Public

Rio Tinto (RIO) 2017 AGM Voting Intentions

Company/ASX Code : Rio Tinto Limited (RIO)
Registry : Computershare Services
Poll/Show of Hands : Poll on all items
Webcast : Yes
Venue :
9.30am Sofitel Sydney Wentworth
61-101 Phillip Street
Sydney, New South Wales
Monitor : Mr Duncan Seddon
AGM Details / NoM : Thursday 4th May, 2017

Much improved outlook for Rio, as Simandou investigations continue

The company monitor had a pre-AGM meeting with the Chairman.

ASA Position
Not Applicable
Item 1: Consideration of accounts and reports

Financial performance

This year has seen the company's fortunes recover from the collapse of last year's income which forced an abandonment of the company's progressive dividend policy, to one of considerably improved outlook due to a significant recovery in the iron ore price supplemented by a significant recovery in the price of both thermal and coking coal.

On the statistics, Rio has still a reasonable operating margin at 20% but depreciation charges relative to gross profit (GP) are over 60%. Interest charges remain low (15% relative to GP). NPAT relative to sales is relatively healthy 14%. The current ratio is low (62%) and receivables relative to sales are 10%. These metrics indicate that Rio is in a position to borrow significant sums to fund acquisitions. Despite major cuts to capital expenditure this is still high relative to GP (43%).

This much improved outlook has improved the prospect of higher levels of dividends being paid.  The company has rewarded shareholders with a dividend of 170 US cents per share, well above the previously indicated 110cps (US) indicated minimum dividend and a US$500m share buy-back.

Key events

Overshadowing the improvement in fortunes, the key event has been (and still is) an investigation into bribery and corruption at the company's Simandou operation in Guinea.  Regulatory authorities in UK, USA and Australia have been informed and each is conducting independent investigations of the allegations. Simandou is regarded as the world's largest undeveloped iron ore province. The company has now disposed of this asset to Chinalco – their Chinese partner in the Guinea iron ore deposit and Rio Tinto’s largest shareholder. Clearly there is a long way to go in this.

As well as this, the company is in the process of selling the old "Coal and Allied" NSW thermal coal operations to Yancoal.

Key Board or senior management changes

The Simandou affair has resulted in the dismissal of several senior executives and the restructure of the key management group and the departure of several other senior executives. LTI bonuses to previous CEOs have been suspended in light of the ongoing investigations.

There have also been several board changes with two board members departing, including Anne Lauvergeon who only joined the board in 2014.  Three new board members are expected to be elected this year, all with strong experience in the oil and energy business.

ASA focus issues

Female representation on the board has now fallen to 2 out of 12, which is below ASA’s guideline of 30%.

The collapse in the share price last year saw many of the board members fall below the company's target for shareholdings by NEDs. The recent improvement in the value of the company's share price has improved the position but has exposed the company's low hurdle of owning an equivalent to the base fee in shares. The problem is that the base fee is very low (2016: £90,000) and all board members receive further fees for other committee work so that in practice a board member earns multiples of this base fee (typically US$250,000 or more). We raised this issue at our pre-AGM meeting with the Chairman and indicated we would want to see an improvement in the company's policy in relation to skin-in-the-game.

Summary



For 2016, the CEO’s total actual remuneration was 69 times the Australian Full time Adult Average Weekly Total Earnings (based on November 2016 data from the Australian Bureau of Statistics).


ASA Position
For
Item 2: Approval of Directors Report on Remuneration and Remuneration Committee Chairman Letter

As per last year, the company has presented shareholders with extensive remuneration reporting and two resolutions on remuneration. This is partly the consequence of the dual listing of the company in the UK and Australia and the necessity of complying with different approaches to remuneration reporting and shareholder resolution requirements. Overall the reports are clearly written and are comprehensive as to the approach and consequences of the remuneration policies. This resolution is required under UK law and is advisory only.


ASA Position
For
Item 3: Approval of Remuneration Report

This resolution is of primary concern to Australian shareholders since it forms the basis of the two strikes policy. However, like other dual listed companies, the two strikes policy is meaningless since the entire board stands for re-election every year anyway.

The extensive and clear reporting is to be welcomed.  In the past we have been critical of the report because the short term incentive payments are too high relative to the executives’ base salary. Furthermore, the LTI awards are paid on relative TSR rather than absolute TSR, which means that executives can get rewarded even when shareholders lose money.

