Case Study

on
Corporate Governance at BHP Billiton
for
Dr. M. Nazmul Amin

By
Md. Latifull Alam; ID: 1611848060
Sushmita Upreti; ID:1621053060
Mostafizur Rahman; ID:1621218 060
Sadia Aurin; ID:1320710060
Md. Kamrul Hassan; ID: 1621104660

An Individual Assignment in Partial Fulfillment

of the Requirement for the Course of
Strategic Management, BUS 690 (Section: 02)

North South University (NSU), Bangladesh

December 2017
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Contents
Background ..................................................................................................................................... 4

Objective ......................................................................................................................................... 4

External Environment Analysis ...................................................................................................... 5

Porter's Five forces framework of Mining Industry for Bhp Billiton LTD. ............................... 8

Overall Result of Porter's Five Forces Analysis ................................................................... 11

Strategic Group Mapping .......................................................................................................... 12

Internal Environment Analysis ..................................................................................................... 13

Resources of BHP Billiton ........................................................................................................ 13

Capabilities of BHP Billiton ..................................................................................................... 14

Core Competencies ................................................................................................................... 14

Competitive Advantage ............................................................................................................ 15

Value Chain Activities .............................................................................................................. 15

SWOT Analysis ........................................................................................................................ 16

Case Analysis ................................................................................................................................ 21

Conclusion .................................................................................................................................... 29

References ..................................................................................................................................... 30

Content of Figure
Figure 1: Porter’s Five Forces......................................................................................................... 9
Figure 2: Result of Porter’s Five Forces for BHP Billiton ........................................................... 11
Figure 3: Strategic Group Mapping .............................................................................................. 12
Figure 4: Intangible Assets ........................................................................................................... 14
Figure 5: Value Chain of BHP Billiton......................................................................................... 16
Figure 6: Stakeholders of BHP Billiton ........................................................................................ 25
Content of Table
Table 1: Fixed Assets .................................................................................................................... 13
Table 2: Intangible Assets ............................................................................................................. 13
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Background
BHP Billiton is a world leading and largest diversified natural resources company. For a
long time, they are ranked as a number one across the globe in the mining industry (BHP, 2017;
PWC, 2016). BHP Billiton began their journey in 1885 as Broken Hill in Australia. It has a proud
history of over 130 years in the mining industry. The current BHP Billiton established after
merging of two companies, BHP Ltd. (Australia) and Billiton Plc (United Kingdom) on June 29,
2001. They operate under a Dual Listed Company structure with a primary stock exchange listing
for BHP Billiton on the Australian Stock Exchange (ASX) and a primary listing for BHP Plc on
the London Stock Exchange (LSE). However, they also have a secondary listing on the stock
exchanges in New York (NYSE), Frankfurt, Zurich, and Johannesburg. Though BHP Billiton is a
Dual Listed Company, they operated as a single economic entity and run by a unified Board and
management.
Their major objective of BHP Billiton is to create long-term shareholder value through the
discovery, acquisition, development, and marketing of natural resources (BHP, 2017). Therefore,
their strategy is to own and operate large, long-life, low-cost, expandable, upstream assets
diversified by commodity, geography, and market. BHP Billiton is among the world’s top producer
of major commodities, including iron ore, metallurgical coal, and copper. They also have
substantial interests in oil, gas and energy coal. Currently, they have a workforce of over 60,000
and operates in 35 countries around the world (BHP, 2017; Roy, 2011). In FY2017, BHP Billiton
made total revenue around $38.29 billion, profit from operations amounting to $11.75 billion,
attributable profit to shareholders of $5.89 billion, and the net operating cash flow of $16.8 billion.
At the same time, they have around $90 billion market capitalization in the mining industry and
their total direct economic contribution is $26.1 billion.
Recently, with much of the former Billiton assets having been disposed of, BHP Billiton
began to rebrand itself as BHP in May 2017 (Robins, 2017). At the same time, they replaced their
previous slogan "The Big Australian" with "Think Big".

Objective
This paper has three major objectives. First of all, try to identify the major indicators which
may use to measure BHP Billiton’ corporate governance performance. Secondly, find out the link
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between BHP Billiton’s strategy drivers and the company’s corporate governance agenda. And
finally, demonstrate how the senior executive remuneration determines at BHP Billiton.

External Environment Analysis

Nowadays, global communities are more concern about global warming and climate
change (Plumer, 2017). Since the mining industry is creating an imbalance in nature during
extracting mineral resources from the earth hence mining industry is facing a great challenge of
global warming and climate change (Roy, 2011). It creates several restriction and non-compliance
issues for the mining industry. Mining industry must require satisfying the 2℃ world goal by the
Conference of the Parties in Paris (COP21), also known as Paris Agreement (Valle, 2016).
According to 2℃ world goals, the world must reach net-zero emissions soon after 2050 to keep
the rise in temperature to 2C or less (Evans, 2017). At the same time, according to International
Energy Agency (IEA), Technologies can make a decisive difference in achieving global climate
goals while enhancing economic development and energy security but the very challenging
pathway to net-zero carbon emissions and most sectors are off track (Evans, 2017). Even this
climate challenge gradually creates other major external facts and challenges for the mining
industry. Like, squeezed the international financing through the lender, fall social acceptance,
increased the nation’s legal restriction etc. It acts like a chain reaction of atomic for the mining
industry.

