Breakingviews - Rio Tinto board can choose CEO – at expense of ESG

A miner holds a lump of iron ore at a mine located in the Pilbara region of Western Australia December 2, 2013.

LONDON (Reuters Breakingviews) - Simon Thompson is in a tricky position. Rio Tinto’s, chairman attempted last month to draw a line under the company’s disastrous decision to blow up Aboriginal heritage sites to make way for iron ore mines. It didn’t work. With shareholders pushing for something tougher than axing Chief Executive Jean-Sebastien Jacques’ 2020 bonus and a chunk of his long-term incentive plan, a bigger sacrifice is needed.

Viewed purely through the lens of shareholder value, Jacques’ position should be secure. Rio’s share price is up by over 40% over the last six months and near an all-time high; the FTSE 100 Index is flat over the same period. The Frenchman, in situ since 2016, has also avoided the industry pitfall of making a large, overpriced acquisition. His policy of sweating iron ore assets, which accounted for three-quarters of last year’s group underlying EBITDA, makes sense considering the commodity fetches $127 a tonne, a six-year high.

The problem for Rio’s board is that it is 2020, and many investors are paying closer attention to environmental, social and governance issues. Though the explosions at Juukan Gorge in Western Australia were legal, it’s an ESG mess that also raises serious questions about the company’s processes.

After giving their initial consent to Rio’s plans, the indigenous Puutu Kunti Kurrama and Pinikura people concluded the sites were of exceptional archaeological significance long before they went up in smoke. Jacques’ defence – that he wasn’t told until it was too late – implies either poorly designed reporting lines or a reluctance among lower-ranking Rio executives to give the boss unwelcome news. Neither is a good look, or an easy cultural fix.

Thompson has three main options. He could dock more pay from Jacques. He could force out senior lieutenants such as iron ore boss Chris Salisbury, and maybe some directors. Or the chairman could conclude that Jacques has to go.

The first option looks inadequate and increases the risk that a substantial minority of Rio shareholders register their displeasure by voting against the board’s remuneration report for the second year running. That would put the board in jeopardy. Too soft a response could also make it harder for Rio to secure mining licences elsewhere in the future. And there’s a danger that the company becomes a pariah with ESG investors. With billions of dollars flowing into sustainable investing strategies, backing Jacques might prove costly.


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