CHAPTER 20

Hunters and Skinners

The difference between executives in the mining world was neatly summarised by one Billiton veteran who classified them as ‘hunters or skinners’. ‘The hunters are mainly guys who go into the jungle and kill the beasts,’ he was fond of saying. ‘The others stay at home and make things from the skins.’ ¹

BHP’s executives, many of them from a steelmaking or manufacturing background, fell mainly into the skinner category. ‘The Billiton team had been together for years and we suddenly encountered a management team that had just been thrown together,’ Dave Munro says. ‘They were still in the process of working out the structure of the group and the strategy. They were happy to sit down and work out how to run this big new company.’ ²

Even before shareholders had given their consent, a team of senior executives from both companies was burning the midnight oil to solve the prickly question of staff integration. ‘In these exercises, you’ve got the deal team and you’ve got the merger team,’ says Mike Salamon, who had moved to Melbourne at the end of March and was living in a penthouse in one of the tower blocks at Beacon Cove, overlooking Port Phillip Bay. ‘The stuff that the bankers get excited about is the deal – they get their fees, and then you’ve got to make it work. The finance guys have been very involved in the transaction but it’s the operating guys who’ve got to make it work. My counterpart, Brad Mills, and I sat down and over the course of a few days essentially designed a new organisation. Then his team and my team met and we worked out the integration plan. First of all, there were no consultants – we agreed we were going to do this ourselves, which was unheard of.’ ³

Salamon, Mills and Ian Fraser, who took over as head of BHP Billiton’s human-resources department, spent a year putting the integration together. In the beginning, they could only do the planning because the Competition Commission 4 had yet to give its approval. ‘When the commission finally said yes and the green lights were all in place and the deal consummated, the actual execution was very easy,’ Mills says. ‘The teams had worked it all out and we knew exactly what we were going to do with the people. They were thoroughly professional people – I liked the Billiton guys; it was a good group.’ ⁵

Paul Anderson admitted in an interview that BHP had become dysfunctional and entangled in red tape, that although executives wanted to progress they ended up taking grander titles but with few added responsibilities. ‘BHP has a good culture in terms of managing a large organisation and having procedures and practices, well-defined systems, to institutionalise efficiency,’ he said. ‘Billiton has a very entrepreneurial culture of finding an opportunity and grabbing it, but they do not necessarily follow it up and get the best out of it. There is no centralised procurement activity. They do not have a well-developed shared facility for back-office functions. Billiton is ready, fire, aim. We are ready, aim, aim. We find it hard to pull the trigger.’ ⁶ He had been successful in moving BHP’s culture about 20 per cent down the desired path, but Billiton would get it the rest of the way in one bound.

On 4 June, the federal treasurer, Peter Costello, announced the government’s blessing of the merger, although it was accompanied by a string of conditions designed to uphold the national amour propre. To retain an Australian identity, the Australian FIRB demanded that BHP Billiton’s headquarters be located in Australia; that the chief executive and chief financial officer have their main residence in Australia; that a listing be retained on the Australian Stock Exchange; and that most board meetings take place in Australia. ⁷

The treasurer was clearly exercised about this South African incursion into Australian big business. ‘Costello wagged his finger in my face when I went to pay my respects,’ Brian Gilbertson recalls. 8 And for understandable reasons: Billiton’s top team – Gilbertson, Davis, Munro, Salamon, Kloppers and Fraser – would make a powerful impact.

But then Mick Davis, chief development officer-designate of BHP Billiton, sent shock waves through the industry when he suddenly resigned to become chief executive of Xstrata, a relatively unsuccessful Anglo-Swiss mining company. In his farewell message, Davis said his time at Billiton had been ‘replete with invaluable and rewarding experiences’ but he now had the opportunity to take a leadership role in a smaller company. He added, ‘As it is smaller, there is more room for growing it – the job I enjoy most.’ This was an understatement: Xstrata was mired in US$500 million of debt.

The real story of Davis’s departure from the BHP Billiton scenario, however, is told here for the first time. ‘The view among my colleagues was that essentially it would be the management team of Billiton who would be running the new company,’ he says. ‘I didn’t take that view. I said to them, “I think this is a very Australian-centric organisation. I do not think that they are going to allow a management takeover. By comparison, BHP is an organisation with a huge amount of process and bureaucracy, and process is almost more important than the outcome.”

