Ethics & Governance in A2 Milk Company Limited

This study describes the corporate governance and ethical practices in A2 Milk Company Limited (A2M) and analyzes its environmental and social responsibilities.

Running head: A2 MILK COMPANY LIMITED
Ethics & Governance: Individual Capstone Project
["A2 Milk Company Limited (A2M)"]
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Executive summary
The main purpose of this study is to describe the corporate governance and ethical practices in
"A2 Milk Company Limited (A2M)". A2M is one of the hugely reputed dairy companies in
Australia. The study finds that A2M promotes diversity in the Board. There are more women
than men in managerial positions. However, the Directors and Executive positions still have
fewer women. The paper studies the “Legitimacy Theory” in the context of communications and
practices held in A2M addressing its environmental and social responsibilities. The paper finds
that A2M has deployed many practices in place to ensure that A2M is acceptable at both
environmental and social level.

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Table of Contents
1. Introduce and summarise the company.......................................................................................3
2. Summary of corporate governance..............................................................................................4
Composition of the board:...........................................................................................................4
The reports from the Chairperson and the CEO:.........................................................................5
The remuneration report:.............................................................................................................6
Immediate priorities of A2M and Plans:.....................................................................................6
3. Board orientation.........................................................................................................................7
4. Interpretation of company communications using Legitimacy Theory.....................................10
References......................................................................................................................................13

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1. Introduce and summarise the company
"A2 Milk Company Limited (A2M)" is an ASX 200 listed public company. The
foundation of this company was laid in the year 2000 in New Zealand. It is headquartered in
Sydney, Australia. A2M has its business operated in various parts of the world that includes
Australia, New Zealand, the United Kingdom, China, the United States of America, Malaysia
and Hong Kong. Currently, Jayne Hrdlicka is the CEO of the company and David Hearn is the
Chairman. The product line of the company includes A2 Milk, Dairy products and many other
products as an infant formula. The number of employees is close to 125
(Thea2milkcompany.com, 2019). The quality of Milk is very high and appears quite natural to
many. Many people have appreciated the taste and quality of A2 Milk. Kids, in particular, are
liking it. They are not anymore making excuses to avoid having milk. Indeed, they are making
demands for a glass of milk. Kids those who have already liked the quality they were earlier just
preferring water or juice. A2 Milk is also considered pretty safe than regular milk. A2 Milk is
indeed pretty safe and natural.
Australia despite being a small producer of Milk is the world’s third largest dairy
exporter as 50% of the entire milk is exported to other parts of the world (Pwc.com.au, 2019).
Australia's dairy industry is the third largest industry in the rural parts of the country. It ranks
behind beef and wheat. The gross value of the industry is $4 billion (Pwc.com.au, 2019).
Australia is a producer of a range of dairy products. These are milk, milk powder, butter, yoghurt
and cheese. Majority of the dairy business in Australia is in the South-East part of the country
and in Victoria; however, other states also contribute significantly to the dairy industry.
Production in Victoria is seasonal and are exported outside. It is vulnerable to volatile global
prices. New South Wales, in particular, is responsible for supplying milk to the local people. It

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goes through a year-round production (Pwc.com.au, 2019). The dairy industry in Australia is
hugely reliant on water availability. The future looks challenging due to uncertainty over water
policy. Since deregulation in the year 2001, the Australian dairy industry has undergone
rationalisation (Pwc.com.au, 2019). In this process, the Australian dairy industry has lost quite a
few dairy producers. Indeed, only a few dairy producers are left now and are required to compete
at the global level. These dairy producers have to bear heavy subsidies (Pwc.com.au, 2019).
Li Xiao has been appointed as the new Chief Executive Greater China. This is effective
from 29th April 2019 (The a2 Milk Company, 2019). On May 1, 2019, A2M participated at
Macquarie Australia Conference where A2M delivered the trending updates and presentation
(The a2 Milk Company, 2019). As per the Director announcement, Peter Hinton will be retiring
from the board panel of A2M on 30th June (The a2 Milk Company, 2019). Pip Greenwood will
be the independent non-executive director for A2M (The a2 Milk Company, 2019). For the half-
year ended 31st December 2018, the total revenue for A2M is $613.1 million (The a2 Milk
Company, 2019). This is an increment of 41.0% (The a2 Milk Company, 2019). Fresh milk
revenue growth was 11.7% in Australia (The a2 Milk Company, 2019). With this, the market
share reached a record of 10.8% (The a2 Milk Company, 2019).
The main purpose of this study is to present and describe an ethical and governance
outlook of A2M.
2. Summary of corporate governance
Composition of the board:
The composition of the board in A2M is done in a way to promote diversity. In the list of
Directors, the male to female ratio as of 30th June 2017 is 83:17 (Thea2milkcompany.com, 2019).

