Running head: ASSESSMENT OF BHP’S CORPORATE GOVERNANCE 1

Assessment of BHP’s Corporate Governance

Student’s Name

Institutional Affiliation
ASSESSMENT OF BHP’S CORPORATE GOVERNANCE 2

Introduction

Corporate governance is an umbrella term encompassing processes, systems, policies,

rules, and regulations organizations adopt and implement in a bid to improve the effectiveness of

their operations. At the core of corporate governance framework is the need to have shared

guidelines when it comes to corporate behaviour as well as ensure sustainability. Moreover, this

framework goes a long way in enhancing accountability and reducing the chances of detrimental

risks from occurring. The current paper seeks to assess the corporate governance framework of

BHP Billiton by applying relevant professional judgements, values, and ethical concepts. Even

further, this paper provides some recommendations for BHP Billiton to improve its governance

system.

Rationale behind Choosing BHP Billiton

In choosing a company that can help understand the whole concept of corporate

governance framework, one can only consider a company that is committed to such. As

evidenced in its corporate governance statement, BHP Billiton is committed to developing and

effective work culture based on ethical and professional standards, the legal landscape, and

corporate integrity. In addition, BHP is a dual-listed company. This feature makes it possible the

corporate governance system of an organization that has to adhere to legislative measures in two

countries, in this case, Australia and the United Kingdom. Moreover, having been established in