‘Billiton was relatively light on that and there was no doubt whose process would win out. I didn’t think that was an organisation that I wanted to battle through.

‘I was still happy to stay on. I was not convinced it was going to be the seamless deal that everybody thought it was going to be but I did everything I could to make sure that the deal would happen because I thought it would be very good for our shareholders.

‘There were some incidents. The first was when Don Argus and Paul visited London shortly before we had meetings with all the management team. Paul said to me, “So why are you against the deal?” I wasn’t happy with that approach. I didn’t appreciate somebody attacking me in that way. That was the first negative.

‘The second negative was the fact that the chief executive officer and chief financial officer had to be resident in Australia – that had been negotiated between BHP and FIRB. I had no doubt that it was something that BHP engineered, and I didn’t take very kindly to that.

‘Thirdly, I had no intention of moving my family to Melbourne. I think it’s the wrong place to be running an international mining company. I still think it’s the wrong place. However, when Brian went over for the penultimate meeting things were about to fall off the rails. The BHP board took the view that Paul had been out-negotiated and out-manoeuvred by Brian and ourselves. He was accused by one of his directors of “dropping his pants”.

‘Brian came back to South Africa and told me that I was seen to be the “touchstone” of this sense of concern. Because of my insistence on remaining in London, I was going to be the guy who eventually moved this company to London. So I said, “Brian, if that’s the case, I’m happy to step back. I’ll see the transaction through and go off.” Initially, that seemed to be acceptable, but then a few days later they said could they not take the job of chief financial officer and split it between myself and Chip, where Chip becomes the chief financial officer and I become what’s called the chief development officer and I could reside in London?

‘We did all those things: we split the job up and how it was going to work. Chip and I would have worked fine together. But I just sat back and thought to myself, “Now is a good time to make a break. There clearly is concern about me. There’s going to be tensions going forward.” I didn’t appreciate Paul’s approach; in fact, I never appreciated Paul’s management style at all, and I thought he and I would clash going forward. I thought, “You know, I’ve had a great time in Billiton. This is a great transaction for shareholders. What a good time to move on and do something else.” And that’s why I took the decision to leave. I communicated that decision prior to the announcement of the transaction [in March 2001] but said I would keep it quiet and do all the roadshows. Paul and I did the roadshows together, and that was fine.’ 9

Brian Gilbertson was sorry to lose Davis but appreciated that he would have found it difficult working in a more bureaucratic environment, which the Billiton executives perceived BHP to be. ‘It had a big head office with one or two thousand people, whereas we just sat in a little office in the Strand with 50 people, so Mick felt that wouldn’t work out for him,’ Gilbertson says. ‘He also wanted to go out and sail his own ship, and he’s done some great things at Xstrata. He was the only member of my team who didn’t come along with me. All my key members got key positions, but they generally got them because they were very good. I would take over from Paul in two years, under the original plan, and I would be his deputy for the initial period so I could learn the bit of the business I didn’t know and get to know the Australians.

‘I guess that’s part of the reason it was perceived to be a reverse takeover. Paul and I didn’t have any issues that I was aware of – we worked well together; I respected what he was doing. He’d come in from outside the industry and had changed the culture greatly and given BHP a sense of pride back.’ 10

In Gilbertson’s opinion, Anderson had secured a good transaction for BHP’s shareholders, but the press didn’t share that view. It was unforgiving. ‘They flogged Don Argus and Paul for months; even now, you hear echoes of it: at least two or three times a year, some journalist or analyst will put out a set of figures that show what BHP had effectively paid,’ Gilbertson says. ‘Given what iron ore has done, what oil has done, given what copper mines have done – we didn’t have copper in Billiton ¹¹ : we had the smelters and coal mines in South Africa – if you do the sums that way, it really does look as though they paid a high price.

