ANZ Board Minutes: from the farm to the bank

Andrew Cornell: Thanks for your time JT. It’s interesting you have a financial markets background - including a long career at Deutsche Bank - but essentially today you're a bit of a farmer and a shopkeeper. You have interests in agri business and commercial property as well as being involved in retailing and tourism. So banking, farming, retail, real estate investing. How do these things fit together - is there some common thread?

John Macfarlane: I have a long career in banking but most of my extended family come from an agricultural background in New Zealand and I spent some of my holidays growing up on the farm. In the 1980s, after New Zealand went through quite a lot of radical change, the agricultural scene in New Zealand changed quite dramatically. I started investing in agriculture with my brother who is an agricultural consultant and became ever more involved.

I have really continued to invest in New Zealand - both in real estate and in agriculture - for the best part of 30 years. When I retired from banking it was really to pursue those passions. Now superficially banking is very different to agriculture and real estate development and management. But when you think about it, actually I don't find that to be the case. When we sit at the Board at ANZ we're dealing with a rapidly changing environment and rapidly changing consumer preferences - changes in the way consumers want to interact with the institution. And technology is a facilitator of those changes - it's omnipresent in everything we do. So people say “well agriculture must be very different” but when you think about it, in agriculture we face many of the same challenges - rapidly changing [HN1] consumer preferences, changing expectations and radical changes in technology.

However, I think the most interesting similarity is the question of trust. Both banking and agriculture face this fundamental challenge around trust. In banking it is about whether the customer - and society - trust the bank to do the right thing. That means really do the right thing as well as protect customers’ finances and their personal data.

That question of trust is more and more important in agriculture. Do consumers trust the provenance of the product, the claims made in relation to production methods and animal health? The broader food security issue really goes to the heart of the value of agricultural products and the industry more generally.

In that sense there is a crucial, fundamental similarity in the challenges faced by banks and farmers and it comes down to trust and social license.

AC: That is genuinely fundamental and there is also the challenge of consumer tastes.

JM: Consumer preferences are changing very rapidly. In dairy, one of the things my brother convinced me to do years ago was to breed an A2 herd. And people thought that was sort of vaguely ridiculous at the time but years later A2 is now a very reputable brand and is sought after.

But there are lots of other consumer preferences that are changing rapidly in agriculture. We can talk about organic, genetically modified, gluten free or food as medicine. Use of water and methane and carbon emissions are also critical topics and all of these things need to be addressed and are working their way back through the system. So like banking, farming is facing process and system change and much like banking, it is relatively capital-intensive change.

In many respects, some things had been done in the same way for a very long period of time. And now all of a sudden we're confronted with changing consumer preferences, changing markets, and the environmental and sustainability issues are very front of mind. We're solving a lot of these through the prudent use of technology and the way we deliver things to market is changing very rapidly.

So there's a lot of the underlying forces that we see in agriculture which mirror those in banking.

It’s very similar with property investment. One shopping centre we bought three to four years ago basically sold furniture and fashion. Now, 50 per cent of the centre is dedicated to selling services. We have gymnasiums, childcare, pharmacies, health and wellbeing services. Of course, food is a bigger part of the offering and will continue to grow.

So just like banking and farming, in real estate and retail, our customers now expect very different things - they expect ease of use, convenience and health and services much more than they did three years ago. Understanding changing consumer preferences and how best to deliver on those preferences is not the preserve of one sector of business!

Flooding the paddock

AC: With technology, is there the same level of disruption in agriculture as there is in banking? When you think about agriculture and agtech you might think it's just apps on a phone but is that technology actually changing the way you farm as well as reflecting consumer preferences?

JM: Yes, it really is changing the way we farm. So for example, I mentioned earlier on my brother and I acquired our first farm back in 1988 and that was a fully irrigated farm. But irrigation in those days was flood irrigation. We would get an allocation of water once every eight days and we would literally open the sluice gates. They operated on old fashioned alarm clocks. And the water would literally flood the paddock.

The challenge with that though was you had high nutrient leaching because of the amount of water and you didn't have a lot of flexibility around how you apply it. We then moved to second generation spray irrigation and again we would put water on the paddocks once every three or four days. We had a bit more control but the roto-rainers just pumped out the same amount of water uniformly across the paddock.

