Frydenberg tells Rio Tinto to hire Australian CEO

Treasurer Josh Frydenberg has told the chairman of Rio Tinto that the company’s next chief executive should be Australian along with the majority of its directors.

The rare high-level political intervention in a corporate appointment comes after pressure from institutional investors led the London-based board to force the exit of CEO Jean-Sébastien Jacques and two senior executives over the detonation of the Juukan Gorge caves in the Pilbara.

The Treasurer phoned Rio chairman Simon Thompson on Friday to express his strong views.

“Rio Tinto is one of the great companies of the world with a proud Australian history,” Frydenberg told The Australian Financial Review. “With the vast majority of its revenue coming from Australia, it is fitting to once again see an Australian as CEO along with the majority of the board.

"It was a constructive conversation.”

This political pressure will greatly increase the stakes for the dual-listed company in its attempts to recover from the massive reputational damage created first by the explosion and followed by the board’s weak response.

Rio’s chairman has said Rio cannot afford to make its choice of chief executive on nationality alone and that the appointment had to be based on skills and experience. That’s even though Thompson has committed the company to greater engagement with Australia and a more senior role for one of the three current Australian directors, Simon McKeon.

Frydenberg is still making it clear the Morrison government does not regard this as sufficient to satisfy its concerns about Rio Tinto, although he is not insisting the company's headquarters should also be moved to Australia.

The federal Treasurer’s ability to directly enforce conditions on Rio is limited but its board and investors will be aware of the problems that could be created by ignoring his call for an Australian CEO.

The Western Australian government is also demanding big changes, including far more connection between the board and management and the state. State Treasurer Ben Wyatt has condemned the “vast distance” between a board in St James Square and where Rio generates most of its global earnings – in the Pilbara.

Rio is in reality a Pilbara company with some overseas interests, Wyatt argues, but currently without the knowledge, the presence or the relationships there that it should have.

But Australian shareholders, including Australian industry super funds and the Future Fund, only add up to around 15 per cent of Rio Tinto’s register even though they have been among the most influential of those calling for resignations and board change.

The biggest individual shareholder is actually a Chinese company, Chinalco, which has 11 per cent after the then Labor government thwarted its attempt to take a much bigger stake in the company over a decade ago.

British and American shareholders now own more than half of the company’s shares and were initially less exercised by the debacle of Rio’s disastrous management of the growing crisis in Australia.

Board momentum only changed after the company’s discredited internal review – conducted by another Australian director, Michael L’Estrange – produced a damp squib last month.

Critics, including institutional shareholders, argued that merely docking the bonus payments of three well-paid executives, Jacques, his corporate affairs head Simone Niven and head of iron ore, Chris Salisbury, was totally inappropriate.

Thompson, who had originally agreed these three were the best placed to fix the problems, had to backtrack along with the rest of the board, its credibility battered.

The three will now leave the company over the next several months with Rio belatedly acknowledging systemic failures delivered on their watch, particularly Jacques’ decision in 2016 to move cultural heritage issues into the corporate relations area.

Even so, the executives’ departure is officially described as “by mutual agreement” and all will receive massive multimillion dollar payouts in addition to their previous generous remuneration.

That is part of the cost of the failure of the company’s own review to hold them more responsible for the debacle.

Thompson’s own duration as chairman is also under question although he insists his priority must be finding the right chief executive. At the moment, Jacques is staying until next year given there is apparently no internal candidate who could even become acting CEO in the meantime.

Canberra’s unhappiness with the lack of attention to Australian concerns and management of issues by the London headquarters of Rio Tinto is not new.

The company has been run from London since the merger of Rio Tinto and CRA in 1995 despite the fact so much of its profit derives from its thriving Pilbara iron ore operations. That is in contrast to having to write down what proved to be some shocking and expensive acquisitions outside Australia over the years.

While Thompson concedes the company’s commitment to shift more staff from London to Australia will continue, he is resisting any idea of moving the London headquarters as some investors are suggesting.

But Peter Costello has used his position as chair of the Future Fund and also his own history as former federal Treasurer to criticise Rio Tinto’s inadequate response to the Juukan caves as being part of a broader lack of appreciation of Australia.

The company’s record of shifting control was another reason Costello insisted when Treasurer on much stricter conditions on the 2001 merger of BHP and Billiton (now undone again) to ensure the management and board remained Australian-operated.

Rio Tinto is sounding more enthusiastic about increasing the number of Australian directors even if the three Australians currently on the board don’t appear to have exerted much influence on the company’s direction under Jacques.

In addition to McKeon and L’Estrange, Megan Clark, who began as a geologist and is currently head of the Australian Space Agency, is the other Australian board member.

The crisis for the board and management exploded in May along with the 46,000 years of cultural heritage that was blown up in the detonation of the Juukan Gorge caves in order to access iron ore.

It became obvious this particular incident was the outcome of years of neglecting growing indigenous sensitivities as well as deliberate changes in Rio Tinto’s internal structure and personnel, including a downgrading of its anthropological expertise.

Jacques was almost invisible in the initial response but met the traditional owners, the Puutu Kunti Kurrama and Pinikura (PKKP) people, last week after spending two weeks in quarantine in Western Australia.

This was too late to divert an emergency board meeting at the end of last week in order to finally accede to the increasing shareholder demands for a much tougher response.

Having now made its own position plain, the federal government will be waiting to see how that translates in practice.