Why Lord Browne is right to leave BP

BP shareholders may have been happy for Lord Browne to remain chief executive beyond the age of 60, but he has made the right decision to go.

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Lord Browne has been an excellent chief executive at BP, guiding the company since 1995 to its position as Europe's most successful oil company through a series of high-profile acquisitions.

So it's not surprising that many shareholders would have been very happy to see him stay at the company beyond his scheduled retirement age of 60.

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But their hopes were dashed yesterday when he came out and flatly denied that he had any plans to stay beyond 2008 - even if asked.

It might upset some shareholders in the short-term - but Lord Browne has made the right decision. Every leader has a sell-by date - the secret of good succession is to leave before you reach it

New age discrimination laws mean that company rules requiring people to retire before the age of 65 are unenforceable. This new legislation has helped to fuel rumours that Lord Browne might stay on at BP past the age of 60.

When BP reported its second quarter results yesterday morning, with no mention of Lord Browne's future plans, the press were quick to jump to conclusions. Stories were already flying of a feud between he and chairman Peter Sutherland over the succession process.

So it's a good thing he clarified his position so rapidly. There remains plenty of speculation as to exactly how heated discussions between he and Mr Sutherland were. But whatever the reasons, it's good that he's decided to go.

It may seem a shame to part company with such a successful chief executive before it's really necessary. But the very qualities that make a person a good leader - a strong vision, decisiveness, the ability to drive through their ideas - can eventually become a liability.

As State Street equity strategist Michael O'Sullivan told Bloomberg: "Under normal circumstances if John Browne wasn't balanced by a very, very strong chairman, someone like that who's been very, very successful could have a stronger hold on the company and there could be corporate governance issues."

The trouble is that other staff and board members start to think the boss is incapable of making a mistake. That means they rely on that person too much - even when he or she gets it wrong. And when a company - especially a listed company - starts being all about one person, that's when real problems develop.

Just look at supermarket group William Morrison if you want to see what happens when a company is too reliant on one strong personality. It's hard to remember now, but at one point Sir Ken Morrison - the son of the company's founder - was the toast of the City for the retailer's ability to consistently outperform expectations. There were always some concerns that he was too much of a micro-manager, and still running his firm like a private family business, rather than a quoted company, but as long as the results were good, who cared?

But then came the ill-advised and badly managed purchase of Safeway, and suddenly Sir Ken was out of favour.

So despite the short-term disappointment of seeing a good leader leave, shareholders should be pleased that BP is taking the thorny problem of succession in hand.

The importance of handling the transition of power well cannot be underestimated. Succession planning is a vital part of running any business that succeeds in the long term. For example, the vast majority of family businesses fail during the transition from first to second generation. And the vast majority of those that survive the first handover, collapse in the transition from second to third generations.

So who could replace Lord Browne? It seems there are five internal candidates, including Tony Hayward, the head of BP's exploration and production unit, a post previously held by Lord Browne. The unit makes up 80% of the company, so it's no surprise that previous chief executives have come from that direction.

With a decent array of potential candidates, and a good two years to find the right person, BP should be able to prove that the company is bigger than Lord Browne.

As for the latest set of results, shares slipped 1% to 630p, even though the numbers were comfortably at the top end of City hopes. The company made a record quarterly profit of £3.3bn. That's despite rising taxation and a jump in costs related to the Texas refinery explosion.

The very simple fact is that BP makes money when oil prices are high. The higher oil prices go, the more profit the company makes. The oil price has risen by more than 10% since the start of this year. And yet BP shares have advanced just 1.7% in the same period.

With the company trading at a forward p/e of around 10, and with a dividend yield of 3.1%, we think it's fair to say that BP offers great value for money - John Browne or no John Browne.

Turning to the wider markets...

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The FTSE 100 rose 17 points to 5,851. Shire Pharmaceuticals was one of the main risers, gaining 3% to 852.5p as US regulators approved marketing of its Elaprase drug for treatment of the rare condition Hunter Syndrome. For a full market report, see: London market close (/file/15851/london-close-gains-trimmed-as-us-stumbles.html)

Over in continental Europe, the Paris Cac-40 rose 2 points to close at 4,933. The German Dax-30 fell 12 points to 5,565.

Across the Atlantic, US stocks made gains, despite a batch of mixed corporate profits and weak housing sales data. The Dow Jones Industrial Average rose 52 points to close at 11,103, while the S&P 500 rose 7 points to 1,268. The tech-heavy Nasdaq was up 12 to 2,073.

Overnight in Asia, the Nikkei 225 fell 121 points to 14,884. Lenders were among the main losers as Aiful Corp, the largest consumer finance company, said its earnings were down.

Oil prices eased in New York this morning, with crude trading at around $73.65 a barrel. Brent crude was lower too, at around $72.95.

Meanwhile, spot gold fell as far as $613.80 an ounce before rising to trade at around $617. Silver was lower, trading at around $10.87 an ounce.

And in the UK this morning, shares in GlaxoSmithKline have risen as the group announced that its vaccine for the H5N1 bird flu strain has proved effective in clinical tests and could be available in 2007.

And our two recommended articles for today...

Why you should buy into US water utilities now

- Billions of gallons of water are lost in the US every day through old, leaky pipes and mains. This may sound like a multi-million dollar crisis, but it's also the next big investment opportunity, says Chris Mayer for the Daily Reckoning. To find out why water utilities are set for stellar growth and how you can get involved in this buyers' market read: Why you should buy into US water utilities now

Is the bull market in gold finished?

- A gold correction was long overdue, but that doesn't mean the bull market in gold is over, says Adrian Ash. Gold will always be a safe haven, and whilst those investors waiting for the delightful' Armageddon war or stockmarket meltdown that will see the price soar may have to hang on a while longer, it is the depreciating dollar that will really keep the gold bull alive. To find how you can invest in gold from the least risky to the most profitable ways read: Is the bull market in gold finished?

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.