By Tirthankar Mukherjee
Any writer – barring the meanest hack and maybe authors of potboilers in the original sense (and I presume to exclude myself from fellowship with either) – is encouraged by feedbacks, appreciative or even otherwise, so I enjoyed it when at an informal exchange of views I was accused of softness towards the exorbitantly high-paid senior mining executives in a recent column. In point of fact, I had been nothing like that and had merely said that success at such jobs demanded several honed skills from the holder. Since that was usually in short supply, those who claimed to have them could bid high.
In rebuttal, I was referred to a speech given at an industry gathering by Tom Albanese, chief executive of Rio Tinto until he was ousted early last year, purportedly, and to me unconvincingly, showing how people with such “extraordinary” skills could misjudge developments. I could not ascertain the date or precise occasion of the speech, nor could I access a transcript, but even a brief report of it did make interesting reading, though saying little to support my critics’ contention, for what was said could hardly be taken as a lack of professional competence. Albanese said mining companies were too slow to spot sentiments among investors souringfrom mid-2011, and this failure allowed the wave of change to gather size and strength, to eventually sweep out a generation of executives, some more renowned than others, but all formidable figures in global mining. “We didn’t react fast enough,” Albanese said,the “we” encompassing the string of executives toppled by writedowns at the world’s largest mining firms, as boom-year deals failed to bloom on schedule, and turned out to be bloomers.
Such things have likely become case studies for discussion and dissection at B-schools, but it might still have hurt Albanese to recall for his audience that when Rio’s half-year earnings were released in August 2011, he and the company had felt they were announcing positive numbers. Indeed, it reported record cash flow and record profits.Investors, though, were watching screens “filled with red”, he said, and Rio Tinto’s shares fell. Instead of demanding more growth, investors had begun to feel nervous.
The speech was quite an occasion, for it was (probably) Albanese’s first public appearance since his not-too-gracious departure from Rio. He continued, “It felt like panic was setting in... We said this is not us, this is not our problem. We should have said this is us, this is our problem. At that point the sentiment changed very quickly -- a matter of three weeks -- and it never turned. It probably took us 18 months to get that.”
Albanese left Rio in January 2013, ending his six-year tenure at the top after the world’s third-largest mining company announced a $14-billion writedown almost entirely on the value of his two most significant acquisitions, the Alcan aluminium group and Mozambican coal.The deal to buy Mozambique-focused coal miner Riversdale -- pursued as Rio came under pressure to move into what was seen as the next coking coal frontier -- was completed in June 2011, just months before the turning point Albanese has now identified. “Even if we had had that clairvoyance in August 2011, it would have been very hard to turn back,” he said of projects approved before that turning point, arguing investors were pushing for growth only months before.
Mongolians have a particular reason to remember Albanese because it was during his stewardship of Rio Tinto that the OyuTolgoi Investment Agreement was signed, and that is why his account of what led to his fall from grace could be especially interesting. Which way their sympathy should lie is not for me to guess or suggest, and in any case, I narrated this only in reference to alleged failures or perceived misjudgements on the part of bosses.
Whatever your views are, no one can expect clairvoyance to be among the assets of a chief executive, as Albanese hints, but one way he can guard his company’s and his own flanks is not to have anybody else know too much about what is happening to him and it. And that is not so easy in this electronic age. Indeed, some time ago the advisory firm Ernst & Young (E&Y) warned mining and metals companies that cyber-hacking could become one of the top ten strategic risks in the near future. Mike Elliott is called Global Mining and Metals Leader at E&Y and he believes that the increased importance of the sector in global supply chains has made it a lucrative target. The problem is that the inevitably increasing reliance of companies on technology also makes the sector more exposed.
“Cyber hacking targets are no longer just the names, many more companies across the sector are now vulnerable,” Elliott recently said.“Mining companies are becoming far more reliant on integrated IT [information technology] systems in their drive to improve productivity and bring down costs, and this makes them more exposed and vulnerable to cyber attacks.”
Elliott has noted that, simultaneously, the relative importance that these commodities play in global, regional and local supply chains means the companies dealing in them have become priority targets and this has been exacerbated by the extreme price volatility E&Y expects to rule the market for the next two to three years. Indeed, a recent report by E&Y has revealed that some 41% of mining and metals sector respondents reported an increase in external cyber threats in the 12 months preceding the survey.
The advisory firm identified three types of groups likely to target mining and metals companies: Criminals, national governments and a brotherhood sometimes called hacktivists.This would mean that many companies who previously thought they would not be targets are now vulnerable.
The danger for mining and metals companies is that cyber-hacking and information security have often been narrowly viewed as an IT issue in the past, but Elliott says in his introductory comments to a report, “The risk is heightened by the centralised nature of many business functions across supply chains now, and the dependence of operations on sophisticated IT systems. A top-down approach from the board and executive is needed to ensure the issues and threats are understood and addressed.”
Only 18% of mining and metals sector respondents to the report believed their information security arrangements fully met their organisation’s needs, while a further 44% indicated that their organisation did not have any threat intelligence programme in place, and 38% had something that could be called only an informal one. E&Y said that this left companies unprepared to understand and identify a cyber-attack-on-information security threat. Where do Mongolian companies stand?
This has been a rather rambling piece, and soI may be pardoned for ending with an anecdote told at the gathering I referred to at the beginning. It was originally told by Curt Monash, the genius who graduated from Harvard at the age of 19, and is now a leading analyst of and strategic advisor to the software industry. He was standing with Nobel Prize winner Ken Arrow by a bank of elevators on the ground floor of William James Hall at Harvard. Three elevators passed them on their way to the basement. When he said, “I wonder why everybody in the basement wants to go upstairs,” Arrow responded, almost instantly: “You’re confusing supply with demand.”
That is what works with salaries also, both high and low.