Don’t Ban James Hardie Directors; No One Hurt

On April 23rd, 2009, Justice I Gzell, presiding over a civil action brought by Australian Securities and Investments Commission (ASIC) against James Hardie and its directors in the New South Wales Supreme Court, decided in favour of AISIC. The matter to be decided was whether the directors indulged in false and misleading conduct in statements about the financial capacity of its Foundation – established to pay current and future claims against James Hardie from sufferers of Mesothelioma and other Asbestos-related health issues – to pay those claims into the future.

In his summary of his decision, Justice Gzell stated:

1269 ASIC alleged that the Draft ASX Announcement was approved at the 15 February 2001 Meeting of the JHIL board of directors and that it contained a number of statements to the effect that the Foundation would have sufficient funds to meet all legitimate Asbestos Claims, that it was fully funded and provided certainty for people with legitimate Asbestos Claims. ASIC alleged that those statements were false or misleading and that the directors were in breach of Section 180(1) of the Corporations Law as carried over into the Corporations Act.

1270 I have found that ASIC has made out this case against Mr Brown, Mr Gillfillan, Ms Hellicar, Mr Koffel, Mr O’Brien, Mr Terry, Mr Willcox and Mr Macdonald.

1281 I have found that Mr Macdonald breached Section 180(1) in approving for release the Final ASX Announcement, or in failing to advise that the Final ASX Announcement not be released, or that it be amended before being released to remove the matters that were false or misleading.

1282 I have found that since the Final ASX Announcement was false or misleading, ASIC has made out its allegation that by issuing it to the ASX on 16 February 2001, JHIL engaged in conduct that was misleading or deceptive, or was likely to mislead or deceive, contrary to Section 995(2) of the Corporations Law as carried over into the Corporations Act.

1283 Since the Final ASX Announcement was false in a material particular or was materially misleading, I have found that in making and disseminating it, JHIL contravened Section 999 of the Corporations Law as carried over into the Corporations Act.

1284 ASIC alleged that false or misleading statements as to the sufficiency of funding of the Foundation to meet all legitimate future Asbestos Claims were made at a press conference convened by Mr Macdonald on 16 February 2001.

1285 I have found that the Press Conference Statements included statements that were false or misleading and potentially harmful to JHIL and Mr Macdonald was thereby in breach of Section 180(1).

1288 I have found that the natural effect of the Press Conference Statements was likely to induce persons to purchase JHIL shares and was likely to increase the market price of JHIL shares; that Mr Macdonald knew, or ought to have known, that the statements were false in a material particular or were materially misleading and JHIL thereby contravened Section 999.

1292 I have found that by issuing the 23 February 2001 ASX Announcement, JHIL engaged in conduct that was misleading or deceptive, or was likely to mislead or deceive, and was in contravention of Section 995(2).

1293 I have found that the natural and probable result of the publication of the 23 February 2001 ASX Announcement was to induce the reader to hold JHIL’s shares thereby maintaining or stabilising their market price and that in disseminating the 23 February 2001 ASX Announcement, JHIL contravened Section 999.

1294 ASIC alleged that Mr Macdonald approved for release to the ASX a further announcement of 21 March 2001. In similar terms to the allegations with respect to the 23 February 2001 ASX Announcement, it was alleged that the announcement conveyed, or was capable of conveying, that the material available to JHIL provided a reasonable basis for the assertion that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future Asbestos Claims, and that was false or misleading.

1295 I have found that by approving the 21 March 2001 ASX Announcement, or in failing to advise that it not be released, or that it be amended before being released to remove matters that were false or misleading, Mr Macdonald contravened Section 180(1).
1296 I have found that ASIC has failed to make out a case against Mr Macdonald under Section 181(1) with respect to the 21 March 2001 ASX Announcement.

1297 I have found that by issuing the 21 March 2001 ASX Announcement, JHIL engaged in conduct that was misleading or deceptive, or was likely to mislead to deceive, contrary to Section 995(2).

1306 ASIC alleged that in June 2002, Mr Macdonald made representations with respect to JHINV in Edinburgh and in London and the slides for these UK presentations were lodged with the ASX. ASIC alleged that in the Edinburgh Representations, the London Representations and the UK Slides, the statements as to the Foundation being fully funded were false in a material particular or materially misleading.

1307 I have found that ASIC has made out its case that, with respect to these Roadshow Presentations, Mr Macdonald was in breach of Section 180(1).

1309 I have found with respect to the ASX Representations in the UK Slides that JHINV was in breach of Section 1041E of the Corporations Act.

1311 I have found that, in forwarding the UK Slides to the ASX, JHINV was in breach of Section 1041H of the Corporations Act.

1312 ASIC alleged that at a meeting of the board of directors of JHINV on 25 March 2003, it was resolved that JHINV execute a trust deed establishing the ABN 60 Foundation; that it approve a $1.5m capital reduction by JHIL by payment to it of $1.5m; that it request JHIL to issue 1,000 shares to the ABN 60 Foundation; that the cancellation by JHIL for no consideration of the one fully paid ordinary share held by JHINV was in its best interests; and that it enter into a deed of covenant indemnity and access (DOCIA). ASIC alleged that JHINV was obliged to disclose this information to the ASX under its continuous disclosure obligations.

1313 I have found that between 25 March 2003 and 30 June 2003 JHINV failed to notify the ASX of the ABN 60 Information in accordance with Listing Rule 3.1 and that it thereby contravened Section 674(2) of the Corporations Act.

