Corporate Governance and Ethics Mining of Minerals

Question: Describe about the Corporate Governance and Ethics for Mining of Minerals. Answer: Background Of The Company BHP Billiton is an Australian company associated with mining of minerals, metals and petroleum. According to the market values of 2015, it is the worlds largest company related to mining and the fourth largest company in Australia with respect to revenue. Prior to this report, BHP Billiton was Australias largest company in terms of the revenue produced by it. The company was incorporated in the year 2001 as the result of a merger between Anglo-Dutch Billiton and Australian Broken Hill Proprietary Company Limited. The part of the company, which is registered in Australia, is primarily listed on Australian Securities Exchange. The global headquarters of BHP Billiton and its Australian registered office is situated in Melbourne, Australia. During the companys progress from the year 2001 the company has successfully placed bid and acquired control over many of its rival companies such as petro hawk energy, WMC Resources and Rio Tinto Group (Acharya et al. 2013). BHP Billiton operates in over 25 countries around the world in the market of mining, gas production, processing and even production of oil. The company has over 41,000 employees on its list as on March 2016. The company had recorded 250 million barrels of oil, 230 metric tones of ironore, 1.7 Million tons of copper and 40 metric tons of coal (Market Realist 2016). BHP Billiton has a social policy of donating 1% of its three years average profit in programs based on community development. The company has also made US$ 100 million donation to charitable entities. It is one of the 90 companies, which has been authorized to extract and market fossil fuel in the world (BHP Billiton, 2016). Criteria For The Review For the purpose of the review of lackluster performance of BHP Billiton Limited in the recent times, corporate governance principles and recommendations provided by the ASX Corporate Governance Council are used. These guiding principles give eight guidelines for better governance of an organization (Council and Exchange 2014). The first guideline is associated with laying a solid foundation for management and keeping surveillance over its activities. It is the duty of the organization to disclose the duties and role of members of the management committee (Hermalin and Weisbach 2012). The second guideline provides us that the board of the company must be effective and its composition with respect to size and responsibility of properly performing its duties must be adequate. According to the third guideline, the decision-making done by the company should be ethical and rational. The fourth guideline for better corporate governance provides that, the reporting of the companys financial affair must be done by the company with care and the company should have a structure within it to authenticate and protect the integrity of such reports. The fifth guiding principle provides that it is the moral obligation of the company to reveal in a balanced and timely manner, material matters related to the company. Accordi ng to the sixth guideline, it is the moral obligation of the company to protect the interest of the shareholders and provide support for the proper execution of their rights. The seventh guideline of the code provides that the company should create a potent system to detect and deter risks, management issues and for the purpose of internal control. The final guideline of the code provides that it is the legal and ethical duty of the company to pay proper and just remuneration to the employees with respect to the effort given by them towards the company (Council, 2014). The guiding principles provide by The Global Network of Director Institute towards good governance can also be considered for the purpose of reviewing the performance of BHP Billiton limited . These guidelines provide about good governance with respect to organizational culture, responsibilities, independence of directors, disclosure of practices, nomination criteria, leadership, and risk, relationship with management, communication, evolution and remuneration. Both these codes provided by The Global Network of Director Institute and ASX Corporate Governance Council are basic to the success and growth of any organizations. The poor governance of BHP Billiton Limited, which is having a major effect on its growth, can be reviewed and analyzed through comparison with these principles and guidelines. The comparison and application of these principles to that of the poor governance of BHP Billiton Limited will give a better picture of what is going wrong in the company and how it can be amended (ArAs 2016). Critical Review Of The Organization Recently BHP Billiton Limited has been in news due to the low number of production with respect to iron ore. The production of iron ore by the company has reportedly fallen 6% year over year. The production of copper by the company also fell 6% along with petroleum product, which recorded a 15% year over year decline in production (Bocken et al. 2013). According to the production report published by BHP Billiton, limited the CEO of the company Andrew Mackenzie said that the decline in production is was due to unbalancing of the market and the production will improve over the next year and a half. He added that the price of copper and iron have been more fixed than they had assumed and they will continue to meet the demand of the products through their production. According to the chief executive officers and the companys official website, everything is going smoothly for the company. In reality, the future for the company is bleak and low production and lower profits are reflecting it. BHP Billiton Limited has suffered a loss of $6.30 billion until June in the financial year 2016 as compared to the profit of 1.81 billion the company had made a year ago. The environment in the immediate future is expected to stay difficult for the company in the coming years. The growth of the company is assumed to remain low for the rest of the year also. The decision of writing down the companies expensive assets in the previous year also hammed the progress of the company. BHP Billiton had also warned the shareholders that the divided policy adopted by the company is bound to change as a result of the poor condition of the companys progress. As compared to the 124 cents divided per share given by the company in the previous year the company has this time announced only 30 cent per share dividends for the shareholders. The total debt upon the company has also increased 7% as compared to the previous year and has risen up to $26.1 billion (Drexler,Black and Sparks 2015). These disappointing results by the company suggest that there are many internal issues within the company, which are hammering its growth (Wintoki, Linck and Netter 2012). The directors of the company are not acting responsibly towards the management of the long-term success of the company and are being incapable of addressing the needs for the companys proper growth. The constitution of BHP Billiton Limited provides for the independence of directors while taking decisions. However, the decisions taken by the directors of BHP Billiton Limited is not looking convincing and its seems like they are collectively taking wrong decisions which are affecting the growth and progress of the company. According to the principles and guidelines discussed above, the development of the company can only be achieved if the directors of the company take independent correct decisions without influence for any other source (Joseph, Ocasio and McDonnell 2014). The prima faice view of the documents provided by the company through its official website suggests that the company has all areas related to policymaking and strength of the management team covered. However, an in