Failure of internal control and risk management regarding corporate social responsibility, Juukan Gorge, and reference in s172 statement

Rio Tinto plc – annual report – 31 December 2020

Industry: mining

Governance (extract pages 114-115)

Juukan Gorge: the Board Perspective

The destruction of two ancient rock shelters in the Juukan Gorge represented a breach of our partners’ trust and a failure to uphold our values as a company.

A review of the events leading up to the destruction of the rock shelters published by the Rio Tinto Board of Directors in August 2020 identified a series of systemic failures of our communities and heritage management processes at Brockman 4 over an extended period of time. To read the full review please visit www.riotinto.com/news/inquiry-into-juukan-gorge.

Both the Board Review and the Inquiry of the Joint Standing Committee on Northern Australia (the Parliamentary Inquiry) make it clear that the events at Juukan Gorge represented a breach of our partners’ trust and a failure to uphold our values as a company.

The Board is determined to learn the lessons to ensure that the destruction of a site of exceptional cultural significance never happens again.

The oversight role of our Sustainability Committee

The Sustainability Committee supports the Board in ensuring Rio Tinto delivers a strong business performance on a sustainable basis that builds trust with our people, our partners and stakeholders and with wider society.

Internal and external reviews of the events leading to the blasting of the rock shelters at Juukan Gorge have identified various deficiencies including how our partnership with the PKKP people was managed, a lack of integration of our heritage management with our front-line operational teams, and a work culture that was too focused on business performance and not enough on building and maintaining relationships with Traditional Owners.

The archaeological and ethnographic reports received in 2013-14 should have triggered an internal review of the implications of this material new information for the mine development plans. Such a review did not take place. Following completion of the archaeological surveys and other mitigation measures agreed with the PKKP people in 2014, the site was reclassified as ‘cleared’ for mining and removed from relevant risk registers. As a consequence, knowledge and awareness of the location and significance of the site was progressively lost. Further opportunities to revise the mine plan were missed in 2018, when the final archaeological report was received, and again during 2019-20.

The Sustainability Committee has been charged with overseeing the implementation of the recommendations set out in the Board Review and Parliamentary Inquiry, and with ensuring that these lessons are applied to our operations across Australia and the globe. The Committee has already commenced the oversight of this implementation process and, at each of its six meetings in 2021, will receive updates on progress, as well as maintaining an ongoing overview of our global Communities and Social Performance (CSP) risks.

Implementation of the recommendations will also form part of the new ESG component of the short term incentive plan for the Executive Committee and other relevant managers. For more detail, please refer to page 173 of our Remuneration Report.

Our new Integrated Heritage Management Process

One of the most important recommendations for the Sustainability Committee to oversee will be the full integration of heritage management into our mining operations such that our product groups have primary responsibility for our CSP partnerships and engagement. In visits on Country in late 2020, Board members heard how Traditional Owners want to engage directly with the person who is in control of the mine site, the drills and the dozers. It is clear that our mines’ general managers also want this direct line of communication with Traditional Owners to ensure there is no room for error.

Another critical component is the new Integrated Heritage Management Process (IHMP).

Phase 1 of the IHMP is well underway and comprises an assessment of all heritage sites, assessing each on the basis of cultural significance, which is informed through consultation with Traditional Owners.

Over 1,000 sites have been reviewed to date and all sites of high cultural significance have been allocated protective buffer zones.

Under the IHMP, any approvals to disturb sites that are low to moderate significance are made at the Rio Tinto Iron Ore Chief Executive level with decisions regarding sites of high or very high significance being made at the Chief Executive level. Where there is any doubt, we have reclassified the relevant sites from ‘cleared’ for mining back to ‘protected’ as a precautionary measure, pending further consultation with Traditional Owners. An increased level of consultation is also occurring, on an ongoing basis, to ensure a shared understanding of heritage sites and the proposed mine plans.

Phase 2 of the IHMP will fully integrate heritage considerations into mine planning and development studies. Our aim is to ensure that Traditional Owners are actively involved in the management of the cultural heritage aspects of mine design. This will inform the conduct of resource development, studies and the approvals process.

