like this this big in the world. It was world news when it did it. You could say there were a lot of unusual things about this deal. Did we get deal happy? Probably, at the end, and that is not unusual. Was it a totally bad deal all round? No. Did we overpay? Yes. Were we misled into overpaying? Yes, in my opinion.
Q800 Lynne Jones: By whom?
Mr Smith: As I have said already, and I am repeating myself, our adviser strongly supported it against myself and my FD's recommendation to drop the price when they sold Country Life. We felt we were totally within our rights to do that; in fact we were. That was silly, not doing that was stupid actually. Then not dropping the price after First Milk dropped out was I think also a missed opportunity. I certainly did strongly put my case forward at an acquisition committee meeting and I remember it vividly now. I said, "Why are we bidding this price when there is no opposition?"
Q801 David Lepper: Had you been a board member, would you have been in a stronger position?
Mr Smith: I doubt it, to be honest, because you are just one among others. Ultimately, in a board meeting, as you know, you very rarely take an open vote, in my experience of 20 years on boards, because the chairman never allows an open vote in a board meeting in any kind of business, never mind a co-op or anything else.
Q802 Chairman: You had these reservations. You felt they were well founded, particularly in the light of the removal from the equation of Country Life. You said that the finance director and yourself had made a recommendation. Who was that to?
Mr Smith: To the acquisition committee. All the board members were there. We said we felt it was particularly unreasonable and, in fact, ridiculous to continue to pay the same price.
Q803 Chairman: When you went to the acquisition committee, did you produce some kind of documentary analysis so that the board could have sat down, looked at a presentation and said, "Okay, here we are"? Against that background, would the other members of the acquisition committee, the people who were on the board, have had a chance of turning to Mr Moody, saying, "Look, Mr Smith says this. You say that" and have a debate about rationalising the two positions?
Mr Smith: Moody rubbished it. We heard about this in a meeting. It did not quite happen in a clinical manner. We were in an acquisition group meeting. Philip Moody came back and gave us the latest words from on high about his last meeting with Guy. He dropped in, "Oh, by the way, they have sold Country Life". Immediately Mark, quite rightly, because he is not thick, said, "Hang on. That means we have lost earnings, therefore the price ought to be significantly reduced". Those were his words: "significantly reduced" by millions. Immediately Moody said it was not an agreed EBITDA and therefore they can sell it and it does not affect the volume of business and carried the board. Absolutely astonishing.
Q804 Chairman: His reaction, the one you have just described, just took everybody else along?
Mr Smith: Yes. On the board there were, I think, six farmers at that point who were not stupid at all, but they were not versed in this kind of fairly esoteric analysis of the evaluation of companies. If you said to them, "What is the average EBITDA multiple for the purchase of a business like this?" they would not have really known because that was not what they did. In fairness, they were a wee bit bamboozled. I still to this day do not actually understand because Philip is a very bright guy. He has many faults but he is bright. I do not understand now even why he was not prepared to do it because he understood exactly what we were talking about.
Q805 Chairman: Understanding the point you make about financial ratios and measures which may not be the lingua franca of farmers, most farmers can understand that if you take something out of a business it is going to be worth less. That is a very straightforward concept. Are we saying that, when the farmer directors who were on the acquisition committee were confronted with this relatively straightforward piece of information that a part of the business that had previously added value had gone, nobody said, "Perhaps that does affect the price"?
Mr Smith: There were one or two dissenting voices. Michael Oakes was always a dissenting voice and he saw it pretty quickly. I think we had got into a wee bit of deal mania by that time. I was astonished. Of all the things that happened, I thought that was the most worrying.
Q806 Chairman: If you had had, hypothetically speaking, a genuinely independent adviser - in other words, you were not in a Philip Moody situation - somebody who you brought along to give a watching brief, it might well have been that said person could have said, "Just a minute. If you want my judgment, this alters the name of the game", but there was not, if you like, a whistle blower on the deal.
Mr Smith: I entirely agree. That is a very astute point. Typically, when you are making purchases you will employ somebody of an independent nature. I have worked in the venture capital world for the last three years and it is black and white. For example, we have used Ernst & Young. Ernst & Young were our auditors at Dairy Farmers of Britain. We used Ernst & Young when I was in the venture capital world until recently. The advisers there would never let anybody get away with that. They would be like a rat down a drain. They would say, "Look, you cannot possibly pay the same price. They have taken a brand out and sold it. Come on. Get real". That did not happen.
Q807 Chairman: What do you think Dairy Farmers would have looked like if it had not bought ACC? In other words, the acquisition of it was compliant with the objectives of the business to buy more customers, processing capacity, distribution system. If you had come to a conclusion and said, "This ain't the deal for us", what would have happened to ACC? Can you help us to understand that?
