Investors are starting to lose faith in Marius Kloppers, the chief executive of the global giant of mining, BHP Billiton, according to reports in The Australian Financial Review.
The problem, it seems, is that Kloppers’ standing has been falling in a confidential survey of fund managers and analysts, called the Corporate Confidence Index (CCI).
Research company Ross Carmichael Singer produces the CCI, which is confidential and sold only to those who participate in the study.
The CCI is one of a range of tools used by boards, fund managers and analysts to assess the quality of corporate leadership.
But are they fair?
Simon Marais, CEO of fund manager Allan Gray, says there is not much wrong with Kloppers’ performance other than that the BHP Billiton share price has fallen. “You want to assess a CEO on whether he has spent his capital well and kept costs down,” Marais says.
Marais is an active fund manager who often brings pressure to bear on boards when he believes a company’s management is underperforming. He made an effort earlier in the year to displace the chairman on paper company PaperlinX in an effort to unseat the CEO, stating at the time that removing the chair was the only option shareholders had to change executives. (It was not successful then, but the CEO has since resigned.)
The CEO’s performance is quite visible to shareholders and to boards through continuous disclosure, and the results of financial and annual reports. This begs the question: why do boards need to rely on external indicators?
Marais says any tool that help boards towards a better understanding of the views of shareholders is a good thing, provided it looks at long-term indicators – not just short-term share price hikes.
However, a company’s share price can be beyond the control of executives, or influenced by factors outside their control. A share price that is over-inflated at the start of a CEO’s tenure may fall to a more sensible reflection of the company’s value, but annoy fund managers, and cost the leader their job.
Marais disagrees: he says the share price is a clear indication of what shareholders think about a company’s performance.
The performance of boards of directors is harder to judge. Typically, non-executive directors have low profiles; the chair of the company (or the CEO) will handle all media comment. Even if directors are independently assessed by consultants, the chair is the only one who has access to this information – not shareholders.
Shareholders have little to go on when judging the performance of individual directors against criteria such as whether they are well-prepared for meetings, make a contribution, follow up on commitments and bring a valuable perspective to the company’s performance.
Marais says competition for board seats would lift the performance of directors. “There should be much more turnover. For six positions, there should be eight or 10 people applying, rather than the current board chair putting a friend on the board.”
If the CEO is not performing, the directors are responsible, and should also make an orderly exit, in Marais’ view.
“A director is such a critical position – the most critical in Australian corporations – but shareholders almost never vote against directors. It is always an afterthought.”