Further information on the steps that we are taking in response to the recommendations of the Board Review and the Parliamentary Inquiry can be found on pages 10-11 and at riotinto.com. These include details of our commitment, in consultation with Traditional Owners, towards the modernisation of our agreements, the formation of an Indigenous Advisory Group and the status of the remedy process with the PKKP people, including a moratorium on mining in the Juukan Gorge area and a remediation plan for the rock shelters.

Risk management and internal control

The overall effectiveness of any risk management framework requires clear expectations and consistency of application of the framework across different product groups and businesses, countries of operation and functional areas of expertise. Unfortunately, this did not happen in the case of Juukan Gorge.

To support the product groups, a new CSP Area of Expertise has been formed to own the relevant standards and procedures, and to ensure that best practices are consistent globally. This team will also provide the second line of assurance on CSP and ensure we have the right people with the right skills in the right locations. Our Internal Audit team will provide the third line of assurance, reporting directly to the Sustainability Committee.

These changes to cultural heritage risk management are designed to deliver more rigorous assurance of the way we manage our communities and cultural heritage risks across our operations globally. The Audit Committee will monitor the effectiveness of these changes to our overall risk management and internal control framework.

Culture

Risk frameworks are only ever as good as the information that flows through them, and the experience and judgment of individual managers in key positions. This is particularly important in a group that is the size, scale and complexity of Rio Tinto.

Effective management of community, heritage and other social risks is therefore dependent upon a work culture that creates the same awareness and accords the same priority to these issues as it does to operational, production or safety risks.

One of the key findings from Juukan Gorge is that we need to provide additional training to our front-line operational managers on the increasingly complex social and environmental risks they are required to manage.

Ensuring that we have the right work culture and relationships to support good decision-making will require sustained effort over many years. We have launched initiatives to increase awareness and training on community and heritage issues and the amount of time that general managers invest in our relationships.

Over the past few months, the Board has held a series of virtual town halls and engagements with staff around the world to seek their views on what we need to do to create a more inclusive, more diverse work culture, where people feel empowered to challenge decisions. In particular, we need to ensure that Indigenous Australians have a stronger voice, not just in our host communities but also within the company. Alongside these steps to build a more inclusive work culture, it is clear that we need to break down silos within the company to ensure that community and heritage issues are fully integrated into business planning decisions (in exactly the same way as safety or production).

The appointment of Jakob Stausholm as our new Chief Executive represents an important milestone as we continue the process of rebuilding trust. One of the reasons the Board chose Jakob is because he will provide clear leadership of our efforts to re-establish Rio Tinto’s reputation as an industry leader in environmental and social performance.

In April 2020, we appointed Hinda Gharbi and Jennifer Nason to the Board, and Professor Ngaire Woods joined us in September. All three new directors bring relevant experience of championing inclusion, diversity, cultural change and governance. We currently have a search underway for a fourth new NED, to replace David Constable. One of our selection criteria will be their ability to support this change programme.

Consequence management

During the two weeks following the publication of the Board Review in August 2020, we engaged with over 70 of our shareholders, Traditional Owners, Indigenous leaders, the governments of Australia and Western Australia, and other stakeholders. At the end of that two-week period of intense engagement, the Board unanimously agreed that J-S Jacques, Chris Salisbury and Simone Niven should leave the company by mutual agreement as it was clear that a number of influential shareholders and other important stakeholders (mainly, but not exclusively, in Australia) had lost confidence in their ability to lead the necessary change.

We acknowledge that some commentators believed that the Board should have acted sooner. There was, however, a very wide range of opinion on the appropriate sanctions and we believe that it was right, on a decision of this magnitude, to establish the facts and engage with as many stakeholders as possible before removing three of our most senior executives, including the Chief Executive, from the business.

