Friesland­Campina’s Members’ Council approves amendments to cooperative governance

Tuesday, 15 December 2020 the Members’ Council of Zuivelcoöperatie FrieslandCampina U.A. approved a number of amendments to the cooperative governance. Furthermore, the Members’ Council provided direction for the development of a future-proof member financing system. The Members’ Council was also updated on the acceleration of the transformation which was recently announced by the company.

Amendments to cooperative governance

The Members’ Council has approved, with a vast majority, a number of amendments to the cooperative governance. These changes are aimed at further increasing the involvement of members and District Council members in the decision-making process, thereby bolstering support. In order to continue improving the effectiveness and agility of the cooperative, the number of districts will be reduced from 21 to 14. In line with this, the number of Members’ Council members is to be reduced from 210 to 140 by way of a transitional arrangement. Moreover, four clusters will be formed within the Members’ Council to provide a structured contribution to the thinking process and to function as a sounding board, these clusters being ‘Day-to-day Management’, ‘Cooperative Values’, ‘Animals and Nature’ and ‘Member Commitment and Member Engagement’. Each cluster will include several District Council members from each district.

Constructive dialogue

Frans Keurentjes, Chairman of Zuivelcoöperatie FrieslandCampina U.A., on the amendments to the cooperative governance: “The governance of the cooperative concerns us all. Which is why we are keen to involve members and District Council members in decision-making more closely and at an earlier stage, thereby bolstering support for decisions within the cooperation. The changes to the governance structure are the result of careful, constructive dialogue between members, District Council members and the cooperative’s management, which we entered into in 2019. The substantial commitment with which all echelons of the cooperative made their contribution fills me with the utmost confidence that we are focusing on the right topics. In this way, we are shaping and giving substance to the governance of our cooperative together.”

The changes to the articles of association will come into force in June 2021. The intervening period will be used to prepare the introduction of the modified governance structure with due care.

Future-proof member financing system

In 2019 we identified a need to give consideration to a new, future-proof member financing system. This is down to the fact that the current system, which was set up at the time of the merger in 2008, no longer fully meets the requirements of the current time. The Board and the Members’ Council are aware that member financing is an important topic for members and so involved them closely and early on in the dilemmas, starting points and potential solutions for the new member financing system.

Dilemmas

The development of a new member financing system presents three dilemmas that need to be considered. First, the tradability of member bonds-free. All sales and procurement orders have always been fully settled since the member bonds-free were introduced. However, due in part to the ageing of and decline in the number of members, an imbalance has arisen in the internal market, meaning there is usually more supply of than demand for member bonds-free and Rabobank, as a liquidity provider, frequently has to submit buy orders. Although the demand for member bonds-free has increased in 2020 compared to 2019 and 2018, in the longer term the tradability will decrease. It is therefore necessary to take action now.

Furthermore, the voluntary nature of the current member financing system has given rise to imbalances in members’ capital commitment. At present, there is no link between milk supply and the capital invested by a member. This has caused significant discrepancies to arise between members in terms of the quantity of capital invested per kilogramme of milk supplied. If policy is not changed, these imbalances will become more pronounced in the future, which will undermine the fundamental cooperative tenet of member financing.

The third dilemma pertains to the quality of equity capital. FrieslandCampina’s equity capital is 39%, comprising 17% capital buffer and 22% hybrid equity capital (the member bonds). Hence the ratio of capital buffer to hybrid equity capital is imbalanced and the capital buffer is currently below FrieslandCampina’s own target of 25%.

Starting points

These three dilemmas were explained and discussed with the Members’ Council and the members several times during the course of 2020 – a process that yielded a number of starting points for a future-proof member financing system. These include: ‘address the three dilemmas with an integrated solution’, ‘link milk to capital’, ‘ensure that the discrepancies in financing between active members do not become too pronounced’, ‘ensure there is a transition model’ and ‘respect the financial benefits accrued in the past when transitioning to a new member financing system’. In principle, the latter means that (1) members will be free to choose whether or not they will retain existing member financing instruments (member bonds) and (2) the accrued nominal value of the current member financing will be respected.

Next steps

Members’ Council members provided direction for the development of a future-proof member financing system during the Members’ Council meeting of 15 December. The link between quantity of milk supplied and capital to be invested, for example, is an important element of the new system for the Members’ Council. Also, for the purposes of fleshing out a new system, there is a desire to consider instruments that would appear to be the best fit for the dilemmas and starting points previously identified. The consequences for the individual members, cooperative and company must be taken into account.

