Saturday 9 February 2013

First Steps to Better Farm Business Governance

Good Farm Governance…”A process of Getting Advice to provide a Better Perspective”

“Effective collective decision making to enhance business performance” is what Farm Governance is all about.
Good Governance, Management and Operational efficiency are critical to all dairy farm businesses. 

First Step to Better Farm Business Governance is to separate the Farm roles. 

On every dairy farm there are Operational tasks where most dairy farmers spend most of their time (day to day routine jobs). The Management role which is making tactical decisions (organising & controlling land, resources & people).  Management is about making decisions. These tactical decisions often relate to this week or over the next one or two months. 
Governance is the big picture strategy “what business are we really in? What personal & family values are really important to our business?

We need to see these three roles as being quite separate. On most family farms the farm owners do almost everything. 
“If it’s going to be it’s up to me? In reality the physical work (operations) swallows up most of one’s energy & time. Management is sometime that happens on the run driven by the urgent rather than the important. 
And Governance….What’s that?

Good Management requires time, planning, good quality information & processes. Management is very difficult if you are physically fatigued. It requires alert bright minds. 
Governance requires time out. Good Governance means stepping outside the business & looking back at it. Governance is about working on the business not in the business. Governance becomes more important as the business grows.

So what is Farm Governance?

 I like Dr Christine Woods(University of Auckland, Business School) simple definition of Governance…”A process of Getting Advice to provide a Better Perspective”. 

Better Farm Governance. Step 1. 
Every dairy farming couple should go off farm for 2-3 days every year to think about their farm business. These days are not holiday(Not part of the minimum of 21 Cow Free Days). These days are off farm work away from the urgency of daily jobs and interrupting mobile phones. Turn the phones OFF. 
“Thinking is Bloody hard work (that’s why so few people do it!)”. 
Key question is “Is our farm business delivering what we want for our family?”

Better Farm Governance. Step 2. 
Every dairy farm business should have an Annual General Meeting.
 You can invite anyone you like of course but I suggest you include your Bank Manager, Accountant & Farm Consultant. You need an agenda and your advisers need to be instructed to prepare a Strategic Outlook Report (no longer than an A4 page) for your business from their professional view point. All the professionals need to hear all the reports. 
You need to provide the meeting with A. your Farm Business Scoreboard benchmarking report (or equivalent like NZ Dairybase report) and B. your Farm Business Plan & Targets for the year ahead (not longer than A4 page). Make it clear that this is a formal meeting & dress for a business meeting. Important to turn off phones & not be interrupted.

Better Farm Governance. Step 3. 
Form an Outside "Ad Hoc Think Group" for strategic management discussions. 
This Group could have a legal identity & responsibilities and you need to be very careful as legally they/group could be "deemed to be Directors" so you dont want a formal structure or keep minutes of the meetings. The group would meet to help the farm owners with the strategic direction for the business. You would choose professionals with the best expertise available. You would look for people with good industry knowledge and experience, have a good support network, good financial literacy and a good understanding of farm governance. You remain in control of your business and make the decisions but will need to improve your business decision making. There is a clear need for good quality information & reporting. You are deliberately exposing your business to outside expert scrutiny.

Better Farm Governance. Step 4. 
 Form a Farm Governance Board with Independent Directors (non-shareholders) 
This decision has structural implications for ownership, continuance & control. What will be the “founders role be in the new business structure?” Are the "founding values" clearly understood? The forming of a Governance Board will be related to the size & complexity of the growing dairy farm business. Good Governance is seen by banks as a risk reduction strategy. Be very careful that you and the Directors you appoint clearly understand the roles & responsibilities of being a Director. It may improve access to capital & reduce the cost of borrowings. 

Good Governance will create long term value and achieve the owners’ goals. Bad governance can destroy a business very quickly. Start improving your farm governance. 
Start with Step One to Better Farm Governance. Have some constructive time out!

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