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Case Of BHP Billiton : Corporate Governance

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Question:

Discuss about the Case study of BHP Billiton for Corporate Governance.
 
 

Answer:

Introduction

Corporate governance is a wide-term that incorporates the rules, policies, systems and processes that an organization adopts and implements in its workplace for carrying out its business operations effectively. The main objective of organizations behind the implementation and adoption of a governance framework is to develop a common set of guidelines that directs corporate behavior and ensures its sustainability. The corporate governance system of an organization aims to strengthen the relationship with its stakeholders thus ensuring its long-term growth and development. The development of an appropriate internal governance system is necessary for business organizations to maintain accountability in its operations and minimize the chances of risk occurrence (Corporate governance in Australia, 2003). In this context, the present report aims to analyze and examine the corporate governance practices of BHP Billiton by the application of the relevant concepts, standards and other guiding principles of corporate governance.  The report also proposes some recommendations for the company for strengthening its corporate governance system.

Brief Description of the BHP Billiton

BHP Billiton is the Australian company and it is one of the largest resource companies in Australia. It was incorporated on 13 August, 1885 and the main activities of the company are exploration, mining, development, processing, production, marketing and production of different minerals. Some of the major minerals that company explores and mine are iron ore, potash, silver, nickel, uranium, manganese, aluminum, copper, coal etc. Apart from these activities company is involved in the process of development, production and marketing of conventional oil and gas in different parts of world (Company Profile, 2016). Corporate governance at BHP Billiton is taken as most important function and every activity is purely accounted and reported to management.

BHP Billiton is committed to follow the highest level of governance and aims to promote foster environment through involving ethical standards, corporate integrity, personal behavior and respect to others. All the directors work independently to provide unbiased report to the stakeholders so that clear and fair picture of company performance can be seen. Functions and areas of directors are clearly defined and every single step is taken to avoid any regulatory issues. Company has clear set of corporate standards derived from the best class of standards provided by the corporate governance body. Each global function and marketing by BHP Billiton has clear accountability that is approved by the assigned executive directors. In short it can be said that BHP Billiton follows all the parameters that are required in corporate governance reporting (Governance, 2016).

 

Criteria for the review of BHP Billiton Corporate governance

Australian government has identified and adopted the best practices of corporate governance for business organizations with the development of ASX Corporate Governance Council. ASX governance council holds the responsibility of ensuring the presence of an effective governance system in Australian corporations (ASX Corporate Governance Council, 2014). It has established some core principles that underline good corporate governance system for a business organization that are as follows:

  • Developing Solid Foundation for the Board and Management: Australian corporations should develop and disclose respective roles and responsibilities for board and management. This implies developing solid foundations for management and board of directors by establishing a clear difference between the business functions of the board and the management (Corporate governance in Australia, 2003).
  • Effective Structuring of the Board: Businesses should form an effective composition of the board with uniform size and is committed adequately to discharge its duties and responsibilities. This indicates that board members should be independent of each other roles and responsibilities such as there should be independent directors, chairman, executive officer and nomination committed (ASX Corporate Governance Council, 2014).
  • Integrating ethical and responsible decision-making: In this context, business organizations are required to develop their Code of Conduct that establishes their legal obligations and responsibilities towards the stakeholders. The Code of Conduct developed by a business organization also lays foundations for the nature of relationship existing between board, management and other operational employees (Corporate governance in Australia, 2003).
  • Protect Integrity in Financial Reporting: Businesses should have an adequate structure to promote and protect integrity in their financial reporting. This can be achieved by business organizations by developing an audit committee that comprises of indent directors, non-executive directors, independent chairman and at-least three other members. The audit committee holds the responsibility of safeguarding integrity in financial reporting of a business firm (ASX Corporate Governance Council, 2014).
  • Timely and Balanced Disclosure of Information: Business organizations are required to disclose all the materialistic information regarding its operations timely. This requires for business to develop written policies that mandates the senior executives to develop and communicate the material information regarding its activities to all the stakeholders regularly (ASX Corporate Governance Council, 2014).
  • Protecting Shareholder’s Rights: Businesses should develop proper communication channel to disclose all the important facts and figures to its shareholders for encouraging their participation in the decision-making practices. This will help the businesses to maintain accountability in their operational activities and gain the trust of all its shareholders (ASX Corporate Governance Council, 2014).
  • Effective Risk Management: Business organizations should establish an effective system for identifying and mitigating the risk. This can be achieved by businesses by developing and implementing an internal control system that manages all the materialistic risk related with its operational activities. The internal control system is necessary for business organizations to identify any type of risk in advance so that prevention strategies can be implemented to eliminate its occurrence (ASX Corporate Governance Council, 2014).
  • Fair Remuneration: Businesses should ensure that the level and composition of remuneration is sufficient and it is in direct relation with the performances. This can be achieved by business organizations by developing a remuneration committee that establishes the remuneration of executive, non-executive and senior management. (ASX Corporate Governance Council, 2014).
 