Follow the global warming and climate change, the social license is another significant
challenge for the mining industry. Nowadays, it is an important requirement to operate mining
industry, especially overseas, involves social acceptance for the people who live around the mining
area (Harris & Harris, 2001). Without achieving the social license, the mining industry will be
faced the consequences ranging from interruptions to mining production through to the permanent
closure of operations. For an example, GCM Resources plc, formerly Asia Energy and Global Coal
Management stop their coal mining operation in the Phulbari region of Dinajpur District,
Bangladesh due to a huge protest from the society (Doward & Haider, 2006). It was a major protest
in Bangladesh in 2006, with an estimated total of 70,000 people involved over weeks (Bedi, 2015).
Protesters have said such a mine would endanger an important food-producing region, as well as
the quality of the water supply, depended on by tens of thousands of people. Similarly, BHP
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Billiton faced the social community protest during their operation in Columbia, Philippines,
Indonesia, Guatemala and Peru (Roy, 2011). Moreover, according to a recent survey on Australia,
China, and Chile, public's acceptance of the mining industry was found to be relatively low (Zhang,
Moffat, Lacey, Wang, González, Uribe, . . . Dai, 2015).
Similarly, government and non-governmental organization are both playing as another
important external fact for the mining industry. The variety of legislation is one of the major
challenges a mining industry is facing from the government. At the same time, the mining industry
is also facing this challenge due to industry’s widespread operation nature (Roy, 2011). A mining
company may not operate their business within a single nation’s boundaries but in several different
nations, like BHP Billiton operating in 35 countries. Therefore, the mining industry is facing a
diverse legislation and facing the tradeoff between standardization and adoption due to
globalization. The government has played a major role in regulating the mining industry and
stipulating how mining activities should be conducted in their jurisdiction to ensure the potential
benefit for both the social and environmental. However, the government sometimes imposed the
regional and national laws governing environmental assessment and public participation processes
to achieve it (Owen and Kemp, 2012 as cited in Zhang, Moffat, Lacey, Wang, González, Uribe, .
. . Dai, 2015). Sometimes, those restriction and activities have brought increased scrutiny of
industry performance (Parsons et al., 2014 as cited in Zhang, Moffat, Lacey, Wang, González,
Uribe, . . . Dai, 2015). For an example, Bangladesh government said no to open pit mine
(“Government says”, 2015). Moreover, Non-governmental organizations have regularly acted as
critics of the mining industry’s activates (Cooney, 2001). They are concerned for several issues of
mining industry include biodiversity and climate, human health, individual and collective human
rights, redistribution of wealth and safety of the working environment. There have several
organizations and among them United Nation (UN), International Council on Metals and the
Environment (ICME), Mining, Minerals and Sustainable Development (MMSD), Global Mining
Initiative (GMI), Organization for Economic Co-operation and Development (OECD), Amnesty
International, and the Mineral Policy Centre are playing the major role. In addition, their principle
and expectation have changed over a period of time and it is a huge challenge for the mining
industry to cope with it time to time (Roy, 2011). Essentially, they will cooperate with mining
industry only if they ensure that there is no risk of association with environmental damage, human
rights, labor exploitation, community oppression, or the erosion of national sovereignty.
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Nowadays, international lending institutions enforced the mining industry to adhere to

certain environmental performance standards, including compliance with host-country
environmental laws, as well as observance of international environmental policies and guidelines
(Williamson, 2001). Generally, The World Bank developed the international environmental
policies and guidelines for lending. Other international lending institutions are also involved in
this process like The European Investment Bank (EIB), the Export-Import Bank of the United
States (USEXIM), and those established by the International Finance Corporation (IFC).
According to World Bank’s environmental policies and guidelines, most of these requirements
are-
 The World Bank Pollution Prevention and Abatement Handbook 1998 (April
1999). The environmental policies and guidelines discussed in this document apply
to coal, base metal, and iron ore mining operations.
 The World Bank Policies and Guidelines: Environment, Health and Safety
Guidelines: Mining and Milling (August 1995). These environmental guidelines
are the most current for application to precious metals mining operations.
 The World Bank Environmental Assessment Sourcebook (most recent version
published in October 1996, with subsequent updates published to clarify subject-
specific environmental policies).
 The World Bank Operational Directives/Policies. These operational
directives/policies (ODs/OPs) address specific subjects, and include ODs 4.00 and
4.01 (Environmental Assessments), OD 4.20 (Indigenous Peoples), OD 4.30
(Involuntary Resettlement), OP 4.04 (Natural Habitats), OP 4.07 (Water Resources
Management), OP 4.37 (Safety of Dams), and OP 11.03 (Management of Cultural
Property).
Day by day, it becomes a great challenge for the mining industry. Recently, the mining
industries are facing a significant liquidity squeeze (PWC, 2016). For an example, some major
banks are no longer financing coal-fired power plants, historical stalwarts of the United States coal
industry, Peabody Inc. and Arch Coal (PWC, 2016).
On the other hand, China currently lowers the demand for mining who is accounting for
approximately 40% of overall commodity demand (PWC, 2016). Nowadays, it is a biggest global
economic challenge for the mining industry. As the country moves from a manufacturing based
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economy to a services-based economy the previously rampant demand for commodities will not
resume with the same intensity. Moreover, world’s top twelve mining organization are China
owned. At the same time, a huge downturn in current commodities prices is another momentous
challenge for the mining industry which hurt the revenues and profits of mining companies across
the globe (Yakovleva, 2015). It results in around 85,000 jobs cut worldwide mining industry in
2015 which was almost two-thirds of the workforce (Yakovleva, 2015). According to PWC’s
survey in 2016, the capitalization of mining industry falling by 37% due to this commodity decline
(PWC, 2016).
Again, today’s technology brings both blessing and curse for the mining industry.
Technology enhanced a significant success and effectiveness at an optimal level for the mining
industry. For an example, nowadays mining industry used drone technology and experts believe
that it will become ubiquitous which could help transform the mining industry. They are used to
ensure areas are all clear before blasting and to improve road safety. Moreover, a drone used to
help inspect buildings and structure to avoid working at height. Also, mining industry map and
digitally record areas of cultural heritage near their sites. In contrast, technology is also considered
a major Anti-Mining tool. In this case, experts think that the internet is a powerful Anti-Mining
tool (McGregor, 2001). Any real or perceived mining incident or environmental spill, no matter
how small or remote, can become a disaster of “biblical proportions” through the judicious use of
the Internet by environmental and anti-mining groups. In addition, mining companies’ own Web
sites and unofficial message boards can provide plenty of additional ammunition to the anti-mining
forces.

