Rio made a fateful miscalculation, and it isn’t over yet
They thought they’d gotten away with it.
It was late May and Rio Tinto, having destroyed 46,000 years of indigenous heritage enclosed within caves deep in the West Australian Pilbara, was expecting blowback from traditional owners. The mining giant knew it would make headlines. The strategy was to ride out what it thought was going to be a wave of initial criticism.
During the next six weeks it seemed Rio's reading of the situation was impeccable.
Back then, none of the board members could have imagined that within three months the wave of protest from traditional owners would have burgeoned to a shareholder-led tsunami of dissent – one large enough that it has wiped out three of Rio’s most senior executives, including chief executive Jean-Sébastien Jacques.
Rio Tinto chief executive JS Jacques is disappointed about the decision he leave the company.Credit:Daniel Munoz
And it isn’t over yet. Rio knows that Australia’s biggest industry fund Australian Super is looking for board changes and will continue to agitate until there is a larger weighting of Australian directors around the table.
Rio’s concession to making itself more Australian-centric is to elevate one of its three Australian-domiciled directors, Simon McKeon, to the role of ‘senior independent director’. It’s a start but it won’t be enough for shareholders looking for a more extensive overhaul.
In June, Rio's board figured it could snuff out the embers of dissent with its announcement of an internal review conducted by one of its own directors, Michael L’Estrange.
The move was designed to reassure the small number of shareholders that had raised concerns with the Rio board that it was looking at accountability and solutions to ensure that such a debacle would never happen again.
The board had studied various other executive and board lynchings, in particular that of Westpac. But where Westpac's board had overseen the incineration of billions in capital, Rio hadn't. Rio thought it was safe.
It turned out to be an epic miscalculation. Just how epic became apparent two and a half weeks ago when the findings of the internal investigation were released.
Described variously as a "whitewash", "riddled with problems" and "unbelievable", the review of cultural heritage management did nothing to allay shareholder concerns.
But it was Rio’s answer to accountability – docking the bonuses of three executives, including Jacques' of $7 million in total – that incensed shareholders.
The aftermath of the report’s release was brutal, particularly for Rio’s chairman Simon Thompson who said on Friday he has fielded calls from 75 large shareholders.
Investors escalated to a chorus of howling. Investors were getting increasingly public and critical – with many stating that the sanctions on executives were not even close to reflecting appropriate accountability.
The board had studied various other executive and board lynchings, in particular that of Westpac. But where Westpac's board had overseen the incineration of billions in capital, Rio hadn't. Rio thought it was safe. It turned out to be an epic miscalculation.
The charge for Rio to take proper accountability was being overwhelmingly led by Australian shareholders, in particular the $175 billion industry fund, AustralianSuper.
They wanted heads to roll, and they wanted changes to the board.
The Australian shareholders could have prevailed alone, but about ten days ago the situation pivoted again when numerous UK shareholders stepped into line behind their Australian peers.
They also wanted heads to roll, and they wanted changes to the board.
Even then Rio was in a dilemma because it retained the backing of the enormous base of passive US investors, who were encouraging the board not to cave in to the demands of Australian and British shareholders.
The waters were further muddied by Rio’s dual UK-Australian listing, which meant the company had two sets of shareholders. Rio Plc has a larger market capitalisation and is dominated by the big US funds and its 15 per cent Chinese shareholder Chinalco.
Rio clearly doesn’t want to engage in any immediate changes to the board, lest it appear like a total governance rout.
But it will be interesting to see how Rio transitions into a company that reflects the reality that the vast bulk of its earnings and assets are Australian.
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