Rio Tinto institutes checks and balances to manage internal lobbying. We have something called the Investment Committee, which approves sizable investments of any kind and consists of the CEO, CFO, the head of technology and innovation, and the head of business services. In other words, it does not contain any of the divisional heads. The plan is that this committee has enough data to have a dispassionate discussion about an investment. Independence is essential: if it’s lost, we’re lost. Separation of powers is important. Is the committee completely immune to lobbying and strong characters? Of course it isn’t. But the discipline and the checks and balances are there.
In addition to that, we have two other disciplines. One of them is the information the committee gets. This committee receives three pieces of paper. We get the recommendation of the project proponent. Then we have an evaluation group that does a critique of the commercial and financial stuff, and a technical and environmental critique. We try to take the passion out of the debate.
The second discipline is a post-investment review. After a period of some years, we go back to the original proposal and calculate what the return has been, which original estimates were wrong, which challenge was underestimated, what came out better than expected. From numerous post-investment reviews we learn what we tend to get wrong and what we tend to get right. That’s an important discipline in any capital-intensive company because otherwise you don’t learn from your mistakes.
Source: “Breaking Strategic Inertia: Tips from Two Leaders”
Original Publication: The McKinsey Quarterly
Subjects: Finance, Management, Strategy