Porter's Five forces framework of Mining Industry for Bhp Billiton LTD.
For a new firm to enter any type of industry we should first consider the type of industry it
belongs to. we should also look at competitiveness among rivals and opportunity to gain profitable
returns from the market. This environment and their impacts can be analyzed by using different
business analysis tools like Porter's Five force model.
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There are five driving forces that help with positive returns or not for BHP Billiton
to build any industry. Their strength and LTD.
weakness are analyzed by this model to
determine the corporate strategy (Staff, n.d.).
According to Porter's rule the stronger the
forces limited are their chances to gain
profitable returns with the raised price for
their product or services. The figure shows
the five forces and their relationship in
creating competitiveness in the market
(CGMA, 2013). The model also gives us
information on the effect each of these has on
achieving company goals and objectives.
Through this analysis, we will determine Figure 1: Porter’s Five Forces

whether the mining industry is still profitable

As mentioned above there are five main forces that make this framework and we will
determine the competitiveness they create for Bhp Billiton Ltd. below.
1. Rivalry Among Competing Industries-moderate to Strong
The competitive pressure created by the rivalry in the competing industry is one of
the strongest competitive force. The strength and weakness of this force depend on a
number of identifiable factors. Bhp Billiton's pipeline method to extract excess ore from
mines which generate high fixed cost and storage creates a highly competitive market for
its rivals. The long-term relations, diverse objective, strategies or country of origin bring
forth more global competitors with less differentiated products, increases the rivalry. This
also helps to stay lucrative when there is drop in price for their products compared to its
rivals. Bhp Billiton has substantial resources in case of equipment, skilled manpower and
the best of the location to extract resources hence make it harder for the buyer to switching
to other firms. A firm takeover their rivals firm on their battle to gain market share in this
industry. The presence of high exit barrier for existing mining firm strengths the
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competition among rivals. These all factor results in having moderate to the strong strength
of the force and makes a highly competitive industry.
2. Bargaining power of Supplier of Mining industry-lower to moderate
The bargaining power of the supplier can be evaluated by the degree to which it can
influence the supply of requirement to the firm. Bhp Billiton has more than 60000
contractors as a supplier of skilled labor, materials, transportations (ships, rails, roads) and
the energy source. Since one of their strategic objectives is to focus on low cost and
effective operations of projects which generates higher returns, the overall supplier has
increased (Andrew Mackenzie, 2017). The presence of no good substitute and increase in
demand have given higher bargaining power to the supplier. At the same time available for
the abundant amount of supplier, no chance of backward integrations and being the major
customer, it creates a weak bargaining power for the supplier. Bhp Billiton's unique method
of forming partners with their supplier gives them sustainable support and maintain a better
supply chain performance. The competitive force is low to moderate in case of bargaining
power of supplier.
3. Bargaining power of Buyer for Mining Industry-Weak to moderate
The bargaining power of buyer in case of BHP Billiton is weak to moderate
because they are not sensitive to price change due to increase in demand for natural
resources. The presence of less supplier and standardized goods at large amount makes
switching cost relatively low. The ability to produce differentially advance products like
natural resources at large amount is also reduces the bargaining power of the buyer as it
has a higher percentage of their purchase, making them dependent on the supplier. of the
other objective of the firm is to create a long-term relationship with its customer through
direct supply agreements gives the buyer a slight moderate bargaining power.
4. Threat of Substitution Products from other industry-Weak
The thread of substitute for the natural resources is relatively weak because they
are rare raw materials and there is very less substitute for them. Only fossil fuel like
petroleum and coal have electric energy as few substitutes. Bhp Billiton has a low thread
from substitute due to its diversified resources and growing demand for them. Switching
cost for the buyer is also high because they constitute a large amount of their purchase.
5. Threat of potential New Entrance to the Mining Industry- Weak to moderate
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The presence of diversified resources, low cost, expandable and upstream assets
delivering created a long-term value for Bhp Billiton which is very hard for any new
company to achieve hence there is a high restriction to enter this industry and compete
globally. The lowering demand for iron from China is dropping the price of the
commodity which is also creating a barrier for new entry (Els, 2017). The huge capital
requirement and an efficient distribution -dealer network against an established firm is
very difficult to form a new entrance. Thou there are many new companies in this mining
industry, but the level of Bhp Billiton is still high to face the threat.
Overall Result of Porter's Five Forces Analysis