‘But at the time I thought it was a very sensible deal: it put BHP Billiton at the top of the pile; it gave them a new sense of pride; it really ignited the BHP interest in the world of mining as opposed to the narrower focus on Australia. They had withdrawn after the Magma thing, an experience that had branded them. The merger made them number one, and whereas before BHP didn’t feature in the reviews of the mining companies published by London stockbrokers because they were down there in Australia, they were suddenly top of the list.

‘As we’d created it as a dual-listed company, it had the following both of the London analysts and the Australian analysts, and that way we kept the internationalisation and a much wider and more intensive exposure among international investors. I think it was a great deal – look what the company has done since then.’

But first, there was a great deal of corporate engineering to complete. ‘Very sensibly, they put the two boards into two much bigger boards,’ Derek Keys says. ‘You had to have a BHP Billiton plc board and you had to have a BHP Billiton Limited board in Australia. Both those boards were the same and they consisted of all the directors of both companies.’ 12

The new boards had 17 all-male members – almost a full Australian Rules football team. Ten were from BHP and seven from Billiton: Don Argus, 62, chairman, BHP; John Jackson, 72, deputy chairman, Billiton; Ben Alberts, 61, BHP; Paul Anderson, 56, managing director and chief executive officer, BHP; David Brink, 61, Billiton; Michael Chaney, 51, BHP; John Conde, 52, BHP; David Crawford, 57, BHP; Brian Gilbertson, 57, deputy chief executive, Billiton; Cornelius Herkströter, 63, Billiton; David Jenkins, 62, BHP; Derek Keys, 69, Billiton; Ron McNeilly, 57, executive director global markets, BHP; John Ralph, 68, BHP; Lord Renwick of Clifton, 63, Billiton; Barry Romeril, 57, Billiton; and John Schubert, 58, BHP.

Don Argus decided that some new-age bonding in a traditional setting would help the integration process among such diverse personalities. He scheduled a board meeting for New York, and Kathy Anderson helped organise the trip. On the afternoon of Tuesday, 19 June 2001, the directors and their wives met at the St Regis Hotel on East 55th Street at 5th Avenue. ‘That evening, we split up into small self-selecting groups either to dine together or to go to the theatre,’ John Jackson says. ‘The following two days, the “boys” worked (I chaired the first meeting of the new remuneration committee) and the “girls” socialised largely on shopping trips. On the evening of Thursday, 21 June 2001, we had a major celebratory dinner with speeches. We dispersed gradually in the course of Friday, 22 June.’ 13

The following Friday – 29 June 2001 – all of the preliminaries had been completed and everything was in readiness when Australia said goodbye to BHP and put out the welcome mat for the merged company. BHP Billiton Limited and BHP Billiton plc existed as separate entities but would operate on a combined basis as BHP Billiton. The headquarters of BHP Billiton Limited and the global headquarters of the combined BHP Billiton Group were located in Melbourne, and BHP Billiton plc in London. Both companies had identical boards and were run by a unified management team.

‘I knew from the start that would only be a 12-month thing as far as I was concerned,’ Derek Keys says. ‘I’d already retired but I did the 14½-hour flight to Melbourne several times. They take the Great Circle route, which involves going south, so you’re over the ice for something like three hours.’

Asked how the South Africans and the Australians interacted in those early days, Keys varied the ‘like poles repel’ analogy. ‘Well, you know,’ he tactfully replied, ‘we’re very alike, so it’s not so easy to get along.’ ¹⁴

Nevertheless, BHP Billiton established an inner cabinet of all the talents, a seven-person executive committee, known as ExCo, comprising Paul Anderson, Brian Gilbertson, Chip Goodyear (chief development officer following Mick Davis’s defection, and also acting chief financial officer), Mike Salamon (president and chief executive officer, minerals), Philip Aiken (president, petroleum), Kirby Adams (president, steel) and John Fast (chief legal counsel). When a new chief financial officer had been appointed, he or she would also join the executive committee.

Bob Kirkby was put in charge of carbon steel materials – iron ore, coking coal, manganese – Dave Munro would run aluminium, Brad Mills got the job of running copper and there were two senior operating roles: Phil Aiken became president of petroleum and Mike Salamon president of minerals.

