The unthinkable has happened: a CEO has taken aim at one of their own. BRW Rich Lister Ivan Glasenberg has launched an assault on outgoing BHP and Rio chief executives Marius Kloppers and Tom Albanese, and he didn’t miss.
Glasenberg, who has amassed a personal fortune of more than $7 billion since taking the reins of Swiss-based Glencore, attacked the spendthrift ways of his rivals, telling investors that Rio and BHP “really screwed up” and that Glencore has “always been wanting to keep building and keep putting the cash which we generate into new assets. That’s what we’ve got to stop doing as a mining industry. We’ve got to learn about demand and supply”.
Glasenberg didn’t stop there, noting he hoped “we are in a new paradigm in the mining industry … that the mining engineers who previously ran these major companies are not just gung ho to build new mines because of what’s happened in the past”.
Let’s hope Glasenberg doesn’t lose his job and want to work for an Australia media company, with the Australian business press being almost universal in their praise for the outgoing Kloppers (and taking a relatively soft line on Albanese).
While Kloppers remains lauded for his supposedly long-sighted and brave move to end long-term iron ore contracts, in favour of a spot price system, this qualifies probably as a “non-disaster”. All that BHP did was effectively remove a hedge which smoothed prices. What most commentators (and apparently Kloppers himself) forgot was that removing a hedge might be beneficial when prices are going up, but when prices are falling, it has the reverse effect. For the half year ending December 31, iron ore profits at BHP fell by 39%, or US$3 billion, as spot iron ore prices slumped.
But that was far from Kloppers’ biggest failing. And to suggest the South African left BHP in better shape than he got it serves to reinforce that most commentators have no understanding of what CEOs like Kloppers and Glasenberg actually do. That is, allocate shareholders’ capital.
When Kloppers arrived at BHP, it was a business with an existing phenomenal set of assets (other than the dud assets that were inherited through the disastrous Billiton merger, which was where Kloppers worked since 1993). Had Kloppers done nothing at all during his time as CEO, BHP shareholders would have been in better shape than now. Most of BHP’s earnings come from iron ore and petroleum, neither of which were boosted by anything Kloppers, and his team of very well-paid executives, did.
Instead, BHP’s C-suite undertook a range of capital destroying initiatives. First, there was the disastrous and ill-timed failed takeover of Rio Tinto. That cost BHP around $450 million in debt costs (not to mention management costs), but would have been far more had the merger actually proceeded. Kloppers then tried to take over Potash Corp but completely failed to read the Canadian political environment, and the acquisition, which would have been a good one, was rejected.
After that came the horrendous decision to purchase Chesapeake’s Fayetteville shale oil assets in the United States for almost US$5 billion. While share gas is expected to be a key source of energy, and a large reason for the US to move from energy importer to exporter, Kloppers and his lieutenant, Mike Yeager timed the acquisition terribly. Within a year, BHP would humiliatingly write off US$2.8 billion from the value of the assets purchased. It takes a very high level of incompetence to destroy so much value in such a short time.
But Kloppers and BHP board proved that they were no one-trick pony. Not long after, BHP decided to proceed with a share buy-back at $40 a share, the problem was, within a year, BHP shares had dropped by almost 25%, costing the company around $2 billion.
Of course, the South African former McKinsey consultant wasn’t a totally “hands off executive” — while he didn’t involve himself in coal mining or oil drilling, he was more than happy to micromanage BHP employees. In 2011, Kloppers demanded that no BHP employee would be permitted to eat lunch at their desk, while post-it notes were required to be removed from keyboards. Apparently, in Marius’ eyes, spilling a tomato on a desk is a bigger danger to shareholders funds than blowing $2.8 billion on the purchase of overpriced shale gas assets.
While perhaps not reaching the heights of destruction that Albanese reached at Rio Tinto, Kloppers should be remembered as one of the worst performing executives in BHP’s history, which was littered with respected business leaders like Ian McLennan and Essington Lewis. For his trouble, Kloppers will leave BHP’s Lonsdale Street headquarters one of Australia’s best ever paid executives.
Kloppers was paid cash salary and cash pensions of $24.8 million. But it certainly didn’t stop there. Kloppers also effectively owns 958,000 performance rights (he owns more, but they won’t all vest), which according to BHP’s own calculations, are worth around $14.5 million. Kloppers also has been handed approximately one million BHP shares and 64,000 deferred shares worth around $40 million. Plus, Kloppers will probably be paid around $6 million in 2013.
That’s a total of about $85 million for five years work and a cavalcade of poor decisions. Glasenberg wasn’t joking when he observed Glencore would hope to “get better returns on our investments, we will be able to kick out more cash to our shareholders”.