BHP Billiton de-merger just the ticket for shareholders

Thursday, 21 August 2014  Media Alerts

“When such monsters like BHP Billiton are split up with the prospect of hopefully smaller and more focused boards there is generally shareholder value created,” said the UNSW Business School’s Peter Swan.

BHP Billiton plans to separate some of its assets into a new $14bn metals and mining company in order to simplify its operations. The world's biggest mining firm said the new company will contain the aluminium, coal, manganese, nickel and silver operations, and the new entity, called NewCo, will list on Australia's stock market. However, the proposal still needs to go to a shareholder vote.

“Boards of mining giant conglomerates such as BHP, and Rio, and even possibly News Corp are dominated by ‘independents’ with little knowledge of the business relative to insiders and with little skin in the game,” said Professor Peter Swan in the School of Banking and Finance at the UNSW Business School. “Their ability to manage such huge and diverse undertakings is exceedingly limited and often hugely dysfunctional.”

UK investor groups have already said they are unhappy they will receive shares in a vehicle that will be listed in Australia and South Africa but not the UK. While the split is designed to treat all investors equally this is not always easy to achieve. But the mechanism means UK shareholders who aren't able to hold shares in companies abroad will have to sell, which may weigh on the new company's stock when it starts trading.

Professor Peter Swan said boards focusing on smaller and less complex companies often work better. “Smaller companies typically have smaller and more fleet-footed boards and they often include directors with more direct firm and industry experience and skin in the game.”

Peter Swan added “concerns have been raised about the Chair & CEO combination of David Crawford and Graham Kerr for the new entity. Neither has a direct mining background although both have had experience on the existing BHP board from an accounting and financial perspective. My research indicates that the new board needs to be kept relatively small and should contain people with direct firm & industry experience and preferably with significant shareholdings. To do this properly could involve failing to meet the ASX governance recommendation of a majority of “independent” members bereft of direct firm experience and probably also lacking significant ‘skin in the game’.

For further comment call Professor Peter Swan on 02 9385 5871, or Email peter.swan@unsw.edu.au

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