In a
recent article on BHP Billiton, senior BRW columnist Adele Ferguson noted that
BHP CEO “[Chip] Goodyear and the Chairman, Don Argus, are behind the mission to
educate the market about how it should value [BHP].” Ferguson later quotes
Argus as saying “I am a bull on the company. We have a marvelous spread of
assets and geographies, a strong cashflow and we keep and eye on the group in
terms of financial disciplines.”

Jeez,
thanks Don. However, BHP shareholders could have been excused for thinking that
their CEO (who is expected to make more than $5 million this year) and CFO (who
will collect around $2.7 million) would be expected to “keep an eye” on
the numbers, you know, when they find the time between golf and
sailing.

A more
serious concern for BHP shareholders is the willingness of their chairman (who
is supposed to be acting on their behalf) to be talking up the share price. As a
former CEO of NAB and long-time company director (admittedly, his tenures at
Southcorp and Brambles have hardly been awe-inspiring), Argus should know that
“talking up” share prices should be left to cowboys like Chris Tyler. If anything,
a share price should be irrelevant to investors who, according to Warren
Buffett, should concern themselves with “the discounted value of the cash that
can be taken out of [the] business during its remaining life.” If BHP is able to
consistently increase profits and by implication, cash flows and dividends to
shareholders, Argus can be rest assured that the BHP share price will
increase.

However, the biggest problem with Argus talking up the share price is not
merely that it makes him look like the CEO of a dot.com, but rather, that it
contradicts his duty to shareholders. Argus will be well aware that top BHP
executives, such as Goodyear have swathes of options. These options become far
more valuable to the executives if the BHP share price increases. This is
because BHP’s complicated options plans are primarily based on “total
shareholder return” – a function of the BHP share price. BHP admitted as much in
its 2005 Annual Report to shareholders, where it was stated that “the total
return to BHP Billiton shareholders” is “measured by the change in share price
plus dividends.”

Therefore, if the BHP share price is re-rated over the short-medium term,
the options currently held by executives (and their annual cash bonuses) will be
far more costly to BHP shareholders. Given that Goodyear may remain CEO for only
1-2 more years (he is currently on a rolling 12-month contract), he has a
significant interest in the BHP share price increasing over the short term. By
contrast, BHP shareholders, who would presumably take a longer-term view, stand
to lose out by a short-term re-rating of BHP (remember, long-term shareholders
will not benefit from a short-term re-rating, because unless BHP increases its
real returns to shareholders, its share-price would eventually be re-rated
downwards). Therefore, Argus talking up the share price causes a direct
detriment to long-term BHP shareholders.

Perhaps
if BHP started returning some of the billions of free cash flow it generates to
shareholders as dividends (of course, that would result in a lower short-term
share price and a lower options value), the market may consider giving BHP the
higher rating that it claims it so richly deserves. And maybe shareholders may
be able to enjoy the largesse currently spread around the top floors of the QV
building.