James Hardie Industries: Restructuring, Removing and Reviewing - Case Study Example

Name : xxxxxxxxxxx Institution : xxxxxxxxxxx Title : James Hardie Industries: Restructuring, Removing and Reviewing the Social Contract. CASE STUDY Tutor : xxxxxxxxxxx Course : xxxxxxxxxxx @2010 Executive Summary Corporate governance involves laws and policies that govern all activities of an organization. The main goal of corporate governance is to ensure that the corporation makes maximum profits and at the same time respecting the rights of its stakeholders. James Hardie is a cement producing company originally based in Australia that uses asbestos in producing cement, a product that is harmful to health of the employees. However, due to poor corporate governance practices in the company, it promises to compensate for all the health claims made by the employees and it set up a compensation fund which was not allocated enough funds. To avoid meeting legal obligations regarding the matter, the company decide to restructure and relocate to Netherlands where Australia has no legal enforcement. This report also looks at various principles of corporate governance that are applied in different countries and makes recommendations for good corporate governance practices at James Hardie. Table of Content Title : James Hardie Industries: Restructuring, Removing and Reviewing the Social Contract. CASE STUDY 1 Executive Summary 2 Corporate Governance 4 Introduction 4 Problem Statement 5 Corporate governance issues at James Hardie 5 ASX corporate governance best practice principles that James Hardie should have conformed to 7 Other legislations on corporate governance 9 Corporate governance for long term sustainability 10 My own company’s corporate governance principles 11 Conclusion about James Hardie’s corporate behaviour 12 Recommendations for good corporate governance practices in James Hardie 13 Bibliography 15 Executive Summary 2 Corporate Governance 4 Introduction 4 Problem Statement 5 Corporate governance issues at James Hardie 5 ASX corporate governance best practice principles that James Hardie should have conformed to 7 Other legislations on corporate governance 8 Corporate governance for long term sustainability 10 My own company’s corporate governance principles 11 Conclusion about James Hardie’s corporate behaviour 11 Recommendations for good corporate governance practices in James Hardie 12 Bibliography 15 Corporate Governance Introduction Corporate governance is a set of practices including laws, and policies that affect a manner in which a company is administered and controlled. It also includes the relationship between the company and the stakeholders. Proper corporate governance is the determinant of integrity in a corporation, monetary organizations and markets. It is also the key to healthy and stable economy (Monks & Minow 2008). The main area of concern in corporate governance is to maintain accountability of the key individuals in an organization so as to eliminate issues between the individuals and other agencies such as the stakeholders. Corporate governance also covers the efficiency of the organization’s activities economically especially on the welfare of the shareholders. However, it also incorporates other aspects such as views of other players rather than the shareholders. The report below looks at corporate governance issues in James Hardie Company that had been producing asbestos products which poses health problems to the employees. The company is aware of the health risks but is not ready to streamline its health compensation program which should cater for future health issues of its employees. Problem Statement The practices at James Hardie were an indication that problems can be mitigated and not eliminated. Despite best practices of corporate governance and government regulation, other factors will have an impact on the corporate and individual behaviour. Corporate governance issues at James Hardie Corporate governance includes considerations of all the stake holders including the employees and the members of the society. The management of James Hardie considered only the maximization of profits and better returns to the shareholders, which they could achieve at the expense of the health of their employees and the neighbouring community. The company was involved in manufacture of fibro-cement which was made of asbestos. Asbestos had been known to cause a deadly lung disease to those who are exposed to it. The company had started the manufacturing work in the early 1930s and it was until mid- 1960s that its management was informed of the risks that asbestos could cause among its employees and that the health claim of the matter could cause liabilities as high as 1.5 million dollars. This amount could be significant when set against the funds of the shareholders which totalled to 30 million dollars (Hills 2005). Despite all the information given to James Hardie, they continued with production of fibro-cement up to 1987. In 2001 the company established the Medical Research Compensation Foundation (MRCF) that would cater for the liability of health claims among the employees. This fund was to allow the management to continue in its activities so that returns to the shareholders will continue. However, in 2005, the company claimed that MRCF was not sufficiently funded. Since the company gave priority to its other obligations which includes its profits and returns to the shareholders, it adopted the concept of mitigating the problems rather than eliminating them. To eliminate the problem could have meant that the company adopts other processes that do not involve risky materials such as asbestos. However, due to profitability factor, the company decided to mitigate the impacts by funding health claims of the affected employees and further research over the issues. However, the company failed to honour its commitment on compensation which was interpreted as avoiding the responsibility. Investigations into the matter found out that James Hardie had acted following the legal requirements but they gave the correct estimates for the compensation costs. The company also gave misguiding information to the public which appeared like a deal to avoid its moral responsibilities. It was also realised that the company was aware of the health risks of asbestos but they ignored the information due to need for profits and returns to shareholders (Haigh 2006). The issues was further complicated by the company’s decision to form a new holding company known as James Hardie Industries Limited NV (JHIN NV) which decided to relocate to Netherlands where Australia did not have any legal enforcement agreements. This was clearly seen as a way of avoiding its