Among the business leaders attending the Global Competitiveness Forum in Riyadh, Saudi Arabia, was Tom Albanese, CEO of Rio Tinto Group, the mining giant. In a recovering global economy, Rio Tinto has had a strong financial year: In early February, the company reported 2010 earnings of US$14.3 billion, a 194% increase from 2009. Demand and higher prices for all commodities drove the company’s growth — Rio Tinto even booked US$682 million in diamond sales, a 52% increase from last year.
It’s a different situation than the one Albanese faced when he became the CEO in 2007. Not even a month into the job, rival mining company BHL Billiton launched a US$66 billion hostile takeover bid. The global financial crisis followed, and a US$19.5 billion investment deal with the Aluminum Corporation of China collapsed. The Chinese also accused four Rio Tinto employees of bribery, and in a secretive trial, sentenced them to up to 14 years in prison last March. These challenges were an instant and intense test of leadership, Albanese says. But not only did they make him tougher, they forced him to focus on getting the mining company back to what it did best.
In the second half of a two-part interview with Arabic Knowledge at Wharton, Albanese discusses risk management and leadership. Beyond learning from the mistakes of others, he says to answer any crisis a company must make sure it has strong support and response systems in place, and that such systems are tested regularly beforehand. In a crisis, leaders should not alter their behavior to a point that they are deemed weak, he suggests. Even during the worst periods of a crisis, Albanese says it is best to keep an open door. Companies, he adds, should be mindful of dismissing an event as impossible. "Because you really don’t want to know what the answer would be if it did happen," he notes.
An edited transcript of the conversation follows.
Arabic Knowledge at Wharton: Speaking about stakeholder engagement and community involvement, what are the lessons that the natural resource industry learned from the British Petroleum Gulf oil spill disaster, and how has it influenced risk management strategies?
Albanese: First of all, we’ve always had a technical focus to risk management, because we’re a company of engineers. So I think we’ve done a pretty good job on assessing technical risks. But with the global financial crisis, one of our big reflections last year was the fact that while we’re pretty good at sort of handling the technical risks, we weren’t really handling the holistic-risk set. So, we spent time with our board last year and one of my key objectives for this year was to basically create a more holistic risk map for Rio Tinto [and] to elevate that [to] the board level, but not by watering down the technical strengths that we had.
In terms of our industry peers, we’re seen reasonably well in terms of handling technical risks. As a company, we’re actually more comfortable with the technical risks than, say, determining what the gross domestic product of China is going be next year.
Arabic Knowledge at Wharton: When you say ‘holistic,’ could you elaborate?
Albanese: What are the risks that can come into our business? The price of carbon, or if there’s no price of carbon, what are [the] adaptation requirements? Will the economy go into recession next year? Or will it continue to be so strong and by not responding quickly enough, we fall back on a competitor basis? What will our markets look like 10 years from now? If it’s going take us 10 years from the spark of an idea to first revenues well, frankly, the price of copper next year doesn’t make much of a difference [as opposed to] the price of copper in 2020.
So there’s a whole range of nontechnical risks that make all the difference in the world, whether we’re successful or not. With the Gulf crisis of BP, the high-profile mining disasters in Chile, in New Zealand, and there’s been some explosions of coal mines in the U.S. [These] actually caused us to go back on each and every one of them, and test the learnings from that against our business model or map.
I’d say we learn from every single one. And we have to take cases even if they’re outside our sector and use those to build upon and learn in terms of our own risk mapping. I think the main thing that we have to be quite aware of is that risk is all about prioritizing resources toward low-probability/high-consequence events. And I think the easiest thing to do, which is wrong in a risk assessment, is to say, ‘Well, that never could happen.’ Because you really don’t want to know what the answer would be if it did happen.
Arabic Knowledge at Wharton: Was that the main lesson you took away from BP?
Albanese: I think that how the public engagement was managed — I think everyone sort of watched that and made proper reflections. I’m sure every board is asking, ‘In that type of crisis, what’s the role of the CEO? What’s the role of the chairman? What is the role for a local team? If you’re a U.K.-based company, do you just rely on U.K.-based advisors for interactions around the world?’ I think these are things I think we’re all taking into account.
Arabic Knowledge at Wharton: If something comparable to BP disaster happens at Rio Tinto, what would you do, and how would you do it?
Albanese: We were brought up around mines, and we’ve unfortunately all had experiences about what to do. The first part is to make sure you have strong support and response systems in place. When things happen that are really unsettling, you want to have systems that actually can move into place quite quickly. At least then you fall back on it. The systems also have to be tested, since they have to be robust.
