Rio Tinto takes bitter but helpful graft medicine

LONDON: Rio Tinto is taking what looks like a brutal approach to graft. The Anglo-Australian miner fired two senior executives roughly a week after announcing an investigation into payments connected with a project in Guinea dating back to 2011.

There is as yet no sign that the employees acted illegally. Rio's new chief executive, Jean-Sebastien Jacques, is sending a strong message, but a helpful one.

Jacques' tough approach may be partly explained by Rio's rocky past. Six years ago it was slow to catch misbehaviour by employees in China.

Four staff were jailed for taking bribes and stealing commercial secrets. In the current probe, Energy and Minerals Chief Executive Alan Davies and Regulatory Affairs Group Executive Debra Valentine have been dismissed, not for any proof of wrongdoing, but for the failure to maintain "the standards expected of them".

Graft is a constant threat in the kind of frontier markets where some of the world's best mining assets sit.

The resource-rich west African country of Guinea is among the shadiest for global miners to operate in, ranking 139 out of 168 countries surveyed in Transparency International's corruption index. Still, striking hard brings a cost.

Both Valentine and Davies were important figures, whose combined pay could have totalled 8.4 million pounds in 2016, according to Rio's annual report. Davies denies any wrongdoing and plans to contest his dismissal, setting up a potentially expensive and embarrassing legal battle.

For investors, Jacques is making a statement that could be read two ways. Under him, there may be less chance of future nasty surprises from fines or corruption probes.

But Rio might have to avoid or scale back in countries where corruption is endemic - which could hamper short-term returns. Rio already ranks fourth out of the top five miners listed in London in total shareholder returns over the past year, according to Eikon. The trade-off is probably worth it.

Applying good practice in frontier markets can be bitter medicine, but neither resource owners nor investors benefit in the long term from uncertainty about what's acceptable and what isn't.

Wherever they do business, Rio employees have a good reason to err on the side of caution.