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					          Moral liabilities: James Hardie and the social contract

Fin Hamilton                                                                                                        Lin Tozer
School of Business                                                                                      School of Accountancy
Eastern Institute of Technology                                                                             Massey University
Napier                                                                                                      Palmerston North
New Zealand                                                                                                      New Zealand

                “… all being equal and independent, no one ought to harm another in his
                                 Life, Health, Liberty or Possessions.”
                                                                            (Locke, J. 1690, p.7)

The social responsibility (and accountability) of organisations has its philosophical roots in the
implied social contract between those empowered by, and those granting power over society’s
resources – human, physical, financial and technological. Whether modern corporations can (or
should) be held accountable under this ‘contract’ was debated in accounting literature in the
1980s and 1990s. However, the ‘fundamental’ debate has diminished in recent years, being
replaced by analyses, particularly from an organisational legitimacy perspective, of increased
social and environmental disclosures.
Current commercial practice focuses heavily on legal obligations and capital market regulations
– including regimes requiring social and environmental reporting and ‘good’ corporate
governance practices. It is the legal obligations that feature as liabilities (including contingencies)
in corporate reports, as ‘moral liabilities’ seldom meet the current recognition criteria. Observed
corporate behaviour, particularly that of large corporations, has thus frequently ignored the moral
or ethical obligations resting, it is argued, on an underlying social contract – until they are
embedded in regulations.
                  1                                                                                                  2
In this paper the authors argue that the case of James Hardie Industries (Hardie )and its
asbestos-related activities, illustrates how corporations have used (and abused) the power
vested in them by law to pursue ‘private’ (e.g. shareholder and lender) interests at the expense
of the wider society that granted them a mandate to operate and to access society’s resources.
It also demonstrates how companies can legally avoid being held accountable for moral
(equitable) liabilities until, as in Hardie’s case, their legal ‘licence to operate’ under the social
contract is threatened. Unless such issues are clarified, in law, or by regulators or professional
standards, companies will continue to ignore their moral and financial obligations to society –
and any individuals whose lives, or environments, may be largely destroyed.
The Hardie case also highlights the contrasting conditions of the underlying social contract in
Australia and New Zealand in relation to corporate financial exposure for personal injury and
provides additional insight into the impact of the ‘social contract’ on corporate behaviour.

Keywords: Asbestos; social responsibility; social contract.

1   In an earlier paper the authors explored the James Hardie case as an example of the consequences of ‘aethical’ corporate
    governance behaviour (Tozer and Hamilton, 2006).
    As various corporate vehicles and consequent name changes were involved over the years, for this paper the generic short-
    form of ‘Hardie’ has been adopted except where critical to the discussion (see The Case and Exhibit 1).

The concept of a contract between business organisations and society derives from political
philosophy: the social contract (or compact) between those ‘empowered’ (government) and the
community that grants them that power (by election, abstention or submission) (Locke, 1690;
Hume, 1748; Rousseau, 1762). In the political arena, such contracts may be explicit (as in the
US Constitution) or implicit as in the Westminster tradition. The social contract may also
explicitly underpin legislation (as in New Zealand’s accident compensation scheme (Injury
Prevention, Rehabilitation, and Compensation Act 2001, Sec. 3)) or implicitly (as in the
redistributive function of taxation regimes).
In the business scenario, corporations are granted rights as legal persons (citizens) under
empowering legislation enacted by society’s political representatives with the expectation of
economic returns to investors, other businesses and society – provided the entities operate
within the legal and moral boundaries applying to all ‘citizens’ (Sheehy, 2004-5). Even business
case proponents, such as Milton Friedman, in urging that business had a social responsibility to
increase profits, acknowledged the constraint of “conforming to the basic rules of society, both
those embodied in law and those embodied in ethical custom” (Friedman, 1970, p.138;
emphasis added).
That this concept is relevant in considering corporate behaviour is acknowledged by Davis
(2005). When discussing the need for large companies to build social issues into strategy he
    “It can help to view the relationship between big business and society in this respect as
    an implicit “social contract”: Rousseau adapted for the corporate world … . This contract
    has obligations, opportunities and mutual advantages for both sides …” (Davis 2005).
Under the social contract, the principal advantages to business lie in access to society’s
resources – natural, financial, human, infrastructural and technological – and, very importantly,
legal protection for their activities. In return, the advantages corporates have provided include:
employment, innovation and research, large-scale investments and productivity gains. In
consenting to the development of corporate citizens, society expects to benefit from such
opportunities rather than to incur additional costs in the form of major detrimental externalities –
such as negative health impacts and/or environmental pollution (Mathews, 1993). Dillard, Brown
& Marshall (2005) argue that this access also gives rise to a fiduciary responsibility over the
resources accessed.
In recent decades, companies have been remarkably successful in achieving their commercial
goals. Many now operate as ‘global citizens’ – with ‘residence’ in one country but operating
beyond the reach of any one nation, giving rise to concerns over global governance (Palacios,
2004; Scherer, Palazzo and Baumann, 2006). A survey in 2000 revealed that 51 of the world’s
100 largest economic entities were corporations and 49 were countries (Anderson and
Cavanagh, 2000) with the impact that “(n)o institution today is so significant in affecting the lives
of things on this planet as the corporation” (Association for Integrity in Accounting, 2004, p.5).
While many large corporates appear to take this increasing responsibility seriously, judged by
their corporate social responsibility statements, the behaviour of other of major companies in
recent decades frequently displays a lack of ethical standards beyond that required for legal or
regulatory compliance.
Among the ‘headline grabbers’ have been corporates that misled stock markets and effectively
undermined pension funds (Doost and Fishman, 2004; Kochan, 2002); companies that
exploited children (Parloff, 2002) or illegal immigrant labour (Boden, 2005); and tobacco
companies that continue to profit from hazardous substances (Moerman and van der Laan,
2005). Yet the behaviour of many other corporates continues to demonstrate serious disregard
for acceptable social and environmental standards in pursuit of profit and ‘shareholder wealth’.
Such behaviours often invoke the legal protection provided by the corporate veil
(Saravanamuthu, 2005), complex group structures (Clarke, 2004), ineffective governance
regimes (Clarke and Dean, 2005), or taking group operations beyond national legal frameworks
(Scherer, Palazzo and Baumann, 2006).

3   The fiduciary relationship of corporate managers to stakeholders (including the public) was discussed as early as the 1920s
    (see Dodd 1932).

