BHP Billiton Corporate Governance - Case Study Example

Case Study Report Introduction Corporate governance can be described as the laid down framework of regulations and rules which provide guidance to the board of directors of an organization so as to actualise accountability and transparency between the organization and its stakeholders (Stolt 2009). Furthermore, corporate governance can be considered as processes and structures used to direct and control companies (Hilb 2008). Effective corporate governance contributes to better decision making, it ensures that companies or organizations efficiently utilize their resources, it improves the relations between the company, it workers, stakeholders and creditors. In addition, effective corporate governance helps to safe guard the interests of minority shareholders (World Bank 2009; Anand 2007). This report seeks to examine corporate governance principles in BHP Billiton, a global oil and mining company. It will highlight the key corporate governance principles in BHP Billiton and then compare these principles with the corporate governance principles of Rio Tinto, a mining company. Subsequently this paper will give recommendations for improving the company’s corporate governance practices. In addition, this report will present a project plan summary depicting how and when the recommendations can be implemented. Overview of BHP Billiton BHP Billiton is one of the largest companies around the world that specialises in oil, gas and mining. The company was established in 2001 through a merger between the Anglo-Ditch Billiton plc and the Australian Broken Hill Proprietary Company. BHP operates a wide range of processing and mining operations in over 25 countries around the world. The company has ten main operating units with over 41,000 employees (Divecha & Martinvich 2003). The British BHP Billiton plc and the Australian BHP limited are listed with different shareholder bodies however they operate as a single business with the same management structure and board of directors (BHP Billiton 2010). Measured by its market capitalisation and revenue BHP is considered to be among the world’s largest companies (Hitipeuw2011). The company’s headquarters are in Melbourne whereas its main management office is based in London, United Kingdom. BHP also has operation centres in Houston, Johannesburg, Shanghai and Singapore.BHP Billiton is not only renowned for its achievement in mining, oil and gas operations, but it is also known for its solid work ethics and corporate governance principles characterised by commitment, respect and integrity. The company endeavours to work with integrity and accountability in all its operations around the globe. In order to actualise this objective the company has well stipulated principles of corporate governance that are extended to its codes of business conduct commonly known as the “BHP Billiton Code of Business Conduct (BHP Billiton 2011). One of the key goals of these codes of conduct and corporate governance principles is to help the company to establish trust with the company’s clients and stakeholders by upholding high ethical and business standards (BHP Billiton 2011; Jones, Felps & Bigley 2007). The Rio Tinto group is one of the key competitors of BHP Billiton, the company is a multinational British-Australian Company that specialises in mining. The compared was founded earlier than BHP Billton, it is alleged that the Rio Tinto was established in 1873 and has since grown through series of merger and acquisitions to become a world leader in the mining and production of products such as uranium, diamonds and iron ores among many other products (Harvey 1981).Just like BHP Billton, Rio Tinto is committed to upholding high standards in corporate governance in which the company’s boards of directors is accountable to its shareholders (Rio Tinto 2011).Nevertheless, there are evident disparities between BHP corporate governance principles and the principles upheld in RioTinto. These disparities will be depicted in the subsequent sections of this report. Corporate governance in BHP Billiton BHP’s key corporate goal is to establish a long-term value by discovering, developing and converting natural resources with the aim of providing market-focused and innovative solutions. In pursuant of this objective the company is committed to effective governance and corporate integrity. The Company’s approach to corporate governance is based on the belief that there is a close link between the creation of shareholder and effective governance. The company’s view of corporate governance is that corporate government is not only about for the board of directors but it also extends to the entire organization (BHP Billiton 2008). On the other hand, Rio Tinto is committed to effective corporate governance characterised by the accountability of the directors