Essay: Corporate Governance In BHP Billiton - Analysis Of Annual Reports.

Corporate governance refers to the rules, practices, and processes through which every company is directed and managed by the board of directors and management of the organization. The main aim of corporate governance is to maintain the balance of interest between the various stakeholders of the company such as shareholders, management, customers, suppliers, government, and social community. With the use proper corporate governance company can achieve its aims and objectives within limited time and with the available resources. It laid down the actions plans to be followed and internal control to measure the performance of the company. Corporate governance also helps in making the financial report to be presented to the all the board of directors and stakeholders of the company. In this report, corporate governance of BHP Billiton has been evaluated through making through analysis of last three years annual report of the company.

BHP Billiton is a leading global resource company and as such its management and directors hold a important responsibility in strengthening its global image.  The senior management of the company holds the responsibility of making effective decisions for carrying out operational processes of the company (Annual Report: 2014, 2015 and 2016).  The senior management of the company owns the responsibility of maintaining a close connection between the management and operations for promoting greater efficiency, adoption of latest technology for improving safety and productivity. The senior management comprises of board of directors of the company who develop strategies for maintaining company values (About US: Leadership, 2016).  The board of directors consists of executive, non-executive, dependent and non-independent board members involves in strategic planning of the company.  Board of directors also consists of Chief Executive Officer, Chief Financial Officer, Chief Commercial Officer, Chief External Affairs Officer, President Operations, Chief of Staff and Chief People Officer. Marius Kloppers is the Chief Executive Officer (CEO) of the company and Alex Vanselow is the Chief Financial Officer of the company. Karen Wood is the Chief People Officer and Andrew Mackenzie is the Group Executive of the company (BHP Billiton Ltd ADR, 2016). The company consists of two entities BHP Billiton and BHP Billiton Plc. and the tow together constitutes a combine group known as BHP Billiton. However, the company has identified board of directors and the unified management team that runs the operations of both the companies. The middle management acts as a link between senior and lower management group (Annual Report: 2014, 2015 and 2016). The middle management consists of managers and leaders who supervise the functions of lower management consisting of employees and workers performing the operational captivities of the company.

Major Shareholders

Shareholders or stockholders are those who own the stocks of the company. The company is entitled to pay them the dividend from the net profit realized. The company issues shares to the shareholders by granting them a certificate. The shareholders receive the benefits of the company’s success through increased stock valuation (Annual Report: 2014, 2015 and 2016). The company’s stock is presenting trading at $29.88. The largest shareholder of the company is Bank of America Corp., Dimensional Fund Advisors LP, Earnest Partners LLC and CI Investments Inc., Neuberger Berman Group LLC and mutual funds shareholders. Bank of America is the largest shareholder of the company holding about 4.2 million shareholders and Dimensional Fund Advisors LP is the second largest shareholder of the company holding about 3.2 million shares. Earnest Partners LLC is thirst largest shareholder of BHP Billiton and CI Investments Inc is the fourth-largest shareholder of the company holding its about 2 million shares. Neuberger Berman Group LLC holds approximately the company’s 1.9 million shares of the company. The mutual fund corporations are also the largest shareholders of BHP Billiton having about 1.7 million shares of the company (BHP Billiton Limited (BHP): NYSE - NYSE Real Time Price, 2016).

The CEO and other prominent board of directors of the company receive a competitive base salary with addition of pension contribution to about 25% of the base salary. In addition to this, they also receive relocation allowance and other benefits as determined by the Remuneration Committee of the company (Annual Report: 2014, 2015 and 2016). The remuneration received by Andre Mackenzie of the company is 7,988 (single figure, $’000) and that received by Marius Kloppers is 15,991 (single figure, $’000). Marius Kloppers is Chief Executive officer and Executive director of the company whereas Andrew Mackenzie is Group Executive and Chief Executive Officer of the company. Alex Vanselow, Chief Financial Officer (CFO), of the company is 9,401,766. The base salary of the board of directors is reviewed on an annual-basis and other benefits are determines on the basis of individual performances (BHP Billiton Ltd ADR, 2016).

There are three main key performance indicators of the BHP Billiton that tells the overall performance of the company over the period of time.  The key performance indicators help the company to measure the sustainable development and overall financial performance of the company. The three main key performance indicators of BHP Billiton are as under:

Compensation of Directors and Top Executives

Underlying attributable profit means profit earned by the company after payment of expenses and tax. This profit is attributable to the owners of the BHP Billiton. It has been noticed that profit attributable to shareholders have been significantly declined in year 2016 as compare to last 3 years profits. This decline is due to drastic change in commodity prices in the international market. The underlying attributable profit of the BHP Billiton in year 2016 is 1.2 Billion $ and it is 80% less than profit earned in year 2015 (Annual Report: 2014, 2015 and 2016).

Underlying EBITDA refers to profit earned before interest, depreciation, impairments and amortization expenses. Focusing more on EBITDA helps the management to earn more operating cash for the operations. EBITDA is the key performance indicator as it provides insight to the cost management policies and helps in improving the efficiency. While evaluating the EBIDTA of last three years it has been that in year 2016 there was 44 % decline in overall EBITDA to 12.30 billion dollars. This reduction is due to reduction in controllable cash cost by $ 1.4 billion particularly in year 2016 (Annual Report: 2014, 2015 and 2016).

