James Hardie: Restructuring, removing and reviewing the social contract
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Added on 2019-09-22
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This assessment task covers six short answer questions on corporate governance, ethical and moral obligations, and social responsibility issues involved in business decision making, with a focus on the James Hardie case. It assesses learning outcomes 1, 2, and 3 of the course ACC8801.
James Hardie: Restructuring, removing and reviewing the social contract
Added on 2019-09-22
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ACC8801: Assessment Task 1Six (6) Short Answer QuestionsJames Hardie: Restructuring, removing and reviewing the socialcontract(Source: Lisa Barnes, University of Newcastle)On Thursday 15 February 2007, the Australian Securities and InvestmentsCommission (ASIC) commenced civil penalty proceedings relating to James Hardie.Both current and former directors and executives were investigated on matters ofpossible criminal issues, especially in relation to the Medical Research andCompensation Foundation (MRCF). On Friday 16 February, the then Chair of JamesHardie, Meredith Hellicar, and several directors resigned their positions.History of James HardieJames Hardie was founded in the late nineteenth century, and became an iconiccompany, especially in Australia in the twentieth century, for mining, importingand manufacturing asbestos-based products. Commonly referred to as ‘fibro’,fibro-cement played a key role in the growth of expanding cities as it was acheaper alternative to brick, but supposedly safe and durable. However, fibro soldby James Hardie was made of asbestos, which even back in the 1930s was knownto be ‘causing deadly lung disease’ (Ministry of Health Report 1938, cited inKjellstrom 2004). Indeed, for James Hardie, the first workers’ compensation caseoccurred in 1939 (Hills, 2005); but it was not until the mid-1960s that JamesHardie was given information on asbestos-related diseases among its employeesin which they were told that liabilities could be as high as A$1.5 million, which setagainst shareholders’ funds of $30 million seemed significant (Haigh, 2006).Despite these health warnings and potential impact of liabilities fromcompensation, James Hardie continued to manufacture the product until 1987.Asbestos and its health impactsAsbestos has been found to cause many medical conditions including lung diseaseand, in particular, mesothelioma, lung cancer and asbestosis. Mostly, however, ittakes between 15 to 30 years before symptoms present themselves after peopleare exposed to asbestos dust (Smartt, 2004). Asbestos was mainly used indomestic and industrial buildings, brake linings, fibro sheeting, pipes andinsulation. The health effects of its use are not limited to employees, however;they also include neighbours of mines and manufacturing plants, and demolitioncontractors. These effects are recognized internationally (Jackson, 2004).The fact that the medical implications of exposure to asbestos were known asearly as the late 1930s, and that James Hardie knew about it via their ownemployees’ workers compensation claims in the 60s, and the fact that it tookanother 20 years until the manufacture of asbestos products ceased, showed thatmanufacturers ‘knew at an early stage about the dangers of asbestos and made acommercial decision to keep producing it, thereby jeopardizing lives’ (Spender,2003: 235). The Medical Research Compensation Foundation (MRCF) and restructureIn early 2001, the board of James Hardie made several announcements, one ofwhich was the establishment of the MRCF. This fund was to ‘compensate sufferersof asbestos related diseases and claims against two former James Hardiesubsidiaries and fund medical research aimed at finding cures for these diseases’(JHIL, 2001). The fund was established to effectively resolve any liability inrelation to asbestos, which would then allow the board to concentrate on growingthe company ‘for the benefit of all shareholders’ (JHIL, 2001). The foundation wasPage 1 of 11
Corporate Governance and Social ResponsibilityACC8801 Assessment Task 1supposed to have sufficient funds (A$293 million) to cover all legitimate past andfuture claims; the funding was by way of ownership of subsidiaries Amaca andAmaba which had net assets of $293 million, and James Hardie also stated thatany leftover funds would be used to support further research on lung disease (JHIL,2001).Later in 2001, a new holding company was set up, called James Hardie IndustriesNV (JHI NV), and the group moved to the Netherlands where Australia has no civillaw enforcement agreements. The decision to restructure and relocate wasgranted by the Supreme Court of New South Wales, based on the assurance bythe company that any future claims would be met and backed up by partially paidshares in JHIL held by JHI NV. However, these