In making the eligible leaver determination for the three executives, the Board fully recognised the gravity of the destruction at Juukan Gorge but was mindful that they did not deliberately cause the events to happen, they did not do anything unlawful, nor did they engage in fraudulent or dishonest behaviour or wilfully neglect their duties.

In making the final determination on their separation terms, it was necessary to balance the findings of the Board Review, the financial penalties that had been applied and the loss of employment for the three individuals, on the one hand, against the considerable achievements of those executives over many years. In this context, the loss of employment was considered the greater sanction.

The full details of the separation terms for each executive are set out in the Remuneration Report on pages 169 and 174.

The non-executive directors donated the equivalent of 10% of their 2020 non-executive director fees to the Clontarf Foundation, which supports education, training and employment for Indigenous Australians. Jakob Stausholm, the Chief Executive and executive director, has made a donation of an equivalent amount.

Governance (extract 2 – S172 statement)

Our Stakeholders

Risk Management (extract)

Taking and managing risk responsibly is essential to running our business safely, effectively and in a way that creates value for our customers and shareholders, employees and partners.

Effectively managing our risks ensures we meet our strategic objectives, mitigate threats and create opportunities in alignment with our values – Safety, Teamwork, Respect, Integrity and Excellence.

Our approach

Effective risk management is necessary to manage both threats and opportunities to our strategy and operations. Our risk management process helps us identify, evaluate, plan, communicate, and manage material risks that have the potential to impact our business objectives. While risk management is a key accountability and performance criteria for our leaders, all employees have a responsibility for identifying and managing risks. Our Board and Executive Risk Management Committee provide oversight of our principal risks and associated management responses described on pages 95-105. The Audit Committee monitors the effectiveness of risk management and internal controls. Our risk management system is made up of six core elements (see page 93) – one of which is our risk management framework, which sets out clear roles and responsibilities, standards and procedures. We also have three lines of defence to verify that risks are being effectively managed in line with our policy, standards and procedures, including across core business processes such as finance, health and safety, social performance, environment and major hazards. You can view our risk management standard at www.riotinto.com.

The overall effectiveness of the risk management framework requires clear expectations and consistency of application of the framework, across different product groups and businesses, countries of operation and functional areas of expertise.

This clearly did not happen in the case of the events leading to the destruction of the rock shelters at Juukan Gorge in May 2020. Following the events at Juukan Gorge, we have made changes to cultural heritage risk management within that framework. These changes strengthen the first and second lines of defence, establishing a Communities and Social Performance Area of Expertise to deliver a more rigorous assurance framework with regard to the way we manage host communities and cultural heritage risks across our operations globally. The tragedy of Juukan Gorge highlights the critical dependency on risks being identified and then monitored on an ongoing basis by operational management (within the first line of defence). From there, if circumstances change, the risk needs to be escalated quickly and appropriately to senior leaders and the relevant functional experts within the second line. The second and third lines also need to be sufficiently well connected to identify the true nature of the underlying risk and how this may then be symptomatic or thematic for other assets or jurisdictions within the Group.

Of course, all of this system of risk management and internal control is predicated upon a culture that recognises and prioritises cultural heritage specifically, and more generally supports the timely and effective communication and escalation of risk. Fundamentally, risk frameworks are only ever as good as the information that flows through them, and the experience and judgment of individuals in key positions. This is particularly important in a group that is of our size, scale and complexity.

The Board, Audit Committee and our business and functional management teams are all determined to play a part in making these improvements to the overall culture and systems of risk management and internal control to ensure that the lessons learned from Juukan Gorge are applied to other risk areas, particularly other environmental and social risks.

Emerging risks (extract)

Increasing societal and investor expectations: In 2020, we continued to see increasing expectations and focus on social equality, fairness and sustainability – and how companies address these issues. Financial institutions are also placing greater emphasis on environmental, social and governance (ESG) considerations when making investment decisions. The increasing focus on ESG has the potential to shape the future of the mining industry, supply cost structures, demand for global commodities and capital markets. While this presents us with opportunities for portfolio and product differentiation, it has the potential to impact how we operate.

