Features Australia

Business/Robbery etc.

19 September 2020

9:00 AM

19 September 2020

9:00 AM

Rio Tinto’s ‘cave-in’: a major boost to shareholder activism

A triumph of shareholder activism in a good cause – or a warning of a serious threat of politically correct agendas to be publicly thrust upon corporate Australia? Good, in the form of London’s Rio Tinto at last recognising its obligations to Australia, may have come from evil, with Rio eventually ‘caving in’ to public pressure in parting with its three senior London-based executives involved in the blast last May that destroyed 46,000-year-old Aboriginal artifacts in pursuit of $135 million worth of Pilbara iron ore. It was what the media has described as the ‘strident demands’ from Australian investment managers such as former treasurer Peter Costello-chaired giant governmental $160 billion Future Fund and Rio’s largest Australian shareholder AustralianSuper that forced a ‘massive retreat’ by the Rio Board. As the SMH reported, ‘Large investors that forced Rio Tinto to remove its CEO have warned the miner that they expect the shakeup to lead to it forging stronger ties with Australia’ and its indigenous heritage. Already one of the small minority of three Australians on the 12-member Rio board has been promoted to ‘lead independent director’, a modest gesture that goes nowhere near quieting the mounting calls for Rio Tinto to return to Australia in line with its broken undertakings to the Keating government on merging with CRA in 1996.

But the activists’ public success has consequences. Rio only succumbed because the Australian fund managers (only 15 per cent of London-based Rio’s shares are held by Australians) enlisted the support of their overseas counterparts; until then the Rio board is reported to have believed international investors had been ‘pacified’ by the flood of cash (and doubled share price) flowing from the continuing iron ore boom and, in line with their global warming concerns, ‘CEO Jean-Sebastien Jacques’ adroit exit from coal’. Nevertheless, the potential for the local public exercise of power by activist Australian shareholders has now been demonstrated. Corporate Australia is on notice that it is no longer a collection of self-perpetuating private bureaucracies whose owner-shareholders are so scattered that no one really has had control. Apart from a few smacked hands at annual general meetings, the boards of most major Australian companies have behaved as if they were responsible only to themselves, selecting their own replacements, determining their own remunerations and setting their own agendas. Not anymore. The wave of public applause for the well-deserved disciplining of an arrogant London-oriented miner that earns 80 per cent of its profits in Australia (on only one third of its stated assets), has yet to take into account what may be some uncomfortable unintended consequences of that unprecedented public exercise of shareholder power.

As the Australian editorialised at the weekend, the Rio experience ‘is a cautionary tale for all businesses of how unrelenting lobby groups have worked their way through funds managers to become a potent force to monitor and police a smorgasbord of social justice issues’. Noting that pension funds have emerged as king-makers or executioners, it warns ‘Investment funds with billions of dollars under management are themselves responding to new pressures that capital be better aligned with socially progressive ideals as reflected in onerous reporting provisions on climate change action, diversity and environmental performance’. And it expresses concern about what the full cost of a more assertive investment community with a social justice agenda might be: ‘Aboriginal interests and those of the wider community have not always been best served when pressure groups have used Indigenous concerns to lock development and push their own ideals’.

The massively mounting share-registry power of those investment professionals who manage other people’s money, especially through the three-trillion dollar superannuation industry, had already increasingly been expressed in private, as in the effective restructuring of the Commonwealth Bank. But what the Australian described as Rio’s ‘blunt reply’ on its Juukan Gorge disaster being due to ‘sins of omission not commission’ and imposing some cash penalties, prompted fund managers to go public, with AustralianSuper stating that ‘the proposed penalties fall significantly short of appropriate accountability for those responsible’. The Australian Council of Superannuation Investors joined the chorus of criticism and warned it ‘will continue to engage with Rio Tinto to understand how the company will manage this transition period’ while outgoing $10 million-a-year CEO Jean-Sebastien Jacques remains in office until next March or until an earlier replacement is found. The $52 billion HESTA superannuation fund is also publicly demanding that ‘changes in senior leadership should not distract from the need for an independent and transparent review of all current agreements between the company and traditional owners. The nature of these agreements and how they are negotiated represents a systemic risk for investors that will not be mitigated by executive changes. The board has yet to adequately demonstrate to investors that they have appropriate governance and oversight arrangements in place to manage this risk’. And just to spread the joy to mining in general, the super industry’s Responsible Investment Association reckons the Rio Tinto ‘scandal’ had uncovered systemic issues within the mining industry over its approach to cultural heritage. If you thought that corporate Australia was already in the hands of activist agenda-pushers, you ain’t seen nothin’ yet.

By the way, a reader has pointed out that my recent depiction on this page of former Rio Tinto CEO Tom Albanese having ‘engineered’ the blocking of BHP’s 2009 takeover bid through the Chinese state-owned Chinalco suddenly becoming Rio’s largest shareholder, relied on the ‘popular fiction’ at that time, and that there has been no official public evidence that any Rio executive initiated the ‘rescue’ move. However, this ‘popular fiction’ has not been officially denied and in last weekend’s Australian Robert Gottliebsen noted: ‘to rescue the corporation the Londoners turned to a Chinese state-owned enterprise Chinalco which is now the major shareholder with just under 15 per cent’. Nevertheless, in the absence of formal evidence, I acknowledge that the word ‘welcomed’ may be more appropriate than ‘engineered’.

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