As a specific example, the asbestos industry prospered financially for many years at the
expense of the health and lives of their employees, customers and neighbours. This was done
with the consent of directors, shareholders and capital markets and, apparently, with the
support of the companies’ legal and financial advisors. In Australia all major participants, even
union representatives, were focussed on the economic outcomes of wages and jobs, rather
than on the serious and widely known health hazards of asbestos dust. Internationally, this
industry has been forced to reform its practices, at least in countries where their actions are
closely monitored, and to confront some of the financial consequences of their previous
operations. However, even when making financial settlements with their victims, the financial
prospects of the company and its shareholders appear to have assumed the dominant role in
managerial and boardroom thinking, sometimes invoking the ‘golden egg’ scenario as
justification (Spender, 2003). Largely overlooked is the lesson that, historically, society
ultimately holds its agents (whether political or commercial) accountable for their actions, under
what the ‘enlightenment’ philosophers deemed the social contract.
In New Zealand, since 1974, companies have been protected against compensation claims for
personal injury under the Accident Compensation Act 1972, with the Accident Compensation
Commission (ACC) assuming responsibility for medical and rehabilitation costs, ‘living wage’
benefits, and (limited) lump-sum payments (ACC, 2007). The scheme is described as a “social
contract” that has “as its overriding goals, minimising both the overall incidence of injury in the
community, and the impact of injury on the community (including economic, social, and personal
costs)” (Injury Prevention, Rehabilitation, and Compensation Act 2001, Sec. 3; Oliphant, 2006).
Under this ‘contract’, employers’ contributions fund a substantial part of the costs of the scheme
– between 1974-1991 c. 75% and after 1992 c 57% (Lichtenstein, 1999). In return, the ‘contract’
provided employers with a “risk-spreading solution to the management of harm to employees”
(Duncan, 2003, p. 454). Employees (and the public generally) obtained 24-hour no-fault
compensation, but surrendered the right to bring common law claims for compensatory
The compensation payment regime under the scheme has been substantially modified since its
introduction, but the definition of “personal injury” continues to cover “incapacity resulting from
occupational disease” (ACC, 2007), and the employers’ position remains largely unchanged.
This legal and social welfare environment impacts substantially on company policies, although
the (past) behaviour of asbestos companies is now raising questions about their protection –
through union and public agitation (Armstrong, 2005).
Does the Hardie asbestos-liability case add to our understanding of the role of the social
contract in underpinning commercial activity? We believe it does and, in particular, that this
case demonstrates that:
 corporations can be forced to acknowledge this contract in determining their moral
  obligations to their ‘community’. In the Australian scenario a ‘general will’ of the community
  prevailed, by means of social, political and market actions, over the economic and political
  power of a large corporate and the protections granted to it by current commercial law and
  accounting practice.
 the different legal form of the social contract existing in NZ gives rise to different responses
  – yet the community still condemns their perceived amoral behaviour and there is some
  agitation for increased corporate accountability.

Background - asbestos
Asbestos was mined and used in manufacturing various products (for its insulation and fire
resistance properties) in domestic and industrial buildings, power stations and ships; it was a
significant constituent in brake linings, ‘fibro’ sheeting, pipes, and insulation ‘fluff’ and wraps.
The serious health consequences associated with asbestos, to employees, installation and
demolition contractors and neighbours of mines and manufacturing plants, are well documented
internationally (Seib, 2004; Jackson, 2004; Hills, 2005; Kjellstrom, 2004). A particular feature of
the resulting medical conditions – principally lung diseases, including mesothelioma, lung
cancer and asbestosis – is the delayed presentation of the symptoms, frequently 15 to 30 years
after exposure to asbestos dust (Smartt, 2004).
The extent of suffering and death has been described as “a worldwide, slow epidemic of
occupational disease on a massive scale” (Kjellstrom, 2004, p. 212) – even in New Zealand

where there were no mining activities and only two asbestos production factories (Armstrong,
2005). Asbestos mining, manufacturing and distribution companies had been aware since at
least the 1930s of health hazards involving asbestos and, since the 1960s, of specific
relationships between exposure to asbestos dust and the incidence of mesothelioma and other
The evidence of medical and social impacts was undeniable, yet companies continued to
manufacture and distribute asbestos-based products in pursuit of profit. As Spender (2003)
     “… asbestos litigation established that many defendants in the US, Australia and the UK
     knew at an early stage about the dangers of asbestos and made a commercial decision
     to keep producing it, thereby jeopardising lives” (p.235).
Given the long ‘incubation’ period before these conditions appear, and the fact that in some
countries, asbestos mining and manufacturing activities still continue, many thousands of
victims can yet be expected to be diagnosed, and lodge claims, from past exposure. In Australia
and New Zealand, it is likely that the greatest worker exposures occurred in the 1960s to the
1980s. However, while asbestos production activities in Australia and New Zealand ceased in
1987 (Haigh, 2006; Kjellstrom, 2004), importation of asbestos products was not banned in
Australia until 2004 and was not then banned in New Zealand (Kjellstrom, 2004). Further, in
Australia it is estimated that one third of all houses built before 1985 contain asbestos (Briton,
2004). These activities leave many potential future claimants from deterioration, renovation or
demolition exposure – in addition to past and future industrial and community exposures.
Internationally, the potential financial impact on companies of asbestos-related liabilities is
shown in that, as early as 1982:
    “… the pace of litigation against (Johns-) Manville had increased to an average filing of
    three cases per hour, every hour of the business day. The company projected its total
    asbestos liability at more than (US)$1bn. On 26 August 1982, Manville Corporation filed
    for reorganisation under Chapter 11 of the US Bankruptcy Code” (Spender, 2003, p. 225);
The continuing escalation in personal injury liabilities is indicated by:
        In September 2006, Owens Corning, which filed for Chapter 11 Bankruptcy in 2000 “in an
         effort to contain its liability for a growing number of asbestos related claims”, settled its
         present and future claims for US$5.1bn (Bergman, 2006);
        Turner & Newall (UK) (T&N) is in voluntary administration. T&N was taken over by US
         company Federal Mogul, which has also filed for Chapter 11 Bankruptcy.
Companies that built much of their equity on asbestos operations have been faced with
potential financial liabilities long after the revenue stream from asbestos-based products
ceased. As these liabilities result from past operations, these companies had a clear ‘moral
liability’ – defined as arising when “a company violates stakeholder expectations of ethical
behaviour in such a way as to put business value at risk” (SustainAbility, 2004, p.5). As these
liabilities are not legally binding (in that they do not arise from breach of law, regulations or
commercial contracts), companies often failed to disclose them on their financial statements, or
even in their ‘social responsibility’ information. However, in significant cases a moral liability may
threaten a company’s ‘licence to operate’, which depends increasingly on compliance with
stakeholder expectations rather than compliance with the law (Black, 2004; SustainAbility,
2004). This ‘licence’ reflects the social contract in granting access to society’s resources, with
the corollary that moral obligations arising from the operations should be met by the company.
Without financial accountability from such companies (and their insurers), the asbestos-related
‘long-tail’ liabilities would fall directly on public health and compensation providers (if any) and
their funders – usually taxpayers.
Despite increasing demands over recent years for socially responsible corporate behaviour, and
their moral liability, asbestos companies generally sought legal means to avoid or limit their
financial exposures to current and future claimants by ‘quarantining’ the asbestos liabilities,
using such strategies as:
     casting adrift asbestos related group entities – by ‘demerging’ or ‘restructuring’ – and using
      limited liability and corporate protections for continuing operations;

