Shareholder Revolt at Rio Tinto Highlights Deepening Relationship Between ESG and Pay

A revolt at Rio Tinto marks the first remuneration report rejection of the year in both Australia’s ASX 100 and the UK’s FTSE 350 — and underlines the increasing focus shareholders are placing on ESG, and on its relationship to executive pay. That relationship was discussed at length at CGI Glass Lewis & Guerdon Associates’ recent Governance & Remuneration forum, and the vote result serves to illustrate some of the takeaways from that discussion:

  • Boards need to exercise justifiable discretion to deal with unintended consequences. Transparent disclosure of the procedure undertaken to address such outcomes is important from shareholders’ point of view.
  • To ensure CEO/executives are accountable for high-profile ESG controversies, boards need to consider shareholder expectations before deciding remuneration outcomes and whether discretion should be exercised.
  • Prompt and adequate responses to ESG controversies are important to avoid accelerated reputational damages.

So what happened at Rio?

Under the group’s unique ‘dual listed companies’ structure, shareholders of Rio Tinto plc (listed in the UK) and Rio Tinto Limited (listed in Australia) vote jointly on a range of matters, including pay. At its 2021 AGM, the multinational miner’s UK and Australian remuneration reports were each rejected by more than 60% of votes cast.

Remuneration report votes effectively serve as a retrospective, advisory look at pay decisions made in the past year. Notably, a separate binding vote on the company’s remuneration policy, mandated by UK law, received overwhelming support, demonstrating that the problem lay not in the pay structure but in how it was implemented.

Shareholder concerns centred on the company’s destruction of two ancient rock shelters in the Juukan Gorge, and its subsequent response. The blasting, which caused irreversible damage to a 46,000-year-old Aboriginal cultural heritage site in the Pilibara region of Western Australia, occurred in May 2020 as part of the expansion of an iron-ore mine.

Following an internal review, in August 2020 the board found the group chief executive, Jean-Sébastien Jacques, along with the chief executive for iron ore and the group executive corporate relations, ultimately responsible for the failure to implement an adequate heritage management system. Moreover, the company determined that Mr. Jacques would not be entitled to receive any bonus awards with respect to FY2020, and that a malus reduction of £1 million would be applied to Jacques’s 2016 LTIP awards, which were due to vest in 2021.

At the time, a number of stakeholders expressed concern that the financial penalties were insufficient and that, to rebuild relationships, changes in leadership were required to move the company forward. This sentiment ultimately led to the retirement of Mr. Jacques and the two other executives identified by the review. In addition, in March 2021, Simon Thompson, chair of the board, announced his intention to retire at the conclusion of the 2022 AGM, citing ultimate accountability for the failings that led to the event.

However, the turnover did not fully mollify investor dissatisfaction regarding the proportionality of the pay reductions, and the terms of Mr. Jacques’ departure appear to have further exacerbated the situation. As a good leaver, all of his outstanding awards will vest as scheduled, subject to pro-rating for time worked and the achievement of applicable performance conditions. Moreover, despite the adjustments outlined above, Mr. Jacques’ FY2020 remuneration still totalled £7,224,000.

In the AGM results announcement, the board states that the voting outcome was “a response to the extent of the malus adjustment applied to unvested LTIP awards of the former Chief Executive, Chief Executive Iron Ore and Group Executive Corporate Relations” and that the committee will “engage further with shareholders in response to the 2020 Remuneration Report vote. The Committee will take time to reflect further on the feedback already received and on any new input obtained from this subsequent engagement.”

Indeed, continued engagement will be necessary to regain the trust of investors and, in line with the provisions of the UK Code, we expect to see comprehensive updates on this process in 6 months’ time.  The remuneration committee’s responsiveness to the result will be crucial. While remuneration report votes are advisory in each market, the rejection counts as a “first strike” under Australian law. If the next Australian remuneration report receives >25% opposition, the company would receive a “second strike” and shareholders would immediately vote on a “spill resolution”; if the spill received majority support, all directors would have to stand for election at a subsequent general meeting.

Moreover, the consequences go beyond remuneration. Megan Clark, the sustainability committee chair, also received approximately 26% of votes against her re-election. The board attributed the votes against Ms. Clark’s re-election to the fact that she “shares accountability for the failings in the areas of communities and social performance that led to those events occurring”; however, Ms. Clark is the only Australian based NED of significant tenure remaining on the board. The board have concluded that Ms. Clark should remain on the board to provide stability and Ms. Clark is leading the board’s oversight of the implementation of the Board Review recommendations into cultural heritage management.

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The vote results at Rio Tinto’s AGM illustrate how investors and public companies are increasingly recognizing the importance of ESG oversight, as well as the relationship between sustainability and executive pay. An understanding of that relationship, and how other parts of the governance agenda fit together, is embedded throughout Glass Lewis’ approach to proxy research.

Here are some ways we help investors manage their governance programs:

  • Industry-leading Proxy Paper analysis that avoids ‘tick-the-box’ for a company-specific approach, based on a deep understanding of how different aspects of the AGM agenda are interrelated
  • Controversy Alerts highlighting material ESG and reputational risks that demand additional scrutiny
  • A variety of Thematic Voting Policies covering Climate, ESG, and more – each one ready to vote right out of the box, or fully customizable.
  • A growing library of thought leadership, including the recently updated In-Depth report on Linking Compensation to Sustainability.

For more information, contact your Client Service Manager. If you’re not a Glass Lewis customer, email GROW@glasslewis.com (institutional investors) or ENGAGE@glasslewis.com (public companies).