Right: After a recent ASIC inquiry, former James Hardie CEO Peter Macdonald was fined $350,000 and banned from managing a company for 15 years.
Background information
(The following is a significantly edited version of the Wikipedia's entry titled 'James Hardie'. The full text of this entry can be found at http://en.wikipedia.org/wiki/James_Hardie)James Hardie Industries Ltd. is an industrial building materials company headquartered in the Netherlands and listed on the Australian Securities Exchange which specialises in fibre cement products.
For much of the 20th Century James Hardie was involved in the manufacture, distribution and mining of asbestos and its related products such as building products, insulation, pipes and brake linings. In Australia, there were asbestos plants in New South Wales, South Australia, Victoria, Queensland and Western Australia. Many of these products - including the building material known as 'Fibro' - resulted in people developing asbestosis and mesothelioma.
The Australian Council of Trade Unions estimated that 4,600 claims for mesothelioma would be made against James Hardie from 2006 onwards, with claims expected to peak in 2010 or 2011 with 250 claims per year. The total amount of past and future claims made against James Hardie for asbestos-related diseases is estimated to be more than 12,500 of which 8,103 will be claimed after 2006.
James Hardie and its subsidiaries had been providing compensation for victims of its operations since the 1980s. There were some claims prior to this, but the proliferation of cases from the 1980s onwards saw James Hardie acknowledge that asbestos was known to be dangerous though the company claimed it had done everything possible to protect workers.
James Hardie had been structured as a parent company operating through subsidiaries since the 1930s. All asbestos operations, including the provision of compensation, were undertaken by James Hardie's subsidiaries, principally James Hardie and Coy and Hardie-Ferodo (later known as Jsekarb). Between 1995 and 2000, James Hardie (the parent company) began to remove the assets of these subsidiaries (since renamed Amaca and Amaba respectively) whilst leaving them with most of the asbestos liabilities of the James Hardie group [14]. In 2001 these two companies were separated from James Hardie and acquired by the Medical Research and Compensation Foundation (MRCF) which was essentially to act as an administrator for Hardie's asbestos liabilities.
Then CEO of James Hardie, Peter McDonald, made public announcements emphasising that the MRCF had sufficient funds to meet all future claims and that James Hardie would not give it any further substantial funds. Indeed, the net assets of the MRCF were AU$293 million, mostly in real estate and loans, and exceeded the 'best estimate' of $286 million in liabilities which had been estimated in an actuarial report commissioned by James Hardie.
After this separation, James Hardie moved offshore to the Netherlands for what it claimed were significant tax advantages for the company and its shareholders. To make this move, the company had to assure Australian courts (as it was listed on the Australian Stock Exchange) that the MRCF would be able to meet future liabilities. The courts were assured of this and that more money would be made available to its Australian asbestos victims it it were needed.
Shortly after, an actuarial report found that James Hardie asbestos liabilities were likely to reach AU$574.3 million. The MRCF sought extra funding from James Hardie and was offered AU$18 million in assets, an offer which the MRCF rejected. The estimate of asbestos liabilities was promptly revised to AU$751.8 million in 2002 and then AU$1.573 billion in 2003. In discussing the shortfall with the MRCF, James Hardie refused to accept further responsibility for the liabilities on the basis that the MRCF and James Hardie were separate legal entities.
On 12 February a judicial inquiry in New South Wales was commissioned by the NSW government. The findings were very critical of James Hardie and its management. Amongst other findings, it found that the actuarial reports commissioned by James Hardie which estimated liabilities at AU$286 million were inadequate because they used a financial model which made unfounded predictions on the value of investments held by Amaca and Amaba, the figures were subject to numerous unspecified conditions and they did not account for the effect of separating Amaca and Amaba from James Hardie.
However, the inquiry found that James Hardie was under no legal obligation to provide compensation. Despite this finding, there was immense political and social pressure on James Hardie to negotiate a compensation deal; governments were boycotting James Hardie products and unions were threatening to instigate a global union movement against the company based on a black ban of James Hardie products.
Subsequent to the inquiry in 2004, prosecutors brought civil and charges against the C.E.O. and other senior executives for making fraudulent statements as to the liquidity of the MRCF. In February 2007 every member of the 2001 board and some members of senior management were charged by the Australian Securities and Investment Commission (ASIC) with a range of breaches of the Corporations Act 2001 (Cth) including breach of director's duties by failing to act with care and diligence.
In April 2009 these senior executives and directors were found guilty of making fraudulent statements and in August the fines and penalties to be imposed on these directors were brought down.
Immediate James Hardie timeline
1987 - James Hardie stops making asbestos products
2001 - In February, the separation of the company is approved
2001 - Company sets up original, underfunded, asbestos foundation
2003 - In October, the company announces the foundation is underfunded
2004 - Special commission of inquiry runs between February and September
2004 - The Commonwealth passes the James Hardie Act in December
2005 - The James Hardie board approves the funding arrangement in December
2007 - Shareholders approve the first payment into the new fund
2007 - ASIC starts civil proceedings against 10 former directors and managers
2007 - Bernie Banton dies from asbestos related disease on November 27
2009 - The civil hearings conclude on March 2, and the verdict handed down on April 23
Duties of a director
Under the Corporations Act directors must
* exercise their powers and duties with the care and diligence that a reasonable person would have which includes taking steps to ensure they are properly informed about the financial position of the company and ensuring the company doesn't trade if it is insolvent
* exercise their powers and duties in good faith in the best interests of the company and for a proper purpose
*ensure that they do not improperly use their position to gain an advantage for themselves or someone else, or to cause detriment to the company, and
*ensure that they do not improperly use information obtained through their position to gain an advantage for themselves or someone else, or to cause detriment to the company.
Importantly, as a director they need to be fully across the financial position of the company.
*As a director they have a "positive duty" to prevent the company trading while insolvent.
*ASIC expressly state that "an understanding of the financial position of their company only at the time they sign off on the yearly financial statements is insufficient."
*If the company is insolvent, their duties as a director expand to include the interests of the creditors, employees and other stakeholders.