By Daniel Litvin, Managing Partner of Critical Resource
[See base of article for background and declaration]
It was in May that Rio Tinto blew up a 46,000-year-old sacred Aboriginal shelter in Western Australia to make way for the expansion of an iron-ore mine. Yet the reputational and political aftershocks of the tragedy continued for months afterwards. Now, under intensifying pressure from ESG-minded investors, Australian politicians, and activists, Rio Tinto has announced that its CEO, Jean-Sébastien Jacques, will be leaving the company alongside two other senior executives. Rarely in the corporate world has a crisis stemming from the ‘social license to operate’ claimed such senior heads as this.
What should senior executives of other companies make of this? It would be easy to smirk and indulge in schadenfreude. But they should understand that while Rio Tinto’s actions were context-specific, unjustifiable and ultimately self-destructive, what drove them was a set of common failures of internal systems around social issues that also pose challenges within many other firms. CEOs (both of resource firms and other sectors) should urgently seek to learn the lessons. Five lessons in particular stand out.
1. Beware neglecting the ‘S’ in ESG: it holds the key to huge commercial, as well as social, value
Executives often see the ‘S’ of ESG as being softer, less-disaster prone (by contrast the cost of ‘E’ catastrophes are well recognised; think oil spills and tailings-dam collapses, for example). But particularly when corporate errors on ‘S’ chime with current societal concerns – and protecting the culture of Aboriginal groups is rightly a deep concern in Australia – outrage can build a powerful and costly political momentum.
This is an era of growing societal anxieties, including over race, inequality, and the power of elites. Large, seemingly powerful corporations make obvious symbolic targets in public debates over these concerns. Moreover, as the Rio Tinto episode vividly demonstrates, investors are increasingly assertive and swift in their reaction to ‘S’-type controversies.
To give one other recent example, the share price of Boohoo, the UK retailer, almost halved earlier this year after allegations of abusive labour practices in its domestic supply chain. Importantly, the episode occurred in the wake of the country’s Covid lockdown, amid deep social anxieties about the pandemic’s effects on jobs and employment. For Rio, as well as the obvious impact on relationships with key investors and the dramatic changes to the top team, the drain on management time has been huge. Its future projects across the world also now risk becoming slowed down due to heightened suspicions from local communities. These days, corporate acts seen to contravene societal norms may require symbolic and high-profile acts of repentance.
2. Avoid taking too much pride in strong ESG policies and ratings
Companies should not be lulled into a false sense of security by the fact they have strong policies on ESG issues or indeed score highly in ESG metrics used by investors. Many senior executive teams take comfort from such indicators. As a result, companies often focus great energies on developing detailed corporate-level standards or disclosing these to achieve higher ESG scores with the investors – but this can distract attention from actually ensuring policies are implemented on the ground.
Rio Tinto had a seemingly complete and sophisticated set of policies, standards and guidance on social and cultural heritage issues. It also performed reasonably on various ESG metrics used by investors (for example, it was rated the top mining company in Corporate Human Rights in 2018 and 2019). Likewise, Boohoo had been awarded strong ESG scores in advance of its own labour-practices disaster. But just as corporate policies may be disconnected from on-the-ground practice, ESG methodologies used by investors are often too crude, broad-brush or too reliant on desktop research, to provide any real predictive insight (either to companies or, for that matter, to investors) as to where major exposures to corporate reputation at the asset level actually lie.
3. Build and value a strong social radar for the company
Executives at all levels need to strengthen their social, political and cultural antennae – or bring those that have them in-house and value their expertise. Rio Tinto’s own board inquiry into the events around Juukan Gorge indicates that such antennae were absent at key moments among relevant executives of its Western Australian iron ore business. The reputationally-dangerous nature of the planned course of action should have been apparent to those aware of the cultural significance of the site concerned.
An underlying factor here is that many senior executives in resource companies, as in other sectors, are educated in (and are often brilliant at) quantitative disciplines such as finance, engineering or geology. Though some are also highly attuned to societal topics, a fair few others are less intuitively sensitive to softer issues, such as the likely stakeholder and political reaction to a planned corporate course of action. Moreover, managing social challenges often requires painstaking navigation of delicate relationships; they rarely can be fixed by imposing the sort of engineering solutions with which a mine manager, say, may be familiar.
Rio Tinto has been criticised, fairly or not, for hollowing out its in-house team of social experts and anthropologists. But few corporates have truly embedded a diversity of societal perspectives in-house. And at times such as these when cost-control is dominating corporate agendas, many firms will be tempted to cull such internal experts whose contribution to long-term value, though surely significant, is difficult for those who view the world through numbers actually to quantify.
4. Ensure bad socio-political news flows upwards within the organisation
Information on potential societal risks facing projects clearly must be channelled upwards to top executives well before any potential blow up – but internal corporate dynamics often keep such data buried. Rio Tinto’s board inquiry reveals that it was only days before the blast this year – and after the explosives had already been laid so that they were dangerous to dismantle – that top executives at the headquarters were made properly aware of the cultural significance of the site. Yet that was around six years after an archaeological report funded by the company described part of it as “one of the most archeologically significant sites in Australia”.
Rio Tinto’s basic information systems in this area were inadequate, as its board review pinpoints. But across all corporates, country or site-based management who wish to make a case to the corporate centre for investment dollars for the projects they have been working on and are personally attached to (that is, most local managers of most multinationals) have little incentive to give awkward societal risks due weight in their reports. Better instead to bury them in long documents they know will never be read by the time-pressed CEO.
This problem is compounded by the fact that societal risks are far more difficult to summarise in short form for senior management compared with say predicted financial outcomes for a project (where a single NPV or IRR number can be quickly grasped). In busy corporate life, what cannot be briefly synthesised is often left unmanaged.
5. Foster internal dissent on societal issues
Finally, internal structures for managing social issues need to foster independent thinking and, wherever needed, internal dissent in this area. More of this within Rio Tinto would surely have allowed the critical information to have bubbled quicker to the top of the organisation. But across many firms, those charged with managing societal issues are either at the fringes of the organisational structure or their mandate is weak, framed primarily in PR terms (that is defending the company against external attack rather than removing any grounds for attack).
CEOs should instead provide such executives with clearer status and a mandate partly as the guardians of the company’s social values (in the same way they look to legal teams or HSE departments to guard against corporate infractions in their respective areas). Regular independent reviews of societal risks are another important tool.
It may be that regular internal frictions result from all this, as social executives seek to clip the wings of operational managers here and there. Of course, the entrepreneurial spirit can be dulled by too many internal nay-sayers. But for top executives, the noise of a few such internal battles may be the best reassurance they not about to walk blindly into a much bigger external controversy.
Daniel Litvin is the founder and managing partner of Critical Resource, which advises companies on sustainability and ‘license to operate’ risk, and author of ‘Empires of Profit: Commerce, Conquest, and Corporate Responsibility.’
Declaration: Simon Thompson, the chair of Rio Tinto, is a member of the Senior Advisory Panel of Critical Resource; please note that all views expressed here are Daniel Litvin’s personal views.