BHP won't chop Kloppers

Speculation that BHP Billiton's board is looking for a successor should be taken as a sign of good governance, not as a sign Marius Kloppers is doing his job poorly. His record is exemplary.

At face value it would be a little bemusing that the Financial Times thinks it particularly newsworthy that BHP Billiton is actively planning for life beyond Marius Kloppers.

The FT reported yesterday that BHP had ‘’quietly’’ started looking for Kloppers’ successor. It said that the process being led by BHP chairman, Jac Nasser, was at a ‘’very preliminary stage’’ and could take 12 to 24 months to be completed.

It is not exactly news that BHP conducts succession planning or that Jac Nasser leads that process. Like any competent board of a large company -- and BHP has a board that prides itself on its governance -- the group has a continuous process of succession planning, not just for its chief executive but for several layers of its senior executive ranks and, indeed, for the board itself.
With Kloppers having held the CEO role for five years already -- he was appointed CEO in October 2007 -- he is probably closer to the end of the tenure than to its beginning and one would expect the succession planning itself to take on a sharper edge.

Reports that an external search firm has been engaged wouldn’t surprise, but could also suggest that the FT has got the first sniff that something less routine is underway.

Neither Kloppers nor Nasser have provided any indication of when Kloppers’ tenure is likely to end.

Kloppers appears content with his role and Nasser, when Kloppers was under some pressure from the market after the $US2.84 billion write-down of the US shale gas assets acquired from Chesapeake Energy last year, described BHP as being ‘’fortunate’’ to have Kloppers’ leadership.

That support from Nasser came in August. Since then the abrupt dive in commodity prices -- notably iron ore and coal -- a slight firming in US gas prices and more particularly the big switch in BHP’s emphasis from dry gas to liquids has eased some of those pressures, or at least those relating to the shale gas deals.

The increased exposure to the oil price, the impact that has had in further diversifying BHP’s portfolio of resources and the contrast between BHP’s position and that of its major rivals has blunted the original criticism of BHP’s A$US20 billion plunge into shale.

It has also led to BHP’s shares performing better than those peers. It is worth noting that during a tenure that broadly coincides with the financial crisis and its still-volatile aftermath, BHP under Kloppers has out-performed Rio Tinto, Xstrata and Anglo American.

While there have been big and quite abrupt shifts from expansion mode to defence mode from BHP during Kloppers’ term that reflects the extreme volatility in the environment in which the resource sector generally has been operating. Similar rapid shifts in direction have also occurred among his competitors.

It is the nature of the industry at present, although the environment and the decisions it has forced -- including BHP’s mothballing of its proposed expansions at Olympic Dam and the outer harbour at Port Hedland -- is one that could provoke considerable discussion within a boardroom and potentially tensions between a board and its management. There have been suggestions of differences over strategy between an ambitious BHP management and a more risk-averse board.

Another of those big shifts in industry direction occurred this year when China’s slowing growth rate and a build-up of inventories saw iron ore and coal prices dive.
Iron ore and metallurgical coal prices, but not thermal coal prices, have subsequently recovered some of that ground. In the meantime all the major miners have made meaningful changes to their plans and have scaled back proposed investment, shut down sub-economic projects and started focusing on reducing their cost bases.

Relative to his counterparts at the other major resource houses, Kloppers can objectively be regarded as having done a pretty fair job in the difficult circumstances over his term so far.

The tilts at Rio and its iron ore business failed, the first because the financial crisis intervened and the second because of the regulators while, the bid for Potash Corp was blocked because of Canadian politics. While success was always problematic, BHP had to make those takeover attempts. Broadly, however, BHP has out-performed its peers.

Apart from the routine need to constantly review succession plans however, Nasser and his board would be conscious that they will need to identify their chosen successor sometime in the next two or three years. Ten-year-plus terms for CEOs are now quite rare and Kloppers is already well past the average CEO’s tenure so the succession issue becomes more of a live one as each year passes.

The time line the FT suggested BHP was contemplating in its search -- between one and two years -- would see Kloppers potentially at BHP’s helm for seven years, which would be a long stint in an extremely demanding job, particular when the record of success is, for whatever reasons, a mixed one. BHP’s scale and the geography of its operations puts considerable strain on its senior executives.

Both Kloppers and Nasser have said on more than one occasion that there is a lot of bench strength within BHP if and when a successor is necessary, with each of the chief executives of its major divisions running businesses that would in their own right be major companies if separately listed.

All seven of Kloppers’ chosen members of the group’s management committee have had lengthy and generally quite varied experiences within the group and in most instances also have experience elsewhere. In Alberto Calderon, Marcus Randolph, Andrew Mackenzie, Graham Kerr, Mike Yeager, Mike Henry and Karen Wood there is a lot of operational and leadership experience within that committee.

An internal appointment, when the succession eventually occurs, would be no surprise. Equally, Nasser would inevitably cast a wider net in order to assure himself and his board that they had identified the best candidates for the job when the time comes, or when they decide that both the time has come and the right replacement has been identified.