4    Long-tail liabilities arise many years after the events or transactions which give rise to them.

  using insolvency legislation to leave asbestos creditors without access to continuing
   profitable operations where the group was not financially insolvent – Chapter 11 Bankruptcy
   (US) and voluntary administration (UK); and/or
  establishing limited fund vehicles, which will seriously constrain the amounts available for
   future claimants – usually to the amounts deemed ‘marketable’.
Corporate arguments in defence of such moves centre on:
  the legal obligations on directors to act in the interests of its ‘members’ – the shareholders;
  protecting the existence of the company – for the benefit of ‘primary’ stakeholders: for
   example shareholders, lenders, employees (including directors and executives), suppliers
   and customers;
  the ‘golden egg’ concept – that killing the ‘goose’ would cut off the resources available to
   fund future settlements, including those of asbestos claimants (Spender, 2003).
The case of James Hardie industries raises serious questions about the behaviour of such
companies and their intentions regarding their financial obligations – beyond those to
shareholders and corporate lenders. It also raises the difficulty that directors face in balancing
what they perceive as their legal duty with socially responsible behaviour. In 2005, Meredith
Hellicar, Chairperson of JHI NV (the Hardie parent company), acknowledged that:
   “… we are an interesting and valid case study into the difficulties of putting into action a
   meaningful and necessary concept of corporate social responsibility in the context of best
   practice corporate governance that has due regard for the interests of all stakeholders”
   (Hellicar, 2005).

The Case – James Hardie Industries
Originally founded in the 19 century, Hardie is a major Australian company. From early in the
20 century, the company was involved in asbestos mining, and importing and manufacturing
asbestos-based products, including asbestos fibre-cement (‘fibro’), until 1987 when it ceased
asbestos activities in Australia and New Zealand. The group holding company is now domiciled
in The Netherlands [James Hardie Industries NV (JHI NV)] and has a market capitalisation of c.
$US3.5bn and 3,300 employees (JHI NV Annual Report 2006a). The company is the world
leader in non-asbestos fibro-cement building products and operates principally in the US,
Australia, New Zealand, the Philippines and Chile.
The first workers’ compensation claim against Hardie in Australia for asbestosis was in 1939
(Hills, 2005; Haigh, 2006). In New Zealand the first formal reference to “asbestos causing
deadly lung disease” was in a Ministry of Health report on silicosis in 1938 (Kjellstrom, 2004,
p.213). By the mid 1960s Hardie had medical evidence of asbestos-related diseases in its
employees and the company was alerted as early as 1967 that their liabilities might be “as
much as A$1.5 million” – against shareholders’ funds of A$30 million (Haigh, 2006, p.99). Yet
even in the 1970s their Australian plants were described by visiting Health Department medical
staff as “not remotely as they should have been” (Haigh, 2006, p.112). Hardie continued to
manufacture asbestos-related products in Australia and New Zealand until 1987.
While the early compensation claims were limited to employees directly involved in the mining
and manufacturing processes, installers and users of asbestos products had also been
diagnosed with attributable medical conditions and joined the queue of claimants for
compensation. Hardie’s initial reaction was largely denial, as highlighted by Hills (2005):
    “Evidence dragged from the company’s files during the past two decades of litigation
    show quite conclusively that the company ignored its obligations to protect the health of
    its workers, its consumers, and the environment” (p. 213).
Faced with a rising tide of compensation claims from many years of asbestos related activities,
Hardie, like other companies in the asbestos industry, sought both industrial solutions and legal
protection to limit the financial impact on the group. Within the Australian industry, however,
Hardie was notable for its consistently ‘hard line’ in denying liability and forcing compensation
claimants through protracted legal hearings (Haigh, 2006). In New Zealand, Hardie, along with
the other local manufacturer (Fletcher Industries) and importers, benefited from the ‘no-fault’
provisions of the Accident Compensation Act 1972 (in effect from 1974) that protected the

company from compensatory damages claims from both workers and others affected by their
asbestos products.
Corporate restructuring
Against the background of escalating asbestos settlements (in number and value), during the
1990s Hardie considered two restructuring plans (Projects ‘Chelsea’ and ‘Green’) to isolate its
profitable trading operations from ‘long-tail’ asbestos compensation exposures. These would, in
effect, establish a limited fund to meet future asbestos claims. Such arrangements were urgent
as Hardie was anxious to float equity securities in the US and wanted to gain approval to
relocate its corporate residence to The Netherlands to take advantage of tax agreements.
The Hardie board was satisfied that the ‘corporate veil’ doctrine would prevent any claimants
successfully pursuing the restructured trading group if funds in the ‘quarantined’ asbestos
subsidiaries proved insufficient. However, discussions with its US advisors indicated that the
proposed IPO was unlikely to succeed for a number of reasons, including US fears over the
potential asbestos liabilities. Hence the board sought “alternative strategies to fund the
company’s future - and predominantly overseas - growth” (Hellicar, 2005, p.2). After considering
the likely public and market reactions to an ‘internal foundation’, the Hardie board authorised a
major restructure outlined in a press release in February 2001. This release claimed:
           the establishment of ”an independent Medical Research and Compensation Foundation
            Ltd (MRCF) to compensate sufferers of asbestos related diseases with claims against
            two former James Hardie subsidiaries and fund medical research aimed at finding cures
            for these diseases”.
           the establishment of the MFCF had “effectively resolved James Hardie’s asbestos
            liability and this will allow management to focus entirely on growing the company for the
            benefit of all shareholders.”
           “the Foundation has sufficient funds (A$293m) to meet all legitimate compensation
            claims anticipated …”
           “JHIL CEO Mr Peter Macdonald said that the establishment of a fully funded Foundation
            provided certainty for both claimants and shareholders.” … “When all future claims have
            been concluded, surplus funds will be used to support further scientific and medical
            research on lung diseases”
                                                                     (JHIL 2001, emphases added).
Under the restructure, MRCF was granted ownership of the principal asbestos-linked
subsidiaries (Amaca and Amaba) with net assets estimated at A$293m – including amounts due
by JHIL, but with no recourse to JHIL once those assets were exhausted.
Later in 2001, using a new holding company, James Hardie Industries NV (JHI NV), the Group
relocated its corporate domicile to the Netherlands with which Australia has no civil enforcement
agreement. Approval under a scheme of arrangement for the restructure and relocation was
granted on 11 October 2001 (in the Supreme Court of New South Wales). The court was
assured that sufficient assets were available in Australia to meet any liability for future
compensation claims and were backed by partially paid shares in JHIL held by JHI NV which
JHIL, it was stated, would be able to call up to obtain further funds if required. These shares
were subsequently cancelled without public (or Court) notification when JHIL (now ABN60 Pty
Ltd) was vested in a new foundation ABN60 Foundation which would meet the calls from MRCF
up to the amount due under its agreement (covenant and indemnities) with JHI NV. This
arrangement was in response to extreme reluctance by the directors of MRCF to accept a
transfer of ABN60 Pty Ltd to MRCF in a ‘full and final’ settlement. It effectively also put a further
‘veil’ between JHI NV and the asbestos claimants.
Serious underfunding of MRCF (which was the subject of many meetings with Hardie) led its
directors to publicly announce in 2003 that the Foundation would exhaust its funds by 2007 –
with at least a further 40 years of claims to be met. Hellicar (2005) notes that MRCF was

