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BHP Billiton’s Handling of Brazilian Mine Disaster Essay

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Updated: Jun 28th, 2020

Brief description of the organization

BHP Billiton prides itself as a leading global resources company with strong financial, operational, and strategic performance. The company’s main business activity is the discovery, acquisition, and marketing of natural resources from its exploration and extraction locations around the world. The company seeks to own and operate long-life low-cost assets that it is able to expand upstream and diversify, such that it takes advantage of natural geography and the dynamic opportunities of its markets located globally (BHP Billiton 2015a).

The company’s latest report shows that it has maintained an A+ Standard & Poor’s rating for long-term credit. This is a sign of robust financial management for the benefit of its shareholders. In addition, it has committed US$225 million for its voluntary, community investment, which highlights its commitment to corporate social responsibility. The company also follows tax and transparency regulations of governments where it has operations. Its main businesses are in coal, iron ore, copper, petroleum, and potash (BHP Billiton 2015b).

This report looks at the BHP Billiton behaviour, motivations, principles, and structures of governance, as shown in the way the company handled a mining disaster in Brazil. In 2015, the company’s iron ore mine in Brazil, which is jointly owned by Vale, SA, was severely damaged after a dam in the facility collapsed and let the water wash away most of the village that was beside the dam. Samarco Mineral SA operated the mine in Brazil. Two owning companies were the principal shareholders of Samarco and used it to run the jointly owned mining business. Initial blame went to the running company, but eventually, the blame went to BHP Billiton as the majority owner of the mine. This paper will review the company’s response and accusations against it to show elements of corporate governance and offer recommendations to prevent inappropriate handling of such issues in the future. In the disaster, two states adjacent to the mine were covered in mud and mine waste, such that it was impossible for the inhabitants of the area to access clean water. Their property was destroyed, as well as most of their income sources (Thomson 2015).

Since the disaster, the company has been open about its considerations for changing the model of operating its joint ventures for mining operations. The company runs two models; one works as a shareholder, while a third-party entity runs the mine. The entity operates as a standalone organization whose owners are the partners in the joint venture. In the second model, the company makes an arrangement where it is the direct owner of the mine and still has a separate operator. However, in this case, the operator does not own the mine.

The company was fined 250 million reais, and the fine was payable to the Brazilian environmental agency. The fine was directed at Samarco, the holding company of the mine. This was before federal prosecutors in Brazil started to investigate possible crimes that the company could have made, leading to the disaster. The government of Brazil, through federal and state departments, would sue BHP and Vale for an equivalent of 7.2 billion dollars. In addition, Brazil’s environmental minister also planned to have another 20 billion reais as additional fines and clean up charges for Samarco.

Outline of the bases or criteria for the review of the organization’s governance

The following criteria will be used in reviewing the BHP Billiton governance. The corporate governance reporting requirements for BHP as a public company listed on the Australian Stock Exchange will be reviewed. This will include the company’s corporate governance statement offered in its annual report. The nature of the information provided by the company and withheld information that could be important for analysing the governance criticism of the Brazil disaster will also be the spotlight. The responsibilities of the company’s board and management will be reviewed in relation to the Brazil disaster. This includes the expectation for the management to have risk management and internal control systems for ensuring that material business risks are considered, mitigated or handled appropriately when there are risky events.

A critical review of the organization’s governance

Ethical code and a corporate responsibility statement are expected for a large global corporation involved in business ventures affecting millions of people directly and indirectly. BHP Billiton is required to have a social responsibility, which includes safeguarding lives and ensuring environmental sustainability. Its projects are risks to the environment when disasters such as the dam collapse arise. BHP Billiton has enjoyed many years of admiration due to its corporate actions, which have helped to establish a long-term positive image and reputation (Calderón, Ferrero & Redin 2012).

Following the Brazil disaster, the Australian resource minister, Josh Frydenberg, expressed satisfaction with the company in the way it had handled the dam disaster in Brazil. The minister said that the company’s chief executive, Andrew Mackenzie, had done a good job at demonstrating great leadership during the crisis (Chessell 2015). However, the fact that BHP Billiton was operating the mine through Samarco showed that it might have anticipated such problems and used the strategy to limit blame. In addition, direct fines and costs of handling the damage were directed at Samarco, which could be crossed off in the BHP Billiton financial report as a bad performing subsidiary for the current year. In fact, the remarks about the excellent handling of the crisis of the company’s chief executive were made in the context of recommending BHP Billiton as a worthy company stock for purchase.

