Talk of Kloppers' exit turns spotlight on BHP's board

There has also been speculation about his future. But the most curious leak - that a search firm was looking for his replacement - appeared in the Financial Times midweek. The article hit the headlines as a plane-load of journalists were en route to the United States to tour the group's operations.

In all the media reports the company declined to be drawn on the specifics of a replacement for Kloppers but issued a generic response that: "BHP Billiton's board has always ensured that it has a well-integrated, continual succession process in place for our most senior executives."

While it is true that one of the most important tasks of any board is ensuring a smooth succession plan is in place, it raises questions about how BHP found itself in a situation where its CEO will now be under intense speculation about when he will be leaving, and who will replace him.

As one analyst said: "The company's strategy will be sterile until the new bull comes in the gate." Another described him as being in the "departure lounge", while an investor said he was a dead man walking.

The company has just come through a major bull cycle that, arguably, it could have better exploited in terms of setting itself up for the future. Much of this has been blamed on Kloppers but it couldn't have been done without the imprimatur of the board. Moreover, there has been some talk of tensions between the chairman and Kloppers, that the senior management ranks have thinned out, and that the company's vision isn't clear.

For obvious reasons the BHP chairman, Jac Nasser, will be careful about his choice of CEO. Finding a replacement in such a big and complex organisation won't be easy, and Nasser's legacy will be judged by how well the new CEO performs (Kloppers was appointed when Don Argus was chairman).

But it won't stop the speculation about when he will leave. Indeed, rumours have already started circulating that Kloppers will be gone before the company releases its next set of results in February.

Whether Kloppers stays for two months, a year or longer, it is disruptive and the board will need to shine a light on how well it thinks it has managed leadership risk. Last time around, the board appointed two senior executives - Chris Lynch and Kloppers - to the board well before Chip Goodyear announced his departure. This time, the market has grabbed on to the news that Kloppers is on the way out, yet there doesn't appear to be any obvious contenders.

The BHP board is filled with some of Australia's most respected non-executives, including John Schubert, Lindsay Maxsted and Malcolm Broomhead. It also has some outstanding international directors, including Nasser and Carlos Cordeiro. Together they bring a breadth and depth of experience for which other businesses would give their right arm.

While a few of BHP's directors have been on the board less than two years, some were there during its botched takeover of Rio Tinto, a failed iron ore joint-venture proposal with Rio Tinto, a failed bid for PotashCorp of Saskatchewan and the more recent $US20 billion shale gas purchases including Fayetteville and Petrohawk Energy in the US, the former of which resulted in write-downs.

It culminated in some investors opting to reduce their weighting in BHP. In March, the world's largest money manager, BlackRock, announced it had reduced its weighting in BHP. Around the same time, Macquarie Equities released a strategy report revealing it had reduced its portfolio position in BHP from neutral to underweight.

Part of the change in sentiment was due to an investor shift from growth stocks to yield stocks. Another part was due to BHP's expensive shale gas acquisitions, which raised questions about whether the purchases were poorly timed or the company misunderstood the dynamics of the domestic US market.

Kloppers took a cut to his 2012 bonus due to the write-downs.

The issue for BHP is that as a mining stock it has been classified as a growth stock. But with the Chinese economy slowing, commodity prices coming off their peaks and the costs of building and operating a mine ballooning, the game has changed and investors are chasing yield stocks and dumping growth stocks.

Since Kloppers became chief executive on October 1, 2007, the group's share price has gone from $44.50 to close on Thursday at $34.51. A year ago it was $38.33. With a yield of about 3.1 per cent, investors have become impatient and have been calling on the company to start diverting more of its cash flow their way through higher dividend payouts and share buybacks.

It will be interesting to see how BHP repositions itself going forward, given its assets are at the lower-cost end, making them less sensitive to commodity price falls than those of most of its peers.

BHP has put a number of projects on hold, including Olympic Dam and some of its iron-ore expansions. It is not known whether this is due to a changing vision for the company or the board deciding to hold off on any serious decisions until a new CEO is found. However, there are many who believe once a new CEO is appointed, some of those projects will be revisited. After all, many have a long lead time, so it is hard to see how short-term dips in commodity prices would affect whether or not to proceed with their development, particularly as project costs start to come down.

BHP has spent much of the past five years engaged with Heidrick & Struggles in assessing management capability with the aim of building a pipeline of talent to close the gaps between what is available and what is needed. But as one well-placed source said: "Can an organisation as complex and capital-intensive afford a CEO who is not a team player? Is the current furore around Kloppers just the tip

of the iceberg? Are we really talking about the need to rethink the role, composition and work of the board in parallel with the CEO's replacement?" They are interesting questions.