This year the company's fortunes have improved, mainly as a result of rising commodity prices. Rather than this fortuitous result flowing on the executive STI bonuses, we have seen the company using a procedure to cap the potential STI outcomes. This is to be welcomed as last year we were critical of the way STIs were used to boost salaries in a time of poor financial performance of the company.

Also of note is the outcome of remuneration of executives embroiled in the Simandou affair. The company is to be congratulated for curtailing and clawing back bonuses of those involved.  This is fully detailed in the remuneration report.

The significant changeover of key management personnel makes comparison of this year's outcome with last year's somewhat meaningless.

Note: In the sections below, LTD refers to Rio Tinto Ltd (ASX) and PLC refers to Rio Tinto plc (FTSE).


ASA Position
For
Item 4: Approval of potential termination benefits for Australian law purposes

This resolution stems from the potential conflict of Australian legislated termination payments and those agreed by the company of individual contracts and those sanctioned by shareholders by the remuneration policy. This termination cap is broadly equivalent to an average of 12 months base salary.  As an international operating company, Rio has over 700 employees covered by various agreements and in various jurisdictions who would be affected. This resolution enables management to comply with the various contractual executive termination benefits within various jurisdictions in which the company operates. The approval, if obtained, will be for a 3 year period.  We will support this resolution.


ASA Position
For
Item 5: Re-election of Ms Megan Clark as a Director

Ms Clark, an Australian citizen, is the ex-head of the CSIRO and prior to that was with BHP as the VP technology. She has a background in economic geology.  She is chair of the company's sustainability committee. She is a director of CSL and sits on three advisory boards. She is not overloaded. We voted for her election last year.

Ms Clark earned US$314,000 in fees and owns 3,215 shares in LTD valued at $139,000. As she was appointed in November 2014, we look forward to her accumulating more shares given her level of board and committee fees.


ASA Position
For
Item 6: Election of Mr David Constable as a Director

Mr Constable stands for election at this year's AGM. He is the ex-CEO of Sasol and has wide international engineering experience with Fluor Corporation. He is well suited for the board. He has two external directorships (Anadarko Petroleum and ABB Ltd) and is not considered to be overloaded.

He was appointed in February 2017 and earned no fees to end of 2016 and owned no shares in the company.


ASA Position
For
Item 7: Re-election of Mr Jan du Plessis as a Director

Mr du Plessis was appointed as a director in 2008 and elected chairman of the board in 2009. As chairman he seems to be slowly changing the board and composition for the better and we continue to support his efforts. Mr du Plessis has announced that he will retire as Rio Tinto chairman no later than the company's 2018 AGM. He will also soon join the BT Group (British Telecom) board as director and will become the chairman in November.

Mr du Plessis owns 30,000 shares in PLC with the recovery in the share price this has a value in excess of his fees and allowances of US$1,078,000 (which was lower than last year). 


ASA Position
For
Item 8: Re-election of Ms Ann Godbehere as a Director

Prima facie Ms Godbehere (a former bank CFO and bankrupt bank rescuer – Northern Rock) is not overloaded with three other listed company directorships (BAT, UBS and Prudential). Ms Godbehere was paid US$230,000 in fees and allowances but only owns 3,100 PLC shares valued at US$120,000.


ASA Position
For
Item 9: Election of Mr Simon Henry as a Director

Mr Henry is the ex CFO of Shell Nigeria and would be an asset to the company. He has one other external appointment (Lloyds) and is not overloaded. He was appointed a director with effect from 1 April 2017. We discussed Mr Henry's involvement with Shell Nigeria (in relation to current corruption allegations associated with a Nigerian oil deal) with the Chairman at our pre-AGM meeting and are comfortable with the assurances received. We intend to vote in favour of this resolution. 


ASA Position
For
Item 10: Election of Mr Jean-Sebastien Jacques as a Director

Mr Jacques was appointed to the board in March 2016 and became CEO in July 2016. Prior to this, he was CEO of the copper and coal group. He has no external appointments other than chairman of the International Copper Association.

He has 21,127 PLC shares valued at $819,000 and we expect him to increase this shareholding in light of his recent promotion to CEO. 


ASA Position
For
Item 11: Election of Mr Sam Laidlaw as a Director

As a solicitor with extensive experience in the oil and gas industry he took up a board position in February 2017. He is a director of two companies (HSBC and Neptune Petroleum) and is not considered to be overloaded. We will support his election to the board.