Companies with ethical codes usually follow three available guidelines. In the first generation, a company’s ethical code focuses on the legal dimension of corporate behaviour. The main concern is to cover laws and regulations for the business while maintaining strategies for maximizing returns. The second generation has a proactive approach and brings up issues relating to internal stakeholders and the way the company must improve the lives of employees and their facilities. It includes recommendations for education, insurance, pensions, and social security, as well as freedom from harassment at work. The third generation transcends the profit motive.

It enhances stockholder positions, protects employees, and includes greater consideration for external global stakeholders. It is apparent that for BHP Billiton, the third generation ethics code would be the most appropriate. The company has global operations and is directly responsible for the lives of many employees around the world. In the dam disaster of Brazil, the company’s ethics code was tested on whether it supported the concerns of the people directly hurt by the disaster, as well as the state and federal governments for their role in representing the public interest (Calderón, Ferrero & Redin 2012).

The joint venture company, Samarco, received warnings two years prior to the disaster. The warnings were issued by Brazilian authorities in charge of renewing the license of the company. The company failed to maintain low humidity and good drainage that was required for the waste pile. Thus, the company could be found guilty of failing to meet the technical specifications of its license. If that was the case, the responsibility for the Samarco negligence would go for BHP Billiton’s leadership. The leadership failed to instil the ethics and governance code of the subsidiary company.

The board of directors has the capacity to influence the performance of a company. The board plays a leadership role in the growth and development of the company’s business interests across the world. It was the authority that approved the establishment of the joint venture with Vale to run Samarco. After the disaster, the board of directors of BHP Billiton expressed its deepest sympathies. The board said that the company was going to offer relevant assistance to Samarco. The board also noted that the CEO would visit the incident site. News reports and the Australian resource minister, when endorsing the BHP Billiton’s approach in handling the crisis, confirmed the visit. From the statement by the board, the main issue was support for Sumarco, but the kind of support was not elaborated. In addition, the company noted that its employees were deeply affected and would receive full support as the company assisted Sumarco in safely and effectively responding to the tragedy (BHP Billiton 2015b).

Incidentally, BHP Billiton’s report on governance showed that the company did well in complying with regulatory requirements. The company has made positive markings on its corporate governance report content checklist for 2014 in all the relevant categories. The checklist details the group’s corporate governance reporting requirements, which allow it to comply with the Corporate Governance Principles and Recommendations of the ASX Corporate Governance Council in Australia (Billiton 2014).

After the incident and the visit by the group’s chief executive, the company mentioned that it would look into its other arrangements for mining that were similar to Samarco for its own benefit. The real meaning of the statement was unknown, but given the reaction of the company to the disaster, this could be a measure to limit its risk exposure to future fines rather than have a full review of the risk responsibilities that the arrangements have (Onstad 2015). Thus, this is another indication of the company going by the intentions of the management. Given that the management made the statement and the board did not make contrary statements, one can expect that the management makes the main decisions that are approved by the board as a formality, as long as the group has adhered to legal requirements for governance.

The Board of Directors of BHP Billiton is made up of eleven independent directors, who work together with ten group management committee members. The CEO is part of the group management committee. Based on the agency theory, the management may be selfish to oversee other interests of the company. Thus, the board is supposed to initiate mechanisms for monitoring to protect shareholders from the management’s conflict of interest. An example of such consequences of conflicts was revealed in the dam disaster in Brazil. The management was concerned with the improvement of the group’s profits. It focused on expanding operations and increasing the revenue source of the group.

Nevertheless, in doing so, it had the motive of neglecting warnings against its pace. For example, the Samarco case showed that there were warnings two years prior to the disaster (Thomson 2015). Even without warnings, two years would be a sufficient period to do annual tests and audits for risks to determine that Samarco was jeopardizing future earning interest of the company’s shareholders. Nevertheless, the management went ahead with its operations.

Studies have shown that the composition of the board of directors affects the performance of companies. However, Nicholson and Kiel (2007) note that with the increase in studies on the agency theory, there has been an increase in inconsistent results regarding the influence of independently constituted boards on corporate governance and performance. At the same time, when the board considers its main task as the monitoring of management, it limits its focus on other board roles and jeopardizes its overall performance. The board has to monitor, provide access to resources, and offer advice to the management. The advice can come with regular and comprehensive reporting of the management activities. If this does not happen or happens poorly, then the board will likely fail to offer appropriate advice. Nevertheless, it is the duty of the board to survey the management and be knowledgeable about all operations and plans of the company.