1860, BHP has a long history of enviable performance, a feature most of MNCs lack.
ASSESSMENT OF BHP’S CORPORATE GOVERNANCE
BHP’S Approach to Effective Leadership
Board characteristics Approach
Separated roles of In accordance with the UK
CEO/Chairman corporate governance code, the
company utilizes a dual
structure system (BHP 2017, p.
95; Code A.2.1). In other
words, the company has two
separate boards: the managerial
board, and the supervisory
board of directors. The CEO
heads the former. The
Chairman of the board heads
the latter. Putting it more
plainly, the person who heads
the management is not same
who heads the board at BHP.
Two different unrelated people
head the two roles.
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Implications
Separating the roles of the
CEO and the Chairman of the
board plays a central role in
countering the agency
problem. With the CEO also
functioning as the Chair of the
board, shareholders can never
be sure that the organization
has their best interests at heart
(Kasem and Higson, 2016).
Separating these two roles
helps ensure checks and
balances. No one enjoys
unfettered powers (Lincoln,
Fields, & Adedoyin, 2013).
Dinh, Nguyen and Dinh (2014)
observe that the roles of the
CEO and the chair being held
by one person may result in
overconfidence in making
decisions, which can pose
negative impacts on
shareholder interests. However,
separating the roles of the CEO
and the chair of the board does
not only convey positive
impacts. Separation of these
roles means increased financial
burden to the organization as
both the Chair and the CEO
have to be compensated.
ASSESSMENT OF BHP’S CORPORATE GOVERNANCE
Extent of Compliance with the Requirements of Board Effectiveness (gender
diversification, skills & board knowledge, age and independence
Board characteristics Approach
Gender diversification BHP is well in tune with the
requirements of the UK code of
corporate governance when it
comes to gender diversity. In
2011, the Financial Reporting
Council FRC commenced
consultations on how the code
would make the board more
diverse (Code B.2.4). Currently,
BHP has three women board
directors, an equivalent of 27
percent of the entire board. The
three are Shriti Vadera, Carolyne J
Hewson and Anita M Frew (BHP
2016, p. 105).
Skills and Board BHP’s directors stem from diverse
knowledge and professions, sectors, and
managerial roles (BHP 2017, P.
104; Code B.6). As such, the
company’s board of directors is a
pool of wide-ranging experiences,
perspectives, and skills. For
example, director Terry Bowen
4
Implications
Gender diversity in the board
room has been found to have huge
impacts on organizational
performance and functioning. A
research conducted by Jedi and
Nayan (2008) found a positive
relation between firms’ financial
performance and female
representation on the board. Lee-
Kuen, Sok-Gee and Zainudin
(2017) also found similar results.
In terms of the choice of
investment, research has also
shown that boards with female
directors are less likely to act in
favour of high-risk ventures or
make radical decisions (Charness
& Gneezy, 2012; Croson and
Gneezy, 2009).
Increasing the number of females
sitting on BHP board can also
have negative implications.
Multiplicity of perspectives
increases the frequency and
magnitude of workplace conflicts.
Additionally, multiple
perspectives mean lengthy
decision making timeframes. As a
result of longer decision-making
processes, BHP may end up
missing some important
investment opportunities.
The multiplicity of skills and
knowledge on board contributes to
the overall effectiveness of the
board. More specifically, the
board has wide pool of different
perspectives, thus being better
positioned in guiding the
management on how to respond to
ASSESSMENT OF BHP’S CORPORATE GOVERNANCE
has served as a board member at
the Western Australian Institute
for Medical Research, served as
Chief Financial Officer (CFO) at
Landmark Operations, and
Finance Director at Coles Group
Ltd. The Chairman, John
MacKenzie has wide experience
in managing corporate sales and
marketing.
Independence At BHP, all directors sitting in the
board have an independent status
(BHP 2017, p. 107). In other
words, every board director at
BHP has zero or minimal business
interactions with the company.
The Code requires board directors
to pass the independency test
(Code B.6)
BHP’s Accountability in Reporting
Accountability Approach
component
External For the past 23 years, KPMG has been An external auditor refers to
Auditors BHP’s external auditor. KPMG will organization or a firm that performs the assessme
continue providing audit services to and verification of company’s accounts and financi
5
shifts and patterns in market
forces. Moreover, it has been
pointed that people with different
knowledge and skills bases make
more effective teams.
Like with the case with gender
diversity, have board members
from different fields, knowledge
levels, and skills, the board may
witness increased conflicts since
people do not see things from the
same viewpoint.
Board independence contributes
significantly to the ability of the
board to act as representatives of
shareholders and in countering the
agency problem. However, this
independence can actually work
against the company. Without
having interests in the company,
board directors may end up being
less committed with improving
the performance of the company.
Implications
“an outsid
ASSESSMENT OF BHP’S CORPORATE GOVERNANCE
BHP for fiscal 2017, 2018, and 2019.
From mid-2109 going forward, the
company has already declared to have
chosen Ernst and Young as the next
external auditor. This move is in tune
with the requirements of EU law
demanding that all listed firms have a
new external auditor by 2023 (BHP
2017, p. 115).
Board BHP conducts internal assessments for
evaluation individual board members every year. In
every two years, the company adopts
whole board assessment. In every year,
each director is reviewed for re-election
and compliance with the terms of
reference. As such, there is no way that
an underperforming board director can
remain with the company for over three
years. The last time the company had an
external perspective to board evaluation
was in 2017 (BHP 2017, p. 124).
6
records with independence and no internal control
lieu of fees” ( Bodan, Aga and Alrub 2017, p. 174
Having an external auditor safeguards transparenc
and accountability in organizations. Extern
auditors have a legal obligation to present fa
truthful, and credible financial statements.
Having a new external auditor for BHP will hav
several implications. To begin with, the act reduc
the potential risk of bias stemming from a length
business relationship with KPMG. The coming
EY external auditors will also help boo
transparency for BHP’s shareholders by confirmin
what KPMG has been reporting over the years.
addition, complying with the legal requirement
have a new external auditor means that BHP
standing as a good corporate citizen remains soun
Good corporate citizenship has been associated wi
improved customer loyalty and brand reputatio
While having an external auditor can help elimina
bias in financial reporting, it can also serve as
threat to the company’s competitive advantages. F
instance, Ernst and Young interact with man
players in the context of providing auditing service
In the process of these interactions, the company ca
end up revealing why a certain company perform
better than others. For instance, the auditor ca
reveal that BHP pays its employees significant
higher than rival players resulting in extremely hig
degrees of employees’ loyalty, commitment an
satisfaction.
Consistent board evaluations contribute positively
the creation of shareholder value. In order to rema
on the board, each board member has to perform
required. The evaluations take into account sever
factors ranging from one’s contribution to boa
effectiveness, development of strategies, providin
direction to the management, and complying wi
laid down ethical and professional standards.
Moreover, board evaluations help individual boa
members as well as the whole board to self-reflec
analyse past performance, and make necessa
adjustments. Even further, markets rewa
organizations that conduct regular and formal boa
evaluations (Clarke, Branson & Sage Publication
2012). While conducting board evaluations is
commendable exercise, the Code and BHP shou
ASSESSMENT OF BHP’S CORPORATE GOVERNANCE 7

provide specific guidelines on how to assess th

performance of board members. Currently, the boa
evaluation practice is very relaxed. Howeve
measures should be put into place to ensure th
evaluations do not lead to board directors feelin
unvalued, untrusted, and eventually desire to resign