Figure 2: Result of Porter’s Five Forces for BHP Billiton

After analyzing all the Porter five forces of the mining industry of Australia we can say
that they have high entry barrier for a new entrance, weak to the moderate position of supplier and
buyer's, fewer threats of substitution products and strong rivalry among competitors. These all
results to earn high profits and huge returns on investments hence making the industry
attractive.BHP Billiton ability to work with long-term investment goals in the attractive industry
is its main competitive advantage which has resulted in the creation of US$5.9 billion as of Nov
2017(BHP Billiton LTD, 2017). They have been able to bring a sustainable and positive difference
to the society as a whole through their performance and in serving their stakeholders.
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Strategic Group Mapping

It is a technique to understand the competitive positions of different companies within an
industry. It helps to analyze a company's position among its rivals mainly their close rivals which
exhibits similar strategy. It also identifies the close rivals within the same strategic approach. In
the group map below, we have used the recent ranking of global mining industries. The two
variables we have taken are the amount of market capital value generated and category of the
market for the diversified mining companies (Els, 2017). all the companies listed below are
focused on diversified natural resources globally. Within their diversified market, the group
belongs to different levels of mining capacity. According to this analysis, BHP Billiton belong to
the highest position in the mining market and generates high value among its only competitor RIO
Tinto. This high market represents an oligopolistic market which has high entry barrier from
another level of the market. Glencoe and vale generate moderate level of value from its mining
activity and falls under a moderate level of capacity to produce natural resources. lastly, we have
Ma'aden and Anglo American which generates the lower level of value from its diversified mining
operations and falls under a lower level of capacity production.

Value ($ Billion)
High-

BHP Billiton
RIO Tinto

Moderate- Glencore Vale

Ma'aden
Anglo American

LOW- South32
Teck Resources

Low Moderate High

Diversify

Figure 3: Strategic Group Mapping

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Internal Environment Analysis

Resources of BHP Billiton
Tangible Resources
1. More than 100 natural resource producing assets in 35 countries and considers its portfolio of
assets to be dynamic (Roy).
2. The company employs more than 60000 employees and also engages the services of 61000
contractors’ worldwide. And BHP Billiton describes, people are their most precious resources
(Roy).
3. Other fixed assets - 2016 (Million USD)
Table 1: Fixed Assets

Land & Buildings $8,762

Plant & Equipment $48,361
Other mineral asset $21,069
Assets under construction $14,502
Exploration and evaluation $1,378
Net Book value $94,072
(BHP Billiton, 2016)

Intangible Resources
1. The knowledge and skills of the human resource.
2. Intangible Assets (AUD)
Table 2: Intangible Assets

2015 2014 2013 2012 2011 2010 2009

6.47B 6.2B 5.01B 1.15B 763M 808M 945M
(BHP Billiton | Intangible Assets)
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Intangible Assets (Million AUD)

7000
6000
5000
4000
3000
2000
1000
0
2009 2010 2011 2012 2013 2014 2015
Figure 4: Intangible Assets

Capabilities of BHP Billiton

1. World class assets (resources) helping them to extract natural resources efficiently.
2. BHP Billiton manages its assets in the most effective and efficient way to generate profits, fund
new investments, contribute to national economies and share benefits with employees,
suppliers, partners and shareholders (Roy).
3. Operating large, long-life, low-cost, expandable, upstream assets diversified by commodity,
geography and market (BHP Billiton, n.d.).
4. Though mining industry is one of the most dangerous industries, yet BHP Billiton produces
minerals with the lowest work-related fatalities and injuries. In 2016, their total recordable
injury frequency (TRIF) was 4.3 per million hours worked (BHP Billiton, 2016).
5. They have technologies to produce minerals with lower cost.

Core Competencies
We find out the core competencies through four criteria tests of Valuable, Rare, Costly to
Imitate and Non-substitutable.

Valuable: BHP Billiton is capable of producing minerals effectively and efficiently than their
competitors (Roy). And due to their upgraded technology, they can produce at a lower cost, so
BHP Billiton has passed the first test.
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Rare: People are their most precious resource, and this is rare for the rivals. Besides they are
following low cost technology for collecting and producing minerals which are also rare so BHP
Billiton has passed in the second test.

Costly to Imitate: The human resource BHP Billiton has recruited and the technology BHPB is
using is unique so that it will be costly for the rivals to copy. BHP Billiton also passed in third test.

Non-substitutable: The machineries that BHP Billiton is using are non-substitutable for the rivals.
BHP is already using the high-class resources to underpin future generations of growth. So, BHP
Billiton has passed in forth test.

Competitive Advantage
1. Large scale operations which results in relatively lower unit production cost.
2. Diversified operations which produce different types of commodities to hedge against market
price movements.
3. Operations in many parts of the world to reduce supply chain costs
4. More than 100 natural resource producing assets.

Value Chain Activities

Value chain analysis facilitates the physical illustration of several processes for BHP
Billiton, which are involved in the mining, and extraction of raw materials and concluding the
procedure by rendering the final product.
Primary activities: Facilitating the arrangement for inbound movement of minerals, metallurgical
coal, silver, irons ore, manganese from the mining site to the manufacturing units. The functions
and operations of BHP Billiton are concentrated on administrating the process, which converts the
inputs of raw materials in to the output of finished goods (Value chain, n.d.).
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Figure 5: Value Chain of BHP Billiton

The picture above shows the value chain activities of BHP Billiton.
Supportive activities: This process consists of procuring the raw materials such as metallurgical
coal, silver extracts, iron ore, diamonds, and manganese from the mining sites to the manufacturing
unit where plants and equipment are located. The technological unit in collaboration with the
manufacturing unit is concerned with pertaining the equipment such as the hardware, software and
technological knowledge which is introduced by BHP Billiton in converting those inputs into
finished goods. BHP Billiton is well supported by the activities such as accounting and finance
controlling the public relation and the quality (Value chain, n.d.).

