Corporate succession in sharp relief
There had been speculation that BHP Billiton chief executive Marius Kloppers' use-by date was up from at least August last year, when the group wrote $US2.8 billion off its $US20 billion shale gas excursion into the United States. There were, however, no signs before BHP's December half-year profit announcement on February 20 that the board had worked its way to a conclusion.
It had, and when BHP Billiton chairman Jac Nasser walked onto the stage that day with Kloppers and the new CEO-designate, Andrew Mackenzie, it was a veritable love-in. Kloppers said he could not think of anyone better to take over, and said one of his first acts as BHP's new chief executive in 2007 was to ring up Mackenzie and offer him a job.
Rio Tinto's beheading of its chief executive, Tom Albanese, in January was more rushed, coming as it did after something that was unexpected - a second, $US14.6 billion write-down of the disastrous $US38 billion Alcan acquisition that Albanese led in 2007 - and something that was genuinely shocking given Rio's resolve to stop impulse buying in the wake of the Alcan debacle: a $US2.9 billion post-tax write-down of a $US4.2 billion acquisition of the Mozambique coalminer, Riversdale, in 2011.
It was nevertheless a seamless change. Rio announced the write-downs, Albanese's departure and the appointment of the group's highly respected iron ore boss, Sam Walsh, as CEO in a single announcement. Walsh had been on the board since 2009, and he was immediately on-message, with promises to rein in costs and sell assets.
There are exceptions to the rule that large corporations manage their boardroom affairs and leadership changes discreetly. The board of Coles Myer waged war openly with board member and largest shareholder, Solomon Lew, in 2002, for example, and the board of NAB was in disarray in 2004 after the bank disclosed a $360 million loss on rogue currency trading.
Big corporations in the main keep their power struggles behind closed doors, however, and they do because they are simultaneously flagships for free enterprise and virtual dictatorships internally.
Board members are elected by shareholders and they ultimately answer to shareholders. But once a director is elected he or she is part of a unit that, in its specialised areas of responsibility, exercises almost untramelled power. The equivalent of the board for the Labor government is the 103-member parliamentary caucus: its members are also elected and judged at the polls, but it is much larger entity and much more difficult to control.
The tightly drawn company board selects the chief executive, and in the best corporations does so through a process that is led by the chairman, assisted by a nominations committee, guided by headhunters and built on largely generic succession planning architecture. Directors might differ among themselves about who should take over, but the tightly scripted process disciplines and contains the debate.
There is no risk of lateral interventions of the kind Simon Crean launched on Thursday, no self-nomination, no internal rules that can force a spill and, crucially, next to no chance that details will leak.
Corporate leadership decisions are also unanimous when they are finally taken by the tightly drawn director cadre. An abstention is about as far as a dissenting director will go, and the voting breakdown is never reported anyway.
Thursday's re-election of Julia Gillard as Prime Minister was also unanimous after Kevin Rudd decided against running, but that was an exception to the usual rule that leadership spills in Canberra make divisions and factions in leadership votes explicit.
The corporate succession process is also self-replicating, and self-reinforcing. New CEOs are told, for example, that one of their jobs is to create a deep pool of potential internal succession candidates: Kloppers put his call in to Mackenzie in 2007 after being told by BHP board member and former BHP CEO Paul Anderson that he needed to begin thinking straight away about who should eventually replace him.
Labor's leadership struggle reached shambolic proportions on Thursday. It felt a bit like a battle inside a car that had already gone off a cliff, to see who should get to hold the steering wheel. Political leadership changes will never be as tightly controlled as corporate ones. In the CEO succession business, company directors are the faceless, powerful men.
mmaiden@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
Corporate succession is the process by which a company board selects and appoints a new CEO through a tightly scripted process led by the chairman, nominations committee and often headhunters. Unlike political leadership changes, which can be public, faction-driven and messy, corporate successions are usually discreet, controlled and unanimous, with minimal chance of leaks or lateral interventions.
Large companies typically manage CEO turnover behind closed doors and announce changes only when a decision is final. The article highlights BHP Billiton’s staged handover—chairman Jac Nasser presented outgoing CEO Marius Kloppers with incoming CEO-designate Andrew Mackenzie at a profit announcement—and Rio Tinto’s single announcement that combined major write-downs with Tom Albanese’s departure and Sam Walsh’s appointment.
At BHP Billiton there had been speculation after the group wrote off US$2.8 billion of a US$20 billion shale gas investment, and the board formalised a change at the half-year profit announcement. At Rio Tinto the move came after large write-downs—including a US$14.6 billion write-down related to the Alcan acquisition and a US$2.9 billion post-tax write-down on the Riversdale deal—prompting a swift leadership change.
Boards prefer to contain debate and avoid public division because directors exercise concentrated, specialised power once elected by shareholders. A tightly drawn process—guided by the chair and nominations committee—reduces dissent, prevents self-nomination or forced spills, and minimises leaks, so final decisions are typically unanimous or presented as such.
Boards usually select CEOs through a process led by the chairman, assisted by a nominations committee and supported by headhunters. That process is often built on succession-planning frameworks and aims to discipline debate, assess internal and external candidates, and produce a preferred successor before any public announcement.
Yes. The article cites the Coles Myer board’s public clash with major shareholder Solomon Lew in 2002 and the National Australia Bank’s disarray in 2004 after a disclosed A$360 million rogue trading loss—both exceptions to the usual discreet succession model.
Investors should watch for sudden, large write-downs or unexpected impairment announcements, simultaneous announcements of major losses and leadership changes, and unusually public disputes involving board members or large shareholders. These events often precede or coincide with boardroom change and can signal a period of strategic reset.
New CEOs are often expected to build a deep internal pool of potential successors as part of succession planning. The article notes that Marius Kloppers was advised to think early about his successor and subsequently recruited Andrew Mackenzie, illustrating how CEOs cultivate internal talent pipelines.
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