Extent of BHP in Reporting Remuneration

Remuneration Approach Implications
characteristics
Structure of BHP has an independent Effective remuneration structure is
Remuneration committee tasked with central in ensuring that each
remunerations (BHP 2017, p. person is rewarded on the bases of
118). This committee is charged merit as opposed to any other
with determining the components personal or functional attribute.
of pay. There is no director who Moreover, the remuneration
enjoys the power to decide how committee is charged with
much or she receives, not even the conducting performance
CEO. evaluation, developing incentive
plans, and advocating for pay
rises.
Structure of The remuneration committee is Having an independent
compensation comprised of five persons elected compensation committee is
committee by the board (BHP 2017, p. 118). central in ensuring corporate
Out of the five, one is appointed integrity. Without such a
to serve as the head. For an committee, remuneration would
individual to serve as the head of be based on person relations,
the remuneration committee, he or ethnic, racial, sex, gender, and
she must have served in the social status backgrounds among
committee for at least 12 months. other factors. Moreover, the
committee helps ensure that
remuneration is linked with
employee motivation.

BHP’s Relations with Its Shareholders

CSR Approach Implications
characteristi
cs
AGM The company holds one Annual AGM reporting provides shareholders
reporting General Meeting (AGM) every year with platforms to raise their concerns,
(BHP 2016, p. 285). In terms of seek answers for certain resolutions,
disclosure of voting, the code requires and engage directors in an active way.
ASSESSMENT OF BHP’S CORPORATE GOVERNANCE 8

that the board explain to shareholders Thus, AGM reporting is directly

the actions it intends to take in the case
where more than a fifth of all votes
have been cast against a given
resolution (Code E.2.2). Moreover, the
code demands that companies include
the resolutions in the reports of AGMs.
In terms of complying with the code’s
disclosure requirements, the company
developed the Market Disclosure and
Communications Document in 2015.
Essentially, this document provides all
materialistic information relating to
BHP’s internal processes as well as
communication strategies to engage
with shareholders.
Communicatio According to UK corporate law, there
ns with are powers reserved to shareholders.
shareholders More specifically, under UK law,
(what tools are shareholders have the right to serve as
used) the monitors and controllers of their
companies. For them to be able to
exercise these rights, companies are
required to provide shareholders with
all necessary information. The code
requires that the chairman to the board
of directors ensure that the company
provides effective communication to
shareholders (Code E. 1).
BHP communicates with shareholders
through several channels (BHP 2017, p.
102). One of these is proving reports
during the AGM. Another way is using
the company’s social media platforms,
especially the official website.
related to shareholder’s confidence in
the firm. While AGM serve the
purpose of shareholders accessing
information not in press releases and
other reports, it can be very
expensive.
For public listed companies,
shareholders are the owners. As such,
they have the right to information on
the company’s progress.
Communication with shareholders
has been regarded as an element of
effective corporate governance. Thus,
communication with shareholders
leads to positive impacts on
shareholders’ commitment and
investor confidence.
Communicating with shareholders
can also be a very risky venture. A
shareholder can have business
interests in many players in the same
industry. As such, revealing details to
shareholders can also be exploited to
serve as a channel of revealing
information to rival companies.

Overall Compliance, Recommendations, and Conclusion

Considering all the principles enshrined in the UK code of corporate governance, there is

no doubt that BHP Billiton is in total compliance. However, there is still room for improvement.

To begin with, BHP seems to have approached corporate governance standards as legal

requirements. The company should go the extra mile of viewing the standards as a social
ASSESSMENT OF BHP’S CORPORATE GOVERNANCE 9

responsibility. Corporate citizenship demands that companies function in a way that exceeds laid

down legal frameworks. For example, while the code requires the board to communicate with

shareholders, the company should develop channels and strategies for communicating with all

stakeholders, including customers and employees. So far, the top management is well

represented on board of directors. In the same way, BHP should ensure that all employees can

reach the top management. In other words, the company should develop an organizational culture

and structure that makes it possible for every stakeholder to contribute more actively towards

company performance.

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https://www.bhp.com/-/media/documents/investors/annual-

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