We had seven office buildings in Brisbane. [Due to flooding in January] six of them were uninhabitable during a three-day period of time. We have 1,600 employees in and around the Brisbane area. It’s a big part of our total company. You have to have plans in place. I can tell a year ago we would not have said, ‘Let’s plan for the entire city of Brisbane being flooded out, and 1,600 employees not being able to show up for work.’ [Now] we have all these other buildings. So, disaster management actually is about setting up what I call business resilience, setting up systems and also actually trialing and testing, rehearsing systems for readiness.
Arabic Knowledge at Wharton: In the event of a disaster, what is your first call, and what would you do?
Albanese: The first thing to do is to ensure that the local team that’s reporting to me is basically doing what they’re supposed to be doing. Because frankly, I’m not as well positioned to be responding to what’s on the ground at that moment as the local team would be. I have to ensure that the local team has all the pieces in place and they’ve got access to all the resources that they need. These are not only sort of the immediate responses on the ground in terms of the engineering activity or the safety activity, but also [having in place] global communication networks, external and internal] that can run itself on a 24/7 basis. One of the benefits of having a global company is that at any point in time we have people on shift in our internal and external communications for that purpose. And I think to some extent for us, having had two years of extreme corporate activity with extreme external visibility has actually made us a more business-resilient organization as a consequence.
Arabic Knowledge at Wharton: Should leaders modify their behavior when managing in times of crisis?
Albanese: I think you have to be yourself. If you seem to be changing stripes I think you’re setting yourself up, because you’ve got to be as comfortable in your own skin as you can be, to be robust and resilient. If you’re not comfortable in your own skin and you put on another set of skins, you’re not resilient.
Arabic Knowledge at Wharton: You’ve been previously asked about the mining industry and its image among some people.
Albanese: The mining industry will always be fighting its image, because for all the good things we do today, there are at least as many legacies. Whether they are contributed by us or not, there are legacies, and we will have to basically fight that rearguard battle not just for the next 10 years or 20 years, but for the next 100 years.
In mine-reclamation issues, if you’re in the U.S., northern New Jersey you find old mines, if you’re in the western part of the U.S. you find them, if you’re in the U.K. you find old coal mines. Everywhere you’ll find mines. You have lots of case studies that are very, very poor examples of what happens when mining doesn’t manage itself well. And so we have, naturally, a difficult legacy.
And let’s be realistic: It’s there. Frankly, that’s what drove our predecessor chairman, Paul Wilson, 10 years ago to go down the path of sustainable development. It was on the basis that if all we do is rely on that legacy, and we don’t try to do anything about it, we will progressively starve ourselves as an industry of capital, of future resource access, and ultimately of people, because no one will want to go into the industry.
And just think of all the people you’ve talked to. They’d rather go into banking for the past ten years than mining, because banking had a good reputation. I mean, wouldn’t you rather be selling subprime mortgages than building copper mines? It’s an obvious choice. (Laughing)
Arabic Knowledge at Wharton: Just two months into your role as CEO, you went through a difficult situation with a hostile takeover bid by BHP Billiton. What did you learn from that experience, and what advice do you have then for other executives who may find themselves in that position?
Albanese: I think that it’s quite important for a new CEO to have some time — not too much time — but some time to become a CEO. And I think if I look at my first two-and-a-half years as CEO, I had only two weeks where there wasn’t M&A actively underway. I also had the week that BHP Billiton pulled out just before the financial crisis blew up [On Nov. 25, 2008, Billiton announced that it would drop its $US147 billion takeover of Rio Tinto]. So it was a challenging time and I learned a lot from it. I used it to inspire and lead an organization of 60,000 employees.
I think we had a very strong organization; but frankly it was an organization that was working with M&A war rooms for much of the time. And that didn’t provide what I call the stabilizing influence every company needs over a period of time.
By the middle of 2009, I think, the organization was exhausted. They had seen their names too much in the newspaper, and they just wanted to get back to the old Rio Tinto. So the key for me over the last 18 months was basically get to the point where everyone says, ‘We really enjoy the old Rio Tinto being back.’
