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1RMIT Classification: TrustedGraduate School of Business and LawMBA Programs Strategy Case Study Series # 2020-8Problems from London Head Office to Outback Australia: Resolving CorporateGovernance and Aboriginal Reconciliation Issues at Rio Tinto LimitedAcknowledgement:This case has been prepared by Timothy O’Shannassy for teaching strategy in MBA programs in the Collegeof Business at RMIT University. Copyright 2020.MBA Programs Strategic Management Case Study Series Editor-in-Chief: Dr Timothy O’Shannassy, SeniorLecturer, Graduate School of Business and Law, College of Business, RMIT University, 379-405 RussellStreet, Melbourne, Victoria 3000 Australia, Telephone +61 3 9925 0111, [email protected]Keywords: corporate governance, risk management, aboriginal reconciliation, diversityIntroductionThere has been much speculation in the Australian business press on the merits of Rio TintoGroup (Rio Tinto) being led from head office in London. Rio Tinto has a dual stock exchange listedstructure comprising Rio Tinto Limited on the Australian Stock Exchange (ASX) and Rio Tinto plcon the London Stock Exchange that reflects the ethos, history and major sources of capital for thebusiness. The London head office is a great distance from the biggest division by sales revenue andprofitability – the Pilbara iron ore operations in Western Australia. Head office location andperformance presents a strategic management problem.One ongoing concern for some years at Rio Tinto Group has been risk management afterdifficulties emerged in relation to merger, acquisition and divestment activity during the tenure ofTom Albanese as Chief Executive Officer (CEO) from May 2007 to January 2013 (Walters, 2013).This era at Rio Tinto Group underperformed for shareholders with significant impairments on assetsimpacting annual results. Problem issues in this period included weakness in decision-making atexecutive level, questionable Investment Committee practices (Walsh, 2016), and shortcomings inboard of director oversight (Walters, 2013).The Board of Directors and Risk Management2RMIT Classification: TrustedCurrently Rio Tinto conducts risk management across the whole business portfolio withemphasis on all organisation layers being able to identify, assess and manage risk in areas like M &A, divestment, occupational health and safety, and cultural sensitivity (Rio Tinto, 2019).Rio Tinto has been heavily criticised in Australia in 2020 for the company’s decision to blastthe 46,000-year-old Juukan Rock Shelter heritage site to expand the Brockman 4 iron ore mine, withthe board and executive scrambling to rebuild the relationship with the Puutu Kunti Kurrama andPinikura people (Hastie, 2020).The Morrison Australian Government is furious with the Juukan Rock Shelter blast and theirreparable damage – a strategic error symptomatic of a business being run from London for London.Board composition and oversight of the executive influences firm performance (Fitzroy, Hulbert andO’Shannassy, 2016), and may be an issue here. There are six United Kingdom based companydirectors, four Australian based directors and one each from Canada and France – refer to Table 1below for further details. Chairperson and CEO co-tenure is low and a concern at the moment withchair Simon Thompson appointed to the role in March 2018 and CEO Jean-Sebastien Jacquesappointed in July 2016 (Rio Tinto, 2019).The Business EnvironmentThe impact of Covid-19 has been traumatic economically for many countries across the world(Lowe, 2020). Global gross domestic product (GDP) is expected to fall between 6% and 7.6% in 2020before recovering to 2.8% growth in 2021; many in the community have lost their jobs or are onreduced work hours and consequently reduced income, with younger age groups bearing much of theburden in Organisation for Economic Co-operation and Development (OECD) developed countries(OECD, 2020).In Australia there is a strong and growing awareness of aboriginal disadvantage, respect forAboriginal artefacts and culture, and need for national reconciliation (Hastie, 2020).Technology is continuing to evolve and is having a number of impacts in iron ore and broadermining sector (Rio Tinto Limited, 2019). All players in this industry are seeking to improve the use3RMIT Classification: Trustedof transport, automation and robotics. Technology disruption is a material risk in this industry (BHPGroup Limited, 2019).The Morrison Government has been reluctant to embrace long range emissions targets andusing a price on carbon as a market-based solution to emissions (Gluyas, 2020). Climate changeTable 1: Rio Tinto Board Composition and Demographics (Rio Tinto, 2019) NamePositionLocationGenderAgeDateAppointedSimon