shares were subsequently cancelledwhen JHIL (later known as ABN 60 Pty Ltd) vested in a new company, the ABN 60Foundation, which was still supposedly able to meet any obligations for the MRCF.The complex structures and restructure of James Hardie made it harder toguarantee the liability of claims would be met.The MRCF, however, had been substantially underfunded. A report by KPMG re-estimated the liabilities to be A$693 million, rising to $1044 million in 2000 (Haigh,2006). The shortfall caused much activity by lobby groups such as trade unionsand local councils, resulting in the 2004 Jackson Inquiry. The findings indicatedthat James Hardie had acted within the law; however, it also discovered that JamesHardie did not use reliable actuarial estimates, the company had made misleadingpublic statements and appeared to be deliberately avoiding its moral obligationsto society (Tozer and Hamilton 2006).The future for James Hardie and its victimsJames Hardie agreed that the MRCF was underfunded. In 2005, James Hardiesigned a Final Funding Agreement (FFA) with the NSW state government, whereclaims were re-estimated to be A$4.5 billion over 40 years (Slater and Gordon,2005). Negotiations then began with the Australian Taxation Office to set up acharitable organisation to fund the rest of the expected liabilities related toasbestos exposure. The arrangement established the Asbestos InjuriesCompensation Fund Limited (AICFL), which would receive income annually fromJames Hardie according to a formula based on a percentage of ‘free cash flow’ anda ‘cap percentage’.The arrangement was agreed to by shareholders in early February 2007 as it ‘isconsistent with current investor and Australian Community expectations’ (JHI NV,2007). Little did James Hardie know that one week later, ASIC would commenceproceedings into the actions of former and current directors and executives,alleging breaches of the Corporations Act 2001. The five allegations were:1Misleading communications in 2001 regarding the establishment of theMRCF.2Failure to disclose in relation to Deed of Covenants between MRFC andJHIL.3Restructure of the group: The scheme of arrangement, specifically theinformation memorandum, was misleading in terms of its lack ofdisclosure in relation to the meeting of future obligations.4Misleading executive presentations: in 2002, presentations made toinstitutional investors contained information on the supposed adequacyof the MRCF in meeting its obligations in relation to asbestos liabilities.Page 2 of 11
Corporate Governance and Social ResponsibilityACC8801 Assessment Task 15Failure of care and diligence: in relation to the cancellation of shares inJHIL, and the failure of information disclosed to ASX and ASIC in relationto the cancellation.Currently, according to ASIC (2007) ‘the investigation, which continues, hasinvolved a complex corporate structure, it has spanned three countries (the US,the UK and Australia) and it has involved about 348 documents, 72 examinationsand the issuing of 284 notices to obtain evidence’. The investigating continues asdoes the increase in the number of victims being identified and claims sought. Itappears that the profit motive was prioritised by James Hardie at the expense ofthe social contract.Page 3 of 11
Corporate Governance and Social ResponsibilityACC8801 Assessment Task 1REFERENCESASIC, ASIC Commences proceedings relating to James Hardie, Media Release 07-35, Thursday 15 February 2007.Haigh, G., Asbestos House: The secret history of James Hardie Industries(Melbourne: Scribe, 2006).Hellicar, M., ‘Managing Corporate Social Responsibility’, Paper presented to theSocial Responsibility of Company Directors Workshop, Monash University,Melbourne, 16 March 2005.Hills, B., ‘The James Hardie Story: Asbestos victims claims evaded bymanufacturers’, International Journal of Occupational and Environmental Health,Vol. 11 Iss. 2 (2005), 212-14.Jackson, D.F.Q., Report for the Special Commission of Inquiry into the MedicalResearch Compensation Foundation (Sydney: The Cabinet Office, NSWGovernment, 2004).James Hardie Industries, available at: http://jameshardie.com.au, viewed 2007. James Hardie Industries Limited (JHIL), Media Release, 16 February 2001; cited inJackson (2004) Sec 2.35, and Haigh (2006), 273-4.Kjellstrom, T.E., ‘The epidemic of asbestos-related diseases in New Zealand’International Journal of Environmental Health, Vol. 10, Iss. 2 (2004), 212-19.SlaterandGordon(2005),availableat:www.slatergordon.com.au/news/docs/WEBSITE%20Hardie%20lead%20v2.pdfSmartt, P., ‘Mortality, morbidity and asbestosis in New Zealand: the hidden legacyof asbestos exposure’, The New Zealand Medical Journal, Vol. 117 (2004), 1205.Spender, P., ‘Blue asbestos and golden eggs: evaluation bankruptcy and classactions as just responses to mass tort liability’, Sydney Law Review, Vol. 25(2003), 223-63.Page 4 of 11
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