How to be decentralised: the Mick Davis masterclass
25 July 2016 -
One of the world’s most admired managers on running a $50bn corporation off a head office of 35
Sir Mick Davis is a mining legend, a platinum-grade business titan.
Over four decades, ‘Mick the Miner’ has been an awesomely effective manager in an ultra-demanding industry.
With his background as a Chartered Accountant, Davis was an architect of the merger that created BHP Billiton, the world’s largest mining company. In 2015, he raised $5.6bn to create a new mining and metals group, X2 Resources.
In total, he’s raised more than $35bn from global capital markets during his career and has completed more than $120bn of corporate transactions.
Davis is best known for his achievements at Xstrata. When he joined it in 2001, it was a small, debt-laden mining company. Davis built it into a $50bn company, before merging it with Glencore in 2013.
The Xstrata story is notable in particular for the mega-corporation’s lean business model.
Even at its pre-merger peak, Xstrata had a head office team of just 35. Davis seems particularly proud of this.
In conversation at the Investec MidMarket Summit, he reflected on how to prevent organisational bloating. From its early days as a tiny company, to the glory years as a mega-corp, Davis ran Xstrata in the same way: with a devolved management structure giving the authority to act to people who were closest to the action.
He was regularly questioned about whether he could stick to these principles as the company grew, but he always held the line.
“I had this fundamental principle that I didn’t want anyone at the centre who could actually run a mine,” he says, “so I made sure that the people who sat at the centre were essentially looking at questions of how we allocate capital, how we manage risk, how we communicate to the market and how we control fund flows.”
All organisations, as they grow, can be dragged towards centralising. The arguments often seem logical and compelling: economies of scale, avoiding duplication, and influence in the market.
None of these ever persuaded Davis.
Don’t build your own bureaucracies
“When you have a great, centralised purchasing function – or a massive, centralised IT or HR function – they create a momentum of their own and a life of their own,” says Davis. “Instead of servicing their customers at the operations, ultimately they service themselves; the customers then start serving them. That doesn’t work for me.”
True effectiveness, according to Davis, is when the people who make the decisions are the people impacted by those decisions.
Too many organisations don’t respect their people’s intelligence, and have large head offices telling people what to do.
In fact, in Davis’s experience, smart people will spot opportunities for themselves: “People aren’t stupid. If their measurement is on some sort of return on invested capital, and they recognise that, they can reduce their costs by banding together with a neighbouring operation; they don’t need me telling them to do that. We underestimate the capability of people to do the right thing if you give them the tools to do it.”
Sceptics say that decentralised organisations can fail to spot problems, and Davis acknowledges that, even in a devolved structure, it’s a leader’s responsibility to have proper oversight: “If you say that you, at the centre, ultimately bear the responsibility for the performance of the company, then you’ve got to have some idea of what’s going on and a capacity to intervene.”
The secret is to respect the organisation’s hierarchy.
Specifically, when CEO of Xstrata, Davis never gave anyone who didn’t report to him an instruction, but he did feel free to speak to anybody in the organisation.
In this way, says Davis, “no manager felt threatened if I was asking one of his employees a question, because he knew that I would never give them an instruction; I just wanted information.”
Regular, informal information gatherings were a vital part of Xstrata’s culture. There was no hanging around for the monthly report. As a result, red flags surfaced quickly.
Mistakes have consequences
Of course, crises do happen; the trick is to be prepared and to react quickly.
“The only times that I intervened were if [managers] didn’t have plans, or if they were creating a risk that I thought was systemic to the business as a whole,” says Davis.
That said, Davis always allowed people to make decisions that he wouldn’t have taken if he was in their position.
“Often people did things I would never have done. Sometimes they were right, and sometimes they were wrong. I only intervened if I thought they were creating systemic risk.”
In practice, the best managers did flag up issues, because they understood there was no chance of criticism.
“The risk of censure from me was if you didn’t identify and tell us that there was a problem, if you didn’t react to the problem or if you made the same stupid mistake twice. You can’t run a business or create value without creating risk. And if you create risk, you expect that, at times, things will go wrong. That’s what you’ve got to live with.”
Mining is an unusual industry in that its assets are always diminishing in value. Once a pound of copper is dug out of the ground, it’s gone forever. In industry lingo, a mine’s net present value (NPV) will always reduce by an asset’s value once that asset is sold – unless managers take action, of course.
This is where Xstrata was formidably successful, because it expected managers to deliver year-on-year increases – not reductions – on a mine’s NPV.
“It’s a huge challenge to people, knowing their mine has a finite life,” says Davis.
By asking them to ensure that the NPV at the end of the current year is higher than at the beginning of the previous year, it encourages managers to recognise the wasting nature of their asset and think of ways to operate at a lower cost. Could mine managers use adjacent ground and pool resources? What about brownfield expansion?
“That was a very effective discipline; it forced people to think of their business as an ongoing, long-term proposition. We measured them on their capacity to do that.”
This article comprises edited highlights from an on-stage conversation between Sir Mick Davis and Sky News correspondent Ian King at the 2015 Investec Mid-Market Summit
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