Critical review of the organization’s governance applying the ASX Corporate Governance Principles

BHP Billiton is committed to highest level of performance with implementing an effective corporate governance system. It has strived to develop a work culture that is based on the ethical standards, corporate integrity and respect or others (BHP Billiton, 2016). In accordance with ASX listing rule, BHP Billiton has clearly distinguished the roles and responsibilities of the board and the management. The Board is appointed by the shareholders and is uniformly composed. It consists of majority of non-executive directors who carry out their roles and responsibilities independently and does not hold any responsibility with other groups of people who can influence their decision-making process. The Board maintains an appropriate balance between non-executive and executive directors for maintain the shareholder interests. Directors of the group should possess the qualifications of honesty and integrity and are committed to highest standards of governance (Board Governance Document, 2016). The board holds the responsibility of reviewing the skills and Competencies’ of each of its member and should determine whether the composition of these skills is in accordance with the corporate purpose. BHP maintains independence of directors by ensuring that majority of the board members are independent and also all the members of risk, audit and remuneration committee also conducts their responsibility in an independent manner. The Board holds the authority of maintaining independency of directors from the management, shareholders group and administrator and ensuring that all directors take independent judgment on the board decisions (Board Governance Document, 2016).

BHP Billiton has also developed its unique Code of Conduct to act ethically and responsible in its decision-making practices. The company’s ‘Code of Business Conduct’ develops the standard for conducting its operational activities by providing guidelines to everyone involved in its decision-making process (Code of Business Conduct, 2016). These guidelines govern and monitor the regular work activities of the company by determining the culture and values that each of its employees must adhere to while performing their job role. BHP Billiton encourages the development of a workplace where employees are empowered to participate in the decision-making process. The company’s supervisors and managers holds the responsibility of ensuring that Code of Conduct is followed by employees and they are involved in all the decisions taken by the management. The company also provides a global business conduct advisory service for resolving the queries and issues related to its ethical obligations (Code of Business Conduct, 2016).

The company maintains integrity in its financial reporting system through establishing an audit committee that holds the responsibility of supporting and advising the board regarding the appropriateness of accounting policies and practices (Risk and Audit Committee Terms of Reference, 2016). The committee is responsible for monitoring the effectiveness of internal and external audits carried by the company. It holds the power of implementing changes in the financial reporting framework of the company. The committee reviews and examines the financial statements and other information related to financial condition of the company with management and external auditors to maintain their integration. It provides its suggestions to the board on the matters relating the fairness and balance of annual report so that is understandable and provides all the relevant financial information to all its stakeholders (Risk and Audit Committee Terms of Reference, 2016).

 


BHP Billiton complies with the disclosure obligations through developing a Market Disclosure and Communications Document (Market Disclosure and Communications, 2015). The document contains all the materialistic information regarding the company about its internal processes and the communication strategies adopted by it to interact with shareholders and other market participants. The company has also established its Disclosure Committee that holds the responsibility of ensuring that all materialistic information is reported to the stick exchange according to the listing rules and regulations. The corporate governance framework of the company ensures that BHP provides timely and accurate information about its financial performance, strategies and operational activities to all the shareholders and public in general. In addition to this, the communication policy of the company also protects the rights of its shareholders by providing them all the information regarding the company’s performance. Disclosure officers are obliged to provide all the material information to the shareholders and also ensure that the information discloses is true and not misleading in nay regard. The communication policy of the company also takes into account that any sensitive information is not provided to any third party (Market Disclosure and Communications, 2015).

BHP has also established its independent risk committee to support the Board in matters relating to the occurrence of nay emergency condition. It reviews the major risks faced by the company that can negatively impact its performance and sustainability. The CEO develops effective procedures and standards to be adopted for mitigating the risk identified. The committee also ensures that CEO has implemented an appropriate internal control system to identify, manage and control the risk (Risk and Audit Committee Terms of Reference, 2016). The board has the obligation of maintaining the independency of the risk committee developed for maximizing its effectiveness. The committee will govern that the company has maintained an effective system of internal control over financial reporting necessary for ensuring its sustainability and long-term growth. The risk committee has to also ensure that the company has maintained an effective internal audit committee and carried out its functions independent of external audit committee. The CEO has to present the results obtained through internal control and risk management to the risk committee for enhancing the company’s operational effectiveness. The risk committee develops and implement necessary strategy and standards required for managing and controlling the organizational risks (Risk and Audit Committee Terms of Reference, 2016).

