There’s quite a decent job going at BHP Billiton; the chance to gain money, fame and influence, in fact, as the next chief executive. Marius Kloppers has signalled (unofficially, natch) that he’s had enough of all three and that he might leave next year, or perhaps the year after that.

This is what passes today for succession planning. Compared to the the treatment meted out last month to Cynthia Carroll at Anglo American (“you’re fired, and stay on until we’ve found your replacement”) Mr Kloppers’ graceful ride into the sunset looks almost civilised, but neither case is satisfactory.

There are, we must presume, some talented people at both mining houses: after all, if you’re a brilliant mining engineer, there aren’t that many big mining houses. Xstrata considers the top cadre so valuable that they are to be paid magnificent bonuses to hold their noses and work for Glencore. That group had included Xstrata’s CEO, Mick Davis. Now he’s considered surplus to requirements, but the directors still argue that without these bungs, the others would all rush off to the competition.

Well, not to BHP or Anglo, if they want to reach the top, since both companies are signalling that they don’t think much of the people who work for them, and would rather employ headhunters to find a better boss. BHP may end up with an internal appointment to succeed Mr Kloppers as, possibly, might Anglo, but the message is clear enough. You guys (they are nearly all guys) can consider yourselves in the running if you like, but we fear none of you is up to it.

This is not how the headhunters put it. They smooth the board into believing that it’s their fiduciary duty to scour the globe for the very best, and to hell with the expense. Sometimes they find Mr Right, but often they don’t. Bringing in an outsider is high-risk. The top internal candidate may not be Superman, but if he’s picked on merit he should come with the backing of his lieutenants. He will also know how the business really works. Those further down the corporate chain will note that it could be them next time.

Strong directors from outside have much to contribute, especially in the mining business. Miners like to dig, or failing that, take over other mines. Restraining these urges would have saved Rio Tinto from almost bankrupting itself buying Alcan, or BHP from blundering into shale gas at the top of the market. The perfect next CEO of a big mining company should want to run the business better. He’s probably already there, but would the chairman know who he was?

A bit of a pong

The offshore owners of Thames Water are crying a river to get us to pay for a new sewer, which they prefer to call the Thames Tideway tunnel.  This is just the sort of infrastructure project we’re always told we need, but it’s jolly expensive (£4.1 billion and rising) so can we please have a government guarantee?

Ian Byatt, former director of Ofwat, the industry’s regulator, says absolutely not, and Martin Blaiklock, a constant thorn in the side of errant utilities, has done some sums. Here they are. Since 2000, Thames has paid its various private equity owners total dividends of £3.14bn, culminating in a bumper £480m for the last two years, just as it asked for the guarantee. Thames financed this largesse by raising its outstanding debt from £1.6bn to £8.1bn, taking its gearing to 85 per cent of book value.

Mr Blaiklock calculates that the first private equity owners, RWE, made 15.3 per cent compound on their investment from 2000 to 2006, while the motley crew who then bought the business have made 12.5 per cent compound since RWE sold. This is after any fees paid to their captain, Macquarie, Australia’s answer to Goldman Sachs. Given the owners’ appetite for Cayman Island based debt issues, these could have been substantial.

All this financial engineering leaves Thames in no position to pay for the new sewer, even if the investment case was, er, watertight. It has so much debt that any more would jeopardise the investment-grade credit rating that its licence demands. Thames may be super-private, but it is still supposed to be regulated by Ofwat. Here’s the regulator’s chance show who’s in charge.

This is a slightly modified version of my FT Saturday column, corrected for the timing of recent dividend payments.

 

Advertisements