There were a number of innovations, such as the setting up of two marketing hubs run by the thrusting young South African Marius Kloppers – one at Singapore to focus on the Asian energy market (energy coal, oil and gas) as well as carbon steelmaking raw materials, and one at The Hague, built around aluminium, base metals and the European energy-coal market. ‘Marius’s role in the new BHP was marketing,’ Dave Munro says. ‘We took the Billiton model of centralised marketing which we’d established after Billiton had come to London, and Marius took that up and for a couple of years refined and developed it hugely.’ 15

However, the centralised decision-making process, established by Paul Anderson following the poor investment decisions of the 1990s, was scrapped in favour of a decentralised structure under which the mineral, petroleum and steel divisions could decide on capital allocation, mergers and acquisitions up to US$1 billion.

Seven customer-sector groups (CSGs) were formed to reclassify the company’s business units. For example, coking coal, manganese and iron ore – all ingredients of steelmaking – were placed in the same division, while steaming coal, used in generating electricity, was in another, a departure from the usual practice of putting all of the coal assets in the same category. ‘We invented a number of things to try to make sure it didn’t look like BHP and it didn’t look like Billiton but it would be BHP Billiton,’ Mike Salamon says. ‘The job was to deliver this business with the customer-sector groups that had a common look and feel, a common understanding of what the company strategy was, a centralised marketing organisation.’ ¹⁶

The biggest breakthrough had been the final resolution of the steel issue. Over time, Anderson had made the bold strategic decisions necessary to engineer the company’s exit from the business that had for so long been its proudest possession. ‘At the time of the Newcastle closure, BHP Steel was still part of BHP,’ Lance Hockridge says. ‘Then, in 2000, the company separated the long-products business, so having closed the steelworks part of Newcastle the long-products business was reconfigured around the Whyalla steelworks and the Rooty Hill mini-mill, and it was spun off into a separate company named OneSteel.

‘At the time BHP merged with Billiton, the decision was taken to separate the flat-products part of BHP Steel, and that has now become BlueScope Steel. 17 From that time forward, the old BHP and what is now BHP Billiton has had no steelmaking operation whatsoever. The only connection with BHP Billiton is that BlueScope buys pretty much all of its coal and 60 per cent of its iron ore from BHPB.

‘Given that the announcement of the separation of BHP Steel was made at the same time as the announcement of the merger, I wound up spending my time on the steel demerger side and was very little involved on the merger side of the business. The company wanted to concentrate on resources, and in that context the manufacturing operations of BHP Steel really didn’t fit the strategy.’ ¹⁸

On 20 August 2001, BHP Billiton released its first combined result, a remarkable profit of US$2.18 billion ($4.07 billion) for the 12 months to 30 June. There was, however, a US$1.1 billion bill for exceptionals related to the writing-off of BHP’s 50 per cent interest in the troublesome HBI plant in Venezuela and the Ok Tedi copper mine in Papua New Guinea, where millions of tons of mine waste had polluted the Ok Tedi and Fly Rivers, devastating two thousand square kilometres of forest and destroying the fish stocks. ¹⁹

Don Argus told investors, ‘In Western Australia, we decided to continue to operate the HBI facility within strict technical and financial parameters. An exit or closure would have resulted in the destruction of shareholder value to a greater extent than we believe can be preserved by improving the performance of this asset.’ It was an important decision and one that would rebound spectacularly in the months ahead.

Paul Anderson introduced a BHP Billiton charter, a mission statement that committed the merged company to deliver value to its shareholders through the exploitation of natural resources, while at the same time maintaining ‘an overriding commitment to safety, environmental responsibility and sustainable development’. The annual report was peppered with references to the charter, which, Anderson said, was ‘the foundation stone of the entire operation’ – a prudent move in view of the Ok Tedi disaster.

‘Paul Anderson had spent a lot of time with BHP designing the charter, while we in Billiton were a little more buccaneer about life,’ Mike Salamon says. ‘We didn’t get carried away with this formal stuff, because there were so few of us. I could look you in the eye and we could work out what our mission was: I didn’t have to get too bureaucratic about it. But we recognised we had this huge company; we had to play that game. We changed one word in Paul Anderson’s vision statement: we took out the word “Australian” and put in the word “global”. That was the only thing we changed. We liked his values and everything else.’ 20

According to Graham Evans, ‘[Anderson] found it quite important to define the values in which the company worked, that there needed to be real clarity around the business strategy and around how the company did business.’