SWOT Analysis
The world at present is intensely competitive. The competition is so intense that it's getting
difficult for the businesses to compete against the prevailing competition. Businesses are analyzing
their position in the global market very frequently to establish their position in the competitive
battle. Often the businesses opt to conduct their business functional and operational analysis to
determine their strengths and weaknesses. SWOT analysis is a suitable marketing strategy used to
analyze an organization's business strengths, weaknesses, opportunities, and threats. SWOT
analysis enables an organization scrutinizes its prevailing external and internal issues. These
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evaluations are then furthered used to make appropriate changes and amendments so stay ahead in
the race and also will translate conclusions into strategic actions so that the company can execute
opportunities and defend against threats.

Strengths
Diversification:
BHP Billiton is one of the most renowned companies when it comes the portfolio of the
natural resources. The company supplies various resources including copper, uranium, lead, silver,
etc. It also produces iron ore, metallurgical coal, and manganese on a large scale with operations
spanning Australia, South Africa, and Brazil. It has worldwide operations The Company is a
provider of thermal coal which is used in the electric power generation as well as general industry
concerns.
Strong Financial Performance:
BHP Billiton has manifested a strong financial return to its stakeholders through aggressive
capital buy back campaigns. The solvency rations, profitability ratios also exhibit a strong hold on
the market. The credit rating of the company also proves the credibility of the company in terms
of its financial performance.
International Presence:
BHP Billiton has its operations across eight countries in Australia, South Africa, USA and
South America. This, in turn, has enhanced the international image of the country, thus
differentiating it from the competitors.
Market Positioning:
BHP Billiton is the largest company in Australia when it comes to market capitalization.
This further enhances the faith of its Stakeholders towards the company.
Association with Social Causes:
BHP Billiton is involved in a lot of GSR activities which has enhanced the image of the
company as a whole. This has inculcated a lot of trust towards the company which adds a
competitive edge to the company.
Customer Service:
The company offers a dedicated customer service for its product portfolio and at the same
time pass along price increases to its customers as well.
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Centralized marketing activities

The group's centralized marketing operations increase the efficiency of the marketing
activities with each office managing end to end marketing activities of certain CSGs. Therefore,
efficient logistics capability and expertise in trading and transaction structuring through centralized
marketing activities enhance the group's product offerings.

Weaknesses
Past history of Mishaps
Due to some recent incidents, the company is facing a lot of restrictions by the law of the
land. For example, Acts like Rail Safety Act, etc. have proved to be deterrence in operational
efficiency. These rule and regulations involve enhancing traffic management standards and
suspending all non-essential work outside daylight hours. These have significantly reduced the
efficiency of the operational activities.
Unskilled/ Semiskilled Human Resources
BHP Billiton is facing a dearth of well –trained human resources which is hampering the
pace of the development of the company. The mining sector, especially, is facing efficiency
problems due to lack of skilled human resources.
Corporate Communication
One of the major weaknesses of the company is the communication system of the company.
The efficiency of the staff involved in the corporate communications department is not up to the
mark and can be detrimental to the growth of the company. The company is weak in corporate
communications as the staff is not proactive in responding to corporate inquiries using new media
or making effective group communication with the investors and stakeholders
Opportunities
Mergers and acquisitions
One of the time-tested and proven ways to grow is to collaborate. Thus, there is a huge
opportunity for BHP Billiton to grow in size by mergers and acquisitions. The company can
acquire related small companies and gain a competitive edge both in terms of human and non-
human resources.
Expanding Operations
 19

The Company’s financial position and overall credibility can be exploited to expand the
existing operations.
Global Ventures
Since the company has its presence in a lot of countries, it can collaborate with the local
players there to grow. This will enhance the image of the company in the respective countries.
Innovations in Marketing
In today’s competitive world, it is imperative to constantly innovate in order to survive,
Though BHP Billiton is B2B Company, proper marketing through effective channels are very
important o sustain and grow. The company can further work on strengthening its brand position
by inducing innovative marketing solutions and using new media tools and customer outreach
while marketing natural resources from the company’s extensive assets. This means promoting the
company’s strengths and operations by creating brand awareness amongst its customers.