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It remained the same from the last year during the same period. It is pretty difficult for an
outsider to predict whether or not diversity is being promoted in A2M as real progress is
unmeasurable from being outside of the company. Considering the senior executives' position,
the ratio remains more or less the same. The male to female ration at the senior executive
position is 90:10 (Thea2milkcompany.com, 2019). However, diversity can actually be seen
amongst the managers as this position is dominated by a female rather than male. The ratio of
female to male managers is 52:48 (Thea2milkcompany.com, 2019). These are some very
outstanding figures. One must say after looking to the list of managers that A2M truly support
and promote diversity in the workplace. Indeed, the managerial positions are more or less equally
shared by men and women. Among other staffs, the ratio is even outstanding as women seem
like dominating this particular job area in the company. The percentage of women in other job
positions is 63% whereas men share 37% of the total number of employees in non-executive and
non-directorial positions (Thea2milkcompany.com, 2019). The chairman of A2M Mr. David
Hearn is a non-independent director. In total, there are 7 non-executive directors and 6 executive
directors. Non-executive directors are all independent directors whereas executive directors are
non-independent (Thea2milkcompany.com, 2019).
The reports from the Chairperson and the CEO:
Report from the CEO:
According to the CEO, Jayne Hrdlicka seems very optimistic with her career in the
company. According to her, there is numerous opportunity in the company. The company had a
humble beginning in New Zealand. According to the CEO, nobody had then thought of the
success, which A2M currently enjoys. The CEO further believes that there are opportunities for

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A2M in China, the United States of America and everywhere in this world. She confirms that
opportunity is not just market-based but also the product-based.
The remuneration report:
A2M has a robust process to measure the performance of its CEO, senior executives and
also managers. A new strategic plan with new objectives and targets is prepared every single
year. This plan in the form of a document is submitted to the company's CEO, senior executives
and managers. CEO, in particular, is held accountable to the board for anything that happens
during the time period for a strategic plan. The company’s CEO on a regular basis cross-check
the performance during the period of a strategic plan. At the end of every strategic plan, the
achievements are compared against the set targets and objectives. Based on this comparison, the
CEO of A2M, senior executives and managers are awarded varying remuneration and incentives
(Thea2milkcompany.com, 2019).
The non-executive directors are paid remuneration in the form of directors’ fees. The fees
paid to them is a reflection of the workload and responsibilities of their respective positions on
the board and committee (Thea2milkcompany.com, 2019). The Chairperson, David Hearn is
regarded as an executive director. He receives consultancy fees as a remuneration. The
Chairperson is rewarded with fees for his service (Thea2milkcompany.com, 2019).
Immediate priorities of A2M and Plans:
Few macro factors are trending and A2M intends to tap these trends. One of these trends
is a growing concern for a product that could boost the health and wellness of consumers. The
second factor is a growing concern for food safety, the provenance of food and naturalness. And,
the third is the growing population of the middle class in China and the rest of the Asian

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countries (Thea2milkcompany.com, 2019). A2M as part of its strategic growth plan intends to
tap these trending macro factors. Moreover, there will be an enhanced focus on providing natural
and locally sourced Milk and related items.
3. Board orientation
Below is how board orientation looks exactly in A2M Australia.
1. Distinguishing features of the organisation:
Over the years A2M’s mission has remained the same. The mission is “to pioneer the
scientific understanding of the A2 protein type so more people can enjoy the nutritional goodness
that only comes from real and natural milk” (The a2 Milk Company.com, 2019). In A2M, value
is given to innovation and smart choices being made for dairy nutrition. The company holds a
high reputation for several reasons. It has a very broad portfolio of dairy nutritional products.
Currently, it has a good presence in China, the United Kingdom, the United States of America,
New Zealand and Australia. It is still very opportunistic for more new markets. A2M holds
Proprietary in know-how, A2 protein expertise (Thea2milkcompany.com, 2019).
2. Overview of key stakeholders:
Key stakeholders in A2M are shareholders, customers, employees, governments, farmers
and communities. Shareholders are communicated on a regular basis concerning major issues
and procedural matters, which have an impact on the company. Communication is done by
means of the range of publications and forums (Thea2milkcompany.com, 2019). In
communities, there are farmers and not-for-profits organisations. Farmers provide milk to A2M
Company. Not-for-profits organisations include the Song Room, the Salvation Army, the
Landcare Grants Program and the Children's Book Council of Australia (The a2 Milk