BHP Billiton has also developed its independent remuneration committee for rendering its support to the board members on the issues relating to compensation. The committee is responsible for acting as advisory body to Board in matters related to the development of remuneration policy that decides the compensation offered to senior executives, non-executives and other management people. It also ensures that the remuneration received by everyone in the company is directly related with their performances. Remuneration committee conducts performance evaluation, develops incentive plan and governance responsibilities related to the compensation. The committee does not hold any responsibility of determining the remuneration offered to Chief Executive Officer (CEO), and other members of the Operations Management Committee (OMC).  Thus, on the basis of all the above discussion held it can be stated that BHP Billion has implemented a strong corporate governance framework that is in accordance with ASX corporate governance principles and standards (Remuneration Committee Terms of Reference, 2016).

 

Recommendations

To provide for better corporate governance policies in BHP Billiton following recommendations are provided:

  • It is essential to establish a positive communication channel between management and with all the other stakeholders as investors, employees and other important stakeholders have direct interest with company growth.
  • Company need to recognize that good governance is not a hard compliance but it is something that balances the overall growth of company taking all aspects of social as well as corporate responsibility.
  • It is must to have clear role and strategy for each director so that all activities go smoothly and also help the owners to keep the directors independent.
  • It is duty of directors to pursue and keep a check on the organization performance on timely basis and there should be proper channel for reporting (Corporate governance, 2013).

Conclusion

At last it can be concluded that corporate governance is not only the compliance requirement but it is social reasonability of everyone in the organization. BHP Billiton confers with the corporate governance with applying best practices and standards defined by Australian Stock Exchange. Still there are some recommendations provided above that can help them to make corporate governance stronger.

 

References

ASX Corporate Governance Council. 2014. [Online]. Available at:https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf[Accessed on: 8 September 2016].

BHP Billiton. 2016. Corporate Governance. [Online]. Available at: https://www.bhpbilliton.com/aboutus/ourcompany/governance[Accessed on: 8 September 2016].

Board Governance Document. 2016. [Online]. Available at: https://www.bhpbilliton.com/~/media/bhp/documents/aboutus/ourcompany/governance/160707_boardgovernancedocument_v2.pdf?la=en [Accessed on: 8 September 2016].

Code of Business Conduct. 2016.  [Online]. Available at:https://www.bhpbilliton.com/aboutus/ourcompany/codeofbusconduct[Accessed on: 8 September 2016].

Company Profile. 2016. [Online]. Available at: https://www.reuters.com/finance/stocks/companyProfile?symbol=BHP Accessed on: 8 September 2016].

Corporate governance in Australia. 2003. [Online]. Available at: https://www.ecgi.org/codes/documents/asx_recommendations.pdf Accessed on: 8 September 2016].

Corporate governance. 2013. [Online]. Available at: https://corporategovernance.dk/sites/default/files/recommendations-ebs-12401-rapport-selskabsledelse-uk-5k-nov-2014.pdf Accessed on: 8 September 2016].

Governance. 2016. [Online]. Available at: https://www.bhpbilliton.com/aboutus/ourcompany/governance Accessed on: 8 September 2016].

Market Disclosure and Communications. 2015. [Online]. Available at:https://www.bhpbilliton.com/~/media/bhp/documents/aboutus/ourcompany/governance/150601_marketdisclosureandcommunications.pdf?la=en[Accessed on: 8 September 2016].

Nomination and Governance Committee Terms of Reference. 2016. [Online]. Available at:https://www.bhpbilliton.com/~/media/bhp/documents/aboutus/ourcompany/governance/160707_nominationandgovernancecommittee_v2.pdf?la=en[Accessed on: 8 September 2016].

Remuneration Committee Terms of Reference. 2016. [Online]. Available at: https://www.bhpbilliton.com/~/media/bhp/documents/aboutus/ourcompany/governance/160707_remunerationcommittee_v2.pdf?la=en [Accessed on: 8 September 2016].

Risk and Audit Committee Terms of Reference. 2016. [Online]. Available at:https://www.bhpbilliton.com/~/media/bhp/documents/aboutus/ourcompany/governance/160707_riskandauditcommittee_v2.pdf?la=en[Accessed on: 8 September 2016].

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