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Contents

Problem.. 1

Reasons for Rio Tinto’s governance problems in China. 3

Works Cited. 5

Problem

The governance strategies employed by Rio Tinto present the company with problems that are somehow different from the ones experienced by other listed companies that operate within China. Jia and Tomasic indicate that the main reason why there are many governance problems in the company’s operations in China is staff paying corruption (16).

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One of the most publicized corruption cases was unveiled in July 2009. During this time, Stern Hu, an Australian citizen and a former head of Rio Tinto in Shanghai, together with three local employees, Ge Minqiang, Wang Yong and Liu Caikui were arrested. According to a statement made by the Intermediate People’s Court in Shanghai, the prosecutors accused the Rio Tinto employees of abuse of their powerful positions. They used their positions to seek profits for others. They also asked for and illegally accepted large sums of money from owners of steel enterprises within China, according to the prosecutors. The four Rio Tinto employees also face charges of trade secret infringement. They also obtained commercial secrets from other companies by receiving bribes from the competitors of these companies.

State-run media and top government officials had earlier reported that security officials were in possession of strong evidence of the state secrets theft in the case. The government also indicated that the four Rio Tinto employees had caused ‘huge economic losses’ to Chinese state-controlled steel makers. Rio Tinto, on its part, has strongly denied any wrongdoing by insisting that all the employees had adhered to the company’s strict ethical guidelines.

However, notes Yao, the highly publicized case was perceived by many as a retaliatory effort by the Chinese government after Rio Tinto rejected a $19.5 billion investment negotiated with Chinese government officials (831). China is known for her weak legal system, whereby members of the judiciary are answerable to the Communist Party. However, Rio Tinto’s top executives seem to have overlooked this problem when deciding on whether to accept the deal or not. This is an indication of a weakness in the company’s governance structures as far as its operations in China are concerned.

In June 2009, Rio Tinto announced that it had scrapped a 19.5 billion involving Chinalco, Aluminum Corp.’s holding company. Instead of pursuing this deal, which would have secured a 9% shareholding by the Chinese government, the company launched a rights issue valued at US$ 15.2 billion. The scrapped deal had been slated as China’s largest single offshore investment also signaled the formation of a 50-50 venture between Rio Tinto and BHP Billiton Ltd.

The company’s board indicated that the Chinalco deal appeared less valuable, considering the recent market movements and attempts by Chinalco to change the details of the deal. The breaking of the deal was detrimental to the company’s relations with Chinalco. It is ironic that the management of Rio Tinto indicated that future relations with Chinalco were still a possibility.

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Some institutional shareholders were angry with the decision made by the top executives of Rio Tinto, citing poor monitoring and governance strategies. This is because their shareholding in Rio Tinto was going to be diluted in the prevailing market conditions. The management is believed to have bowed to pressure from the Australian government, which was interested in maintaining control over the company’s decisions for reasons of national interest. In the months leading up to breaking the deal, politicians and members of the Australian business community were urging the government to block the deal.

Corruption is injurious to efficient governance systems since it impacts negatively on Rio Tinto’s reputation, especially in situations where staff members are involved. Claims of poor monitoring and governance among Rio Tinto leaders seem justifiable considering that these same officials are the ones who announced on February their intention to establish a strategic alliance with Chinalco. The move had been motivated by the company’s monumental net debt, which stood at US$38.9 billion in October 2008. According to Lai, a huge chunk of this debt arose from its acquisition of Alcan, a Canadian aluminum producer, for about US$38 billion in 2007 (35).

Mr. Hu and two staff members who reported directly to him, Liu Caikui and Ge Minqiang, admitted to the graft charges leveled against them. On his part, Wang Yong did not plead guilty. Wang was a member of a sales team through which the ore from one Pilbara operation was being channeled. It is through this channel than US$ 9 billion are believed to have been paid out to Wang, a Rio Tinto employee. The alleged money train involving Mr. Wang may be an ultimate indication that the internal governance and monitoring systems at Rio Tinto are not as effective as the executives of the company had originally hoped.

Reasons for Rio Tinto’s governance problems in China

Rio Tinto’s governance problems have been fuelled chiefly by corruption. The main reason why corrupt activities are rampant among the company’s staff is that the existing organizational structure creates room for these practices. Monitoring and evaluation systems permit corruption to continue taking place with the company, either through paying out o bribes or disclosure of commercial secrets.

Although Rio Tinto’s problems in China are an indicator of the difficulties that investors in the lucrative Chinese market face today, it is also a measure of Rio Tinto’s governance weaknesses. Sadler states that the company has been reluctant to face the uphill task of strengthening its internal regulatory structures in order to stamp out corruption (37). The company’s executives also have not done enough explaining regarding their decision to reject a deal they had initiated in the first place. They have not explained the perception of inconsistency that they instilled in the company’s shareholders. Therefore, the shareholders have ended up concluding that the huge debt level is an outcome of these regulatory and organizational weaknesses.

Another reason for the corruption problem is that Rio Tinto’s executives do not understand they are not merely corporate players. They are players in international politics as well. Therefore, their corporate decisions have tended to fail to take into consideration not only the market conditions but also political circumstances between China and other countries, particularly Australia, which is critical to the company’s future strategies. One concern expressed as an outcome of the Hu’s bribery case is the manner in which Australians will be perceived by the Chinese in the future. Rio Tinto’s top executives do not seem to be pondering over the best management strategies to adopt. Additionally, they have not borne in mind the unfolding developments in China-Australia relations, in order to make the necessary organizational-structural mechanisms.

Works Cited

Jia, Xinting and Tomasic, Roman. Corporate Governance and Resource Security in China: The Transformation of China’s Global Resources Companies, London: Routledge, 2009.

Lai, Xiao.A Research of Chinese Companies’ Cross-border Mergers & Acquisitions (M&A) Deal, MA in Finance and Investment, University of Nottingham, 2008.

Sadler, David.“Trade unions, coalitions, and communities: Australia’s Construction, Forestry, Mining, and Energy Union and the international stakeholder campaign against Rio Tinto”, Geoforum, 35. 1 (2004): 35-46.

Yao, Shujie and Sutherland, Dylan “Chinalco and Rio Tinto: A Long March for China’s National Champions”, The China Quarterly, 199.2 (2009): 829-836