Rio Tinto’s chairman Simon Thompson was deep in discussion with the board over how severe the sanctions should be for its worst crisis in decades when a question was raised: where does the destruction of a 46,000-year-old Aboriginal heritage site sit on the spectrum of other crises that have rocked corporate Australia?
The first comparison, board members agreed, should be rival BHP’s 2015 Samarco dam collapse in Brazil that killed 19 people and poured mine waste into the local river. Rio’s disaster was different; no one was dead. But they were still interested in looking at what accountability followed. Although BHP to this day is dealing with the fallout of lawsuits, reparations and recovery activities, Rio’s board noted that the reckoning for BHP’s top brass had been relatively contained. No immediate dismissals. Case Study No. 1.
Case Study No. 2 involved more recent events at Westpac (money-laundering scandal, child-trafficking links) which claimed the scalps of the bank’s chairman and chief executive last year. But this, too, was different to what Rio was facing, because Westpac’s crisis involved something illegal.
A third corporate crisis – sexual harassment allegations that shook AMP – was also being monitored, but at the time of this conference call, was still playing out.
Nearly three months had passed since Rio Tinto’s ill-fated decision to blast through two culturally significant rock shelters at Western Australia’s Juukan Gorge for a mine expansion, leaving traditional owners devastated and the Australian public incensed. The miner’s board of directors, spanning three continents, was searching for a precedent – any relevant benchmarks – that could guide its accountability response.
It could find none.
But if daily updates and a stream of investor phone calls would make one thing painfully clear, it was that the board’s first try at delivering accountability – a proposal to dock the annual bonuses of chief executive Jean-Sebastien “JS” Jacques, iron ore boss Chris Salisbury and corporate relations boss Simone Niven – was not going to satisfy. A chorus of investors was saying: “Heads have to roll”.
“Some were very vocal in expressing their concerns both publicly and privately, but there were a lot of shareholders who were supportive of the management team and felt they had done a good job,” chairman Simon Thompson recalled. “We had to balance a wide range of views. If we feel some critical stakeholders do not have the confidence in the ability of this leadership team to make the necessary changes, then, of course, we have to move on.”
Thompson, at least for a while, didn’t think he had to. Why would he?
Shares in Rio Tinto, the world’s second-largest mining company, are dual-listed on the London and Australian stock exchanges, where its shareholder registers are dominated by US-based investment giants and the Chinese-owned Chinalco.
Australian investors, where the trouble was emerging, account for less than 20 per cent of Rio’s stock.
It began with the likes of AustralianSuper, HESTA, Unisuper and Aware Super (formerly First State) seeking teleconferences with the board. After it was determined that accountability would be limited to pay cuts rather than dismissals, the calls increased in frequency. The proposed penalties fall “significantly short”, is how AustralianSuper’s chief executive Ian Silk put it. “We have asked the board to reconsider its response.”
But, equally, the board was also hearing from other investors – investors in the United States, Britain and Europe – many of whom were much larger shareholders, and many of whom held views on appropriate accountability that were vastly different to the Australians’.
Rio’s American shareholders were said to be furious, and even viewed the proposed bonus cuts as a dramatic overreach against three otherwise-excellent executives, according to a source familiar with the workings of the board. Rio’s European funds, too, were more muted in opposition to the bonus cuts proposal. And many fervently supported the board’s decision to keep Jacques as CEO.
If this was an uprising, it didn’t have the numbers.
“Just a few colonial troublemakers … won’t worry us,” is how the head of one large Australian fund characterised Rio’s London-focused board’s views at the time. Not to mention that the calls were largely coming from industry super funds with links to left-leaning trade unions.
There was no single tipping point so to speak. Pressure for action picked up slowly. And two key interventions came at the eleventh hour – from the Church of England Pension Fund and Australia’s $160 billion Future Fund.
Peter Costello, the Future Fund’s chairman and a former federal treasurer, told Thompson directly that resignations were necessary.
“What has become clear,” Thompson said, days later, “is that the issue of individual accountability was hindering our ability to start rebuilding trust. On that basis, by mutual agreement with JS, Chris and Simone, we took action.”
The “rabble” in Australia didn’t have the support. What they did have was the ethical arsenal. And in a stark sign of the times the ethical issues fanned out and prevailed. Shareholder democracy – that idea that you get as much say as your vote – had been turned on its head.
Everyone’s talking ESG
Would a coup like this, without the bulk of shareholder support, have succeeded five years ago?
In the aftermath of last week’s Rio resignations, it’s a question that has been raised by several mining and corporate governance insiders, with BHP’s 2015 crisis cited as the most obvious benchmark.
“Probably not,” said one. “Samarco is obviously a very different event, but a good comparison for severity of response.”
“Do you think if Samarco happened today that the CEO would have survived?” asked another. “I am not so sure. Standards have increased. We are all now on notice.”
