Asbestos case: James Hardie directors banned, fined

Directors liable for statements issued by their companies

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published November 13, 2012 6:30 am AEDT

James Hardie Industries (ASX: JHX) directors have been fined $25,000 each and disqualified from serving on boards until April 30 2013, for misleading the market, investors and shareholders.

Seven former directors of the building materials group were found guilty of misleading the market more than 10 years ago, by saying that an asbestos compensation fund was fully funded. It was later found to be short around $1.3 billion, according to a report in the Australian Financial Review.

The bans imposed by the Court of Appeal are significantly less than the five years the High Court had originally imposed back in May, and the fines are also less than the $30,000 originally imposed. For the Australian Securities and Investment Commission (ASIC), this represents a high profile win – something it hasn't had for a long time. Andrew 'Twiggy' Forrest, major shareholder of Fortescue Metals Group (ASX: FMG) won a case against ASIC earlier this year, while ASIC and the Commonwealth Bank of Australia (ASX: CBA) settled the bank's Storm Financial case in September.

James Hardie has had a long running battle over asbestos, although it was by no means the only company that was involved in the production of asbestos related products.

The modern asbestos industry began in the 1880s, but there was no medical understanding of the dangers of asbestos until 1930, when the British factory inspectorate published a report acknowledging the dangers of asbestos. Industrial and public health officials began pressing for dust controls among workers in the industry shortly after.

Despite incontrovertible proof of the issues asbestos fibres caused, it wasn't until 2003 that the importation of any form of asbestos into Australia was banned.

James Hardie ceased using asbestos in any of its products by 1986, and setup the Medical Research and Compensation Foundation (MRCF) in 2001, transferring former subsidiaries involved in asbestos manufacture to it and established a dedicated organisation to manage and deal with asbestos liabilities of those former subsidiaries. The foundation was established with $293 million of cash funds and income producing assets.

In 2004, the company established a special purpose fund to compensate asbestos victims and James Hardie agreed to make annual payments to the fund of up to 35% of the company's free cash flow, based on actuarial estimates of future compensation claims.

In 2006, the Asbestos Injuries Compensation Fund was formed and James Hardie committed to funding compensation awarded against three former subsidiaries. James Hardie has contributed around $550m to this trust since 2007 – according the fund's latest annual report. While the number of claims are falling – in the year ending March 2012, there were 456 claims against the three subsidiaries, compared to 494 the previous year – James Hardie may still be paying compensation for some time to come.

The Foolish bottom line

The outcome of the court case shows that directors need to make sure they read and agree with any statements that are issued publicly and to the ASX. The alternatives – such as James Hardie has faced, especially for companies operating with potentially dangerous materials, don't bear thinking about.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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