Host communities and cultural heritage: We are committed to strengthening our relationships with host communities, including Traditional Owners and First Nations and improving the way we manage cultural heritage. We have taken a number of actions to address the lessons learned from Juukan Gorge, including establishing a standalone Communities and Social Performance (CSP) Area of Expertise, which will deliver more rigorous assurance across our operations and elevate communities risk processes. We have also set up an Integrated Heritage Management Plan with strict approval protocols at both the product group and Group levels. We include more detail about the actions we are taking in response to Juukan Gorge on 114-115.

Chairman’s Statement (extract)

The destruction of the Juukan Gorge rock shelters

These achievements were overshadowed by the destruction of two ancient rock shelters in the Juukan Gorge, at the Brockman 4 iron ore mine in Western Australia, in May 2020, which should not have happened.

I would like to reiterate our unreserved apology to the Puutu Kunti Kurrama and Pinikura (PKKP) people for the destruction of the rock shelters.

The loss of the Juukan Gorge rock shelters has also impacted many others, in Australia and beyond, and within our company it has left many of our employees, including our Indigenous Australian colleagues, feeling deeply shocked and ashamed.

Following publication of the Board Review of the events leading up to the destruction of the rock shelters, and consultations with shareholders in Australia, Europe and North America, our Chief Executive, the Chief Executive of Iron Ore and the Group Executive, Corporate Relations, have left the company by mutual agreement.

The Board and senior leadership team have taken decisive action to implement the recommendations set out in the Board Review and the Interim Report of the Parliamentary Inquiry. These include measures to ensure that the destruction of a site of such exceptional cultural significance never happens again; to re-confirm that we have recently consulted with Traditional Owners for potential impacts; and to begin the modernisation process of our agreements with the Traditional Owners in Western Australia to increase transparency and redress the imbalance of power that existed in our older agreements.

We are also reinvigorating our cultural awareness training, have stepped up our investment in career development for Indigenous Australians and taken numerous other measures to ensure that Indigenous Australians have a stronger voice, not only in our host communities, but also within Rio Tinto. In parallel with these internal changes, we have continued to engage with the Government of Western Australia in relation to reforming the Aboriginal Heritage Act of 1972.

In November 2020, my fellow director Megan Clark (Chair of our Sustainability Committee) and I visited the Juukan Gorge with the PKKP people. It was my first opportunity to apologise in person to the PKKP people for the destruction of the rock shelters, and to see and feel their sadness and pain first-hand. Megan and I subsequently attended a joint meeting of the PKKP and Rio Tinto Boards in Perth, where we discussed the steps that we must take to rebuild trust and to strengthen our partnership, as well as progress with the remedy process.

Separately, Megan and I also met elders from nine of the ten Traditional Owners of the lands where we operate in Western Australia. The Traditional Owners expressed their sadness and anger at the destruction of the Juukan Gorge rock shelters, but they also expressed their hopes for a more equal and respectful relationship with Rio Tinto in the future.

Traditional Owners recognise the social and economic benefits that mining brings to their communities, but they demand a relationship with our company that respects local customs and traditions and recognises their obligation to preserve their unique culture for future generations. It is our responsibility to make sure this happens both now and into the future, and I know that this determination is shared throughout our organisation.

Strategic Report (extract)

Juukan Gorge

A breach of our values

We apologise unreservedly to the Puutu Kunti Kurrama and Pinikura (PKKP) people, and to people across Australia and beyond, for the destruction of Juukan Gorge.

In allowing the destruction of Juukan Gorge to occur, we fell far short of our values as a company and breached the trust placed in us by the Traditional Owners of the lands on which we operate. It is our collective responsibility to ensure that the destruction of a site of such exceptional cultural significance never happens again, to earn back the trust that has been lost and to re-establish our leadership in communities and social performance.

A nearly two-decade-long timeline

Our relationship with the PKKP people extends over more than 17 years, with initial agreements covering our operations on PKKP land at Brockman 4 signed in 2006 and 2011. The decision to destroy the rock shelters was taken nearly eight years ago but, because mining is such a long-cycle industry, that decision was not actually implemented until 2020.

