ESG Focus: Rio, Cleanaway Boards Break A Sweat

ESG Focus | Sep 17 2020

Corrected version. When this story was initially published it mistakenly referred to the Australian Financial Review which should be The Age. This has now been corrected.

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
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The resignation of Rio Tinto's corporate chiefs and the recent chastising of Cleanaway's CEO Vic Bansal have shifted the corporate spotlight from the "E" and the "S" to the "G" for governance – and boards are feeling the pressure.

By Sarah Mills

Anyone might be forgiven for thinking FNArena slightly obsessed with the resources and waste-management industry, following a series of articles recently.

But it is only because the pair continue to grab ESG headlines, and often for different reasons every time.

The ESG interest this time lies with the “G” governance, both incidents pointing to potential sweeping change in board cultures across all industries.

The most recent news on Rio Tinto last week was the resignation of its chief executive Jean-Sebastien Jacques, and iron-ore chief executive Chis Salisbury – and interestingly, the corporate affairs chief Simone Niven – in response to the Juukan Gorge incident.

Cleanaway chief Vik Bansal, meanwhile, was reprimanded by the board for multiple instances of “unacceptable conduct” after an investigation revealed he had created a “culture of bullying and harassment” and placed on final notice.

Such pressure on CEOs, previously almost unheard of, appears to be becoming more frequent. More interesting, is its reflection on the state of mind of boards.

Starting with Rio Tinto, most people shrugged when its CEOs were issued with salary penalties, and there was a general, if slightly uneasy, confidence, that boards and CEOs could rest assured of a return to business as usual. 

Then the resignation bombshells were dropped. The playing field tilted. The rules of the game had changed. This signalled strong and serious intent by the powers that be on ESG; or so I thought.

But then I was dining with a fellow board colleague (BC) yesterday, who advised that CEO sackings were not the solution and that the buck may not have stopped at the CEO on the Juukan Gorge incident. There was still the “G” to consider.

Firing the CEO is buck-passing, BC reminds me. Boards cannot continue to use management as scapegoats or nothing changes. Everything is top down and comes from the board, including the culture. The corporate playbook is crystal clear on this.

Whether heads will roll on Rio Tinto’s board has yet to be seen, but the London Daily Mail reports that the Chairman Simon Thompson’s “flaccid” handling of the incident is understood to have erupted into a boardroom row. It seems at least a few board members have broken a sweat.

The faint odour of fear is detectable in both the Rio Tinto and Cleanaway responses.

After 30 years of an apparent accelerated purge of ethics from business, it appears the tables are turning.  

Historians of purges will remember that, particularly under police state principles conceived by Ivan the Terrible and enacted with regularity in Communist Russia and Chinese dictatorships, purges are regularly employed for the soul purpose of shaking up the status quo and reminding the inner circle of who wields the power. 

It will be the consistency of enforcing standards set and punishments meted that will distinguish ESG as more than just a purge instrument and a genuine tool for change.

Boards are on notice, and they know it. Shareholders are starting to catch on.

The Cleanaway board has acted swiftly on complaints about Vic Bansal, a state of affairs that, in an industry as dirty as waste management (excuse the pun), would have been unheard of 10 years ago.

The share price fell sharply following the news.

As noted in previous articles, the waste-management industry occupies a pivotal space in the transition to a circular economy and it is likely that it will continue to attract close board and cultural scrutiny over the next few years.

Another interesting takeout from the Juukan Gorge incident is how poorly structured politically companies are to deal with ESG issues, given most ESG issues pivot around concepts of engagement. 

The Age points out that a few disastrous forays in Africa had led Rio Tinto to embark on rounds of cost-cutting in its operations. As usual, the marketing and communications departments were among the first casualties. The AFR suggests these cuts led to the breakdown in communications with indigenous landholders and other errors.

The interesting thing about the Rio Tinto incident is that it draws attention to the long-term trend of persecution towards these strategic communications subject-matter experts within the corporate sector. 

Not being profit centres, marketing and communications, although vital to company profits, have largely been sidelined in all but fast-moving consumer goods companies in which their contribution to the bottom line, while no more quantifiable than in B2B companies, would never be questioned. 

Large pools of knowledge and experience have been destroyed and many corporate affairs departments have been reduced to the fluffy top-down message purveyors that the largely legal, accounting and IT management fraternity perceive them to be. That and crisis management, which is often outsourced to hedge internal political communications risk, and because it is rarely called upon. 

(It is fair to say that in a post-ESG age crisis management in its current incarnation appears as an anachronistic, reactive modus operandi – one that often relies heavily on a lack of corporate ethics and moral courage for its very existence.)

The marketing and communication industry’s representation on boards is also parlous.

Houston, we have a problem. Big data and e-tailing are changing all that even for the boffin-denominated B2B market. And now boards can add ESG to that mix.

Engagement and communication (both up and down; and respectfully among external stakeholders) may end up being the deciding factor between those boards and management that survive in a post-ESG world and those that don’t. 

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

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