Mr Smith: I think ACC was in severe difficulties. The Co-op had more to do with ACC, more to the point. They were playing a very clever sales game. They did a very good job with the negotiations, there is no doubt about that. They knew we needed to do something and they knew the farmers were minded to do something. I think they used that very cleverly against us, which is fair play from their side of the table. What would you do in their situation? You would do the same. As to what they would have done, they may well have carried on for a wee while. Who knows? It is difficult to say.
Q808 Chairman: Forgive me if I have not made myself clear. I was trying to understand whether Dairy Farmers could have carried on.
Mr Smith: I misunderstood. I think the Co-op's point of view was more interesting than the Dairy Farmers', but that is another side of the coin. If you take the Dairy Farmers' point of view, I said to the board that there was only one alternative to us if we did not buy ACC. That was to join with First Milk, come what may. I did not see a third way. We had a low average milk production against competing co-ops. Milk Link had done a reasonable job under quite a good CEO, in my opinion, and a good chairman. They had done a good job and continue to do so in getting into milk processing and I think they were extremely well advised and did well. I felt First Milk were in a bit of a state and they still are actually. That is no disrespect to the chairman who is doing a great job, in my opinion. Some of his farmer directors are truly trying hard to make the best of a bad job, but you do not need to be a genius to see that First Milk has one or two strategic issues facing it at the moment. Combined, the two companies could have done great things. Paradoxically, the CEO of First Milk at the time had also been brought in, an ex-Mars employee. Peter Humphreys, I think his name was, who has just recently left the company. He had no particular interest in joining the two companies together, I dare say. For my part, I got on extremely well with John Duncan, the CEO. I think he was minded to try and work together to join the two companies at the hip. We did an awful lot of work on anti-competitive stuff to find out if that was possible. That was a definite nixed opportunity for us. There was only one thing. There could only been one chairman and one CEO and they would not have needed an adviser.
Q809 Chairman: That rather underscores again the argument that you put to us at the outset, which is part of the reason we are where we are is the personal agenda and the protection of the positions of others on the board.
Mr Smith: I think you might say that I am pushing that point overly. That is my opinion. I think that most people on boards have an agenda of their own, in my experience, having worked on boards a long time. What you tend to find normally is that the robust nature of the board dynamic prevents them getting control. That did not happen in DFB. Nobody was stopping it happen. You cannot blame somebody for getting his hand in the till when he can. Somebody is going to get his hand in the till unless you stop him. I have worked in private business all my life and in business people will dip their hand in the till unless there are systems to stop them doing it. Even MPs have done that in the past, sadly, but, moving on from that point, it is true in the world, is it not?
Q810 Lynne Jones: I gather that the Members' Council was given a presentation on the purchase, in favour of the purchase, after which there was overwhelming support. Who gave that presentation?
Mr Smith: I was involved heavily in that presentation in terms of what I saw as the operational advantage of being involved in the liquid milk business. I genuinely felt I could turn it round. I have a history of turning businesses round. We presented to the council. It was at Stoke. We always used to present at the Britannia Stadium. I remember the day vividly. The farmers had some reservations about ACC. It would be unfair to say they were totally behind it, although only one person voted against it. We had a long presentation; we discussed it with them and they saw perhaps it was one of our only two opportunities. They all knew what the other one was, which was joining First Milk, because they had worked it out for themselves.
Q811 Lynne Jones: Was there any discussion about the price that was to be paid?
Mr Smith: Not a lot, to be honest.
Q812 Lynne Jones: Why did you not express your reservations that you had at the presentation?
Mr Smith: At that point in time, the die was cast. I was on the acquisition group. It is a bit like Cabinet responsibility. You have done the deal. What is the point in rubbishing it to the poor guys who are going to pay for it? I still felt we could make it happen. I felt personally we had overpaid, but I felt that that was not the major issue. I felt we could have made it happen even having overpaid. I felt it was inappropriate at that point in time to go through that dirty washing because it would not have helped the farmers and, more importantly, I still felt we could make the deal work.
Q813 Lynne Jones: Would that have been different if you had been a member of the board?
Mr Smith: That is a very good question because as you know probably from previous knowledge you have gained the board met privately with the council. The interesting thing was the council chairman - the last one was Steve Yates; before him was a different character altogether - the previous one and I, used to have regular meetings for dinner once a month, because I asked to do that. I did not know that the board was actually giving the truth, the whole truth and nothing but the truth. I arranged to see him and meet him for dinner, sometimes at his house, sometimes at a hotel or wherever. The chairman stopped those meetings between six and nine months before I was sacked.