‘It was basically as a consequence of BHP doing business across a whole range of countries that it hadn’t previously done business in. There was uncertainty on the part of some of the employees on what they could and couldn’t do. There was clarity around the legal issues but much less clarity around what attitude the business took to issues that were in the grey area – for example, facilitation payments.

‘There are certain issues that are clear-cut, issues that are illegal and improper, but there are plenty of others which are judgmental issues and what the company tried to do was to expose employees to the framework of global business conduct and get people to think about and talk about what that meant in their workplace. John Prescott started this and Paul Anderson followed it through.’ 21

It was, however, merely the forerunner of many good intentions and ecological initiatives which were open to question. Anderson was on more solid ground when he promised investors that the company would announce a new strategic framework early the following year, with an emphasis on return on invested capital and a strong customer focus. The following month, he announced that the new chief financial officer would be the burly 46-yearold former Australian Rules player Christopher J. Lynch, who had joined BHP from Alcoa the previous year and was currently chief financial officer of BHP Billiton’s minerals division. Chris Lynch was educated at the Marist Brothers College at Forbes, New South Wales, and gained a commerce degree, accounting, and MBA at Deakin University, Melbourne. His appointment freed Chip Goodyear to move to London at the end of 2001 in his new role as chief development officer. ²²

Meanwhile, Brian Gilbertson moved his main domicile from London to Melbourne. ‘I stayed in hotels,’ he says, ‘but then I did a deal with Don Argus and the remuneration committee that I would get an apartment – a very nice apartment overlooking the Botanic Gardens and the Eternal Flame. I could actually see the office in Bourke Street. My building was an old hospital once – I lived right at the top of that.’ ²³

It was at this point that he started a bumpy relationship with the Australian press that continues to this day. ‘When Brian had his first meeting as deputy chief executive around the table with senior Australian journalists, he made the point that he now had an apartment in Melbourne and was living there,’ Marc Gonsalves says. ‘The first question was from some hack who said, “What colour are the sheets on your bed?” I wanted to get rid of this ridiculous spotlight that was on us in Australia, where you couldn’t fart without someone writing a story. I wanted the freedom we had in London to get on with the business of the company and take control of the communications around it, so that when we had something to say, we’d tell them.’ 24

Gilbertson, however, appeared unconcerned. He and his wife, Rensche, sampled the city’s culinary delights and declared that Melbourne had ‘the best chefs in the world’. ²⁵ He attended a couple of Australian Rules football matches but, although he enjoyed the spectacle and the passion, his favourite sports remained squash and cycling. As a symbol of his successful campaign, he had a picture of Brigitte Bardot – ‘the famous pouting one’ – hung on the wall of his office in BHP Tower.

‘I really have been very fortunate,’ he says, looking back at that remarkable period. ‘The purchase of the Billiton assets was perfectly timed; when Anglo made its move on us and bought the Rembrandt shares, we were ready; Paul Anderson came through at the right moment; we got it just right – we got the right deal for Billiton. And for BHP the timing was terribly important, too, to make the next step.’ ²⁶

However, John Jackson, the wise and emollient deputy chairman, saw trouble ahead. ‘It became clear pretty quickly that Don Argus was not looking forward to the day when Brian Gilbertson would take over from Paul Anderson,’ he says. ‘There was uneasiness in Don’s mind about how he saw the proper relationship between a board and its chairman and chief executive, and how Brian might see it. It emerged that before Paul and Brian had ever met, but at about the time we’d heard that BHP might be interested in Brian, BHP had made inquiries about Brian and been advised that he was – I think the exact expression used by Don – “strong-headed”.

‘One could see winding up a pretty familiar conflict which I’ve seen in other companies where you get a very capable and powerful leader of the executive team – which Brian had undoubtedly shown he was at Billiton – and a strong nonexecutive board chaired by a very determined person who had clearly got in the back of his mind the interests of Australia plc. There was going to be the most enormous explosion.’ 27