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Resources Companies Need Better Corporate Governance

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John Robertson

Governance standards among mid tier listed resources companies are relatively poor. With overseas investors clamoring to buy our assets, this needs to change or all Australians could be disadvantaged.

In the past few days, listed Broken Hill zinc miner, Perilya, pulled out of a merger agreement with its near neighbor, Consolidated Broken Hill. The man in charge at Perilya had assumed the position of executive chairman early in 2008 ostensibly to oversee a strategic review before returning to non-executive duties. Inexplicably, at the same time, the then chief executive also left the company.

Now, important directional changes are occurring without the usual safeguard of a non executive chairman to ensure that the best interests of shareholders are being pursued.

Unfortunately, there is nothing particularly unusual within the resources industry in such a departure from what is regarded as sound corporate governance elsewhere in the market.

The merger of CopperCo, a Queensland-focused copper mine developer, and London based investment company Mineral Securities was supported by a common director who was also a CopperCo financier and chairman of one of the merger participants.

So antagonised were some shareholders that 30% of the general meeting votes were against the merger going ahead in a market renowned for shareholder reluctance to oppose board initiatives.

Last year, west African iron ore mine developer, Sundance Resources, and a local budding producer, Gindalbie Metals, were targeted by their common chairman as merger partners. The idea was not popular with all shareholders and the deal was scuppered when, apparently, the anticipated valuations could not be justified.

More recently, Yukon based zinc mine developer Overland Resources appointed a new director because the company employing him had agreed to buy the output of the future mine.

Directors swapping between executive and non executive roles, common directors initiating friendly deals and customers being given board seats compromise sound corporate governance standards.

Admittedly, it is not all one way traffic. Last week, Macarthur Coal founder, Ken Talbot, resigned his board seat to give himself more flexibility to shop his equity stake in the company to potential buyers unencumbered by the limitations imposed from being a director.

High profile industry stalwart Michael Kiernan resigned from several boards recently to take up executive responsibilities at Monarch Gold where he had long had an interest. This immediately improved governance standards at Matilda Minerals and Territory Iron on whose boards he had been sitting while proposing a merger of both.

The poor state of governance is more than just anecdotal. Some evidence of its failings can be found in a 2007 report by leading accounting firm BDO Kendalls.

Its report on mid-cap corporate governance, based on research conducted at the University of Newcastle, summarized the governance standards of 150 Australian listed companies ranked between 251 and 400 based on market capitalization at the end of December 2006.

The report contains an overall assessment of each company's corporate governance structures, giving each a maximum five star rating and a relative ranking.

There were 27 resources companies among the 150 stocks covered by the report or 18% of the total number. Of these, 22 companies (or 81%) were ranked 75 or lower (i.e. below average) based on the standards set by the research team and applied to companies across all sectors of the Australian stock market.

A total of 39 out of the 150 companies received a four star rating or better. Of these, only four companies were from the resources contingent and none of them received a five star ranking.

Cost is a standard argument against smaller companies following best practice corporate governance. This is not an excuse these resources companies can use. The BDO research makes quite clear that resources companies are falling short of their similarly sized peers and not just the biggest companies in the market.

The report is slightly dated with another financial year just completed. The next report will make interesting reading to see if there has been any improvement.

Governance standards need to improve in the resources sector. The people overseeing our mid cap resources companies are increasingly making judgments about the long-term value of Australia's mineral asset base and who should own it.

With only a very few exceptions, governments leave it to boards of directors to set the values and decide to whom Australia's assets should be sold. It is critically important not only for portfolio investors but for the broader Australian community that the people engaged in making these decisions can pass the highest standards of probity and competence. Best practice corporate governance will go some way to reassuring everyone of that being the case.

John Robertson is a member of the investment committee of the Emerging Resources Company Share Fund (http://www.eimcapital.com.au/ercsf.htm) and may be involved in investment decisions relating to companies mentioned in this article.

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