Q814 Lynne Jones: Was there a presentation about how the deal stacked up financially?
Mr Smith: You are missing something. What I have just said is very significant.
Q815 Chairman: I did not ask the question because I thought Lynne would ask it. Why?
Mr Smith: I was hoping she would.
Chairman: Go on. Tell us the story then.
Q816 Lynne Jones: I wanted to finish asking the question.
Mr Smith: My apologies.
Q817 Chairman: Answer the question as to why and then we can go back to your answers.
Mr Smith: The answer to the question why, in my opinion, is because I was telling it like it was and giving an opposing point of view. The chairman did not like that. He wanted only his point of view to be accepted by the chairman of the committee because the chairman of the committee had the potential to stop things happening that the board was recommending.
Q818 Lynne Jones: Could I have an answer to my question then in terms of what finances were presented.
Mr Smith: We gave them a presentation of the cash flow that we thought was going to come out of it. We told them it was going to be hard work and I told them upfront it was going to cost them for a couple of years at least. The penny a litre they were not going to get back on the selling price initially.
Q819 Lynne Jones: Did you feel that you had told the truth in terms of your presentation?
Mr Smith: I am not a liar.
Q820 Lynne Jones: Did you omit certain things?
Mr Smith: I am not a liar by omission.
Q821 Lynne Jones: You still gave a presentation which gave them the impression or you felt at the time that the purchase at that price was something that was reasonable at the end of the day?
Mr Smith: They wanted us to get into liquid. We got into liquid. I told them at the time we paid a lot of money for it, but that was the only way we could get it. It transpires that maybe it was not the case but I did not know that exactly at the time. I found out more later.
Q822 Lynne Jones: Why do you say it was the only way? Earlier on you were talking about the Co-op and the fact that the implication was that there was some discussion with the Co-op about paying a lower price. You implied that the price for the deal of having the loan was that in effect you paid more.
Mr Smith: No. That is not the case at all. You are mixing everything up there. The reality is I told the acquisition committee I thought they were paying too much. That information was not conveyed to the Co-op by Philip Moody at all, ever, and the Co-op extracted the additional loan because we could not get that money from the HSBC.
Q823 Lynne Jones: I think in the discussion it was implied that you only got that loan because you paid more than it was worth.
Mr Smith: In retrospect, I suspect that is the case.
Q824 Lynne Jones: The way you gave evidence implied there was some discussion over that point.
Mr Smith: No. That is not the way I gave evidence. I did not imply it.
Q825 Lynne Jones: You said at the start of your evidence session that you were sacked, and you just repeated it, although on your CV I think you write that to the surprise of the industry Dairy UK was born and unified the dairy sector for the first time since deregulation in 1994. "My work being done, the board agreed a generous exit." That is a somewhat different gloss on the situation than being sacked.
Mr Smith: I got a lot of people writing to me in the industry at the time, including the Wiseman brothers, asking what was going on. Also, I got a nice letter from Sir Ben Gill, who I had worked with at Westbury, and various people were ringing asking what was going on. I did not think it was very appropriate for me to rubbish Dairy Farmers of Britain, which had been my employer, and the chairman and the board to the industry at the time. I think it is appropriate now because you have asked me a direct question. I did not know at the time, when I originally wrote that, that of course Dairy Farmers of Britain was going to go down the tubes.
Q826 Lynne Jones: You also say in your CV that DFB posted record profits in 2003-4 and a turnover of 550 million and you also say with an employee base of approximately 3,000. That must have been before the acquisition.
Mr Smith: No. We employed about 400 people before we bought ACC.
Q827 Lynne Jones: That was 2003-4. You talk about an employee base of approximately 3,000. That must have been the period before the purchase of ACC.
Mr Smith: I would have to look at the numbers again. We had Lubborn. We had Nene Valley Foods. We had a lot of drivers. I would need to look at that.
Q828 Lynne Jones: That is not actually accurate.
Mr Smith: In your opinion it is not. I will have to check that.
Q829 Chairman: She is only reading out what is written down here.
Mr Smith: Her opinion is not accurate. I am saying I do not know. I will have to check the exact numbers.
Q830 Lynne Jones: You also earlier on implied that Mr Knight was somewhat overpaid for the work that he did. I presume both the chairman's and the CEO's salaries were on public record?
Mr Smith: Yes.
Q831 Lynne Jones: You also referred to a generous payout that you received. I am not necessarily asking for the exact figures, but in terms of the orders of magnitude what was the proportion of the chief executive's salary that the chairman was receiving and what was the proportion of that, in multiples perhaps, that you received in your generous exit?
