Jennifer Hewitt’s article in last Thursday’s Australian Financial Review entitled “Swapping leaders 101″ focused on the relatively sudden departures of RIO’s Tom Albanese and BHP’s Marius Kloppers. The Sydney Morning Herald claimed “outgoing BHP Billiton Chief Executive will take cash, shares and performance rights worth up to $75.2 million at current prices”.
We believe the timing of the departures was to draw attention away from the substantial erosion in returns and profit, however some discussion about remuneration is warranted.
Andrew Smithers, the author of Valuing Wall Street, makes the following point,
“The change in the way company managements are remunerated has been dramatic this century. Salaries have ceased to be the main source of income, with bonuses and options (or performance rights) taking over”. He also writes, “Senior management positions change frequently, so if management wish to get rich, they have to get rich quickly”.
Those readers interested in exploring this subject further may want to download the December 2011 Federal Bank of New York Report entitled “Some Unpleasant General Equilibrium Implications of Executive Incentive Compensation Contracts“. Download here.
Meanwhile, a brief analysis of BHP in the six year period from Fiscal 2007 to Fiscal 2013, which coincides with Marius Kloppers’ leadership, reveals:
* Normalised net profit after tax will have fallen 17.5% from $16.6 billion to an estimated $13.7 billion;
* Shareholders’ Funds will have doubled from $35.0 billion to an estimated $71.8 billion;
* Net debt has doubled from $11.3 billion to $22.7 billion; and
* Return on Average Equity will have more than halved from 46% to an estimated 20%.
In our view there are two vital parts to a CEO’s role. The first is the running of the business – which MBA’s from Harvard and the hiring of management consultants have gone some of the way to ensuring there is expertise here. The second however is capital allocation – something Warren Buffett talked about at length – and which we have seen very few successes. CEO’s wanting to understand the fundamentals of capital allocation have no course to study, no manual to follow and no broad and deep pool of talent to access.
When Roger Montgomery wrote Value.able he had senior management and CEO’s of public companies and their capital allocation role in mind. Download Value.able here: http://rogermontgomery.com/valueable-book/