Investment Checks and Balances
It wasn’t the first time I stepped in to lead during times of hardship. My father, a former postmaster, and later a director of the commonwealth government in Australia, died when I was 15, so I had to manage the family finances at a young age. In the 1980s I led the team that overhauled the Australian division of General Motors, which at the time was struggling with huge debt, lost market share, and overcapacity. I learned more than just fortitude during my time in the automotive industry (I also worked for Nissan). I learned how to operate systems effectively, how to be truly competitive, how supply chains work, how to foster innovation, and that the customer (not the product) must always come first. My first meeting on the day I was appointed CEO was with the investment committee, which would decide whether and how to spend hundreds of millions—perhaps billions—of dollars. This committee was supposed to evaluate all projects, and it was signing off on almost everything at the time. But the subject matter experts–the people in the middle of our or ganization–were the ones who actually understood how things worked. They knew about geology and hydrology, geotech, marketing, financing, joint venture relationships, and so on. Those vital managers were being passed over. I saw immediately that I needed to reinforce the system of checks and balances that had once been a core competency for Rio Tinto. The first thing I did was stop the upward flood of delegation. I wanted people who were were closer to projects to make more decisions; the investment committee should act as a final safeguard, not the only one. And I decided to raise the hurdle for new investments–dramatically. During the boom years, almost every project with a positive net present value had been given the green light. We made a bold announcement: Only projects that met or exceeded an internal rate of return of 15% would move forward under my leadership. My thinking was: Good projects are always good projects. The problem with marginal projects is that people work to pull them over the line. They stretch assumptions. High prices during a bubble can hide a lot of sins, but when this bubble burst, we were left exposed. Chris and I felt that by setting an IRR of 15% we could cull the marginal projects and focus on the good ones. So our spending on new projects went from $17.6 B to $B in 2015.
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