Mr Smith: It is a matter of public record. It is in my contract. I got a year's pay. I say "generous"; it was what I was due really. It was not an issue which caused any atmosphere.
Q832 Lynne Jones: As a proportion of your salary, what was the chairman paid?
Mr Smith: The chairman was earning at least as much as me by the time I left.
Q833 Lynne Jones: Mr Moody?
Mr Smith: An awful lot more than that.
Q834 Lynne Jones: He was earning more than the chairman?
Mr Smith: I would think so.
Q835 Lynne Jones: I think we had the figures from him.
Mr Smith: He got five million I think over a five year period. Not him personally, I have to say, but his company. However, he was the lead partner and he would have had a rather nice bonus out of that.
Q836 Mr Williams: In evidence he said he had a salary, he was a particular type of partner and his remuneration was not dependent on either the income or profit of the business.
Mr Smith: It was unique in my experience but I have no reason to doubt his written word.
Q837 Chairman: Just help me to understand what happened after you had acquired ACC. You had these assets of various efficiencies and vintages. What did you then do with ACC?
Mr Smith: That is an altogether more interesting question and I think it is
very germane. I have a policy of
visiting every company that I run, even when I had an international
business. I visit them all to get a feel
for it. With Llandyrnog immediately I
just knew there was a major problem and that frankly we were being misled at
the DD. I believe to this day we were
misled at the DD. Proving it is one heck
of a thing to do. We did try to prove
it. Once again, fair play to the chairman,
he did do his best to try and get reparation on that, but we did not get very
far. You tend not to. We decided to shut it and we got on with
it. I employed a guy called Gerry Smith,
who was a very experienced operator, who did a great job in a difficult
circumstance. I wanted to close
Q838 Chairman: You really left the business before the radical plans. I think we heard that towards the end there was Project 523 which had begun. Supposedly, profitability had returned to the business but at the end of the day the customer base had disappeared. You did not really advance the rationalisation agenda very much for ACC.
Mr Smith: I was not really allowed to get on with that in the way that I thought was appropriate. I brought in a really good guy in Gerry. He did a pretty good job in difficult circumstances subsequent to my departure. He was a very experienced operator. They brought a guy called Andrew Cooksey in, a nice young lad but not fit for the role he was given. They interviewed Gerry for it and they interviewed Andrew for it. Andrew was given a job way beyond his competence, I mean way beyond his competence. I could speculate on the reasons for that but it would be really rather pointless.
Q839 Chairman: One of the things which I probed about a little bit earlier, but perhaps we could just revisit so that we really understand it, is this question of the bidding for the Co-op's business. In terms of the diversification strategy, you had had very good support, it seems to us, from Tesco. With their local milk initiative, they strike me as having gone out of their way to try and be helpful. When things went wrong they accepted some difficulties in then developing what they wanted to do, but they still stuck by you as a supplier. On the other hand, the ruthlessness of the bidding process for the contract for the Co-op's business obviously was the undoing of ACC. It still bothers me that, for better or worse, there were a lot of people who knew something about the dairy industry who would have realised that when it came for that contract to be renewed you would have been up against people like Wiseman, who had an awful lot of capacity to fill. Seemingly, their reputation is one of getting business to fill up their factories because obviously it makes sense so to do. There is a strong probability that they are going to bid you down to the last whatever. Perhaps you did not have the necessary assets and efficiencies to rival the Wiseman's of this world. Did that kind of analysis go on when, if you were like, you were saying, "We have ACC but its wellbeing is going to be dependent on keeping the customer base alive"? The only way to do that was to be as efficient as the best in the industry because, by definition, if you were not you were going to lose out in a contract bidding war.
Mr Smith: As I said previously, you are absolutely right. Your analysis is spot on. We were never going to win that one. That was why I said, "Look, there is only one thing to do here. We have to take the next step and consolidate with another co-op." The DFB board was known as the £1 million board in the industry because of what was being taken out of it by one means or another by the board. One of the reasons for my final departure was I strongly objected to the chairman's budget. I said, "Look, at a time of stringent operations when you are asking us to take the costs down on everything, I notice the board budget has gone up". He told me to get lost; it was none of my business.
Q840 Chairman: Was it solely the personal agendas of certain members of the board - the chairman and others perhaps - that meant they did not pursue the merger strategy? In other words, was it examined rationally as opposed to emotionally?