The board of director’s statement for the Samarco disaster offers an overview account, instead of giving detailed measures. It highlights the lack of involvement on the board of directors as an opportunity that would have it corrected the management’s bad practices (Nikolic & Erik 2011). Media reports highlighted the plight of the affected people in the disaster. Some of them called for BHP Billiton to take responsibility because Samarco was a name that the group just made up (Thomson 2015). Issuance of statements that showed the shareholders of Samarco were not obligated to act immediately was a failure in the ethics code that these companies abided by.

Nevertheless, when reviewed according to the laws governing their conduct, they could only point blame to Samarco as the company responsible for the disaster. Nevertheless, the company failed short of the public’s expectations when the BHP board failed to take appropriate responsibility other than sanctioning the visit by the company’s CEO to commit funds to disaster management. One reason for this response might be the ten-member group management committee that would likely defend the group’s profit interests at the expense of the ethical responsibility of the company. The structure seeks to ensure the board remains independent of management influence and have the management operate with a distributed leadership framework. However, it can also lead to systematic problems when the management operates like a group that unanimously focuses on profit and company growth (Joseph & McDonnell 2014).

It is evident from the case that having Samarco as the operating company of the mine was a technique used to defend BHP Billiton’s safety record and its environmental and social governance reputation. Nevertheless, the case may inform authorities and governments in different parts of the world about the ills of such arrangements, which may lead to the establishment of laws that hold the parent company responsible for such disasters directly (Tricker 2012). Corporate governance of public companies has to extend beyond issues of insider trading and funds management. The codes of governance that were all adhered to by BHP Billiton were insufficient at this stage to govern companies’ conduct when such companies use proxies to handle risky ventures (Shean 2010).

Recommendations for suggested improvement based on this paper’s discussion

BHP Billiton should review the existing joint venture projects, where it relies on independent companies to run its business. The structure offers information bottlenecks that prevent the group from acting on issues when there is time to do so. Therefore, the firm must take up the initiative, such as coming up with an audit program for its independent joint venture subsidiaries to ensure they adhere to similar codes of governance as the group.

This report has shown that even after paying fines, BHP Billiton will likely face additional reputational costs due to the disaster. While on one part, the company received a good review for the way it handled the disaster, the other part of the review was negative and very critical of the company’s response. Thus, the firm should be making changes to the way it responds to future warnings about its subsidiary companies regarding the risks of the business. The only way to do this is to extend the corporate governance checklist that the company uses for evaluating its BHP Billiton operations to ensure that they cover all its subsidiary joint-venture companies, such as Samarco.

The company should look beyond compliance with corporate governance principles and rules of the countries where it is listed as a public company. It needs to focus on the third generation ethics, where its interests transcend profits and employee welfare. BHP Billiton must consider the impact of its business globally, especially on the environment and welfare of people, depending on the natural resources around its operations worldwide.

Reference List

BHP Billiton 2015a, . Web.

BHP Billiton 2015b, Statement from the BHP Billiton Board of Directors: Samarco Incident. Web.

Billiton, B 2014, BHP Billiton annual report: Corporate governance report – content checklist 2014. Web.

Calderón, R, Ferrero, I & Redin, D 2012, ‘Ethical codes and corporate responsibility of the most admired companies of the world: toward a third generation ethics?’, Business & Politics, vol 14, no. 4, pp. 1-24.

Chessell, J 2015, . Web.

Joseph, J, W, O & McDonnell, MH 2014, ‘The structural elaboration of board independence: executive power, institutional logics, and the adoption of the CEO-only board structures in US corporate governance’, Academy of Management Journal, vol 57, no. 6, pp. 1834-1858.

Nicholson, GJ & Kiel, GC 2007, ‘Can directors impact performance? A case-based test of three theories of corporate governance’, Corporate Governance: An International Review, vol 14, no. 4, pp. 685-608.

Nikolic, J & Erik, J 2011, ‘Boards of directors models and role in corporate governance’, Management, no. 60, pp. 68-75.

Onstad, E 2015, . Web.

Shean, R 2010, ‘Good governance – a tool for better management and outcomes’, Keeping Good Companies, vol 62, no. 4, pp. 196-204.

Thomson, J 2015, . Web.

Tricker, RI 2012, ‘The cultural dependence of corporate governance’, Keeping Good Companies, vol 64, no. 1], pp. 27-31.

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