Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Martin Currie sells down Rio Tinto on governance issue
It’s not only big super funds, such as Australian Super, which have taken a stick to Rio Tinto over the destruction of a 46,000-year-old Aboriginal heritage site at Juukan Gorge in Western Australia, forcing the departure of the chief executive, head of iron ore and head of corporate affairs. ESG-orientated fund managers have also been active on the governance problem at the mining giant.
Martin Currie, the international equities manager, sent a note to clients last week, (September 17) advising them the firm had downgraded Rio through Martin Currie Australia’s (MCA) ‘management, governance and sustainability’ ratings which support its ‘active ownership’ process. The upshot was the sale of all Rio shares in its Ethical Income portfolios and a down-weighting across its more general portfolios. MCA has also called for a full board review and an assessment of its competency and policies.
The client note, ‘Governance on watch for Rio Tinto‘, published on the firm’s website (www.martincurrie.com/australia), says that the changes following the incident, in late May, which drew condemnation from around the world, and after which the company originally imposed financial penalties on management before bowing to pressure to dismiss those directly responsible, were “welcome, but not enough”. MCA says it would expect the board, too, should shoulder accountability for the destruction of the caves “given this points to a complete lack of governance and board oversight.
The note says: “The appointment of Simon McKeon, an existing non-executive director, to the role of ‘senior independent director, Rio Tinto Ltd, to enhance board engagement in Australia and work with stakeholders to deliver the changes set out in the board review, is a step in the right direction, but we still want to see a [full] board review and assessment of the board’s competency and policies.”
Will Baylis, MCA portfolio manager, said that Rio had previously had a very good track record, especially in the 1990s, in dealing with indigenous groups, showing respect for the traditional owners of the land and their sacred sites. “We find it extraordinary that processes, board and management oversight have all failed in this instance,” he said. “This shows a change in culture and raises important unanswered questions about the board and management structure.”
The Pilbara region of Western Australia had an estimated 30,000 sacred sites dating back to up to 60,000 years and Rio had been operating in and around the area for decades, Baylis said. In fact, Rio commissioned a report on the Juukan caves by Dr Michael Slack, an anthropologist, in 2014, who described the caves as making up one of the most significant in Australia for cultural heritage and importance to the Puutu Kunti Kurrama people.
“Rio Tinto has now admitted that the report should have been used to elevate the importance of the site to senior management, rather than to just lead to two excavations of the caves. This points to a complete lack of process and involvement of senior management responsible for the Pilbara iron ore,” the MCA note says.
MCA raised a ‘red flag’ against Rio for its ethically screened investible universe, which precludes the stock from Ethical Income strategy portfolios, and reduced the company’s ‘quality’ rating from three to four, which has meant a “heavily” reduced holding across all portfolios because it imposes a higher hurdle to invest.
“Before we are able to lift the ‘red flag’ for our Ethical Income strategy, or improve our Quality rating, we will need to see greater traditional owner representation within management of Rio Tinto and more accountability to believe that management and the board have a genuine intent to change the culture of Rio Tinto and embed traditional owner rights and heritage management in the DNA of the company,” the note says.
The three Rio executives to lose their jobs are: Jean-Sebastien Jacques, global chief executive, Chris Salisbury, head of iron ore, and Simone Niven, head of corporate affairs. So far, no compensation has been offered to the local indigenous population, who may be interested to learn that Simone Niven was understood to be on a total annual remuneration package of $3.3 million. Ian Silk, the chief executive of Aussie Super, and Debby Blakey, chief executive of HESTA, have both gone public with their criticism of the company and have demanded further action.
– G.B.
Note: Martin Currie is a sponsor of Investor Strategy News. The views expressed are those of the author and not necessarily those of Martin Currie.