to the shareholders (Rio Tinto 2011). Conformance with corporate governance standards The Listing Rules of the UK Listing Authority demand that UK-listed companies should be transparent on the extent to which the company complies with Code of Best Practice and Good Governance principles that are stipulated in Section 1 of the Combined Code. The Listing Rules of the ASX demand that Australian-listed companies should be transparent on the extent to which they adhere to the Recommendations and Principles stipulated by the ASX Corporate Governance Council as part of the company’s Principles of Good Corporate Governance. Over the years of its operation, BHP Billiton has complied with the guidelines that are set out in Section 1 of the Combined Code and with the ASX Principles and Recommendations (BHP Billiton 2008). On the other hand, the main documents governing the affairs of Rio Tinto are the Constitution of Rio Tinto Limited and the Memorandum and Articles of Rio Tinto plc (Rio Tinto 2011). Board of Directors In BHP the role of the board of governor is to represent the company’s shareholders , the board is accountable to the shareholders with regards to its governance practices in business. The company’s board of directors comprises of 13 members. Some of the company’s key decisions that are made by the board include; CEO appointment, the company’s constitutional document and the approval of the company’s annual budget and strategy among many other functions. The Board’s role is to represent the shareholders and is accountable to them for creating and delivering value through the effective governance of the business. The board carries out regular assessments of its governance processes, performance, its committees, directors and chairman (BHP Billiton 2008). The reappointment of directors is not automatic, the directors who want to be re-elected by shareholders must be subjected to performance appraisal by the Nomination committee. The board only endorses directors whose performances are regarded as satisfactory. The company board has appointed committees who assist in overseeing the performance of the company’s business and exercising authority. Some of the appointed committees include; Risk and Audit Committee, the Nomination Committee, Sustainability Committee and the Remuneration Committee (BHP Billiton 2008). On the other hand, the board of directors in Rio Tinto consists of 12 directors who employ their expertise to manage a number of industries and give their invaluable leadership on Rio Tinto's business (Rio Tinto 2011). Issues in BHP corporate governance Risk Management The company considers the identification and management of risk to be an integral aspect of realizing company’s Corporate Objective which is geared towards delivering long-term value to shareholders. Every year, the Board of directors evaluates the risk profile of the entire business. The risk profile revolves around both strategic and operational risks. The Risk and Audit Committee oversees the risk management operations. Moreover, the board requires the CEO of the company to execute a system that identifies, control and manages risk. Through the Risk and Audit Committee, the board reviews the effectiveness of the risk management system regularly (BHP Billiton 2008). In Rio Tinto, the company’s policies on risk management are defined clearly and applied consistently (Rio Tinto 2011).Apart from the matters that are reserved for the board’s decision, the BHP CEO has been delegated with the authority to achieve the Corporate Objective. Furthermore, the company’s CEO has an approved framework that further delegates authority to individual members of the management and the management committees. Notwithstanding these delegations the CEO is still accountable to the Board concerning the authority that is delegated to him (BHP Billiton 2008). Market Disclosure BHP Billiton is committed to upholding the highest standards of disclosure in order to ensure that its current investors and potential investors have access to relevant, timely and high-quality information that can enable them to make informed decisions. The BHP disclosure committee oversees the company’s compliance with the guidelines of market disclosure. The committee is also responsible for executing reporting controls and processes and developing guidelines for the release of information (BHP Billiton 2008). Similarly, Rio Tinto recognizes the significance of timely and effective communication with investors and shareholders (Rio Tinto 2011). Business Conduct The company has published a set of code of Business Conduct also referred to as the BHP code of Business Conduct. The code reflects that company’s values of openness, integrity, trust and respect. All BHP directors and employees regardless of their location or position are bond by these codes and are expected to