Threats
Fluctuations in demand:
Since the developing countries like China, India are developing at an ever-increasing rate
by manufacturing in house-the demand at BHP Billiton is increasingly fluctuating. This can prove
to be a major threat to the company. BHP Billiton severely relies upon China’s demand for natural
resources and any global slowdown in world markets could directly impact the sales and
profitability of BHP. The company must work to fulfill demand yet remain financially disciplined
to achieve increasing levels of profitability along with growth in shipments of natural resources
commodities.
Reduction in demand from China
The global commodity market is driven by Chinese demand and a slowdown in the Chinese
economy could adversely affect the prices of commodities. China is a significant consumer of
commodities like iron ore and copper. China's demand for these commodities has been driving
global materials demand over the past decade. Though the increase in commodity demand is a
significant business opportunity for the group, BHP Billiton's exposure to China's economic
fortunes and economic policies has increased. China contributed 19.7% ($9.9 billion) to the group's
total revenues in FY2009.
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Intense competition
BHP Billiton faces intense competition in the metals and mining industry. The metals and
mining industry tends towards concentration. Within each segment, large multinational companies
dominate. Moreover, this is a cyclical industry, which suggests that the current high growth rate is
unlikely to be sustained. Industry margins are susceptible to changes in raw material prices, with
iron ore prices expected to rise in the next few years, and the industry is also vulnerable to rises in
the price of energy, one of its main costs. The group faces competition from Newmont Mining, a
US-based gold producer and Xstrata, a UK-based natural resources company with presence in coal,
copper, zinc, alloys, and other businesses. The group also faces competition from UK-based
ThyssenKrupp. Intense competition in the industry could lead to loss of market share and put
pressure on the group's margins.
Increasing Competition:
BHP Billiton is facing stiff competition from various other organizations like Anglo
American Plc, ExxonMobil Corporation, Chevron Corporation, Nippon Steel Corporation, etc.
This can be proved to be a major threat in the coming years.
Increasing Costs:
The cost of various raw materials used by the company is increasing at a fast rate. This will
further increase the cost of production, which will further decrease the overall profitability. BHP
Billiton is facing threat from continuously rising costs from suppliers, including energy, shipping
and contract labor costs; inflation and labor staffing issues, which are restricting the company
growth and development.
Political Threats:
The threats from the present government, especially after the occurrence of some mishaps,
can prove to be detrimental to the smooth functioning of the company. The company is facing
continuous political threats even in its home country, Australia, as the company has received an
unfavorable ruling from the government regarding infrastructure access and the political dynamics
of being on the ‘right side’ of issues cannot be underestimated.
Environmental issues
BHP Billiton is one of the major producers of energy-related products such as energy coal,
oil, gas, liquefied natural gas, and uranium. Energy is also a significant input in the group's mining
 21

and processing operations. The carbon dioxide (CO2) emissions from fossil fuel-based energy
consumption contribute to global warming, greenhouse effects, and climate change. Many
governments have introduced regulatory changes to address the impacts of climate change. BHP
Billiton's petroleum assets in the UK are currently subject to the EU ETS. To address climate
change, the Australian Government has announced the introduction of a national emissions trading
scheme by 2010 and a mandatory renewable energy target of 20% by the year 2020. In other
regions, the current and emerging climate change regulation could affect energy prices, and
demand and margins for carbon-intensive products. The compliance costs and in some cases
remedial costs could increase the group's operational costs which in turn could affect its operating
margins. Consequently, these regulatory mechanisms could adversely impact the cost, production
and financial performance of the group's operations.

Case Analysis
1) What indicators would you use to measure up BHP Billiton’s corporate governance
performance?
Answer:
Corporate Governance: Corporate governance is the system of rules, practices and processes by
which a company is directed and controlled. Boards of directors are responsible for the governance
of their companies. Corporate governance essentially involves balancing the interests of a
company's many stakeholders, such as shareholders, management, customers, suppliers,
financiers, government and the community. Since corporate governance also provides the
framework for attaining a company's objectives, it encompasses practically every sphere of
management, from action plans and internal controls to performance measurement and corporate
disclosure. The shareholders’ role in governance is to appoint the directors and the auditors and to
satisfy themselves that an appropriate governance structure is in place. The responsibilities of the
board include setting the company’s strategic aims, providing the leadership to put them into
effect, supervising the management of the business and reporting to shareholders on their
stewardship. Corporate governance is therefore about what the board of a company does and how
it sets the values of the company, and it is to be distinguished from the day-to-day operational
management of the company by full-time executives (M. Grant, 2011).
 22

Indicators to measure BHP Billiton’s corporate governance performance:

Let’s see the corporate governance system of BHP Billiton to understand the performance of BHP
Billiton’s corporate governance. The performance indicators are as follows:

The Board of Directors: The board of directors is the primary direct stakeholder influencing
corporate governance. BHP’s directors are elected by shareholders or appointed by other board
members, and they represent shareholders of the company. The board is tasked with making
important decisions, such as corporate officer appointments, executive compensation and dividend
policy. In some instances, board obligations stretch beyond financial optimization, when
shareholder resolutions call for certain social or environmental concerns to be prioritized. BHP’s
board is comprised of inside and independent members. Insiders can be major shareholders,
founders and executives. Independent directors do not share the ties of the insiders, but they are
chosen because of their experience managing or directing other large companies. Independents are
considered helpful for governance, because they dilute the concentration of power and help align
shareholder interest with those of the insiders. According to BHP Billiton’s annual report 2017,
the board has 11 members, including the CEO. BHP has four key Board Committees whereas the
Sustainability Committee being critically important for mining industry. The average tenure of
directors is four years and four months. The board is committed to ensuring a majority of directors
is independent. The board considers all of the current non-executive directors, including the
Chairman, are independent which is 9 out of 11. Only 2 boards of directors are dependent. On
other hand, the board has 3 female directors on board which accounts for 27% of the total board
members. Moreover, BHP has an aspiration to achieve gender balance across BHP’s workforce by
2025, and board diversity remains a focus (BHP Billiton, 2017).