The $130 billion Aware Super, which joined a coalition of 11 investors to co-sign a letter to Rio’s board last week demanding greater accountability, says the outcome was part of a broader, accelerating shift of shareholders and boards becoming more attuned to environmental, social and governance matters – commonly referred to as “ESG”.
‘Just a few colonial trouble-makers … won’t worry us.’Head of a large Australian fund
Superannuation investors have been spearheading the rise of ESG pressure amid the growing awareness that companies lacking in their “social licence to operate” – that is, ongoing acceptance of its business practices by stakeholders and the broader public – present longer-term risks to members’ retirement savings.
“Having engaged with companies over the last five years we have continually heard from them that no one ever asks them the same questions we do,” says Liza McDonald, Aware Super’s head of responsible investments.
“We have a real opportunity to encourage companies to behave in a way that creates long-term, sustainable returns for our members.”
Few industries are more exposed to such ESG risks than mining, which, by its very nature, has a significant impact on the environment and communities.
‘I think we are seeing a significant moment.’Danielle Welsh-Rose, head of ESG at Aberdeen Standard
Until now, most of the ESG pressure facing mining companies has been around the global warming impact of their operations and carbon-intensive resources they sell. At risk of being screened out by ESG-conscious investors and seeing their shares dumped, miners have been ploughing billions of dollars into emissions-reduction initiatives in recent years, switching to renewable energy where possible, signing up to goals to become “net-zero” emitters. Some of the biggest diversified miners have been hastening moves to reduce their exposure to coal.
But what Juukan Gorge has done is set off a groundswell of investor attention on companies’ engagement with traditional owners this year, which will feature more heavily in future ESG considerations, explains Danielle Welsh-Rose, the head of ESG at Aberdeen Standard, one of Rio’s biggest British shareholders. This attention post-Juukan Gorge is being amplified by inequality issues raised in the concurrent Black Lives Matter movement.
“I certainly think this hasn’t been an issue with mainstream investors before and this does mark a shift into the mainstream,” Welsh-Rose says. “I think we are seeing a significant moment.”
Legal reform push
A disturbing truth that this crisis has exposed is that what Rio did was not unlawful. In fact, sacred sites are blasted with some regularity across the Pilbara with all necessary legal approval, consent of traditional owners, and the knowledge of traditional owners (The Juukan Gorge’s traditional owners say they were unaware of the blast plan until it was too late to stop it).
As a federal inquiry probing Rio’s actions widens its lens to look how Indigenous heritage is treated industry-wide, a light is finally being shone on what some Indigenous leaders have long described as the extreme power imbalance that underpins their heritage legislation and the land-use deals they sign with resources companies. Namely, that they are afforded no right to appeal approvals granted for works that would impact significant sites on their ancestral land, and no power to veto projects themselves.
Executives from BHP were questioned on Thursday about why they proceeded with applying for approval to destroy 40 heritage sites at its $4.5 billion South Flank iron ore mine despite knowing about traditional owners’ concerns. While the Banjima people did not object to the approval, BHP acknowledged to the inquiry that its deals with the Banjima did not allow them to legally object. Since Juukan, BHP has paused all such plans until it has re-engaged with traditional owners. Momentum is growing for legal reform.
“It took a catastrophe for people to start looking at this,” said Jamie Lowe, of the National Native Title Council, which represents 70 traditional owner groups and native title bodies. “Hopefully we can drive changes to actually happen.”
For Rio’s part, there is a recognition that it has significant changes to make. There is trust to rebuild and a healing process to begin – with its traditional owner partners, shareholders, and with Australia.
The Juukan disaster has resurfaced long-held criticism that the leadership of the mining giant – dual-listed on the Australian and London stock exchanges – has drifted from Australia and become disengaged since merging with CRA in 1995, despite its iron ore operations here generating the lion’s share of the global group’s profits.
Large investors and government leaders alike have told Rio’s board they expect the shake-up to lead to stronger ties with Australia and its Indigenous communities. And with Jacques’ exit date set down for March 31 or sooner, a question mark remains over what extent that will guide the board’s choice for the next CEO. Some early names in the mix include a list of Australian ex-Rio executives: Tom Palmer, the president of global gold miner Newmont; OZ Minerals boss Andrew Cole; ex-Shell Australia chair Zoe Yujnovich. Stephen Pearce, an ex-Fortescue Metals chief financial officer and current CFO at Anglo American, has also been mentioned.
Peter Costello, when he was federal treasurer, set strict requirements for BHP to base its operations and executive leadership team in Australia following its merger with Billiton in 2001.
Costello says he has now made clear to Thompson his position about what Rio needs to do – at the senior executive level, board level and head office functions.
“Rio now derives 85 per cent of its profit from mining in Australia, yet its headquarters is in London, its CEO is based in London, its CFO is based in London … if it wants to get more in touch with the issues that affect its business, it’s got to have a greater presence in Australia,” he says.
“This is a view that I have made plain to the chairman, and we hope that the company comes to the same view.”
Source: Thanks smh.com