ThompsonChairpersonUnited Kingdom(UK)Male6003/2018Jean-SebastianJacquesCEOLondon HeadOfficeMale4807/2016Jakob StausholmChief FinancialOfficerLondon HeadOfficeMale5109/2018Megan ClarkINEDAustraliaFemale6111/2014David ConstableINEDCanadaMale5802/2017Simon HenryINEDUKMale5804/2017Sam LaidlawSenior INEDUKMale6402/2017Michael L’EstrangeINEDAustraliaMale6709/2014Hinda GharbiINEDFranceFemale4903/2020Simon McKeonINEDAustraliaMale6401/2019Jennifer NasonINEDAustraliaFemale5903/2020Ngaire WoodsINEDUKFemale5709/2020 4RMIT Classification: Trustedand a greener future is an increasing concern of the international business community including theAustralian business community (Coles, 2019).The mining industry is a capital intensive business with great rivals such as BHP GroupLimited, Fortescue Metals Group Limited, Hancock Prospecting Pty Ltd and Vale S.A. investingsignificant financial resources. There are high financial stakes in play here (Rio Tinto, 2019).The materials sector is a strong component of the ASX with many small and medium size firmsplus these big rivals. The big challenge for any materials sector public company is to get access toquality resource assets, then achieve economies of scale in operations to ensure asset efficiency (BHPGroup Limited, 2019).In relation to buyer power China is the world’s largest purchaser of iron ore. There is a limitednumber of suppliers of key commodities including iron ore, copper, magnesium and alumina. Theprice for iron ore has been favourable in the past financial year (Rio Tinto, 2019).In relation to supplier power the major iron ore players in Australia set out to be connected totheir local communities, deliver strong community engagement, a desirable location for the workforceto live, transport links and a Covid-19 free work environment – these are strategic priorities forsustainable operations (Fortescue Metals Group Limited, 2019).Threat of substitutes for a material such as iron ore is scrap, and aluminium is being increasinglyused in mobile phones, jet engines, motor vehicles and aircraft (Rio Tinto, 2019).Critical success factors required for survival in the industry include occupational health andsafety, workforce, mining engineering, transport technology, transport capability, exploration,network alliances, distribution channels and research and development.Company AnalysisRio Tinto Group has operations in 36 countries and communicate their strategy as follows: “Ourstrategy is to create superior value for shareholders by meeting customers’ needs, maximising cashfrom our world class assets and allocating capital with discipline” (Rio Tinto, 2020a).5RMIT Classification: TrustedRio Tinto is arranged into four main operational businesses: Aluminium (2019 Earnings beforeinterest, tax, depreciation and amortisation (EBITDA) USD 2.29 billion), Copper & Diamonds (2019EBITDA USD 2.07 billion), Energy & Minerals (2019 EBITDA USD 1.76 billion), Iron Ore (2019EBITDA 16.10 billion) plus Growth & Innovation and Commercial (Rio Tinto, 2019; Rio Tinto,2020b). Funding, design and build of each operation is carefully managed with safety, cost controland performance to schedule high priorities (Rio Tinto, 2019).There are four Group strategic priorities. First the portfolio of low cost, long term assets offeringmarket growth opportunities. Second performance with focus on operational excellence, safety, valueprioritised over volume. Third partnership – working thoughtfully and responsibly with partners (i.e.governments, community groups, local suppliers, industry leaders, NGOs, technology providers),Finally people – access to, developing and retaining the best talent; a diverse and inclusive workforceglobally, plus growth of technical and commercial capability through centres of excellence (RioTinto, 2019).Diversity is promoted with an increase woman in senior management roles 2% p.a. and 50% ofeach graduate intake is woman; more to do (Rio Tinto, 2020c). Rio Tinto has 47,000 employees withtalent development and retention a priority (Rio Tinto, 2019).The Commercial division of Rio Tinto Group maintains the focus on the customer. Mineral andmetal products are used in a wide range of everyday products including motor vehicles, coffee podsand smart phones. Strong supply chain control is maintained through construction and managementof end-to-end logistics (i.e. rail, port, ship). Rio Tinto is mindful of the impact of operations on theenvironment and the significance of this for brand management. China is a big importer of Rio TintoGroup iron ore including its high quality Pilbara BlendTM iron ore – better geographic spread of saleswould assist risk management over the medium to long term (Rio Tinto, 2019).Technology is a critical success factor for Rio Tinto especially as it relates to use