Teflon Rod could be cast asunder at Rio
Rio Tinto shareholders should send a message next week to Rod Eddington that repeated failures to act in their interests will not be tolerated.
One of Australia’s most prolific company directors, Sir "Teflon" Rod Eddington faces a battle to be re-elected as a non-executive director of embattled Anglo-Australian miner, Rio Tinto. Proxy advisory group, RiskMetrics, has recommended that clients vote against Eddington’s re-election. Rio’s Annual General Meeting is being held on Monday 20 April in Sydney.
"Teflon" Rod is one of the busiest men in corporate Australia. Aside from being a director of Rio Tinto, Eddington is also a non-executive director of News Corp, John Swire (the parent company of Cathay Pacific), Chinese electricity generator CLP Holdings and the Chairman of JP Morgan’s Australian and New Zealand business. Eddington is also Chairman-elect of ANZ Bank and finds the time to head Infrastructure Australia and pen Victoria’s controversial transport blueprint.
Eddington’s once stellar reputation has taken numerous hits this year. Rio Tinto is a corporate laughing stock, after paying US$38 billion to acquire Alcan (largely to fend off unwanted suitor, BHP), it then rejected BHP’s overly generous 3.5-1 merger offer, before agreeing to a maligned deal with Chinese-state owned aluminium company, Chinalco, which has enraged major shareholders. The Chinalco deal also led to the shock resignation of highly respected chairman-elect, Jim Leng. Eddington was on the Rio board during which it approved all three corporate moves.
Eddington was also a New Corporation board member at the time that the company paid US$5.6 billion for Dow Jones (publisher of the Wall Street Journal). Within a year, News Corp had written off US$2.8 billion from the carrying value of Dow Jones.
However, Eddington’s greatest folly is without doubt his decision (alongside fellow independent directors, Bob Mansfield and Barbara Ward), to approve of Allco’s $330 million purchase of related party, Rubicon. At the time of the acquisition, Rubicon was owned by Allco directors David Coe and Gordon Fell (as well as Fell’s lieutenant, Matthew Cooper). Eddington sat on Allco’s related party committee, whose critical role was to ensure that minority Allco shareholders were not detrimentally affected by the deal, which netted Fell (himself an Allco director) $28.8 million cash and Coe (Allco’s founder and Chairman) $12.8 million cash.
It is widely believed that the acquisition of Rubicon by Allco was a key precipitating factor in the finance company’s collapse.
Eddington’s problems at Allco do not end with the related-party purchase of Rubicon. While an Allco director, Eddington also approved of the decision by Allco to provide a $50 million "line-of-credit’ to an entity called the Allco Principals Trust in August 2007. APT was partly owned by Allco management, including Chairman, David Coe, who held 28 per cent interest in the Trust. APT in turn owned interest in various Allco entities, including a 6.5% stake in Allco Finance Group. The Allco directors (including Eddington) agreed to provide APT with the ‘line of credit’ to prevent allegedly prevent margin lenders from seizing Allco shares which had been held as security (and causing a further drop in Allco’s share price as those shares were sold).
Allco’s share price collapsed in any event, causing APT to be margin-called out of its holdings in January 2008. On 24 January 2008, APT was forced to dispose of its holding of 22 million Allco shares, causing the stock to slump from $5.01 to $2.21 in less than a week. APT entered voluntary administration in March 2008, with Allco presumably receiving minimal value for its $50 million "investment".
Sportspeople, actors and other high-profile members of the community are often offered few second chances, like Australian swimmer, Nick D’Arcy, who saw his career felled by a single punch in 2008. Fortunately for our so-called business elite, shareholders appear to be more forgiving. Eddington has been involved in three separate catastrophes at Rio Tinto, billions of dollars of losses at News Corp and the destruction of a multi-billion empire at Allco, but still remains ensconced in Australia’s leading boardrooms.
It is up to Rio Tinto shareholders to send a message next week to Eddington (and other leading company directors) that repeated failures to act in the interests of shareholders will not be tolerated.