Mr Smith: In fairness, I had made a point of making the board discuss it on many occasions. It was not new. They all knew this. As to why it did not happen, there may be all sorts of reasons. It is no good just blaming one or two individuals because, let us face it, there was a board there, was there not? Unfortunately, they were being misled for whatever reason, we do not know. I do not know what goes on inside another person's head. I wish I did sometimes. I just do not. The fact is that I think there were some bad decisions taken. If you said to me, "What really went wrong?" the board governance did not work. We did not have a truly independent oversight of what was going on and there was not a truly representative view being given to the council, who I think were trying to work in a bit of a vacuum.
Q841 Chairman: Bearing in mind you had externally appointed non-executive directors, and, in other words, on a normal plc board you have a simpler arrangement, you have the executive directors and the non-executive directors.
Mr Smith: It got a bit cosy. Philip knew one of the other directors, who was meant to be our financial guru, very well from his days at HSBC. George Risley was about to retire and was an older man obviously. He had done a very good job but obviously he was going. The time had come to move on. Subsequent to my departure, you only have to look at the people who came on the board as non-executives. Some of them were good people, but they were all acolytes of Rob Knight. They were people he had known from his previous experience. They were not independent at all. They were good people in themselves but there was a relationship with the chairman which necessarily was a little unhealthy. I am not being critical of individuals because that is not what this is all about. I just do not think that there was that independence of spirit among the independent, so-called, directors.
Q842 Mr Williams: As I understand it, it was the chairman of the council who appointed the non-executive directors.
Mr Smith: No.
Q843 Mr Williams: That is the impression he gave us.
Mr Smith: Was that Stephen Yates?
Q844 Mr Williams: Yes.
Mr Smith: That is not true. Stephen would not have been so daft. The reality is the people who came on were acolytes of the chairman. Some of them were very good individuals but the trouble is it got a bit incestuous, frankly. You just need to look at the relationship he had had with them over the years. It did not take a long time to work it out. It lacked independent oversight. I am really sorry for the farmers and for my part in this whole sad affair I am totally apologetic to the farmers. I feel I could have done better.
Q845 Mr Williams: You are saying that the chairman was solely and absolutely responsible for the appointment of the non-executive directors?
Mr Smith: After my departure, looking at the people he brought in, and he tried to bring some of them in when I was there but I blocked it, or I had done my best to block it, because I knew what he was at.
Q846 Lynne Jones: In what way could you have done better?
Mr Smith: I am really good at looking back. I suppose if I said to you what could I have done better, maybe I should have blown the whistle to the council during the process of the bidding. Maybe I got tied up in the bid myself. I am not totally blameless in all of this. I cannot hold myself blameless. I felt I could have turned it round. I did not get the chance to do it, but maybe I should have been more strident at the time in telling the members.
Q847 Lynne Jones: Do you think it would have been different if your dinners with Mr Yates had continued?
Mr Smith: It was not Mr Yates. It was the previous chairman, John Loftus. It might have been. Rob is a very charming man and quite a smart guy. I think John fell under his spell a bit. I actually think that Rob fell under Mr Moody's spell. That is part of what went wrong here. I am not being critical. I am not going to start blaming everything on Philip Moody because it is not all his fault, but I really rather suspect there was a pretty unhealthy relationship developed between them. I think that really kind of formed what the board did and I could have tried harder to do something about that. You have asked a very good question: would my dinners with John Loftus have made any difference? I think they might.
Q848 Lynne Jones: Was it in order for the chairman to tell the chief executive not to meet the chair of the members' board? Did you have any choice but to stop?
Mr Smith: It would have been difficult. I was not on the board. I was being told by the chairman of the board that this was no longer appropriate.
Q849 Lynne Jones: The chairman of the members' committee could have protested about it.
Mr Smith: He could have done, but he did not.
Q850 Chairman: Thank you very much indeed. You have provided a unique insight into the workings of the board during the period of the purchase of ACC. You have given us some helpful commentary about the governance issues for which we are very grateful. I think we see perhaps just a modicum clearer as to some of the reasons why sadly the business went down. As we come to the end, one of the great sadnesses - and it reflects on your own observations as to why you decided to come and talk to us, namely the farmers - is the sense of optimism that so many of them started off with when the co-operative was first formed. Their evidence to us gives almost a naïve optimism that by pursuing the strategy that we have been discussing they would at last be able to take control of their destiny to their own long-term advantage. Sadly, the way that thought process was translated into reality delivered the opposite result with all the pain and suffering that some of them have had to endure. Thank you very much for your contribution to our inquiry. We are very grateful.
Mr Smith: Sadly, I think it could have worked. That is the bit that sickens me to my stomach.
Chairman: As one of our witnesses said with a BA in hindsight, "We could all see how it could have been done better". Clearly at the time you had your thoughts but, for the reasons you have stated, you were not able to pursue them. Thank you.