The possible set-up and instruments for the future member financing system will be fleshed out over the first few months of 2021 to enable a substantiated proposal to be shared with the members at a spring members’ meeting.

We envisage that decisions on the new member financing system will be made by the time of the Members’ Council meeting of June 2021 to enable the new system to be introduced from 2022 onwards, depending on how the Members’ Council votes.

Update on developments within the business

CEO Hein Schumacher, CFO Jaska de Bakker and other senior managers updated the Members’ Council members on the latest developments within the company at a business update. They focused in particular on the acceleration of the transformation announced on 10 November 2020. The purpose of the transformation is to create a FrieslandCampina capable of operating successfully even in extremely challenging market conditions – such as we are seeing at present with the coronavirus crisis – and able to pay its member dairy farmers a competitive rate for their milk.

Areas for attention transformation

The transformation will see FrieslandCampina focusing on five priorities:

1. Accelerating the implementation of the ‘Our Purpose, Our Plan’ corporate strategy.
2. Successfully implementing a new route to market for the infant nutrition business in Hong Kong/China.
3. Optimising the organisation and thus structurally lowering costs.
4. Strengthening the company's equity.
5. Preserving and bolstering the prevailing corporate culture.

Progress

Subsequent to the transformation being announced on 10 November 2020, a series of more detailed announcements were made in the weeks thereafter.

On 10 November it was announced that FrieslandCampina intended to concentrate all operational financial activities for the operating companies in Europe, the Middle East and Africa in the Financial Shared Services Centre EMEA in Budapest, Hungary. The plan is to initiate the transfer of operational financial work in Wolvega and Amersfoort to Budapest from January 2021 onwards.

FrieslandCampina Germany announced on 25 November that the company would be focusing even more on its strong brands, such as Landliebe, Chocomel and Valess, and scaling down production of unprofitable volumes and products in Cologne and Heilbronn. 

On 1 December FrieslandCampina announced its intention to discontinue its powder production in Dronrijp and Gerkesklooster so as to further optimise the production network. The Dronrijp site is to be closed as a consequence of this proposed step.

On 10 December FrieslandCampina announced that it would be optimising its cheese-packing activities and that it was intending to concentrate the cheese-packing in Wolvega and Leerdam and, as a consequence of this, to close the site in Genk (Belgium). 

On 14 December FrieslandCampina announced that it has signed a letter of intent with Royal A-ware to sell the powder production facility in Aalter (Belgium). The possible sale of the powder tower is to be fleshed out in more detail over the next few months.

Business structure

To optimise its business structure, bring more focus and structurally reduce (overhead) costs, FrieslandCampina announced during the business update that two new units are to be created in 2021. The first of these is FrieslandCampina Professional, which will be responsible for all of the company’s high-value Business-to-Business (Out-of-Home and Foodservice) activities.

As a result of this, the ‘Food & Beverage’ activities of the Business Group FrieslandCampina Ingredients will be transferred to FrieslandCampina Professional. A strategic partner will actively be sought for the animal food business of FrieslandCampina Ingredients.

Over the course of 2021, the current Business Group Dairy Essentials will be transformed into a specialised trading business, FrieslandCampina Trading. This unit will focus on profitable trade in bulk dairy products such as butter, cheese and milk powder. Zijerveld Kaas in Bodegraven, which currently falls under Dairy Essentials, will be merged with the company’s other cheese activities in the Business Group Consumer Dairy. The high-value Business-to-Business activities of Dairy Essentials cheese, butter and milk powder will go to FrieslandCampina Professional.

Cost savings

The aforementioned proposed changes to the business structure will result in the redundancy of 55 jobs in the Business Groups. Staff have been informed of the proposals and advice has been sought from the works council involved.

Sustainability strategy

Finally, FrieslandCampina is today launching its revised sustainability strategy: ‘Nourishing a better planet’. This strategy entails the organisation focusing on six ambitions:

1. Better nutrition, affordable for everyone
2. Better living for farmers
3. Better climate, carbon neutral future
4. Better nature, improving biodiversity
5. Better packaging, 100% circular
6. Better sourcing, 100% sustainable raw materials

The organisation is also keen to ensure that sustainability is embedded even more firmly in its brands and products. The success of Campina products bearing the ‘On the way to PlanetProof’ marking attests to an increasing need on the part of consumers for sustainability being a top priority for producers.

Further information on sustainability within FrieslandCampina and the new ‘Nourishing a Better Planet’ strategy can be found at https://www.frieslandcampina.com/sustainability/.