5   Summarised from Haigh (2006) and Jackson (2004).
6   “JHIL will have, through existing reserves and access to funding in the form of the partly paid shares, the means to meet
    liabilities which will or may arise in the future …” Written response to Santow, J. by JHIL counsel, in Haigh, 2006 p288 footnote.
7   It must be stressed that none of these restructuring ‘manoeuvrings’ are illegal – indeed Hardie was driven by what they
    perceived as their legal duty to shareholders.

provided with more funds (A$293) than the minimum required to cover the estimated liabilities.
However, as established by the Jackson Inquiry, this funding was based on (already) outdated
actuarial assessments of A$273m, that were made without access to Hardies’ claims record for
2000. In evidence presented to the Inquiry, “KPMG’s independent recalculation of the liabilities
(was) $694 million, rising when including the (2000) data to $1044m” (Haigh 2006, p.241).
Media and union action also resulted in the threat of customer boycotts throughout Australia,
the US (where the company now does 80% of its business), and Canada (Alderton, 2005).
Several Australian State Governments also threatened to ban Hardie products under supply
contracts and, at a local level, “James Hardie has admitted that council boycotts are starting to
bite into its profits” (Buffini 2004). The government of New South Wales also threatened to pass
retrospective legislation to force Hardie to compensate victims. These evidences of public revolt
resulted in the formation of the Jackson Inquiry in early 2004 by the Government of New South
Wales, which reported in September 2004.
The Commission
The terms of reference of the Special Commission of Inquiry into the MRCF covered:
  (i) the financial position of the MRCF with respect to its future asbestos-related liabilities;
  (ii) the circumstances of the separation of MRCF from the James Hardie Group;
  (iii) the impact of the corporate restructuring on the ability of MRCF to meet its current and
        future asbestos-related liabilities; and
  (iv) the adequacy of current arrangements under the Corporations Act to assist MRCF to
        manage its liabilities and whether reform is desirable to those arrangements.
The Commission’s hearings revealed and documented evidence of Hardie’s failure to fund the
Foundation on reliable actuarial estimates of liability, of making misleading public statements,
and deliberately avoiding its moral obligations. In examining individual events (taking a
‘transaction by transaction’ approach rather then an overview of corporate strategy), the
Commission held that the company had acted generally within the law.
The Commission’s deliberations were partially overtaken (at the very end) by JHI NV accepting
that “the Foundation (MRCF) had been underfunded, and to a very significant degree” (Jackson
(2004) Sec 1.22) and the Group also indicating that it was prepared to fund the future asbestos-
related liabilities of MRCF arising from the JHIL companies (Sec 1.23).
Despite these events pre-empting a full finding on the initial adequacy of the funding of MRCF,
the Commissioner expressed serious concerns, including:
   That while “there was no legal obligation for JHIL to provide greater funding to the
     Foundation (MRCF), JHIL was … very aware … that if it were perceived as not having
     made adequate provision … there would be a wave of adverse public opinion which might
     result in action being taken by the Commonwealth or State governments (on whom much
     of the cost of such asbestos victims would be thrown) … to legislate to make other
     companies in the Group liable …” (Jackson (2004) Sec 1.8).
     “The notion that the holding company would make the cheapest provision it thought
      ‘marketable’ in respect of those liabilities so that it could go off to pursue other more
      lucrative interests insulated from those liabilities is singularly unattractive. Why should
      victims and the public bear the cost not provided for?” (Jackson (2004) Sec 1.25).
     “The circumstances have raised in a pointed way the question concerning whether existing
      laws concerning the operation of limited liability or the ‘corporate veil’ within corporate
      groups adequately reflected contemporary public expectations and standards.” (Jackson,
      2004, Sec 30.67).

8   Media coverage commencing in the late 1960s increased following an ABC TV ‘Four Corners’ programme in 1989. Following
    Hardie’s launch of the MRCF and relocation to The Netherlands, only a few commentators (for example Hills) followed the
    story. The financial press was “docile and tractable … and other public guardians were largely inert” (Haigh, 2006 p. 277). By
    late 2002 national media coverage was escalating focussed on the plight of victims and the ‘scandal’ of Hardie’s responses.
    This pressure combined with union and political activity until, in February 2004, Carr announced the formation of a Special
    Commission of Inquiry.
9   Summarised from Jackson (2004).

Throughout the years leading up to the Inquiry, Hardie’s directors maintained publicly that the
company had discharged all its obligations – legal and social. As stated in JHI NV’s 2004
Annual Report:
    “While it is difficult to predict the incidence or outcome of future litigation, the Company
    believes it is remote that any significant personal injury suits for damages in connection
    with the former manufacture or sale of asbestos containing products that are or may be
    filed against ABN 60 (formerly JHIL) or its former subsidiaries would have a material
    adverse effect on the Company’s business, results of operations or financial condition.
    This belief is based in part on the separateness of corporate entities under Australian
    law, the limited circumstances where “piercing the corporate veil” might occur under
    Australian law, and there being no equivalent under Australian law, of the US legal
    doctrine of “successor liability” (p.86, emphasis added).
The Commission’s conclusions clearly indicate that this perspective of the company’s
obligations would not have been supported. Even within its narrow terms of reference, the
Commission accepted that there were underlying social and ethical obligations that the
company had disregarded, and this case had potentially brought the adequacy of society’s
protection from corporate abuses under scrutiny – at least in Australia.

