'Speak up' is the lesson from Rio

Anthony Hilton
10 Feb 2009

One criticism heard increasingly of some of the banking boards worst-affected by the credit crisis is that, in the run-up to it, they all behaved like sheep, with no one baa-ing out of turn.

If that has taught us anything, it should be that we need to be doubly alert when there are signs of dissent in any other boardroom, and to treat it as significant unless it can be proved otherwise.

Jim Leng - the man who was scheduled to become chairman of Rio Tinto later this year, having been appointed to the post just three weeks ago - abruptly quit the board of the mining giant yesterday. That is dissent in anyone's book.

It is something you don't see every day - indeed I can't remember seeing such a thing in a company this size in 40 years.

The Leng version of events, or strictly speaking the version of those close to him, is that he thinks Rio Tinto has a financial problem, born of its overpriced acquisition of Alcan at the top of the market.

Therefore, Leng is said to feel, Rio needs a financial solution - also known as a rights issue. The board, and particularly Tom Albanese, reckons that the problem can be solved by selling significant chunks of the business to the Chinese, for cash. Leng quit because you could not have a chairman so at odds with the chief executive over something so fundamental.

That alone makes him remarkable. Too often directors suppress their dissent in order to hold on to their board seat.

But it would have been particularly difficult to do so given that the weekend's Sunday Times pictured Leng receiving an award as Non-Executive Director Of The Year.

An immediate problem, however, is that a straw poll shows other FTSE 100 chairmen and chief executives don't believe this can be the whole story.

The general assumption is that "there has to be more to it than that". And this brings us to the second point. Presumably there is similar scepticism among Rio's institutional shareholders, and at the very least they should press for an immediate meeting with management to get the full story.

Institutions have complained to the Treasury Select Committee that boards pay them insufficient attention, and ignore them when they ask awkward questions.

Now is the time for them to employ the strategy advocated by Eric Knight, of activist investment group Knight Vinke.

They should put their questions in public and ask for the responses also to be in public. If there are deeper issues within Rio Tinto, or the management and board is in any way dysfunctional, now is the time to find out.

Pension scheme that won't work

It has been a theme of this column that the Government's plan for new state second pensions - known as personal accounts - for which everyone should be encouraged to save could achieve the remarkable feat of making almost everybody worse off.

Those already in company-run pension schemes would suffer because the employer would trade down to the lower level of contribution legitimised by personal accounts.

More damaging, the poorest people in society, whom the scheme was most designed to help, would also suffer.

The low level of savings they could afford would produce a lump sum that would disqualify them from means-tested state benefits, but the annuity the lump sum would purchase would most likely be less than the state benefit they had lost.

The Government last week published a paper that claimed to disprove those assertions, or at least the ones about the poor being rendered worse off.

But its methodology and calculations have brought a howl of protest from Ros Altmann, one of our leading independent pensions campaigners - and a former Government adviser to boot.

She says the report is a whitewash because the favourable outcomes it describes are achievable only if investment returns are higher and annuity rates much more generous than they are currently.

To get the sums to work, Government has assumed 80% of the fund would be invested in equities for most of its life, and this would yield a real return over inflation of 5.1% every year.

Given that the UK's long-run rate of economic growth is only 2.7% and, without a hypercharged banking sector in the future, it may well drop to 1.7%, the target return does seem optimistic.

Moreover, chasing such returns is a high-risk game not at all suited to someone with very little money.

There is a fair chance most professional pensions experts privately agree with Altmann, but of course none of them will speak up.

The investment companies are endorsing the personal accounts because they expect to earn fees from managing the money; employers support the plan for the aforementioned reason that they could use it to halve their pension costs; politicians back it because they will get the glory of setting up a new system and be long gone by the time its failures become obvious.

Meanwhile, they all intone about the importance of treating the customer fairly.