ASA Position
For
Item 12: Re-election of Prof Michael L'Estrange as a director

Professor L'Estrange was appointed in September 2014 and is an Australian citizen is a full time employee of the National Security College at the ANU. He is no longer head but holds a professorial position. We have discussed his time commitments with the chairman and believe he is not overcommitted. Prior to this L'Estrange has served as high commissioner to the UK and earlier as a policy advisor to various Liberal opposition leaders prior to becoming Secretary to Cabinet under John Howard. He has the distinction of gaining two Blues for cricket whilst on a Rhodes scholarship to Oxford.  He was first elected to the board in 2014.

Professor L'Estrange earned US$262,000 in fees and owns only 2,003 shares in LTD valued at $86,000. He increased his shareholding significantly in 2016 and we expect him to continue to accumulate more shares so that he can be sufficiently aligned with shareholders.


ASA Position
For
Item 13: Re-election of Mr Chris Lynch as a Director

Mr Lynch, an Australian citizen, is the ex CFO of BHP, and is now CFO of Rio. With Walsh he was seen as being instrumental in improving the performance of Rio. He has no external appointments.

Mr Lynch earned US$5,384,000 in fees and allowances but despite being associated with the company more than 4 years, he has only accumulated US$714,000 of shares in PLC and LTD, however, we note this is a significant improvement on last year. We expect him to accumulate considerably more shares in the next few years in accordance with ASA guidelines and the company executive shareholding policy.

ASA guidelines are now for only one executive to be on a company board but it would seem churlish to vote against his re-election to the board at this juncture.


ASA Position
For
Item 14: Re-election of Mr Paul Tellier as a Director

Mr Tellier previously served on the board of Alcan. He is the director of several non-listed Canadian companies and is not overloaded. We have supported his election since 2007 and see no reason to change.

Mr Tellier earned US$259,000 in fees and allowances and owns 25,371 PLC shares valued at US$984,000. The ratio of share value to fees is an excellent 380%.


ASA Position
For
Item 15: Re-election of Mr Simon Thompson as a Director

Mr Thompson is fully loaded with the chairmanships of Tullow Oil PLC and 3i Group. Interestingly he has a degree in geology and extensive work experience with Anglo American (base metals and aggregate) and fits our requests for a mining expert on the Board. We supported his election last year and will support his re-election this year.

Mr Thompson earned US$204,000 in fees and owns 7,458 shares in PLC valued at US$289,000. Since he was only appointed in 2014 this is a statement of aligning his personal finances with those of the retail shareholders.


ASA Position
For
Item 16: Re-election of Mr John Varley as a Director

Mr Varley is ex CEO of Barclays and should have useful experience (Barclays survived the 2008 credit crisis better than most UK banks) and is currently a director of Blackrock Inc. and is not overloaded.  He was first elected in 2012. We will continue to support his election.

Mr Varley earned US$300,000 in fees and allowances and owns 9,685 shares in LTD valued at US$375,000 and so has good skin-in-the-game.


ASA Position
For
Item 17: Re-appointment of auditors

This is a procedural vote required under UK law and hence required to be passed as part of the dual listing structure by Rio Tinto Limited.


ASA Position
For
Item 18: Remuneration of auditors

Auditor remuneration is reasonable, slightly lower than last year at $17.4 million (2015, $18.4 million) of which the audit cost was $13.5 million (2015, $14.4 million).


ASA Position
For
Item 19: Authority to make political donations

The ASA is opposed to political donations and the company states that it is Rio's policy not to make political donations. We discussed the resolution in more detail with the Chairman and understand that seeking shareholder approval is in line with practices in the UK where there are stricter rules regarding political donations and that it is still Rio's policy not to make political donations. In light of this, we intend to support the resolution however we will be asking at the AGM about expenditure associated with the recent WA mining tax campaign. 


ASA Position
For
Item 20: Renewal of off-market and on-market buyback authorities

We have voted against this in the past as we have a concern that this authority will cause an undue loss of franking credits, which are considerable in the Rio Tinto Ltd accounts and which would be useful to Australian resident shareholders. Despite this we supported the resolution last year as it facilitates capital management and we will continue to support the resolution this year.



The individual(s) (or their associates) involved in the preparation of this voting intention has a shareholding in this company. 


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