Subsequent events
Following the findings of the Jackson Inquiry, on 28 October, 2004 the Premier of New South
Wales, announced that the NSW Government “would seek the agreement of … the Ministers of
the Commonwealth and the Australian States and Territories, to allow the NSW Government to
pass legislation to “wind back James Hardie’s corporate restructure and rescind the cancellation
of the A$1.9 billion in partly paid shares”” (FFA, 2006, emphasis original).
On 21 December 2004 a nonbinding Heads of Agreement which set out the agreed position of
the Initial Negotiating Parties in relation to the principles on which the binding agreement would
be based and the key standing considerations relevant to implementing those principles to be
reflected in that binding agreement;
On 1 December 2005, JHI NV signed a ‘Final Funding Agreement’ (FFA) with the NSW State
Government under which JHI NV would provide further funds to enable MRCF to meet future
asbestos compensation claims. The value of current claims was estimated at 30 June 2005 as
AU$1.6 billion and is estimated to reach $A4.5bn over 40 years (Slater & Gordon, 2005).
After extended negotiations with the Australian Taxation Office, an Amended and Restated
Final Funding Agreement (FFA 2006) was agreed between JHI NV and the NSW Government.
This Agreement which will be put to a meeting of JHI NV shareholders in February, 2007, “has
the support of other interested stakeholders such as the Asbestos Diseases Groups, Australian
Confederation of Trade Unions (ACTU) and UnionsNSW, and is consistent with current investor
and Australian community expectations”. This Agreement is being “unanimously recommended”
to shareholders by the Boards of JHI NV as being “the best option available to respond to the
estimated future funding shortfall for Australian asbestos-related personal injury claims against
the former James Hardie subsidiaries.” It is also believed that “on balance, the benefits
expected to be derived by the James Hardie Group … outweigh the expected disadvantages
and risks …” (JHI NV, 2006b)
                     10                                  11
The FFA (2006) establishes the structure and conditions under which JHI NV through a
‘Performing Subsidiary’, will fund compensation payments for proven personal injury claims
arising from exposure to asbestos in Australia against a member of the James Hardie Group.
The Asbestos Injuries Compensation Fund Limited (AICFL) is a company limited by guarantee
that is the Trustee responsible to make authorised payments of compensation claims and
expenses from the Trust funds. Annual Hardie funding payments, in accordance with an agreed
formula, will provide the Trustee (immediately after each annual payment) with approximately
three years’ actuarial estimates of claims’ funding plus the estimated current years’ operating
expenses. The amount of funding is subject to a cap based on the ‘free cash flow’ (largely
operating cash flow adjusted for interest received and paid) and a ‘cap percentage’. The cap is

10   The information on the FFA that follows is summarised from the Amended & Restated Final Funding Agreement - Conformed
     Copy (FFA, 2006) and the JHI NV Explanatory Memorandum (JHI NV, 2006b).
11   See Exhibit 3.

set initially at 35%, but stepping down on or after 2012 by 5% each four years, to ‘bottom out’ at
5% after 2035 until the end of the term – initially estimated as 2045.
The latest (discounted) actuarial estimate of personal injury claims liabilities (net of insurance
recoveries) is A$1,555 million. This is reflected in the JHI NV provision at 30 September (net of
tax benefit) of A$1,056 million. The actual amounts to be paid in the future will depend on the
volume and value of emerging proven claims – with annual payments forecast to peak at c.
A$140 million in 2023.
The FFA includes guarantees, covenants and restrictions covering (inter alia):
           future restructuring and takeovers to commit any future acquirers to accession
           restrictions on adverse legislative or regulatory action in relation to asbestos liabilities;
           releases of civil liabilities against James Hardie companies and “certain persons” –
            including directors, officers, employees, agents and advisers – in actions which led to
            the development of the FFA (including the formation of the MRCF).
As Hardie appoints the majority (including the Chair) of members of the Trustee (AICFL), under
US GAAP JHI NV will consolidate the net asbestos liabilities in its financial statements. This
means that the settlement not only affects Hardie’s annual cash flow (via the Performing
Subsidiary), but affects the consolidated statements of financial position and financial
performance (JHI NV 2006b).
Confirms the impact of the actions taken by ‘society’ in enforcing the accepted ‘norms’ of
behaviour, in the FFA JHI NV explicitly cites market and political pressures as the reasons for
entering into the Final Funding Agreement (FFA, 2006, Recitals (l) and (m)) .

Hardie in New Zealand
There is no doubt that a significant number of individuals in other countries, such as New
Zealand have been or will yet be diagnosed with crippling medical conditions arising from
asbestos exposures from Hardie products manufactured in, or imported into, the country. It is
estimated that between 2,000 and 4,000 cases of asbestos-induced disability will be diagnosed
in New Zealand – with just under half being mesothelioma cases (Kjellstrom, 2004). Of course,
not all of these would involve Hardie products.
Prior to Hardie commencing the manufacture of asbestos-cement building products in Auckland
in 1938, all asbestos material was imported. In the same year a Ministry of Health (New
Zealand) report referred to “asbestos (as) causing deadly lung disease” (Kjellstrom, 2004
p.213). Hardie continued asbestos-related manufacturing operations until 1987. Hardie was the
major supplier of asbestos building products, principally in fibro-cement sheet and pipes, to the
New Zealand market – both manufactured and imported. A smaller factory operated by Fletcher
Industries in Christchurch opened in 1943 and closed in 1974.
In New Zealand, as outlined earlier, companies are generally protected from compensatory
damages claims for occupational diseases relating to their New Zealand operations, as they are
covered by the Accident Compensation scheme. Under a recent Court of Appeal decision, a
number of claimants will qualify for up to NZ$100,000 as a lump-sum payment from the
Accident Compensation Commission (in addition to health and medical costs). However, there
are limiting conditions relating to the time of exposure and of diagnosis under which lump-sum
settlements will be approved.
In 2005 one claimant (Frost v Amaca, 2005)) successfully sued Hardie in NSW Dust Diseases
Tribunal over contamination between 1963 and 1966 from an asbestos insulating product that
had been manufactured in Australia and used (unmodified) by Frost in New Zealand
(Armstrong, 2005). In the initial hearing before the NSW Dust Diseases Tribunal, Hardie
(Amaca) admitted a breach of a duty of care to Frost, in particular:
           “continuing to use asbestos in products when it knew, or should have known, that
            persons such as Mr Frost were at risk of inhaling asbestos dust and fibres from the
            products and thereby suffering the respiratory diseases; and

12   See Exhibit 4.

       “failing to substitute the asbestos in the products at its New south Wales
        manufacturing centre with non-asbestos materials.”
                                                                 (Nygh & James, 2006)
The Tribunal held that the tort of negligence occurred in NSW where the product was
manufactured, and awarded Frost A$320,000 compensatory damages under NSW law. On
appeal by Amaca the NSW Court of Appeal ruled that, as the exposure occurred in New
Zealand, that country’s “… no-fault compensation regime, which served as a ‘social contract’
and replaced any common law rights of action” should apply, and overturned the earlier award.
Under the terms of the Final Funding Agreement in NSW, claims relating to exposure outside
Australia have been specifically excluded. This exclusion and the NSW Court of Appeal
decision in Frost, effectively limit Hardie’s financial liability to claims arising from exposure within
Australia and such potential liabilities are excluded from the actuarial estimates of settlements
(and consequently from JHI NV liabilities) in the FFA (KPMG 2006, p.32).