Making the shareholders Happy: BHP Billiton Limited has around 6,000,00 shareholders where
around 30% is corporate owned and 70% is private owned. The BlackRock group is the substantial
shareholder, which owns only 5% of total shares of BHP Billiton Limited. The board treats both
arms of the company as a single unified economic entity. All economic decisions affecting
shareholders of either arm of the company are based on the observation of certain predetermined
dual-listed company equalization principles. These principles are designed to ensure that –for as
long as the equalization ratio between a BHP Billiton Limited share and a BHP Billiton share 1:1-
 23

the economic and voting interests resulting from the holding of one BHP Billiton Plc share. In
other words, all decisions taken by the board of directors that affect shareholders have to be
formulated on the basis of a principle of matching actions at either end. Take for instance a
recommendation of dividend payments. This will affect shareholders of both arms. The company
annual report states that the amount of any cash dividend paid by BHP Billiton Limited in respect
of each BHP Billiton Limited share in Australia is normally matched by an equivalent cash
dividend by BHP Billiton Plc in respect of each BHP Billiton Plc Share and vice versa. However,
in a situation where one arm of the group has insufficient profits or is otherwise unable to pay the
agreed dividend, BHP Billiton Limited and BHP Billiton Plc will, as far as practicable, enter into
such transactions as are necessary so as to enable both arms of the company to pay the same amount
of pre-tax dividends per share to their respective shareholders (M. Grant, 2011)

3) Transparent Senior Executive Remuneration System: BHP Billion has productively

implemented the formulation of senior executive remuneration packages for senior
executives. The senior payment method corresponds with the corporate governance
requirements suggested in both the Australian and the London stock exchanges. The fact is
the corporate governance rules and regulations are very strict and different in both stock
exchanges. In response to this situation, the company has prepared a new remuneration
system where a senior executive’s remuneration will comprise 40 percent from base salary
and the rest 60 percent will come from his/her performance, which is also known as “risk
pay”. Risk pay is usually paid out as annual bonuses. A matching 50 percent of the risk pay
amount is paid by the way of deferred shares or share options with a 2 years maturity time.
However, some companies may find the company’s senior executive pay model to be
complicated. Having said that the payment policy does meet the governance standards that
will raise no questions in shareholder or stakeholder forums (M. Grant, 2011).
4) Dealing with environmental challenges in stakeholder communities: The nature of
operations in the mining sector creates a series of governance issues closely linked to the
natural environment and stakeholder communities. With changing times, BHP is facing
additional requirements and expectations laid down by certain international organizations
such as the Organizations for Economic Co-Operation and Development (OECD). The
OECD’s corporate governance principles and expectations have changed over a period of
 24

time and have become more specific and inclusive of shareholder rights. The recent OECD
Principles of Good Corporate Governance (2004) included two significant governance
principles: ’Protection of shareholder rights’ and the ‘role of shareholders in corporate
governance’. These two principles drive the many governance challenges for BHP Billiton
more particularly because the company is involved in mineral extraction and production
operations that may have an impact on the environment, climate change and global
warming- all compelling stakeholder issues. Thus, corporate governance for BHP Billiton
is no longer just a matter of compliance with the stock exchange listing requirements,
compliance with laws pertaining to accounting and auditing standards, and appropriate
treatment of shareholder and investor issues. It now potentially extends to general
stakeholder issues that arise as a result of the company’s operations or actions. BHP Billiton
responds to the OECD’s corporate governance principles by incorporating the interest of the
stakeholders’ first and BHP Billiton is continuously working and the company’s perception
of its commitment to stakeholders. Throughout the years, BHP Billiton is appreciated and
awarded by many organizations for their commitment to stakeholders and the environment.
For instance, they are ranked “best in class” for its environmental and social performance
among 21 mining corporations according to Dow Jones Index. BHP Billiton is best known
for their best practice standards with a 5-star ranking according to WHK Horwath. There are
also some criticisms for BHP Billiton regarding environmental obligations exhibited by BHP
Billiton in recent past. The fact is, as they are in mining industry, dealing with environmental
issues are always going to be a weak link in their corporate governance system (M. Grant,
2011).

Question 2) What is the link between BHP Billiton’s strategy drivers and the company’s
corporate governance agenda?

Answer: BHP Billiton’s corporate governance’s agenda are deeply embedded in its core of strategy
drivers. The corporate agendas like stakeholders; ethical practices and social legitimacy play a
vital role in shaping up the strategy drivers of BHP Billiton. The major corporate agendas are as
follows:
 25

1) Stakeholders: The management at BHP Billiton have expressed their commitment to

company’s stakeholders as a part of the governance process. The company has framed
policy statements pertaining to stakeholders specially. These are stated within the
company’s operating policies and principles, publicly available on their website, in its
charter and within its annual report. The most of such statements appear in BHP Billiton’s
2017 annual report:
“Our social license to operate depends on our ability to operate all aspects of our
business responsibility, including our ability to work effectively with our host
communities.” (BHP Billiton, 2017).

