JOHANNESBURG (miningweekly.com) – Executive compensation should be linked to factors other than financial performance, Principles for Responsible Investment (PRI) MD Fiona Reynolds said on Tuesday.

Responding to Mining Weekly Online within the context of this month’s collapse of the tailings dam of the Samarco iron-ore mine in Brazil, which killed nine people and displaced 600 villagers, Reynolds outlined that her London-based institutional investor group felt strongly that existing remuneration plans for senior executives did not necessarily promote sustainable value creation for their companies.

She added that the inclusion of appropriate environmental, social and governance (ESG) issues within executive management goals and incentive schemes could be an important factor in the creation and protection of long-term shareholder value.
 
Given the potential for accidents and fatalities in mining, ESG-related risk was high, which meant that linking C-Suite remuneration to the company’s health and safety record as well as to environmental issues was of particular importance.

PRI, a United Nations Environment Programme Finance Initiative aimed at helping to integrate ESG issues into investment decision-making, has engaged with its signatories in the extractives sector and its research shows that significant work still needs to be done in developing longer-term and rigorous approaches to incentivising ESG performance through executive pay.

“Our research also highlighted that the performance metrics used are often opaque, ill-defined, or simply fail to capture a company’s most significant ESG challenges,” Reynolds told Creamer Media’s Mining Weekly Online.

Investors needed to engage in a wider dialogue with mining companies to ensure that ESG issues comprised a meaningful component of overall remuneration and that incentives were aligned with long-term strategic plans.

That would be a way of ensuring that senior management was held accountable for sustainable performance and the delivery of sustained shareholder value.

Meanwhile, prosecutors in the Brazilian state of Minas Gerais have demanded that Samarco – a joint venture (JV) between large diversified mining companies Vale and BHP Billiton – pay preliminary compensation of one billion reais ($370-million) to help provide aid to the victims of the disaster and fund environmental restoration work.

On Friday, a Brazilian court froze 300-million reais of Samarco's funds, and said the funds could be used to pay for only damages.

Deputy state prosecutor-general Sandra Cureau has also warned the mine might be forced to close permanently.

"Normally, we recommend the most severe penalties. It will be a punishment to serve as an example to avoid other accidents as serious as this," Cureau was reported as saying.

The disaster comes at a time when BHP Billiton is already under pressure from tumbling global commodity prices for the iron-ore and oil it produces.

The 25% fall in the company’s share price since July 1 has already wiped about $6.31-billion off the retirement savings of Australian workers, the Sydney Morning Herald reported on Monday, when it added that the company was now also facing potential pressure from institutional investors to better link executive pay to safety breaches.

A message that came over loudly and clearly at last month’s Joburg Indaba from a panel made up of Regarding Capital Management chairperson Piet Viljoen, Public Investment Corporation listed investments executive head Fidelis Madavo, Allan Gray portfolio manager Sandy McGregor and Coronation Fund Managers analyst Henk Groenewald was that the incentivising of mining company executives needed to be reformed.

A panel heard that mining company executives are making a ton of money on the basis of the skewed way in which mining top brass are incentivised. Thrashed was the short-termism of incentivisation for what is a very long-term industry.

Share price incentives were given a firm thumbs down and questions were asked about the absence of incentives around operational metrics such as lower unit costs, life-of-mine extensions – and now also ESG considerations, following the Brazilian tragedy.

The November 5 disaster in the south-eastern state of Minas Gerais saw a flood of mining waste and muddy water pour from a breached reservoir at Samarco’s iron-ore mine. The torrent devastated and knocked out water supplies to the area, and battered the village of Bento Rodrigues.

Bloomberg reported on Monday that, following the deadly Brazil mine disaster, BHP Billiton was reviewing the operating structure of its mining JVs Samarco, as well as its Antamina copper operation in Peru and its Cerrejon coal venture in Colombia.

Three of its mining JVs - Samarco, Antamina and Cerrejon - are operated by standalone entities owned by the partners.

"That is the kind of arrangement we need to review and have been reviewing, to be honest, to decide not just the perspective of our shareholders, but the shareholders of the companies who are partners to that joint venture and whether a more petroleum-type model might be more appropriate in the future," BHP Billiton CEO Andrew Mackenzie was reported as saying.

Vale is said to have insufficient insurance to cover the Samarco costs, with costs and fines reportedly surpassing insurance against civil damages.