Case analysis
Hardie and the social contract
Over many years, Hardie attempted to avoid any responsibility for the adverse results of its
asbestos related policies and practices – beyond reluctant settlement of a small number of
employee claims. Their avoidance behaviour relating to social (moral) obligations arising from
their asbestos-related operations continued until 2005.
There can be no doubt that, over several decades, Hardie has provided significant economic
benefits to its shareholders, employees and local community, through wealth creation and
distribution. It has also contributed to the national economies in which it operates. There is also
little doubt that Hardie, in relation to the asbestos-related events reviewed by the Jackson
Inquiry, generally acted within the law and complied with contemporary accounting and
accountability practices.
While over time, societal norms and values change and organisations may be slow to adapt to
the changes, the expectation that individuals have a right to protection of their health and life,
from the actions of others, has been embedded in social consciousness for centuries. As
summarised by Locke (1690):
   ”all being equal and independent, no one ought to harm another in his Life, Health, Liberty
   or possession” (p.7, emphasis added).
In what can be seen, at best, as insensitive behaviour, for many years Hardie failed to give
serious attention to working conditions and paid scant regard to customers’ exposure and
community health concerns. Further, long after many international companies had conceded the
need to meet the growing tide of asbestos-related claims (often through restructuring or class
action settlements). Hardie continued to fight individual court battles and ignore increasing
public discontent, which gathered momentum from the mid 1960s (Haigh, 2006).
Facing a rapidly increasing value of long-tail claims, between 1995 and 2001 Hardie attempted
to minimise the potential financial fallout through a series of restructuring schemes, including
‘isolating’ the former asbestos-linked companies, establishing (but seriously underfunding) the
MRCF, relocating its corporate domicile to The Netherlands and cancelling the asset backing
(uncalled capital) from the parent company. These strategies also attempted to position the
group for a listing on the New York Stock Exchange, which necessitated eliminating the
asbestos ‘heritage’, and to take advantage of international tax treaties.
The principal decision focus was financial return and corporate growth (Hellicar, 2005) – which
confirms the dominance, in Hardie thinking, of shareholder interests. To the extent that other
stakeholders were considered, it is clear that only those considered ‘fundamental’, such as
lenders and market regulators, were given serious attention. Other stakeholders, for example
employees, installers and customers were simply ‘instrumental’ in that they were ‘used’ in
pursuit of increased wealth (Bishop, 2000). The Hardie board, under advice from senior
executives and legal and financial advisers, firmly prioritised financial responsibilities ahead of
social obligations. As is now well documented (Jackson 2004; Hills 2005), Hardie’s
manoeuvring left only very limited funds in the hands of the MRCF to meet future health claims,
yet Hardie publicly maintained that it had discharged all its obligations – legal and social.

There is, of course, the argument that the continued growth of the company was the best
security for future claimants – ‘the goose that lays the golden egg’ scenario (Spender, 2003).
This was alluded to by Hellicar when she stated, with hindsight: “(i)t is the group’s very success
that will enable it, with the support of its shareholders and lenders, to provide compensation for
claimants so far beyond its legal liabilities” (Hellicar, 2005, p. 7). However, all Hardies’ initial
attempts (from the late 1990s until mid 2004) to quarantine the claims and establish a limited
fund, were designed to restrict the access of asbestos victims to the rewards from future
“success” of the group.
Of significance is the timing of the ‘disclaimer statement’ in the Annual Report (JHI NV,2004)
quoted earlier – which was made towards the end of the Jackson Inquiry – that it is “… remote
that any significant personal injury suits … would have a material adverse effect on the …
Company’s … results”(p. 86). The directors (and their legal and financial advisors and auditors)
may well have been attempting to protect the company’s position, but the statement could
hardly be said to ‘fairly represent’ the underlying position that, less than four months later, saw
the company ‘voluntarily’ offer in excess of A$1 billion in additional funding to settle future
Even during the course of the Inquiry it became apparent that directors, senior executives and
advisers had known otherwise (Haigh, 2006). With the benefit of (very short) hindsight it would
be evident that the financial impact of their moral obligations was not remote and should have
outweighed the legal (and accounting?) interpretations of ‘contingent liabilities’.
Using their reasoning, Hardie adhered to the ‘rules’ (norms) of the business community in which
it existed – laws, regulations, accounting standards and legal precedents. In addition, in their
annual reports, Hardie promoted their corporate governance regime complete with “high
standards of ethical behaviour” and a “Code of Ethics” (JHI NV 2004, p.62 and 2005, p.90). In
this regard, Clarke 2004 states:
     “It is sobering to note that James Hardie received four and a half (of five) stars in a
     recent governance tick-a-box rating exercise. James Hardie also received “gold” in the
     2004 Annual Report Awards, notwithstanding the criteria being supportive of the triple
     bottom line notion, which is supposed to capture social awareness”. (para. 4)
If such acclamation has any meaning, it would indicate approval by peers (market analysts and
commentators) for Hardie’s disclosed actions – even while the Jackson Inquiry was under way.
It would seem that Hardie had retained organisational legitimacy, which is ‘conferred’ on an
organisation by external parties based on its behaviour as perceived by its immediate
community and wider society (Suchman 1995). As discussed in the literature, such legitimacy,
which is based on an underlying social contract, is held to be important in gaining and retaining
access to society’s resources. Consequently it is held that an organisation will ‘legitimise’ its
activities in response to perceived changes in political and social expectations (Dowling &
Pfeffer, 1975; Donaldson, 1982; Lindblom, 1994; Neu, Warsame and Pedwell, 1998; and Milne
& Patten, 2002).13.
When analysed from this perspective, Hardie attempted to retain perceived legitimacy, although
by statements rather than substantive actions despite retaining market approval (share prices).
As identified by Dowling & Pfeffer (1975), a firm may legitimise its actions by:
         adapting its operations to conform to societal norms (“prevailing definitions of legitimacy”);
          or attempting, through communications, to:
         change society’s expectations so that they conform to the organisations current practices
          and values (“altering the definition of social legitimacy”); or
         improve society’s view of the entity by identifying with symbols, values or institutions that
          already possess strong social legitimacy (p. 127, adapted).