We're now in the third generation with what the agricultural industry call centre pivots. So we might have up to 120 acres under the single pivot. The key technological advance now is we use drones to survey the paddocks, we analyse the soil types and then program the G.P.S. on the centre pivots. So as they go around, they will apply the requisite amount of water for the soil type based on the feedback they're getting from the evaporation measures as well.

So the efficiency with which the water is being applied and gets applied once every 24 hours has gone up enormously. Not only is that much better for the productivity but of course it controls the leaching from the soil. So it's a much better environmental outcome as well as a much better productivity outcome. If you think about what we did with water 30 years ago and what we do with water today and how technology has allowed us to improve the efficiency - it's astonishing.

AC: That touches on your other point, money - it's a very capital- intensive business. Does that mean every agri business now has to be bigger and bigger and maybe even have external shareholders or corporate shareholders? Or can you still be a boutique producer of, say, goats cheese with your goats running around in a nice home paddock?

JM: There's quite a lot of discussion around that in agriculture in New Zealand - particularly around the dairy sector. But the reality about a lot of the new farming debt is it's gone into development and strong infrastructure. Take water: depending on where you are in New Zealand, then your source of water and whether you're buying permanent water or seasonal water means you might have invested anywhere between $NZ3000 and $NZ6000 per hectare in water infrastructure alone. So it has become a lot more capital intensive.

Again if you go back 30 years ago, you would have had owner-operator dairy farms and a partner may well have been milking 150-180 cows. In mid Canterbury, where I farm, the average farm today probably milks 700-800 cows. That's probably on something like 250 hectares and that land, fully loaded for its infrastructure and water accessibility and so forth, is trading at circa $NZ50,000 a hectare without stock. So you're talking about a $NZ12.5-15 million enterprise value for your average dairy farm in Canterbury. So to your question, yes these are real businesses now. Real businesses.

Balancing act

AC: If we look at ANZ’s Annual Review, you are not only a director of ANZ but you are a customer of ANZ - and it sounds like you're probably a fairly decent-sized customer. As a director, you're an agent for the owners of the business - for the shareholders. And then you're also a customer. How do you balance those two hats?

JM: Well I find it gives me a very interesting perspective. I sit at the Board table and I get to see the bank from the top. That is, from a governance and strategy perspective. But then when I'm dealing with the bank as a customer, I am dealing with frontline bankers.

I was in New Zealand recently and I met with three of the people who I bank with at ANZ in Christchurch. We spent two hours going over a number of those enterprises I’ve been talking about, going through our debt structure and thinking about what was optimal. So I get a very frontline, first-hand view of the challenges frontline bankers are dealing with. I think I get very frank feedback too. I can sit at the top of the bank and see the strategy but by dealing with the frontline I also get very direct feedback.

I also get the experience as a customer because I get the letters - I get the envelopes in the mail from ANZ. I remember saying to one of the managers that I was a bit annoyed because in the last week I'd had 15 envelopes from ANZ. And someone said "but JT, you can go online and you can receive it all electronically and you don't have to get these envelopes".

And I said "No, I get the envelopes for a purpose". Because the day I get one envelope instead of 15 envelopes, I’ll know the bank's data has been able to identify that the various accounts I have all belong to the same person. So it's a real world experience.

AC: I’d guess every director is actually a customer in the bank in some way or another but does there need to be more direct customer input at the Board level?

JM: I think it's always valuable for the directors to get out and talk to people in the frontline and the board's been doing a lot more of that in the last 18 months or so. In the last 12 months we've had Board meetings in Canberra, we've had Board meetings in Wagga Wagga, in Hobart.

Speaking for myself - and I know the other directors feel this as well - the highlights of those trips are when we go to the branches. First of all, to meet people who are on the frontline but secondly when those people take us to meet their customers.

AC: There is the old line the Queen thinks the world smells of fresh paint because everywhere she goes everyone knows she’s coming and so everything is spruced up. Are customers and branch staff frank with you? How do you encourage that frankness, because surely in a big organisation like this, the board does want people to be able to be honest and open and even a bit confronting about what's going on?