But I think if I had some time before getting thrown into that, whether through my own actions or actions induced by others, I’d have fewer grayer hairs right now. But I [don’t] regret any of that. In terms of what we’ve done, what we’ve accomplished, it was a tremendous period [when] I think about some of the future leaders we developed during the period. I remember when we first had the unsolicited takeover bid, we basically said, ‘Let’s find the brightest people we have that are willing to work 24/7 in a war-room setting.’ They were mining engineers, they were in the finance area, and they were in mining operations. They were working in very remote locations doing what were very typical early-career activities. And we’d been through [an] incredible hothouse of a commercial environment. And just to watch how they grew and matured and virtually every single one of them is still in the company, and they’re now doing things for the company that they would never have dreamed of doing at this stage in their careers.
Arabic Knowledge at Wharton: Could you talk briefly about the situation you faced when you took over?
Albanese: It’s been typically a rough couple of years for any CEO in any industry, because of the worst financial crisis the world has seen since the Great Depression. It came upon us by surprise in terms of the sheer intensity of the crisis. We had to work ourselves through it. Now, some would say, ‘Well, you already had your high debt level going into it, so it’s your fault that you did an acquisition in 2007.’
Events play out as they will play out. And so the cards I had prior to the financial crisis were such that it meant we had to pull in our spending very quickly. We had to make it very clear to the financial markets that it was our intention to drop that debt down as quickly as we could. And we did. In a very short period of time, we’ve moved from where people saying, ‘Well, we are concerned about the liquidity aspects of your balance sheet,’ to now, ‘Well, we’re concerned because you’re not efficient with your balance sheet.’
Arabic Knowledge at Wharton: How did you handle the pressure, say the public scrutiny or the shareholder pressure…
Albanese: My lesson from that experience is you have to have a thick skin to external media attention. But you have to have a thin skin to the internal organization. That’s probably the most important lesson I got out of it, because in many ways I think that’s reverse of what some chief executives do.
I’ve always felt all through the worst of it, you’ve got to have an open door; I’ve got to be out there spending as much time with employees, engaged and getting around. Even though I really had to take some knocks from time to time, by being sensitive and being seen to be sensitive to internal organization, actually created a level of respect. I think it actually makes it much easier to deal with the external critique, and the external critique frankly has a short memory. Internal memory is quite long.
Arabic Knowledge at Wharton: What are some of the unique challenges of decision-making at the top level?
Albanese: Reminding yourself that you’re always just one person in a team. You’re the ultimate decision-maker, or you might have a board that’s the ultimate decision-maker, depending on what the team is. But you’re basically part of a team, and you will always have a stronger response from your team if they feel like they’ve been given the accountability to respond.
I’m a type of person that likes to dive into the details. I’ve always been one that all through my career my bosses have said, ‘You’ve got to delegate more.’ So it is about delegating, it is about empowering, and making sure that the people that work for me can do my job. I am a true believer that I’m only as strong as my team. So have as strong a team around you as you can. People can do amazing things in very, very short periods of time if they rally around a common objective and they’re suitably empowered to do it.
Arabic Knowledge at Wharton: What are the challenges facing global acquisitions, considering your experience with Rio Tinto’s bid for Australia’s Riversdale Mining?
Albanese: I think that first of all, we have to look at local M&A activities from a global perspective. Because of our sheer scale, we recognize that some of the M&A activity we’ve been involved with over the past six or seven years wasn’t something that was accepted by the regulators.
So at a certain level of scale, you’ll find that you have different stakeholders that are involved. I think Riversdale has been a good example of something where it is not a competition issue. We are working very closely with the host government. There are a number of stakeholders involved all around, and basically we’re in the middle of a big period. We have a strong team that’s involved with it. We have people that have actually honed their M&A skills over some bigger transactions or potential transactions, and I think it’s got all of the right reasons to come to the right answer.
Arabic Knowledge at Wharton: What’s next?
Albanese: From the global broader perspective, I see 2.5 billion people who actually want to live like the top half-billion consumers of the world. Who is to tell them they can’t get refrigerators or air conditioning or apartments or automobiles or mobile phones, or anything else?
So you have 2.5 billion emerging consumers that require the things we produce. That means we have a strong demand picture. We’re working in an environment [where] the supply response will be slower, because as these 2.5 billion people get richer, their aspirations and their expectations will get higher, and they will want clean air, and clean water; so it takes longer to develop these things. That presents reasonably good industry fundamentals. I think we’ll find that will lead to more global pressures, because more people will want a stake of that, or they will want a stake of us.
So we have to stick true to what our strategy is: large, long-life/low-cost assets to build for the future. I think we’re well positioned now for at least the next five to 10 or 15 years, because barring those terrible ‘Black Swan’ events that could come in, like the global financial crisis, you do have this expectation, now that [an increasing percentage] of the world’s population are living better than their parents did.