13   Counter arguments to the social contract and organisational legitimacy philosophies and corporate social responsibility
     proposals were put forward based on alternative political and economic philosophies and the role of accounting information in
     situations of social conflict (for example Den Uyl, 1984; Tinker, 1984 & 2004; Guthrie & Parker, 1989; Tinker, Lehman &
     Neimark, 1991). Alternative explanations of corporate disclosure practices within capital market structures are also found in
     institutional theory: companies conform to accepted institutional practices (Suchman, 1995); and strategic response theory:
     companies adopt strategies to advocate change in society’s expectations (Sethi, 1977; Oliver 1991).

Suchman (1995), views legitimacy as an intangible asset that can be ‘gained’, ‘maintained’ or
‘repaired’ through investment spending on actions such as “lobbying, advertising, event
sponsorship, litigation and scientific research” (p.593), and “restructuring” and “disassociation”
(p. 598) In particular, to retain their ‘legitimacy’ companies must, over time, be seen to comply
with relevant legislation.
In its public statements relating to the asbestos issues (in annual reports, media releases and
statements to the Stock Exchange), Hardie emphasised that:
      its actions were entirely consistent with legal requirements;
      MRCF was “independent” and “fully funded” (in excess of the legal requirement);
      the MRCF package included funding for asbestos disease research;
      the possibility of significant financial impacts of the asbestos liabilities was remote; and
      the funding proposals were ‘voluntary’.
Such statements may show sensitivity to market perceptions and attempt to ‘legitimise’ the
company’s actions among economic peers and observers; yet Hardie’s behaviour over many
years shows minimal concern for the health (and life) of its employees and others affected by its
asbestos operations – as required under the implied conditions of the social contract. Despite
rising international concerns over the dangers of asbestos during the 1970s, 80s and 90s, the
      ignored warnings of serious dust conditions and admitted negligence in relation to
       asbestos contamination in the early 1960s;
      played ‘hard ball’ over individual compensation claims;
      planned to isolate the asbestos subsidiaries behind the corporate veil and national legal
      was extremely reluctant to negotiate a funding settlement and then seriously
       underfunded its initial ‘voluntary’ foundation (MRCF); and
      continued its denials of moral obligations from acknowledged negligence (unless backed
       by legal obligations) – even after the Jackson Inquiry and the subsequent events in
On the behaviour of the company in relation to the quarantining of the asbestos liabilities and
funding of MRCF, Jackson commented:
   “The notion that the holding company would make the cheapest provision it thought
   ‘marketable’ in respect of those liabilities so that it could go off to pursue other more
   lucrative interests insulated from those liabilities is singularly unattractive. Why should
   victims and the public bear the cost not provided for?” (Jackson (2004) Sec 1.25).
Patel and Xavier (2005) examined the Hardie case using Suchman’s (1995) matrix of legitimacy
strategies: the ‘pragmatic’, ‘cognitive’ and ‘moral’ types of legitimacy, and the ‘gain’, ‘maintain’
and ‘repair’ phases of legitimacy management. They concluded that Hardie had focused their
efforts on ‘repair’ and ‘(re)gain’ actions, and on ‘pragmatic’ and ‘cognitive’ types of legitimacy.
They particularly noted that “… very few moral legitimacy strategies were used. This presents
an interesting juxtaposition, as much of the debate from stakeholders to the organisation related
to moral legitimacy” (p.12).
Hardie’s eventual ‘voluntary’ response to social pressures (“adapting its operations to conform
to societal norms” (Dowling & Pfeffer, 1975)) only came once it was under market and political
threats to its continuing business activity – in Australia and the US. While meeting what the
directors and their professional advisors saw as their obligations to shareholders and the capital
markets, Hardie has been shown to have behaved in anything but an ethical manner towards its
employees, customers, end-users of the asbestos products and to the wider community
exposed over decades to asbestos contamination.
Hardie’s behaviour in regard to its New Zealand operations and, specifically, in the Frost case
and subsequent appeal, provides ‘hard’ evidence of Hardie’s culpability in relation to asbestos
contamination from the early 1960s. It also evidences their continuing denial of any financial
responsibility arising from moral liabilities (unless backed by legal obligations) – even after the
Jackson Inquiry and the subsequent settlement in Australia.

In business ethics terms, it can be argued that Hardie did not pursue genuine social legitimacy
(nor observe the implied social contract) in that it did not adhere to:
    the societal norms and values (Donaldson and Dunfee’s (1999) “hypernorms”) expected of
     it; and/or
    the wider concept of justice put forward by Rawls (1971), or by Donaldson (1982) to show
     respect for … workers as human beings, [or] … avoid any practice that systematically
     worsens the situation of a given group in society (adapted, p.53).
In observing this corporate behaviour, it is important to note that this is not a case of short-term
oversight, but of long-term strategy. From at least the 1960s, Hardie knowingly breached safe
working conditions and, at the same time, made settlements, mostly “out-of-court … with
secrecy clauses” (Hills, 2005, p.213) to claimants who fronted up to the company. Based on
interviews with Hardie staff and external parties, and extensive analysis of documentary
material, Haigh (2006) traces the development of Hardie’s strategies and responses to
increasing (internal and external) concern over settlement costs and ethical obligations.
Consequently, the authors believe that Hardie did not take genuine legitimising actions – at
least until absolutely forced to do so under victim, media, market and, especially, political
pressures. These actions amounted to a ‘revolt’ against Hardie’s breaches of acceptable
standards of corporate behaviour by the society that granted the company its ‘licence to
operate’. Such concerted and successful action provides evidence of the existence and public
enforceability of an underlying social contract and is reminiscent of the views of Locke and
Rousseau that the (political) social contract was “a means to justify the overthrow of tyrannical
rules” (Sheehy, 2004-5).
The different outcomes for ‘victims’ under New Zealand’s ‘social contract’ compensation regime
reflects the different approaches to welfare and social equity between Australia and New
Zealand – and the different ‘value systems’ in each country. In search of a ‘fairer’ and more
accessible outcome for injured parties, New Zealand exchanged the costly and potentially
inequitable tort actions for a ‘no-fault’ scheme, whereas Australia rejected a similar proposal in
the 1970s. However the New Zealand approach has provided a ‘haven’ for companies, such as
Hardie, from the direct financial consequences of their negligent behaviour in respect of moral
obligations. The breaching of society’s moral expectations by Hardie in New Zealand, shielded
by the provisions of the accident compensation regime, has resulted in some efforts to have
such situations reviewed by the government (Armstrong, 2005) – perhaps the beginnings of a
social contract ‘revolt’ in New Zealand.