operate based on the provisions of the BHP codes of Business Conduct (BHP Billiton 2008; BHP Billiton 2011). A good example of BHP code of Business Conduct in practice is replicated in the health and safety code. Zero Harm is the organization’s aspirational objective to reduce harm to the environment, people and communities in general. The company’s health and safety practices, are governed by mandatory standards, policies and procedures that are also designed to ensure the safety of the company’s employees and its assets. The company endeavors to invest in safety procedures that are ultimately geared towards reducing instances of accidents and injuries that would translate to higher medical costs and damage of equipment or assets that can take place at the expense of the shareholders (BHP Billiton 2011). Corporate responsibility is a principle that is greatly embedded in the BHP Billiton Code of Business conduct. One of the ways through which BHP Billiton upholds corporate responsibility is through its commitment to environmental stewardship. For instance, Chapter 3 of BHP Billiton Code of Business conduct provides that the Company is committed to environmental responsibility. Employees in BHP work to ensure the company’s resources are utilized efficiently and biodiversity is enhanced by evaluating land use and ecological value in all its operations. Moreover, BHP endeavors to avert and reduce pollution by ensuring that the negative effects associated with its operation are identified, managed, minimized and prevented (BHP Billiton 2011). Moreover, Chapter 3 of BHP Billiton code of business conduct also puts into account the plight of the community. The code acknowledges the fact that some of its mining operations can sometimes affect the local communities negatively. Thus the involved BHP employees work closely with the relevant stakeholders in the community especially those that have been affected by its operations so as identify and address the concerns, problems and expectations of the community (BHP Billiton 2011). The BHP code provides that the company values the needs of the local community therefore all its operations sites include a register that records and follows-up on the manner in which the concerns and problems of the community are being addressed (Deegan, Rankin & Tobin 2002). Recommendations According to Porta, et al (2000), in order to enhance investor protection there is need for extensive legal, judicial and regulatory reform. Porta et al observes that the legal protection of investors is potentially an important aspect of corporate governance. With reference to the sentiments of Porta et al, it is essential for BHP Billiton to incorporate legal processes that ensure the legal protection of its investors. Besides using measures such as market disclosure, the enforcement of its Business conduct codes and risk management, the Company should strengthen its regulatory and legal framework. The BHP board should work together with its stakeholders and legal experts from outside to review and implement effective legal and statutory frameworks that will enhance the protection of its investors and shareholders (Burkart et al 1997). For instance, BHP should establish a legal committee whose key roles are to develop, implement and regularly review BHP corporate governance policies and framework. The legal committee should have full support from the board and it should be given adequate resources to enable its proper functioning. Furthermore, the legal committee should given the mandate to access and give regular reports to the board with regards to the effectiveness of the company’s legal and statutory frameworks in the protection of its investors and shareholders (World Bank 2009). In addition to its market disclosure strategy, BHP Billiton should create awareness among its investors and shareholders by initiating awareness campaigns that are geared towards informing the company’s shareholders, investors and potential investors on the performance of the company’s business. Furthermore, these awareness campaigns should cover issues such as financial and non-financial disclosure, risk management and good board practices. The awareness campaigns should incorporate a series of media events, conferences, workshops and seminars. In the course of these awareness campaigns shareholders, investors and potential investors should be given course offerings and corporate governance materials that educate them on their responsibilities and rights as investors or shareholders. In addition, it is essential that these awareness events should be instituted and organized through new or existing institutions such as institute of directors, corporate governance institutes or Institute of Banking (Doyle 2001;World Bank 2009). Besides using business codes of conduct and risk management processes to protect shareholders