of artificialintelligence, automation and robotics. An operations centre is located in Perth and is the base fromwhich the AutoHaulTM operations are managed. STEM capability development is important to Rio6RMIT Classification: TrustedTinto including the benefits of learning and feedback from data-insight. STEM is promoted inpartnership with QUT, UWA, McGill University and Polytechnique of Montreal (Rio Tinto, 2020c).Group Revenue is up in the past financial year due to high iron ore prices; 2019 results alsoshow a substantial impairment charge of USD3.49 billion mainly related to delays with the OyuTolgoi, Mongolia project and an impairment on the Yarwun alumina refinery and Weipa bauxitemines in Queensland – refer Table 2 below for the financial summary. Rio Tinto maintain strong cashflow generation capability, though delays on major projects can create big financial swings (RioTinto, 2019).The Strategy Challenge at Rio Tinto LimitedAverage tenure on the board of directors is an issue here. Are there enough women on theboard? How would you assess the financial efficiency of Rio Tinto? Calculate the interest cover,return on assets and return on equity ratios using the information in Table 1, then go to the Rio TintoAnnual Report for 2019 and extract any further financial data that will assist you in conducting furtherfinancial ratio analysis and making recommendations for the future strategy of this organisation. Inparticular comment on the dividend payment capability of the Group plus the available time andresources to deliver the strategy you propose. Will you recommend a change to risk management andboard of director structure arrangements? How can Rio Tinto better manage indigenous issues in thefuture? Are industry conditions favourable?ConclusionRio Tinto clearly have corporate governance and top management team issues to address inrelation to their overall strategic management. One school of thought in the media is that Rio Tintois run from London for London. This is a major issue when core cash flow is dominated by operationsin Australia, especially in a region where Aboriginal reconciliation is a high Federal and StateGovernment priority.7RMIT Classification: TrustedTable 2: Rio Tinto Summary Audited Financial Data 2017 to 2019 (Rio Tinto, 2019) (United States Dollars (USD)Millions)201720182019+/- % ChangeSales40,03040,52243,1657%Earnings before interest and tax14,47418,20011,767-35%Net interest/finance expense(1,658)(33)(648)1864%Net profit before tax12,81618,16711,119-39%Net profit after tax8,85113,9256,972-50%Basic earnings per share490.4 cents793.2 cents491.4 centsTotal assets90,94987,802Total liabilities41,12642,560Net equity49,82345,242Net cash generated11,82114,912Debt to equity ratio0.830.94 8RMIT Classification: TrustedReferences:BHP Group Limited, 2019. Annual Report, Melbourne, Australia.Coles Group Limited, 2019. Annual Report. Melbourne, Victoria.Fitzroy, P., Hulbert, J. and O’Shannassy, T. 2016. Strategic Management: The Challenge ofCreating Value, 3rd Edition, Routledge Publishing, London, UK.Fortescue Metals Group Limited, 2019. Annual Report, Perth, Western Australia.Hastie, H. 2020. ‘Rio chief to say sorry to gorge owners’, The Age, 1 September 2020,http://ezproxy.its.rmit.edu.au/login?url=https://www-proquestcom.ezproxy.lib.rmit.edu.au/docview/2438719888?accountid=13552, viewed 1 September 2020.Gluyas, R. 2020. ‘Call to end 10-year war over climate’, The Weekend Australian, June 27-28, p. 22.Lowe, P. 2020. ‘Covid-19, the labour market and public sector balance sheets’, Address tothe Anika Foundation Online, 21 July, https://www.rba.gov.au/speeches/2020/sp-gov-2020-07-21.html, downloaded 28 July 2020.Organisation for Economic Co-operation and Development, 2020. Global economy faces atightrope walk to recovery, 10 June, http://www.oecd.org/newsroom/global-economy-faces-atightrope-walk-to-recovery.htm, viewed 4 September 2020.Rio Tinto Limited, 2019, Annual Report, Melbourne, Australia.Rio Tinto Limited, 2020a. Our Strategy,https://www.riotinto.com/can/about/strategy#:~:text=Our%20strategy%20is%20to%20create,%2C%20People%2C%20Partners%20and%20Performance., viewed 12 August 2020.Rio Tinto Limited, 2020b. Our Business, https://www.riotinto.com/about/business, viewed 12August 2020Rio Tinto Limited, 2020c. People, https://www.riotinto.com/sustainability/people, viewed 12August 2020Walsh, S. 2016. ‘How I did it…the CEO of Rio Tinto on managing in a hypercyclicalindustry’, Harvard Business Review, March: 33-36.Walters, K. 2013. ‘Why Rio Tinto gave its CEO, Tom Albanese, a push’, SmartCompany,https://www.smartcompany.com.au/people-human-resources/leadership/why-rio-tinto-gave-its-ceotom-albanese-a-push/, viewed 4 September 2020.

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