This is by no means the full extent of the summary, but it is unequivocal: The statements approved by the board of James Hardie for release to the Australian Stock Exchange (ASX) to the effect that the Foundation would have sufficient funds to meet all Asbestos claims were false or misleading, and that the directors were in breach of the Corporations Act. Not once, but on multiple occasions and to multiple channels each time – in announcements to the ASX, in media releases and in presentations by the CEO to investors.

The CEO was still spruiking that line at the end of 2003. See the October 2003 presentation here – downloaded from the James Hardie website 29th July, 2009.

Full list of contraventions here: http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/James-Hardie-table-of-findings.pdf/$file/James-Hardie-table-of-findings.pdf

More on the chariman’s role here.

The esteemed board was found to have deceived the ASX, the public, its shareholders, and the Foundation claimants.

But most significant is the constancy of deception (and attempted deception) of James Hardie of its employees, subjected as they were through the course of employment to the most God-awful disease imaginable. Its employees were dying and still the board continued to battle against them in the courts to avoid paying compensation.

It further defies comprehension that a board of directors in the 21st Century would constantly seek to then avoid its legal obligations and further obfuscate and mislead investors, regulators and potential claimants, as to the status and security of funds promised (itself only after much legal action) to the sick and dying. It is now suggested in some circles that this foundation is so underfunded it very likely will fold without too much more in the way of compensation.

Current media discussion surrounds the board members themselves suggesting they do not deserve the harsh penalties recommended by ASIC – including fines and bans from serving on other boards – and that really, no one was hurt by their actions.

Writing in The Australian newspaper July 28th, Susannah Moran captured the tone of the defence in the Penalty Hearing in the NSW Supreme Court this week (arising from the findings outlined above), in an article entitled Former Hardie directors fight calls for bans, fines.

Former James Hardie directors say they should be appointed to more company boards, not banned or forced to pay millions of dollars in fines as recommended by the Australian Securities & Investments Commission.
They argue they did not act dishonestly, had already suffered from bad publicity, were relying on advice from others and no one had been hurt by their actions.

Let me be very clear: When a corporation constantly and intentionally deceives its employees; when it knowingly or negligently allows injury to its employees, its environment or its customers; when it misleads regulators, investors and potential investors, the hurt is profound and indisputable.

Thomas L. Carson, Professor of Philosophy, Loyola University Chicago, in a paper called Self-Interest and Business Ethics: Some Lessons of the Recent Corporate Scandals published in the Journal of Business Ethics, says:

Recent events reveal serious weaknesses of the stakeholder theory about the social responsibilities of business which lacks prohibitions against fraud and deception. This is a glaring deficiency of standard versions of the stakeholder theory, but it is easily remedied by adding explicit prohibitions against fraud and deception. In addition, recent events highlight the stakeholder theory’s very naive and unrealistic hopes and expectations for business executives as moral arbiters and agents of social improvement.

I disagree. Stakeholder theory shouldn’t need prohibitions against fraud and deception. That’s what we have corporate regulations for – but even then, what can we do when these ****heads don’t abide by the law?

As for the Professor’s dismissal of executives as moral arbiters and agents of social improvement, I suggest that there are many examples in history where visionary leaders have proved that business executives and their corporations can make significant positive contributions to social improvement of their workers and their communities, profitably. I would further suggest that the principles of corporate governance dictate that in fact the board must uphold legal and moral obligations to all stakeholders, and society’s expectations of what is right and what is wrong.

The OECD Principles of Corporate Governance, published in 2004 states:

III. The Equitable Treatment of Shareholders
The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.

In the following chapter, it goes on to say:

IV. The Role of Stakeholders in Corporate Governance
The corporate governance framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.

It astounds me that the business schools do not preach these guidelines at the very least as a base benchmark – yet all member countries of the OECD contributed to and agreed to the final guidelines. The presumption is that these guidelines would be adopted by corporations domiciled in those member countries. Yes, the Netherlands, James Hardie’s current country of domicile (after it fled Australia) is a member. So is Ireland – mooted as James’ Hardie’s next stop in its search for a corporate headquarters with weak tax legislation and equally weak corporate regulators.

In Australia, the Australian Stock Exchange (ASX) convened the ASX Corporate Governance Council in August 2002 “as a central reference point for companies to understand stakeholder expectations and to promote and maintain investor confidence. Its purpose was and remains to develop Principles and Recommendations which reflect international good practice.”

The ASX Principles of Corporate Governance includes the following:

Principle 3 – Promote ethical and responsible decision-making
Companies should actively promote ethical and responsible decision-making.
Recommendation 3.1: Companies should establish a code of conduct and disclose the code or a summary of the code as to:
• the practices necessary to maintain confidence in the company’s integrity
• the practices necessary to take into account their legal obligations and the reasonable expectations of their stakeholders
• the responsibility and accountability of individuals for reporting and investigating reports of unethical practices.

To those who dismiss the relevance of stakeholders and claim corporations are beholden exclusively to the benefit of shareholders, that does not mean at the expense of stakeholders.

And where in all of this was the board of James Hardie actually looking out for shareholders? It surely isn’t in how they continued to lie to shareholders. It can’t be in how they misled regulators, setting the company up for legal action and fines, nor in how they have handled the whole Asbestos issue.

Of note here too, is that a great many of James Hardie’s retail investors were its employees.

Had they done the right thing from the start, shareholders might have a company worth hanging on to. But who in good conscience want to now?

Which leads me to the directors’ own argument against a ban from board membership – I agree. Don’t ban them. Let’s test the moral fibre of the club and see who hires them first. Any bets on who that might be?

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Tags: asbestos, ASX, Australian, corporate behaviour, corporate social responsibility (CSR), CSR & Sustainability, culture, featured, James Hardie, social responsibility

Category: Sin & Spin