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25 August 2009

Directors’ duties take centre stage

The New South Wales Supreme Court last week imposed penalties against 10 former non-executive and executive directors of James Hardie Industries Limited (JHIL).

NSW Supreme Court hands down penalties in James Hardie case

The New South Wales Supreme Court last week imposed penalties against 10 former non-executive and executive directors of James Hardie Industries Limited (JHIL). The penalties stem from a decision of the Court in April of this year in which it was held that the former board members had breached the Corporations Act 2001 (Cth) (Act) when making statements about the adequacy of asbestos compensation funding. Among other findings, Justice Gzell held that the directors had breached their duty to exercise due care and diligence under section 180(1) of the Act in making representations to the public that a foundation set up for compensating asbestos victims was “fully funded”. The foundation later proved to be under-resourced to the tune of $1.9 billion.

The penalties

In handing down his decision, Gzell J said, “This was a serious breach of duty and a flagrant one. The non-executive directors were endorsing JHIL’s announcement to the market in emphatic terms that the Foundation had sufficient funds to pay all legitimate present and future asbestos claims, when they had no sufficient support for that statement and they knew, or ought to have known, that the announcement would influence the market.”

While falling short of the penalties requested by the Australian Securities and Investments Commission (ASIC), the Court ordered substantial penalties against each of the former board members. Despite application by all but the former chief executive officer, Peter Macdonald, none of the former directors were exonerated. Macdonald was disqualified from running companies for 15 years and fined $350,000 for his role in the misleading and deceptive representations made to the public. The company’s former secretary and general legal counsel, Peter Shafron, was fined $75,000 and disqualified from managing corporations for seven years. The remaining former non-executive directors were banned for five years and fined between $30,000 and $35,000 for their involvement in the furor. James Hardie Industries NV, the parent company based in the Netherlands, was fined $80,000 for breaching its continuous disclosure obligations in 2003.

Commenting on the decision, ASIC Chairman Mr D’Aloisio said, “The decision is another important step in improving corporate governance in Australia and that improvement will add confidence to the integrity of our markets.” Justice Gzell also made limited costs orders in favour of ASIC.

Non-executive directors

Under section 180(1) of the Act, directors and officers are required to exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they were a:

  • director or officer of a corporation in the corporation’s circumstances; and
  • occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

In considering a director’s responsibilities, courts have traditionally drawn a distinction between executive and non-executive directors. Gzell J’s judgement goes some way to breaking down this distinction, placing a greater burden on non-executive directors to investigate the veracity of information placed before them by the executive team. Despite not being involved in the day to day running of the business, the Court found that the non-executive directors knew, or ought to have known, that the press release was misleading.

A timely reminder

Above all else, the case demonstrates in real terms that the role of a company director, whether executive or non-executive, is not a passive one. Directors need to display proactivity in corporate decision making. This requires more than simply relying on the guidance of fellow board members. If a director knows or ought to have known that a decision of the board is flawed, and they do not act on that knowledge, they are highly likely to be held accountable. Where a director does not have sufficient information to make an informed decision on a board matter, the best course of action is to abstain from voting and ensure that the board minutes reflect their non-participation. It is also advisable for in-house legal counsel and directors to keep detailed personal file notes should supporting evidence ever need to be adduced.

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