Net operating cash flows mean cash flows generated by the consolidated group incorporating dividend received and other payments. Operating cash flow does not include cash generated through investment, discontinued business and financing activities. This key performance indicator helps to provide the insight how the BHP Billiton manages cash flows between various operations. It also helps in maintaining the efficiency and overall productivity of different operation in the company (Silver, 2011). When the net cash flows from operating activity has been measured for last three years, it has been found that there was continuously decrease in cash flows due to overall decrease in the revenue earning capacity of the organization. In year 2016, cash flows from operating activity has been reduced to 10.60 billion US dollars reflecting the overall decrease of 45% as compared to past year performance (Annual Report: 2014, 2015 and 2016).

Shareholders return represents total return earned by the shareholders in the particular year. Total shareholders return includes both increase/decrease in share prices and dividend paid by the company during the year (Parmenter, 2015). This key performance indicator is important from the point of view of shareholders wealth and overall return to the shareholders during the year. After evaluating the performance of the company during the last three years it has been found that share price of the company is decreasing regularly and BHP Billiton has also reduced the dividend paid to the shareholders. In year 2016, there was about 36 % decrease in total shareholder return due to decrease in share price of the company and also decrease in percentage of dividend paid to shareholders (Annual Report: 2014, 2015 and 2016).

Key Performance Indicators

In order to evaluate the overall performance of BHP Billiton as compared to industry average, different ratios have been calculated of BHP Billiton and it is compared with industry ratios.

Liquidity Ratio: Liquidity ratio shows the solvency position of company. Current ratio and quick ratio are two main liquidity ratios (Drake and Fabozzi, 2009).

• Current ratio: The current ratio of BHP Billiton is 1.44 in year 2016 and industry average is about 2.00 in the same year (IBIS, 2016). It shows that current ratio of BHP Billiton was underrated as compared to industry average (Annual Report: 2014, 2015 and 2016).
• Quick Ratio: The quick ratio of BHP Billiton was 1.15 in year 2016 and industry average was 1.23 in the same year that shows that quick ratio of BHP Billiton below the industry average in year 2016 (IBIS, 2016).

Profitability Ratio: These ratios show the overall earning capacity of the company. Net profit ratio and return on assets are some of major profitability ratios (Marr, 2014).

• Net profit ratio: Net profit ratio of BHP Billiton was negative 20.66 % in year 2016 and industry average was -5% to 4 % in year 2016 (IBIS, 2016). It shows that profitability performance of BHP Billiton was very adverse in year 2016.
• Return on assets: = Return on assets of BHP Billiton was -5.24% in year 2016 and industry average was – 1.00 % to 3 % (IBIS, 2016). It shows overall profitability performance of BHP Billiton was underrated as compared to industry average (Annual Report: 2014, 2015 and 2016).

Time value of money is the most important concept of financial accounting and as per this concept money receives at present time worth more in future time period. It is because of basic principle of economics that future has potential earning capacity that reduces the value of present money in future due to difference if time. In finance there is simple principle that on each amount of money one can earn some interest that makes value of money more if it is received in present as compared to money received in future time period. This concept has much importance in the managerial decisions as it impacts financial performance of company if proper decision has not been taken at right time. For example, a large flow of cash at sudden can make the liquidity position weak if proper flow of has not been maintained by the company.

In the given case Robert Alba won the lottery and has given two options of either take $62.90 million today or $ 5 million for next 35 years with payment starting from today. Now to examine both of these options, concepts of time value of money has to be applied. Details of calculations are presented below:

For this case, assumption is made that discount rate is 10%

Option 1: $62.90 million received today

After analyzing both the options it can be said that Robert Alba must chose to receive $62.90 million today as against the $ 53,042,874.349 (Present of $5 million for every year till 35 years). While making the estimation discount rate has been assumed at 10%. Therefore, solution can vary if there is change in discount rate.

Conclusion

After complete analysis of corporate governance in BHP Billiton it can be said that company maintain high standards in governance procedure through employing proper internal controls and safety precautions wherever required. Everyone in the company is reportable for the task they carried out for the sake of stakeholders. Key performance and ratio analysis shows that financial performance of company was adverse in year 2016 as compare to year 2015 and 2014.

References

About US: Leadership. 2016. Retrieved October 12, 2016, from https://www.bhpbilliton.com/aboutus/leadership

Annual Report. 2014. BHP Billiton. Retrieved October 12, 2016, from www.bhpbilliton.com/investors

Annual Report. 2015. BHP Billiton. Retrieved October 12, 2016, from www.bhpbilliton.com/investors

Annual Report. 2016. BHP Billiton. Retrieved October 12, 2016, from www.bhpbilliton.com/investors

BHP Billiton Limited (BHP): NYSE - NYSE Real Time Price. 2016. Retrieved October 12, 2016, from https://finance.yahoo.com/quote/BHP/holders?ltr=1

BHP Billiton Ltd ADR . 2016. Retrieved October 12, 2016, from https://insiders.morningstar.com/trading/executive-compensation.action?t=BHP&region=usa&culture=en-US

Drake, P. and Fabozzi, F. 2009. Foundations and Applications of the Time Value of Money. John Wiley & Sons.

IBIS. 2016. Industry Mining in Australia: Market Research Report. Retrieved October 12, 2016, from https://www.ibisworld.com.au/industry/default.aspx?indid=55

Marr, B. 2014. 25 Need-To-Know Key Performance Indicators. Pearson UK.

Parmenter, D. 2015. Key Performance Indicators: Developing, Implementing, and Using Winning KPIs. John Wiley & Sons.

Silver, T.L. 2011. The Time Value of Life: Why Time Is More Valuable than Money. IUniverse.