Investors and boards on the brink of war

High drama at the banks has almost overshadowed the extraordinary situation at Rio Tinto and BP. This pair, two of the largest companies in the FTSE 100, have been thrown into leadership limbo by a row over a £13.8bn deal that will hand Beijing control of 18% of Rio.

Paul Skinner, Rio’s chairman, was about to take over the same position at oil giant BP, from Peter Sutherland. That move had already been thrown into doubt after BP shareholders expressed unease over the appointment because of the high level of debt run up at Rio following its purchase of Alcan at the top of the market. Then Jim Leng, the replacement for Skinner at Rio, backed off because of his disquiet over the £13.8bn deal with Chinalco, the Chinese state aluminium company.

Still with me? The musical chairs – or lack thereof – is important because the Rio deal highlights two big issues: shareholders’ rights and the way companies have appeared to trample over them in the crunch; and the selling of stakes to sovereign funds.

Like the deal by Barclays bank to raise money from Middle Eastern investors, Rio’s move has attracted the ire of shareholders who are complaining they are not being allowed in on the same terms. I have some sympathy for Skinner on this score. He is an honourable chairman of the old school and will stay at Rio to see this issue through, although losing the chairmanship of BP will be a personal blow as he also missed out on the chairmanship of Shell, where he spent much of his career.

He and chief executive Tom Albanese, who faces calls for his head, are not, as some accuse them of being, the Sir Tom McKillop and Sir Fred Goodwin of the mining world. It is, though, quite astonishing that a board containing such City smoothies as David Mayhew, the veteran Cazenove man, and Sir David Clementi, until recently the chairman of the Prudential, should have shown such a tin ear when it came to investor concerns. Or did they? The suggestion from within the Rio camp is that when shareholders were sounded out about a rights issue, they showed no appetite for it, so it is a bit rich for them to complain now. It’s a shame, perhaps, that Rio can’t call their bluff.

There is no way a humble commentator will ever know the rights and wrongs of this spat for sure. What can be said with some certainty, however, is that the Barclays and Rio affairs show relations between large companies and their shareholders in a worryingly dysfunctional light. The channels of communication are not functioning properly: neither Paul Skinner nor Barclays boss John Varley would want to ride roughshod over investors, so wires are clearly crossed. The Association of British Insurers and other investor bodies need to try to thaw frosty relations between the City and UK plc before it turns into a cold war.

The second issue, that of sovereign funds, is also a difficult one. Heavily indebted western companies cannot afford to be too choosy from whom they take money – they are grateful to get any funds at all. But Chinese and Middle Eastern investors are not buying in because they have had a Damascene conversion to Anglo-American corporate governance: they have political as well as commercial agendas. Leng is not discussing the situation, but he may well have felt that having Beijing – one of Rio’s biggest customers – on the board, would set up conflicts of interest and put the company in a strategic straitjacket.

I have questioned the UK’s ultra-relaxed policy to overseas investment in this column many times. I have no wish to be jingoistic, but it has got to be a cause for concern when some of our biggest companies surrender large chunks of their capital to sovereign shareholders that may be operating as much from political as commercial motives. Ownership matters.

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