Commodity cycle robbed Jac Nasser of a triumphant BHP exit

Despite a global search for Nasser’s heir, the next BHP chair will likely be an internal appointee and perhaps a woman.

Jac Nasser appears before a US House & Senate committee hearing during his stint as Ford chief executive in 2000.

The Jac Nasser era at BHP Billiton will end on a far more sombre note that it began. The way in which the company’s board and management adapted to the seachange in industry conditions that occurred between his elevation to the chair in 2010 and today, however, explains why he will leave on his own terms.

Nasser told last night’s annual meeting in London that, having been urged by his fellow directors to defer his plan to retire from the board last year because of the Samarco tailings dam disaster, he wouldn’t seek re-election at next year’s annual meeting.

BHP will conduct a global search for his successor, although for a number of reasons it is probable that the next chairman of BHP will come from within the board’s existing ranks.

Nasser, the former global chief executive of Ford, was brought onto the BHP board a decade ago by former chairman Don Argus, with whom he’d served on the Brambles board and who saw in him his eventual successor at BHP.

He did succeed Argus, in 2010, during the last two years of the raging China-inspired commodities boom.

Like Argus, an expansionist by nature, Nasser and his board initially oversaw a period of aggressive investment and attempted expansion by former CEO Marius Kloppers that included the failed $US40 billion bid for Potash Corp in Canada and the $US20bn-plus plunge into the US onshore oil and gas sector.

Nasser had been nicknamed “Jac the knife” at Ford after a traumatic but successful restructuring of its business — he made Ford easily the most profitable of the US carmakers — and showed the same streak of ruthlessness at BHP when the cycle turned savagely against the miners in 2012.

Kloppers was gone, replaced by the methodical Scot Andrew Mackenzie, and the focus of BHP shifted abruptly from expansion to a relentless focus on costs and productivity.

There was a deep reappraisal of its portfolio that resulted in assets being sold and, in a major strategic and structural change to its core portfolio of resource assets, the demerger of South32 last year.

That demerger halved the number of assets within the portfolio and has left BHP with a relatively small number of very large “basin” assets. It is a simpler, more manageable group that can more easily transfer skills and processes — and flatten and narrow its management and support structures — across its more focused asset base.

The progressive dividend policy that BHP was so committed to was also reluctantly jettisoned this year as BHP prioritised its financial stability and the preservation of its cash flows over cash returns to shareholders (although Nasser is proud of the $US67bn of capital returned to shareholders since 2006).

As Nasser noted last night, over the decade that he has been on the board, the fundamentals of BHP’s performance have been impressive and, despite the damage caused by the commodity price downturn, the writedowns of its US onshore oil and gas assets and the financial impact of the Samarco disaster have wrought, and remain soundly-based.

It has delivered annualised productivity gains of more than $US10bn since commodity prices cracked. It also has the only balance sheet that has an “A” rating from all three major ratings agencies.

In very difficult external circumstances BHP has ground its way into relatively strong underlying shape even as the commodity cycle — and downturn in prices that has wiped more than $US25bn from BHP’s earnings before interest, tax, depreciation and amortisation in the past two years — appears to have stabilised.

Even if the current general bounce in bulk commodity prices isn’t sustained — there are question marks over the sustainability of the stimulus in China that sparked it — there is a glimmer of upside in oil prices next year, the supply-demand equation in copper will improve steadily towards the end of the decade and the concentrated market for metallurgical coal that BHP dominates provides some support for its prospects.

Samarco will continue to be a lingering issue for BHP, witness the charges laid against more than 20 Samarco executives and board members in Brazil.

BHP’s response to the tragedy — with Vale it is funding the remediation and compensation of the affected communities and publishing of a full and independent expert investigation into the causes of the dam’s collapse — was as responsible and appropriate as it could be in the awful circumstances.

With Mackenzie and his management philosophy now well entrenched and targeting another $US1.8bn of productivity gains this year, Nasser will leave the group in a sound position, even if he might have hoped for a somewhat more triumphant exit.

One assumes that, like Argus before him, he will have some influence over the search for his successor and (despite the global search) that his replacement will probably come from within the existing board.

The chairman of BHP doesn’t have to be an Australian but, given the dominance of the Australian assets within the portfolio and the range of political sensitivities that always surround them (like the West Australian Nationals’ proposal for a big and destructive increase in the state’s taxing of BHP and Rio Tinto’s iron ore production), it is probable that they will be.

Nasser has been proud of his board succession planning, which also points to an incumbent director.

Of the Australians on the board, former Amcor CEO Ken MacKenzie only joined this year — last month — but Malcolm Broomhead, Lindsay Maxsted and Carolyn Hewson have all been on the board for more than five years.

Maxsted may be too committed to Westpac, which he chairs, as it heads towards its bicentennial celebrations next year.

Broomhead, the chairman of Orica and with previous senior executive experience within the resources sector, probably has the most relevant qualifications, although neither Argus nor Nasser had executive experience in the resources sector.

Hewson, with an investment banking background, is perhaps the most interesting candidate, given BHP’s commitment/aspiration to achieving gender balance by 2025 across the entire company, including the board.

Appointing Hewson, a very highly-regarded non-executive, as chair of the world’s largest mining group would certainly send a very strong signal of BHP’s commitment to that objective without, given her qualifications, it being considered tokenism.

The next chairman will face some challenges, given the board’s responsibility for strategy.

Initially it looks like being more of the same — at least several years of continuing to grind away at costs and lowering capital intensity — but there is always an obligation within resource companies to sensibly invest in the future to replenish depleting reserves and generate long-term growth through the industry’s cycles.

BHP’s balance sheet and positive cash flows at the bottom of the cycle and the distressed — or at least stressed — condition of much of the rest of the sector does create opportunities.

Nasser’s successor will have to lead the board and support Mackenzie and his team in deciding when and where best to invest its surplus cash and capital during what remains, and is likely to continue to remain, a very uncertain and unstable global economic and financial markets environment.