responsibility. The company was allowed to restructure by the Supreme Court in New South Wales after giving an assurance that they will meet any future claims over its employees. This was also backed up by shares held by the new company JHIL NV. However, these shares were dissolved when JHIL vested in a new company known as the ABN Foundation which was seemingly able to the obligations of the MRCF. The complex restructuring of the company made it difficult to guarantee meeting the claims. ASX corporate governance best practice principles that James Hardie should have conformed to The principle 10 of the Australian Securities Exchange council states that corporations should recognize the legal interests of its stakeholders. This means that companies have a legal obligation to the stakeholders who are not its shareholders. These include the employees, the customers and the members of the society. Business principles recognize that a company can increase its productivity by better management of its resources which include the human and the social capital. The tenth principle of ASX further explains that a company should also state in its code of conduct the responsibility to safety of the good produced. Therefore after receiving the information on the health impacts of asbestos, the company should have considered optional means of solving this problem. This could have been through protective devices, banning the use of asbestos in its manufacturing processes and substituting asbestos with another product (ASX Corporate Governance Council 2003). The principle also extends the responsibility to the community. This applies the corporate social responsibility that calls for responsibility of the corporation over the members of the society. It was found out that manufacture of asbestos caused health problems not only to the employees but also the neighbouring community. Responsibility to the community includes protecting community environmental policies. Every company should do activities that are not a threat to the community well being. James Hardie could have found ways of ensuring its products releases do not reach the neighbourhood since they were a threat to the community members. The ASX requirements also pay much attention to the needs of the shareholders and have given them priority in their other principles. However, this cannot be achieved when the corporation neglects its social responsibility. To conform to the ASX principles, the company should have given the role of financial position disclosure to an independent department that will give information to the state and members of the public to an independent department that will do it maintaining accounting standards. This would have played a part in maintaining the integrity of the company. In meeting the obligations to the employees and members of society, the company would have taken seriously the compensation claims. This would have called for taking the full responsibility and eliminating the problem completely. Other legislations on corporate governance Other countries in the world also have principles that guide corporate governance in their countries. The Organization for Economic Co-operation and Development (OECD) outlines principle for corporate governance among its member countries. The member countries, most of which are the European and Asian countries have recognized the need for proper corporate governance in attaining fundamental goals of an organization. According to their principles, corporate governance is main aspect in improving economic growth and efficiency. The principle of OECD also recognizes the relationship between the management of a company, its shareholders, the government and the stake holders. They also state that the employees and other stakeholders play a great role in contributing to the performance and long term success of an organization. Similarly, the government also plays a role of establishing the legal framework under which corporate governance operates (OECD 2004). The fifth principle of the OECD document also states about disclosure and transparency by explaining that the corporate governance framework should disclose all matters concerning the corporation including its ownership, financial position and its governance. It is further explained that disclosure should also not be limited to foreseeable risks factors. This means that an organization that involves processes that pose a risk to its employees should inform them of the risks. This should also extend to the members of the community. If an organization is aware that its location in a certain area will cause risks to the neighbourhood, it should disclose this to the relevant authorities and find means of eliminating the problem. It is further explained that the information should also include high standards of financing and accounting. This however means the accounting of compensation funds. Australia also follows the corporate governance principles explained in the Australian Corporate Law such as CLERP9. This is a law that was released in 2004 to clarify on some corporate governance issues affecting some listed public companies in Australia. This law requires that CLERP 9 addresses issues of reforms in remuneration of executives, involvement of shareholders and disclosure of a company’s information in observance of the law. This is to enable to Australian corporations meet the global business requirements (McConvill, J., 2004). Corporate governance for long term sustainability The most important thing in corporate governance is meeting the interests of the shareholders. Since the shareholders are the owners of the business, their rights must be maintained for long term success of the organization. After the goals of the shareholders have been met, the legal and social obligations of the business should follow. Failure to meet the legal business requirements can cause a threat to the business. This is because these are requirements by the government concerning how businesses should be conducted in their country. Other stakeholders must also be dealt with appropriately. All these factors contribute to the success of the business in the long run failure to meet a business’ obligations creates a poor working atmosphere where the company is always avoiding to meet the concerned parties such as the government officials. Other companies may take desperate measures such as those taken by James Hardie of restructuring and relocating. Another case of corporate governance that may have cases in an organization is ethics. Ethics are the defined morals and values that should be observed by all employees in the organization. However, due to desire to maximise profits, some organizations neglect the set ethics