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Company.com, 2019). A2M has its customers in Australia, New Zealand, the United Kingdom,
the United States of America and China. Their changing preferences for Milk and other dairy
products do impact A2M’s growth strategy. Governments in different countries impact A2M’s
business with their range of policies relating to trade tariffs, subsidies paid to farmers, trade
barriers, etc. (Mialon et al., 2017).
3. Strategic plans, goals and current challenges:
A2M has various strategic plans in the future. The company is targeting people from
adults to infants for satisfying their growing concern for digestive health needs. The company
has a significant existence in ANZ, China, USA, UK and the rest parts of Asia. The plan is now
to enter all regions that provide new opportunities. The plan is also to make A2M a differentiated
brand.
One of the goals is to meet the health concern of adult people, and of children and infant.
Another goal is to enter more potential markets.
It faces challenges in the form of competitors such as Fonterra. There are various other
challenges for A2M. These are changing global markets, production costs, tough seasons, retail
price and stagnation (Thestandard.net.au, 2019).
4. Responsibilities of the board:
The overall governance of A2M is governed by the board. In cooperation with
stakeholders, the board takes cares of the substance, which can potentially affect the company.
The board takes care of three committees. These are Nomination Committee, Audit and Risk
Management Committee and Remuneration Committee. Senior executives have regular meetings
with the management for providing strategic guidance and effective oversight of the

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management. The role of the chairman is to facilitate interaction between the Board members
and the Chief Executive Officer of the company. The company secretary, Jaron McVicar, holds
direct accountability to the board on all matters (Thea2milkcompany.com, 2019).
5. Type of board:
The Board is very progressive in A2M Company. The Board’s renewal process happens
on a regular basis to assess the strategic capabilities of the Board. The Board will have
independent directors in significant number. However, directors those who have a personal
interest in the company's growth and also aware of strategies to contribute to the process are only
selected. The Board has three distinct committees like the Nomination Committee, Audit and
Risk Management Committee, and Remuneration Committee. The remuneration committee
makes recommendations to the Board in the context of remuneration for the non-executive
directors. The committee also reviews the remuneration of the company's CEO and other senior
executives on the board. The nomination committee is responsible for advising the Board on
various matters as outlined in the Nomination Committee Charter. They also recommend in any
new appointments to the Board (Thea2milkcompany.com, 2019).
6. Summary of programs and services:
A2M continues to apply close attention to its infant formula, inventory and supply chain
management. Continuous focus is there on expanding the operations capability. The a2 Platinum
brand is doing well in Australia and China. Now, there are plans are to make it successful also in
the United Kingdom and the United States of America. There are plans to include more
nutritional products in the company’s product portfolio. A2M will approach for taking
consultancy guidance on the infant formula market in China (Thea2milkcompany.com, 2019).

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7. Revenues:
Total revenue as of FY17 stood at $550 million (Thea2milkcompany.com, 2019). Net
profit after the tax deduction was calculated at $91 million (Thea2milkcompany.com, 2019).
Earnings per share were calculated to be 12.7% (Thea2milkcompany.com, 2019).
8. Policies:
Policies can be divided into three broader categories such as Risk Management, Diversity
and Remuneration. There is an Audit and Risk Management Committee who observes the
company’s risk management policies in relation to the adequacy, efficiency and effectiveness of
the policies. The remuneration committee is responsible for establishing policies and practices to
be followed to review the remuneration benefits for the company’s Directors, and executive and
non-executive directors (Thea2milkcompany.com, 2019). A2M’s diversity policy is to recruit
more women at the managerial, and executive and non-executive positions. Moreover, the
diversity policy is designed in a way to avoid any sort of biases performed during the recruitment
process (Thea2milkcompany.com, 2019).
4. Interpretation of company communications using Legitimacy Theory
In A2M, they believe doing business in the best interest of the stakeholders. This means
the strategy making is objective-oriented. The objectives definitely have measures for A2M’s
attention towards its social and environmental impact. The Board and its members on a regular
basis communicate with each other to know the progress of the work. The concern towards the
environment and the community in which A2M operates just resembles its orientation with the
“Legitimacy Theory”. The Legitimacy Theory provides a mechanism that examines how a

