THERE is a whiff of revolt in the air. We saw it three weeks ago at the big oil company, Royal Dutch Shell. This was followed last week at Rio Tinto and, unless Dryblower is misreading his tea leaves, we’ll see it again next Thursday at OZ Minerals.
Linking each event is a dispute between the owners of the companies, the shareholders and the hired help, management.
Until recently, owners were generally a passive lot, prepared to accept the recommendations dished out by managers.
The global financial crisis, falling profits and disappearing dividends has changed that cosy relationship.
For the first time, owners are challenging the pay packets managers award themselves, sometimes on the spurious grounds that “the chap up the road gets more than me therefore I deserve the same”.
They are also questioning the strategic advice of management, and have shown an increasing willingness to force a showdown.
The Shell dispute over how much the directors and senior managers are paid led to an embarrassing vote of no confidence in salary recommendations, and played a role in the retirement of the chief executive.
The Rio Tinto dispute was the second round in a bruising encounter between owners and management that has been largely seen in Australia as a battle over the relationship between resource companies and China.
The looming OZ Minerals showdown is also being portrayed as an Australia versus China stoush.
Part of that view is correct, but only part. The real struggle is between management (including directors) who have pushed hard for a particular course of action which has been resoundingly rejected by the owners.
It’s the new-found willingness of shareholders to express publicly their anger at the way a company is being run that is the real sea change we are watching.
While the good times rolled, share prices rose and dividends flowed, lazy shareholders copped nonsense arguments from management over matters such as pay packets, politely overlooking the fact that 90% of a company’s improving performance was a combination of good luck and a rising tide of customer demand.
In the case of some companies, a trained (or untrained) chimpanzee could have delivered the same results.
Shell’s problems were all about bloated costs. Rio Tinto’s problems are all about a company which swallowed a poisoned pill in the form of a vast debt load to acquire the Alcan aluminium business in order to make itsself unpalatable to its arch rival, BHP Billiton.
OZ Minerals’ problems are much the same as Rio Tinto. Excess debt, and an awful merger with the zinc-mining specialist, Zinifex.
As far as Dryblower is aware, no one from the management teams at Rio Tinto or OZ has stood in front of the owners of the business and said “sorry, we really got it wrong”.
Excuses have included falling commodity markets, and falling exchange rates, classic management factors for which the directors and senior executives were handsomely rewarded to, well, manage.
Back in mid-2007 Dryblower and quite a few other casual observers of the resources sector could see the writing on the wall.
Prices had risen too far, too fast. A bubble of immense proportions had developed in all asset classes. Pop time was not far off.
That the bursting of the bubble took another year is irrelevant. Astute managers are paid to prepare for these events, and many astute investors did take evasive action – but not the management of Rio Tinto or OZ.
The owners at Rio Tinto obviously had a gut full when their hired help tried to sell effective control of the business to the central committee of the Chinese communist party, represented by a puppet business called Chinalco.
The BHP Billiton solution proposed on Friday is the start of a remedy, but it will struggle to pass anti-monopoly regulators, and it is yet to be accompanied by the sight of directors falling on their swords.
OZ Minerals is moving towards a similar result. Management caused the problem, and has proposed a dubious Chinese solution.
Worse still, OZ management appears determined to not put before the owners of the company an alternative proposal from Royal Bank of Canada and Resource Finance Corporation.
The official line from OZ management is that the RBC/RFC proposal is “not superior” to that from Beijing, and OZ shareholders will not be given the right to consider it when they meet on Thursday.
That is outrageous, and if there is not an owner’s revolt then the shareholders of OZ deserve what they’re getting.
OZL Price at posting:
$9.10 Sentiment: Buy Disclosure: Held
