A Lesson From Tesco PLC For Glencore PLC & Rio Tinto plc Shareholders


At first sight there’s little in common between struggling supermarket chain Tesco (LSE: TSCO) and these two global miners, Rio Tinto (LSE: RIO) (NYSE: RIO.US) and its would-be suitor Glencore (LSE: GLEN) — though both sectors are facing difficult markets, and Ivan Glasenberg’s success in building Glencore bears some resemblance to Terry Leahy at Tesco.

Tesco’s latest troubles have arisen from poor corporate governance. The £250m profit-forecast overstatement was made in the interval when Tesco didn’t have a finance director. According to a report in the Sunday Times two weeks ago, the former FD Laurie McIlwee and former CEO Philip Clarke hadn’t been on speaking terms for two months before McIliwee’s departure: that’s a situation no chairman should tolerate.

No FD, no comment

Here’s something that may surprise you. Glencore doesn’t even have a finance director. The then-FD stood down from the board when Glencore acquired Xstrata in 2013, continuing to be employed as Chief Financial Officer. That matters as 1) he doesn’t have fiduciary responsibilities to shareholders like a director does, 2) he’s clearly subordinate to the CEO, 3) it’s much easier for an employee to say ‘I was just following orders’ than a finance director who would have to resign if his professional advice wasn’t followed.

What’s more, unlike most FTSE 100 companies, Glencore doesn’t have a former senior FD on its board. Ivan Glasenberg, the CEO and sole executive director, is the only former accountant. The three members of the audit committee are investment bankers. They undoubtedly have, as Glencore says, “recent and relevant financial experience and competence in accounting”, but probably not the same mentality as is forged by the grunt and grind of auditing. With former BP CEO Tony Hayward as chairman, the board is more entrepreneurial than focused on ‘checks and balances’.

Mr Glasenberg has built Glencore into a massive powerhouse since taking the reins in 2002, though the shares are down 37% since its 2011 flotation. But Tesco demonstrates how the pressure to perform can be dangerous without a culture of checks and balances in the background.

Rio 2

Rio similarly grew fast under a hard-driving CEO during mining’s boom years, but that story turned sour with $14bn worth of write-offs arising from over-ambitious acquisitions. A new CEO has successfully steered Rio in a different direction, concentrating on shareholder returns and turning Rio into one of the top two most-efficient miners. The current depression in iron ore prices almost certainly means that if shareholders succumb to any further advances from Glencore, then they will be giving away the upside to Glencore’s shareholders.

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Tony Reading owns shares in Rio Tinto and Tesco. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.