JM: When you meet customers, the question is whether they resonate with you or they feel there is a connection. So when, for example, the board went to Wagga Wagga last year I did have the opportunity to go and meet with one of the large farming enterprises we bank. One of the benefits of that particular interaction  was the customer had only moved to ANZ in recent years.

So they talked to us not only about their experience with ANZ but they talked about the reasons that led them to come to ANZ. Now you can take the attitude of "Oh that's great ANZ is obviously better" or you can listen closely to why they left their previous bank and try and digest what the lessons are from that.

We can't be naive about this Andrew, for every customer who has had bad experiences with another bank and come to ANZ, there will be customers of those other banks who may have left ANZ for similar reasons. You can learn a lot just by talking to customers and understanding their challenges but also understanding their journey.

Listening well

AC: I’ve been in business journalism for three decades - much too long. But every one of those years I’ve heard companies say "we've got to be more customer focused. We've got to listen to our customers". And yet people are still saying they've got to listen more to customers. Is there an art to listening well to customers and then to making sure that feedback you're getting from customers actually does feed into the operations of, not just ANZ, but other companies?

JM: It's a continuous challenge. You say people have been saying it's “about the customer” for 30 years. And you're exactly right. And the fact we're still saying that tells us that we don't have it right. But I don't expect we're going to wake up in two years’ time and say "Ah, we've finally nailed it".

We need to understand the organisations we come from. And part of my background, coming from a wholesale bank, was I used to always try to remind myself I came from a large institution which was essentially a producer of products - Deutsche Bank. We often reminded ourselves we needed to be more customer focused and that was always true but essentially we come from a product background.

So I think the fact we need to remind ourselves to be more customer orientated will be a constant. We will always need to do that. Do I think we will ever get to the point where we think that we've got our customer interactions absolutely nailed down? I doubt that very much because when we started this conversation we talked about how quickly consumer preferences were changing. Hence, because our customers are either those consumers or businesses serving those consumers, we are going to have to be ever-changing in what services we deliver and how we deliver them.

So look I think it's a process. In Japan there's a word - kaizen - that means continuous improvement. And I think that's where we're always going to be with customers. We're always going to be in this process of trying to listen better, trying to adapt quicker, trying to deliver quicker and make sure that we're on the same wavelength. But I think it will be a continuous process.

AC: Given your Deutsche background, do you still pay attention to financial markets? Do you still involve yourself even though you're not formally tied to the markets?

JM: Very much so. Once you're a market participant, you're always a market participant. I've spent a lot more time looking at commodity markets, not just interest rate markets and equity markets. But now I'm still very much a market animal and there wouldn't be a day go by where I'm not looking or doing something in markets.

Learning at pace

AC: As a board at ANZ, are there particular global issues, national issues, you're focusing on for 2019?

JM: I'd have to say that having been through the Royal Commission and in confronting the issues that came out of that there's this continual focus on how we can be a better bank for our customers. And it's inevitable there's going to be an enormous amount of focus on remediation through that process.

But there are a couple of other things. One of the overarching themes of course is technology and coming to grips with technology. There's been an enormous amount of work done on data in the system and cleaning up the database and thinking about how we can use that.

But this year the theme and the strategic challenge for us at ANZ is the market in which we're operating continues to develop pretty quickly.

There are “neo-banks” in sectors like SMEs and elsewhere. There are giants like Softbank, Alibaba and even Facebook coming into the banking, financial services. So while we'd like to think that with everything going on in the Royal Commission and so forth the market will take a break while we focus on fixing and remediating, unfortunately that's not the case.

So learning to do things at pace is something we need to adjust to. An ever increasing pace. Both competitive opportunities and competitive threats in the market. That’s the focus as we go through our strategy reviews and we think about 2019 and 2020. The Board has this responsibility for governance but we also have a responsibility and oversight for strategy.

It's a pretty complex and challenging picture but I'd like to think that we're up to the task.

Andrew Cornell is Managing Editor of bluenotes

To access more of the Board Minutes series, click HERE.