especially on matters concerning the employees and the society. It is therefore important to ensure that the company has a sense corporate social responsibility. This means that all aspects of the employees and the community should be included in all their activities. The company should care about the environment, welfare of its employees, the poverty levels of the community members and other factors such as unemployment. Corporate social responsibility results to increased production in the organization since it will avoid legal crisis due to failure to meet its obligations. My own company’s corporate governance principles In managing my old company, the ASX and the OECD principles of corporate governance would be my main guide. To avoid the crisis such as those experienced at James Hardie, I would seriously take the OECD principles which requires that all the rights of shareholders be respected. The main goal of the business being to make profits, which is also the main focus of the shareholders. It is therefore important to give the shareholders the first priority in the business activities. However, to achieve the goal of the organization, it is very important to consider other players in profit making. These include the employees and the members of the community. These are the other stake holders who also have their rights and which must be granted by the organization. According to the OECD principles, the rights of stakeholders are protected by the law and therefore to avoid legal crisis, it is important to respect them. Another very important principle in running my business is disclosure and transparency in the financial situation of the company. Financial information should be well prepared and disclosed with maintenance of highest standards of accounting. This is very important in maintaining the integrity of the business. At James Hardie, the integrity of the company was destroyed when they gave an untrue report regarding underfunding of the MRCF. Conclusion about James Hardie’s corporate behaviour James Hardie’s corporate behaviour lacked good governance by giving more focus on profits and neglecting its responsibility over the employees and the members of the community. After receiving the information about the health risks of asbestos, the company should have acted immediately to mitigate further impacts of asbestos to the health of the employees and of the neighbouring community. However, in its mitigation efforts, it failed to address the issues of the MRCF adequately. The company gave misleading information concerning the funding of the foundation. James Hardie further showed a neglect of its obligation by restructuring itself and formation of a new holding company, the James Hardie Industries. This complicated its structure resulting to uncertainties in its ability to meet the health claims of the employees. The decision by the company to restructure and to relocate to Netherlands was also another poor action by the company. This was an indication that instead of addressing their issues, they decided to avoid it. The restructuring process was a way of making its structure more complex so that the employees could find it difficult to follow up their claims. The government of Australia also could not be able to follow up since the company vested into another new company thus totally changing its structure. Recommendations for good corporate governance practices in James Hardie Since James Hardie operated in a number of countries, it therefore operated under several jurisdictions. In Australia, the current regulations on corporate governance have set thresholds for competency of the senior offices in the corporations. The corporations are supposed to ensure that the directors and senior managers are responsible and fit for the job (Morris & Robinson 2009). In such a case, the company should have ensured that its board of directors take up the responsibility of the health of its employees. To maintain the integrity of the company, it would have been important if the accurate financial information is given regarding the funding of the MRCF. This is following the principle of disclosure and transparency which states that an organization should ensure transparency in financial reporting and ensures high levels of accountability. For uninterrupted business, James Hardie should have ensured that it conforms to all the requirements of corporate governance in all the countries in ventured in. This would have made it easy to operate without interruption from the government authorities. To enable the company meet global business requirements, it would have been important to face its issues and solve them completely instead of restructuring and moving from Australia to avoid its legal obligations. Global corporate governance requires that a company meet the legal corporate governance principles in all countries of business interest. To meet the requirements of ASX, the company would have just taken up its obligations. The organization should have also ensured a balance between all its stakeholders which include the shareholders, the employees, board of directors and the general community. Corporate governance involves addressing of the main issues. Since the main issue in the company is the health risk posed by the asbestos, the company should have focused on addressing the issues to eliminate it completely. It would have been better if the company adopts the principle of eliminating a problem rather than mitigating it. Generally, ensuring good corporate governance entails respecting all the rights of concerned stakeholders who include the government, the shareholders, the employees and the community members. Other requirements of good corporate governance include the employees welfare by good remuneration, good leadership styles where all members are involved in decision making and doing actions that maintain the integrity of the company. Bibliography OECD, 2004, OECD principles of Corporate Governance, OECD Publications Service, Paris. ASX Corporate Governance Council, 2003, Principles of Good Corporate Governance And Best Practice Recommendations, Australian Securities Exchange, Austria. Morris, D., & Robinson, M., 2009, Creating a Governance Framework across Multiple Jurisdiction, Retrieved from Monks, R., & Minow, N., 2008, Corporate governance, John Wiley and Sons, New York. Haigh, G., 2006, Asbestos House: The secret history of James Hardie Industries, Scribes Publishers, Melbourne. Hills, B., 2005, The James Hardie Story: Asbestos victims’ claims evaded by manufactures, International. Journal of Occupational and Environmental Health, vol. 11, (2): 212-214. McConvill, J., 2004, An introduction to CLERP 9, LexisNexis, Alberta. Read More