Internal and external reviews of the events leading to the blasting of the rock shelters at Juukan Gorge have highlighted deficiencies in how our partnership with the PKKP people was managed, a lack of integration of our heritage management with our front-line operational teams, and a work culture that was too focused on business performance and not enough on building and maintaining relationships with Traditional Owners.

The archaeological and ethnographic reports received in 2013/14 should have triggered an internal review of the implications of this material new information for the mine development plans. Such a review did not take place. Following completion of the archaeological surveys and other mitigation measures agreed with the PKKP people in 2014, the site was reclassified as ‘cleared’ for mining and removed from relevant risk registers. As a consequence, knowledge and awareness of the location and significance of the site was progressively lost. Further opportunities to revise the mine plan were missed in 2018, when the final archaeological report was received, and again during 2019/20.

Remedy process

We are engaging with the PKKP people to determine an appropriate remedy process for the destruction of the rock shelters. This includes providing funding to support their submission to the Joint Standing Committee on Northern Australia (the Parliamentary Inquiry) and their effective participation in discussions about how we rebuild and strengthen our partnership and provide a remedy that respects the wishes of these Traditional Owners.

A moratorium has been agreed on mining in the Juukan Gorge area and work is underway on a remediation plan. In partnership with the PKKP people, we are focusing on understanding how, through the remediation of the Gorge, we can re-establish a sense of place that recognises the exceptional cultural significance and connection of the Juukan Gorge area to past, current, and future PKKP people as well as their aspirations for future use and interaction with the place.

Remediation of the Gorge will be a challenging project. While the Juukan 2 rock shelter is likely to be irreparably damaged, Juukan 1 appears to be largely intact. Both shelters will be restored to the fullest extent possible and, if it is safe, access will be re-established. Other parts of the Gorge, including the Snake pool, which were not impacted by the blast, will remain protected and its connection to the Juukan 1 and 2 rock shelters will be re-established.

Artefacts and other materials salvaged from the rock shelters during archaeological excavations have already been moved to a purpose-built conservation facility. Discussions are in progress with the PKKP people on the provision of an appropriate, permanent ‘keeping place’.

For a more detailed summary of our response to the recommendations issued by the Parliamentary Inquiry, please visit riotinto.com. Please refer to pages 114-115 to learn more about the Board review of the events that led to Juukan Gorge.

Ensuring this never happens again

We have taken decisive action to strengthen our processes and approach to cultural heritage.