and investors, BHP Billiton should develop a process that systematically evaluates whether the BHP Billiton codes of business conduct and its risk management processes are effective. The board should appoint an independent audit to evaluate the effectiveness of these corporate governance strategies. The independent audit should carryout these evaluations regularly so as to establish whether there are nay improvements in the manner in which these systems. In response to the provision of its business codes of conduct and risk management control process In the 2006/2007 financial year BHP Billiton embarked on research geared towards investigating new forms of engineering technology that reduce exposure to chemicals alleged to cause cancer. The company developed a Diesel Particulate Initiative that reduces the exposure of diesel exhaust fuel to the environment (BHP Billiton 2007). The effectiveness of such initiatives should be evaluated by the help of an independent audit tea so as to establish whether they are effective and whether they comply with the company’s principles of risk management and business codes of conduct. Conclusion BHP Billiton is a multi-national company that is not only known for its achievement in mining, oil and gas operations, but it is also known for its solid work ethics and corporate governance principles characterised by commitment, respect and integrity. The company endeavours to work with integrity and accountability in all its operations around the globe. Some of the key corporate governance principles used by BHP include; Risk Management, the enforcement of BHP Billiton code of business and market enclosure among many other corporate governance principles. In order for the company to increase the effectiveness of its corporate governance principles, it is essential for the company to strengthen its regulatory and legal framework, initiate awareness campaigns and develop a process that systematically evaluate whether the BHP Billiton codes of business conduct and its risk management processes are effective. Project Plan Recommendations Goals Duration Stakeholders Strengthening BHP’s regulatory and legal framework. - Establishment of a legal committee - Review of BHP’s legal and statutory frameworks. -Implementation of effective legal and statutory frameworks 6 weeks 4weeks 12 weeks -The board of directors -Legal committee -Legal committee & BHP Board Awareness campaigns - Enlightening the company’s shareholders, investors and potential investors 4weeks -CEO -Directors Investors -Stakeholders -Banking and Corporate governance institutions Independent auditing -Evaluate the effectiveness of risk management systems -Evaluate the effectiveness of enforcing BHP Business codes of business conduct 4weeks 4 weeks - Directors -An independent audit team Bibliography Anand, S., 2007, Essential of corporate governance, John Wiley and Son, New York. BHP Billiton, 2007, Sustainability Report Full Report 2007, Retrieved on March 30, 2011 from BHP Billiton, 2011, Codes of Business Conduct, Retrieved on May 23, 2011 from < http://www.bhp.com.au/bb/aboutUs/codeOfBusinessConduct.jsp> BHP Billiton, 2010, Our History, Retrieved on May 23, 2011 from BHP Billiton, 2008, Corporate governance summary, Retrieved on May 23, 2011 from Burkart, M., Gromb, D., Panunzi, F., 1997, Large Shareholders, monitoring, and "duciary duty, Quarterly Journal of Economics 112, pp.693-728. Deegan, C., Rankin, M., & Tobin, J., 2002, An Examination of the Corporate Social and Environmental Disclosures of BHP from 1983-1997: A Test of Legitimacy Theory, Accounting, Auditing & Accountability Journal. Vol 15, Iss: 3, pp.312 – 343 Divecha, S. & Martinvich, D., 2003, BHP Billiton: Behind the world’s Biggest Mining Company, Mineral Policy Institute, UK. Doyle, P., 2001, Shareholder-value-based brand strategies, Journal of brand management, Vol 9, No.1, pp.20-30. Harvey, C., 1981, The Rio Tinto Company: an economic history of a leading international mining concern, Alison Hodge Publishers. Hilb, M., 2008, New corporate governance: successful board management tool, Springer, London. Hitipeuw, J., 2011, Bigger than Microsoft, Retrieved on May 23, 2011 from Jones, T., Felps, W. & Bigley, G., 2007, Ethical Theory and Stakeholder Related Decisions: The role of Stakeholder Culture, Academy of Management Review. Vol 32 No: 1. 137-155. Porta, R., Lopez-de-Silanes, F., Shleifer, A. & Vishny, R., 2000, Investor protection and corporate Governance, Journal of Financial Economics 58, pp. 3-27. Stolt, R., 2009, Corporate Governance in Hong Kong, Grin Verlag, Norderstedt, p.2. Rio Tinto, 2011, Corporate governance, Retrieved on May 23, 2011 from The World Bank, 2009, Report on the observance of standards an Codes, Corporate Governance Country Assessment, Kingdom of Saudi Arabia, February 2009.Report on the Observance of Standards Read More