dept analysis of the composition of the management committee of BHP Billiton Limited gives the view that the management of the company is not skilled and capable enough to support the growth of the company in conditions which are not in favor . The corporate governance guidelines provide that the company should have an effective management team and the composition of the board should be adequate to handle the affairs of the company easily and effectively (Nini, Smith and Sufi 2012). The nomination procedure for the board of directors of a company has to clear and transparent to eliminate the existence of any unethical act with respect to nominations. On paper the nomination and appointment of director policies of BHP Billiton Limited is clear and transparent. However, in practice, such norms are rarely followed by the company and the result of such unethical acts are reflecting on the progress and growth of the company. These norms not only help to support the growth of business but also maintain a sense of transparency in the company, which makes the shareholders, and investors feel secure (McCahery, Sautner and Starks 2016). The decisions taken by the directors of the company should be based on accurate information and market conditions; they should have access to appropriate and authentic information about the market and should be skilled enough to understand its conditions. The decisions taken by the directors of BHP Billiton limited is not proving to be adequate and justified enough to improve the present situation in the company. The mining market is hitting a new low point every week and the directors of BHP Billiton Limited are not being able to cope of with the problem condition of the market. This inability to fix the problem is by the directors is eventually reflecting on the poor performance of the company (Tricker 2015). The board should be aware of when to take risk and when to play safe. The given market condition of the mining and petroleum market does not allow for risk, the market is so uncertain that an unplanned risk will most probably result in a loss. The directors of the company should not take risk due to personal ego and competition, such risk is proving to be very harmful for the progress of BHP Billiton Limited and ultimately is making the company and its shareholders bear losses (Khan, Muttakin and Siddiqui 2013). The company was also recently in the news for internal review form the commission on the internal policies of the company though the report provided by commissioner Cole was consistent with the companys internal review , there are many ethical problems going on inside the company which needs to be immediately addressed for the progress of BHP Billiton Limited. It is the responsibility of the board of directors to communicate to the stakeholders and shareholders of the company about the current situation of the company. This information provided by the directors should be correct and authentic (Larcker and Tayan 2015). If the shareholder gets other information from different sources, they will eventually lose their faith in the management of the company. This will also discourage the investors to put their money and trust in the company, which will eventually, hamper the companys progress. The directors of BHP Billiton are not giving proper information to the shareholders and other stakeholders of the company and this is causing a sense of insecurity and is belief between them. This is not only wrong ethically but also will be harmful for the companys progress in the long run (Jo and Harjoto 2012). The board of directors of BHP Billiton Limited should also take the imitative to assess the actions taken by them towards the company, and adequately address any issue which they fine inappropriate. This review of action is not seemed to be happening in BHP Billiton Limited. The directors of the company are making one mistake over another and there is no initiative on their part amends such mistakes made by them. This is ultimately taking the company to a situation where it will suffer more loss instead of recovering (Bovens et al. 2014). The remuneration received by the chief executive officer of the company and other managers who are at an influential position should be clear and transparent to the shareholders. This remuneration should be fair, reasonable and not only motivates the directors and other officers but also work in towards the betterment of the company. The non-executive directors of BHP Billiton also receiving performance based gains; this is not only unethical but also hampering the growth of the company. The financial incentives received by the non-executive directors of BHP Billiton Limited should different to that of the executive officers; they should be more focused on the long-term success of the company (Claessens and Yurtoglu 2014). It is the duty of the board of directors of BHP Billiton Limited to disclose all relevant documents with respect to the companys progress to the shareholders within an appropriate time through the companys website. This keeps the shareholders and the employees motivated which plays an important role in their support toward the company (Brammer, Jackson and Matten 2012). Recommendations BHP Billiton should frame fixed functions for the board and disclose such functions to the shareholder and other employees, for their better performance and accountability. BHP Billiton should disclose the process, which they use to evaluate the performance of the board of directors. This will help the company keep a check on the performance of the board of directors and the shareholder will feel secure about the policies of the company. The majority of the board of directors in BHP Billiton limited should be independent directors. Most importantly, the chairperson of the company should be an independent director. The same individual as at times in case of BHP Billiton Limited should not address the functions and roles of the CEO and the chairperson. It board of directors of BHP Billiton Limited should establish a Nomination Committee which will help in independent and fair nominations. BHP Billiton Limited should establish a code of conduct and take necessary steps to disclose such code of conduct with respect to maintaining the integrity of the company, legal and reasonable expectation of the shareholders and investigation of reports related to ethical issues. The board of BHP Billiton Limited should establish a committee for the companies audit; such committee should be comprised of only non-executive members and the majority of independent directors. The chairperson of the committee should not be the chairperson of the company and such committee must have at least three members. The disclosers made by the BHP Billiton Limited towards its reports must be timely and balanced and must comply with the rules set up by the ASX commission. The board of BHP Billiton limited should establish a remuneration committee and such committee should also like the audit committee be comprised of a chairperson who is not the chairperson of the company and must have at least three members in it. Conclusion Thus, if such recommendations are applied to the governance of BHP Billiton Limited then the company can expect a change towards their growth. The market conditions of the mining and petroleum market are not very progressive in the recent time and combined with the bad governance policies of BHP Billiton Limited the company is suffering from excessive loss during the recent time. Inappropriate decision of the board of directors and lack of their accountability is causing such problems in the company, which needs to be addressed immediately. The shareholder and other stakeholder are losing their faith in the management of the company and this can prove to be disastrous for the growth of BHP Billiton Limited in the long run. 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