Governance

  • Integrated Heritage Management Process (IHMP): The most urgent task was to ensure that we do not have other sites of exceptional cultural significance within our existing mine plans. We are currently completing the first phase of a new IHMP, which is being rolled out at our Pilbara iron ore business. The lessons from the IHMP will subsequently be implemented across our business globally while taking into account local circumstances. In the Pilbara, the IHMP involves a systematic review of all the heritage sites that we manage starting with those that may be impacted by our activities over the next two years. So far, we have reviewed over 1,000 sites and ranked each one by: (i) cultural significance (which is informed through consultation with the Traditional Owners of the land on which we operate); (ii) our re-confirmation that we have recently consulted with Traditional Owners for potential impacts; and (iii) the materiality of the impact. Where there is any doubt, we have reclassified the relevant sites from ‘cleared’ for mining back to ‘protected’ as a precautionary measure, pending further consultation with the Traditional Owners.
  • Empowering operational management: We have increased the responsibility of our product groups for Communities and Social Performance (CSP), partnerships and engagement. This means that line managers within the product groups directly own the relationships with host communities, including Indigenous peoples. All community and heritage management professionals at our operations now report to product group line management.
  • Improved governance and Board oversight: Any direct impacts to sites categorised as being of ‘high’ or ‘very high’ significance under the new Integrated Heritage Management Process must also be approved by the heritage sub-committee of the Executive Committee or the Board, as appropriate. The Sustainability Committee of the Board will oversee the implementation of the recommendations arising from the Board Review and the Parliamentary Inquiry and will ensure that lessons learned are applied, as appropriate to our operations worldwide. The Audit Committee of the Board will ensure that relevant lessons from Juukan Gorge are also applied to all other risk management processes, particularly those, like Juukan Gorge, where there is a significant lag between decision and implementation. Please refer to the risk management and internal control section on page 115 of this report for more information.
  • Strengthened assurance: Second line assurance will be provided by a new stand-alone CSP Area of Expertise (AoE), reporting to Mark Davies, our Group Executive, Safety, Technical and Projects, a member of our Executive Committee, based in Brisbane. The CSP AoE will ensure conformance with Group policies, standards and procedures, including the new Integrated Heritage Management Process, and will share best practice worldwide. The new CSP AoE sits alongside the existing health, safety, environment (HSE) function. This will help to ensure that communities and heritage risk processes are aligned with our existing robust health, safety and environmental systems. The AoE will also oversee internal assessments and reviews, including deep dives and operational reviews in conjunction with experts from our Group Risk function. The framework includes a rigorous annual self-assessment and certification of impacts and risks. Internal Audit will provide a third line of defence.
  • Modernisation of agreements with Traditional Owners: We have written to Traditional Owners advising them that we will not enforce any clauses that restrict Traditional Owners from raising concerns about cultural heritage matters or that restrict them from applying for statutory protection of any cultural heritage sites. We have also offered to modernise agreements in the Pilbara where Traditional Owners have indicated that the current agreements have not met the aspirations of partnership we mutually sought at the outset. We will seek to agree an appropriate mechanism in our revised agreements so that there is a clear pathway for resolution of any differences of view that may emerge. We will also continue to work with Traditional Owners to increase the economic benefits that flow to their communities from employment, skills, training and business development.
  • Increasing transparency: Subject to the consent of Traditional Owners in Australia, we intend to make our new agreements public. We intend to engage with the Traditional Owners on how independent input can be sought to support this modernisation process.
  • Indigenous Advisory Group: We are consulting with Traditional Owners to create an Indigenous Advisory Group (IAG), intended to bring Indigenous voices into the senior leadership and oversight of the business in Australia. An IAG would provide direct input on our Indigenous strategy in Australia and coaching, mentoring and advice to senior leadership and, where possible, to the Board.
  • Work culture and relationships Making sure that we have the right work culture and relationships will require sustained effort over many years. We are not underestimating the time it will take to build a more inclusive work culture that better recognises and celebrates Indigenous partnership in our business.
  • Increasing awareness and understanding of community and heritage issues: Operational leadership will receive training and coaching to ensure that they understand their new responsibilities and have access to the subject matter experts and information they need to support good decision-making. They will be encouraged to invest time in building relationships with Traditional Owners to ensure that they are aware of any concerns, before they escalate into major issues. To support them, we are reinvigorating our cultural awareness training, with all frontline staff, including the Board, undertaking both e-learning and face to face training with Indigenous Australians.
  • Fostering Australian Indigenous leadership: In order to increase the diversity of our leadership team, we have appointed a Chief Advisor, Indigenous Affairs, reporting directly to our Chief Executive Australia, and committed a US$50 million investment to advance employment opportunities and accelerate the career development of Indigenous Australians in our business. The Chief Advisor, Indigenous Affairs will also assist and coach operational management in the renegotiation of our agreements with Traditional Owners.
  • Building a more inclusive work culture: It is clear that we need to create a more inclusive, more diverse work culture, where people feel empowered to challenge decisions – a priority of the management team and our new Chief Executive.

External engagement

In parallel with these internal changes, we continue to contribute to the reform of the Aboriginal Heritage Act 1972 (WA), making clear our support for a right of appeal by Traditional Owners in relation to approvals to impact cultural heritage sites on their Country. We are also engaging with the Chamber of Minerals and Energy in Western Australia, the Minerals Council of Australia and the ICMM, sharing the lessons that we have learned from Juukan Gorge.