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company facilitates communication and devise a strategy to reduce its adverse environmental
impact and become addressable on a social level (Bitektine & Haack, 2015).
A2M’s products are hugely consumed by young, children, infants and pregnant women.
Hence, it is very vital that the products are of high quality and are safe as well. According to the
triple bottom line (TBL), a company should have appropriate concerns for all three levels in a
TBL. These are people, planet and profit (McWilliams et al., 2016). However, it is conceptually
challenging for a dairy company to fulfill all these parameters. The biggest challenge is perhaps
to resource Milk from local farmers, establishing an effective relationship with these local
suppliers and reducing the greenhouse gas impact of the dairy farm (Sargeant & Paine, 2015). To
ensure quality management at A2M, the company has a priority focus on third-party firms who
will assess the business performance of both A2M and its suppliers in relation to their social and
environmental impact (Thea2milkcompany.com, 2019).
According to the Legitimacy Theory, a company should also address its social
responsibility at the various level of its key stakeholders (Bitektine & Haack, 2015). A2M
ensures identifying high-quality third-party manufacturers and establishing long-term
relationships with them. These manufacturers share the focus and ambition of A2M on its social
responsibility (Thea2milkcompany.com, 2019). A2M has attained several relevant certifications
such as ISO 9001 (infant nutrition), SQF (certification of Company’s Sydney processing facility)
(Thea2milkcompany.com, 2019). In addition, A2M has systems in place to maintain ongoing
monitoring and compliance with various legislative requirements of the different marketplace in
which A2M operates. A significant amount is invested in training people on compliance issues
and on the product safety procedures followed in the workplace. A sufficient amount is invested
in the brand and other types of communication. A2M conducts rigorous testing system at the

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organisational level to ensure that manufacturing and other business activities are in compliance
with quality programmes. To avoid foods and other dairy products from any kind of quality
tempering QR code-based tracking system is in place. There are food traceability experts
appointed to test the food quality (Thea2milkcompany.com, 2019).
The pieces of information furnished as above suggest that despite a fact that dairy
industry in Australia faces a challenges in respect to environmental and social factors as
governed in the legitimacy theory, A2M still has done considerably well to address its social and
environmental responsibilities. It effectively communicates with various internal and external
partners to ensure that the quality management process is never affected.

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References
Bitektine, A., & Haack, P. (2015). The “macro” and the “micro” of legitimacy: Toward a
multilevel theory of the legitimacy process. Academy of Management Review, 40(1), 49-
75.
McWilliams, A., Parhankangas, A., Coupet, J., Welch, E., & Barnum, D. T. (2016). Strategic
decision making for the triple bottom line. Business Strategy and the Environment, 25(3),
193-204.
Mialon, M., Swinburn, B., Allender, S., & Sacks, G. (2017). ‘Maximising shareholder value’: a
detailed insight into the corporate political activity of the Australian food
industry. Australian and New Zealand journal of public health, 41(2), 165-171.
Pwc.com.au (2019). [online] Pwc.com.au. Available at:
https://www.pwc.com.au/industry/agribusiness/assets/australian-dairy-industry-nov11.pdf
[Accessed 30 May 2019].
Sargeant, K., & Paine, M. (2015). Building a robust capability framework to face the fast-
growing challenges of the New Zealand dairy industry. Rural Extension and Innovation
Systems Journal, 11(1), 210.
The a2 Milk Company (2019). The a2 Milk Company. [online] The a2 Milk Company. Available
at: https://thea2milkcompany.com/ [Accessed 30 May 2019].
The a2 Milk Company.com (2019). About us - The a2 Milk Company. [online] The a2 Milk
Company. Available at: https://thea2milkcompany.com/about-us/ [Accessed 30 May
2019].

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Thea2milkcompany.com (2019). [online] Thea2milkcompany.com. Available at:
https://thea2milkcompany.com/wp-content/uploads/The-a2-Milk-2016-2017-Annual-
Report-spreads.pdf [Accessed 30 May 2019].
Thestandard.net.au (2019). Australian Dairy Plan to address industry’s challenges. [online] The
Standard. Available at: https://www.standard.net.au/story/5796522/australian-dairy-plan-
to-address-industrys-challenges/ [Accessed 30 May 2019].