At the 2020 Denver Gold Conference, the Shareholders Gold Council (SGC) issued an open letter to the gold industry offering solutions to “improve the perception of the sector” and make it “more attractive to a wider audience” of generalist investors.
Many of the solutions proposed by the SGC are appropriate and reasonable responses to value eroding behaviours that have plagued the industry: over-compensation of executives, poor capital management and dilutive M&A activity.
But as leaders in our industry we should take note, not only of what the letter asks of us, but what it doesn’t ask. In a world that is increasingly focused on environmental and social outcomes and diverse organizations, these topics go largely ignored by the SGC. These omissions, when combined with the inclusion of self-serving requests related to incentives and governance, call into question its true intent. Do the SGC want to attract a wider investment base or simply better serve the existing one? And, are their suggestions progressive and far reaching enough to create a meaningful shift in perception?
As a long-term participant in the sector, I offer the following thoughts for consideration in response to the SGC’s letter.
Environmental and social record
The SGC letter highlighted a number of areas of gold company underperformance in their investment criteria, however, environmental and social performance was not one of them.
Companies exist in a world of diverse stakeholders and mining companies are no exception. There has been notable public recognition by the world’s largest investors (Blackrock, Vanguard) and corporate associations (Business Roundtable) that companies can no longer succeed with a narrow focus on shareholders alone. While the mining industry has made progress on this front over the years, there have been some recent high-profile cases of egregious ESG failures that suggest we have a long way to go. Earlier this year, Rio Tinto desecrated a 46,000-year-old sacred aboriginal site in Western Australia in the process of a mine expansion. In 2015 (and again in 2019), Vale was responsible for two separate uncontrolled releases of tailings in Brazil, which combined, killed over 290 people and polluted more than 900 km of riverway. And recently the CEO of Pebble Partnership “resigned” after being caught boasting about his ability to influence government officials, eroding not only the reputation of the company, but the industry. These examples should not be accepted outcomes for any mining company. We should do better and our shareholders should demand as such. While the primacy of shareholders in the stakeholder group is recognized, not protecting a full set of stakeholders through appropriate environmental, social and governance (ESG) action is to the detriment of all shareholders. In the first quarter of 2020 alone, ESG funds grew by $45 billion globally, where the broader fund universe saw an outflow of almost $400 billion. All trends point to ESG becoming an even bigger criteria for generalist investors going forward.
The SGC letter calls for the industry to broaden diversity. The irony of this should be lost on no one. Of the 24 signatories to the letter, none are female, none are Black.
Delving a little further, of the 21 signatory funds, only 14 provide some level of public disclosure on the composition of their leadership – where 11% are female, 15% are visible minorities, and just 4% are Black. And these statistics likely overstate diversity given the nature of the non-reporting funds. Our industry has long suffered from a lack of diversity at all levels, mirroring our investors. This is not an unavoidable outcome for either industry. It is a choice we make when we are unwilling to change our behaviours or appropriately align and prioritize our incentives. And unless we do something about it, it will remain a barrier to the attractiveness of our industry in a world that is moving in a different direction.
The SGC call for “meaningful” levels of stock ownership and equity-based compensation for management and boards, to encourage long-term value creation through aligned incentives. While this is a popular concept, it is worth considering the unintended consequences of a disproportionate focus on stock ownership.
“Meaningful” ownership is different for everyone. How do you define the level of ownership required for investors to believe that management and board members would make more “aligned” decisions and not simply create entrenchment? This concept is further complicated by the next two points. First, we are an industry of price takers, there is an element of luck and timing that cannot go ignored in value creation in the gold space. Incentives are far less effective when they are tied to things people cannot control and can just as easily act as a source of frustration or unjustified reward. To be effective, incentives should to be peer comparable, metal price adjusted and behaviour based. Second, the request for board members to have “meaningful” share holdings, or alternatively strict limits to tenure, creates a roadblock to the diversity we should be seeking. Women and people of colour are historically disadvantaged from a wealth perspective and this requirement reinforces the systemic barriers to participation that already exist.
Governance and control
The SGC propose more shareholder input into board composition, a greater say on strategy, and increased access to information for the purposes of bypassing management and boards. This is a transparent appeal to increase control in the companies in which they are invested.
This is problematic for a number of reasons: First shareholders are not responsible to all stakeholders. Second, they do not necessarily have the experience, skills or time to run mining companies. Third, shareholders, particularly activist ones, are equally capable of being the source of destructive behaviour in a company – who governs the shareholders? Rather than advocating for increased control, specialist investors would better serve the industry and its boarder perception by remaining supportive through metal price cycles, investing in good projects and teams for the long term, demanding strong stakeholder engagement and diverse organizations, and holding teams accountable for executing on their stated vision and strategy. At the same time, management and boards can reduce the desire for shareholders to take control by providing thoughtful and transparent information on capital return frameworks, budgets, future capital requirements and their ability to independently govern, as suggested by the SGC.
The SGC signatories are willing and essential participants in the gold mining industry, and we should be open to, and interested in, the advice they provide. But it is also beneficial to reflect on the incentives that drive their recommendations. They can too often be narrowly focused on how to extract a larger share of profit, missing a valuable opportunity for purposeful change in the sector. We should take what is helpful from the SGC letter and push back on what may be mis-guided or misaligned, collectively working to build an industry that plays an active and positive role in the world for the benefit of all stakeholders.
Jaimie Donovan is a mining engineer with over 20 years experience working in operations, technical and corporate roles. She currently serves on the board of Dundee Precious Metals.