This table illustrates the stakeholders of BHP Billiton:

Figure 6: Stakeholders of BHP Billiton

2) Public Commitment to Ethical Practices: BHP Billiton has made public commitment to
ethical practices in every stage of its business operation. For instance, BHP Billiton has
signed UN Global Compact, which have significant ethical governance implications for
BHP Billiton’s mineral extracting operations. According to UN Global Compact’s
principle 1 & 2, BHP Billiton supports and respects human rights within their sphere of
influence. And BHP Billiton ensures that they do not become a party to human rights
abuses and are not complicit in any situation of human rights abuse. There are no
international laws that oblige corporate to respect human rights, but the united nations
committee on transnational corporations has developed a code of conduct that places
responsibility on companies to ensure that they respect human rights. For instance, a
 26

company faces stakeholders’ protest by calling security agencies or government security

forces to protect company’s employees and assets, the company is responsible for the
action of those security agencies and forces. For this kind of acts, the company becomes
'complicit in human right abuse’ and is responsible to comply with the agencies or forces
to give fundamental rights to protect the stakeholders who have faced a human rights
abuse. BHP Billiton has an ethical business code of conduct that upholds the human rights
and protects the stakeholders’ interest first. The company evaluates the success not only
on financial measures but also based on its contribution to the community where it operates
(M. Grant, 2011).

3) Social Legitimacy: One of the significant governance policies of BHP Billiton is seeking
social legitimacy everywhere it exists. They respect the communities' norms and values at
the same time ensuring safety of the both people and environment. The safety of the people
has been one of the most important even more than financial profits. In order to reflect
their commitments towards safety, they introduced a series of five-year safety, health,
environment and community targets in 2007. Mining industry is one of the most hazardous
industry but BHP Billiton has set targets of 'zero harm' to eliminates any type of work
related injuries. According to company's 2017 annual report, it reveals that it has
experienced lower injury frequency rate and fatalities in comparison with previous years.
Moreover, BHP Billiton is also working towards reducing the greenhouse gas emission
and carbon-based energy use on per unit of production. On the other hand, the company is
further facilitating the rehabilitation of land that is no longer suitable for mining, which is
one of the major issues stated by stakeholders (M. Grant, 2011).

Based on these above agendas the company have come up with six strategy drivers that links
corporate agendas with good governance commitments. The six drivers are: -
1. People: BHP describes people as the foundation of its business and its most precious
resource. It is company's people that find and develop resources, operates its business and
delivers its product to customers (M. Grant, 2011).
 27

2. License to operate: BHP aims to ensure that the communities that host its operations value
the contributions of the company. It emphasizes the win -win relationships and partnerships
that respects, and benefits health, safety the natural environment and the community (M.
Grant, 2011).

3. World-class assets: Company aims to manage its assets in a most effective and efficient
way to generate profits, fund new investments, contribute to national economies and share
benefits with all the stakeholders (M. Grant, 2011).

4. Financial strength and disciplines: BHP's capital management program priorities

investing in projects those with attractive rate of return (M. Grant, 2011).

5. Project pipeline: BHP is focused on new high-class resources to underpin future

generations of growth (M. Grant, 2011).

6. Growth options: BHP pursues growth through exploration, technology and its global
footprint (M. Grant, 2011).

Question 3: How is senior executive remuneration determined at BHP Billiton?

Answer: BHP Billion has the same senior executive remuneration packages for senior executives
working in both Australia and UK to ensure equity in senior executive payment in relation with
the corporate governance requirements recommended in both the Australian and the London stock
exchange. However, in both places the corporate governance rules and regulations are both very
strict and different at the same time from each other. As a result, the company had to prepare a
sound executive remuneration formula that would comply with corporate governance of both
countries without attracting shareholder or stakeholder criticisms. In response to this situation, the
company has tackled the task very effectively by introducing a new remuneration system that is
based on the performance of the senior executives mostly. According to the new remuneration
package, a senior executive’s remuneration will comprise 40 percent from base salary and the rest
 28

60 percent will come from his/her performance at workplace, which is also known as “risk pay”.
The base salary depends on scope of the job, experience and market comparisons whereas risk pay
is based on a number of performance measures or “value drivers”. The risk pay is usually paid out
as annual bonuses. A matching 50 percent of the risk pay amount is paid by the way of deferred
shares or share options that are to be held for a period of two years before they can be vested. This
remuneration formula has also pre-empted costly severance packages in cases of non-performance
and termination. Above all, the senior executive’s payment formula at BHP Billiton is transparent
and can be defended in public domain. However, some companies may find the company’s senior
executive pay model to be complicated. Having said that the payment policy does meet the
governance standards that will raise no questions in shareholder or stakeholder forums (M. Grant,
2011).
The benefits of this payment procedure are as follows:

 The salary payment for senior executives is based on their work performance mostly which
will lead to more productivity and urgency from the executives’ end

 This remuneration system will save money for the company as executives are being paid
what they deserve.

 As executives’ shares take at least 2 years to mature, it will most likely to engage executives
for long-term commitment with the company

 No payment discrimination and discrepancy among senior executive’s remuneration in

both countries

 The remuneration system for senior executives is transparent and validated by corporate
governance of both Australia and UK.

 BHP Billiton can avoid costly severance payments to the senior executives in terms of
termination due to non-performance.
 29

 And shareholders or stakeholders are content with the policy as it ensures accountability in
payment of senior executes

Conclusion
Conclusion: BHP Billiton's corporate governance is transparent, and it upholds
accountability in all of its business processes. Strong public (stakeholders) commitments for
ethical practices make BHP Billiton standout among its competitors. The board of directors is
independent in their way of governing the corporation. And BHP Billiton is concerned about
maximizing shareholders’ return on investment in the form of dividends. And everything they do
for example dealing with- People, License to operate, World-class assets, Financial Strengths,
Project Pipeline, Growth Options are built on the foundation of its commitment towards-
stakeholders public commitment to ethical practices and social legitimacy.
 30

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