Company law and the social contract
Factoring responsibility for past actions that result in long-tail liabilities and moral obligations
into corporate decisions poses difficulties for directors under current corporate law in Australia
(and most other capital market economies). Hellicar (2005) is undoubtedly correct when she
asserts, of corporate social responsibility, that “saying … is the easy part; doing would be easy
too, if shareholders, directors, the courts, lawyers and the community at large all held the same
view on social and environmental concerns”; she continues: “doing, however, is part of a
director’s duty…” (p.2). It is the duty of directors to balance these ‘views’ in order to implement a
responsible policy with care and diligence, and to make appropriate recommendations to
Across the asbestos industry, corporate responses 14 have included: acknowledging
responsibility by settling individual and joint claims; providing for estimated financial impacts and
noting contingent and potential (unquantifiable) liabilities; establishing limited fund trusts;
demerging and quarantining asbestos related group companies; using insolvency procedures to
limit future settlements, particularly in class actions (Spender, 2003). The outcome in the Hardie
case effectively establishes that there were (actuarially) quantifiable financial liabilities attaching
to ethical obligations in the situation of long-tail personal injury liabilities, which were
inappropriately ‘balanced’ by the directors. This, we argue, raises serious issues for ‘good’

14   It is notable that CSR Ltd (another former asbestos producer in Australia) has settled many hundreds of individual claims and, in
     1989, “voluntarily lifted the corporate veil” when it reached “an agreement … with the West Australian Government Insurance
     Office” and “essentially handed over $20 million” to be apportioned between claimants” (Haigh, 2006, p. 151). However, in 2003
     CSR ‘demerged’ its major trading operations from its asbestos linked activities and subsequently reported a provision of A$342
     million and disclosed potential liabilities for “claims that cannot be reliably measured” (CSR, 2004, p. 65).

corporate regimes in all major corporates: to ensure that they are appropriately responsive to
developing societal expectations.
Further, Hardie’s assurances in their Annual Reports regarding their corporate governance
practices and their “Code of Ethics” call into question the effectiveness of corporate governance
regimes in influencing the ethical behaviour of directors and executives. The lack of congruence
between these claims and the observed behaviour in this area also raises serious questions
about the validity of management representations and accountability – particularly in the
absence of audit standards for social and environmental responsibilities.
Should a (contingent) liability have been disclosed in the consolidated financial statements of
JHI NV? Not under Australian equivalents to International Accounting Standards (AIAS) as the
liability attached to entities legally outside the group, with JHI NV ostensibly protected by the
corporate veil. However, the ethical/moral/social and ultimately financial liability arose from past
events (actions or inactions) by JHI with demonstrably measurable outcomes. This resulted in a
recommendation that Hardie’s institutional investors not accept the 2004 Annual Report.
Corporate Governance International advised its “blue ribbon clients to abstain from voting or
reject the accounts because they do not allow for potentially billions of dollars in asbestos
disease liabilities” (Higgins, 2004). That such advice was necessary raises serious concerns
over the appropriateness of Hardie’s disclosures, and the validity of accounting and auditing
standards for the recognition of liabilities (including contingencies) arising from moral
Under financial reporting regimes based on the IASB Framework “an essential characteristic of
a liability is that the entity has a present obligation …Obligations may be legally enforceable as
a consequence of a binding contract or statutory requirement …they also arise … from a desire
to maintain good business relations or act in an equitable manner” (para. 60, emphasis added).
Such equitable obligations would include those arising from “social or moral sanctions and
custom rather than legal sanctions” (Deegan, 2006, p.375). International Accounting Standard
37 defines a constructive liability as arising where “an entity has indicated to other parties that it
will accept certain responsibilities” (para. 10).
Whereas recognition of a legal liability (under statute, regulation or contract) usually allows no
discretion, an equitable or constructive obligation frequently requires the exercise of
professional judgement to determine whether there is a realistic alternative to meeting the
liability. Further, long-tail liabilities arise, in part, from as-yet unidentified claimants (potential
creditors) and are subject to significant uncertainty of long-range actuarial estimates.
Hardies treatment of the liabilities in relation to their 2004 Annual Report appears to be in
harmony with the requirements of international financial reporting regime. Exercising their
judgement in the Hardie case, the directors (and auditors) apparently determined that the
likelihood of the personal injury settlements having any significant impact on the financial
statements was “remote” – as late as September 2004 (JHI NV 2004). However, the Inquiry
found that their funding of MRCF in 2001 had been seriously understated and their actions in
using the corporate veil to remove the liability for the group financial statement were highly
undesirable. This situation casts considerable doubt on the appropriateness of the financial
reporting requirements for the recognition of moral liabilities.
In linking the parent company (JHI NV) to claims against other companies within the group,
social pressure effectively forced Hardie to lift the corporate veil which it had been insisting
made these moral liabilities ‘remote’. This has focussed attention on the ‘expectation gap’
between company law and contemporary social ‘norms’ of ethical behaviour – particularly for
complex corporate groups. As expressed by the Commissioner:
     “The circumstances (that have been considered by this Inquiry) have raised in a pointed
     way the question (of) whether existing laws concerning the operation of limited liability or
     the “corporate veil” within corporate groups adequately reflect contemporary public
     expectations and standards” (Jackson, 2004, para 30.67).
The possibility of either ‘single entity’ treatment of groups or of ‘successor liability’ legislation in
Australia was considered in 2000 by the Companies and Securities Advisory Committee
(CASAC). Their Report recommended “that the existing principles of tort liability should not be
changed for corporate groups” leaving open the strategy of ‘quarantining’ liabilities in subsidiary
companies (CASAC, 2000, Summary 0.13 and Chapter 4). However, the Hardie case has

resulted in such issues being referred to the Ministerial Council for Corporations for review as
“potential weaknesses in corporate law” (Horrigan, 2005).
Additional issues raised in this case and that are under review in Australia for possible change
in corporate law include: the treatment of ‘long-tail personal injury claims’, ‘corporate social
responsibility’ and ‘personal liability for corporate fault’. These matters were referred to the
Corporations and Markets Advisory Committee (CAMAC) and submissions called (CAMAC
2006a, b & c).
Despite serious criticisms of corporate behaviour from Commissions of Inquiry (Jackson, 2004;
Owen, 2003), the Report of the Committee (CAMAC, 2006d) recommends no change to the
duties of directors under the Corporations Act. Arguing that there is currently sufficient legal
flexibility for directors to appropriately balance stakeholders’ interests, CAMAC recommends
that any concerns over social and environmental issues should be addressed by specific
legislation when necessary. The Report argues that any widening of directors’ duties would
obscure and reduce their accountability. The Committee also concludes that ‘the market’ is the
best determinant in relation to corporate social and environmental behaviour and disclosure
requirements. Although this Report rehearses the international ‘corporate social responsibility’
debate, it appears to sidestep the fundamental issue that under the present formulation
directors, senior executives and their professional advisers continue to act in the narrow
interests of shareholders, while ‘genuflecting’ to social and environmental concerns. There
appears to be no discussion of ‘moral obligations’ as a source of financial liability, with social
concerns being discussed in the context of ‘non-financial’ disclosures. CAMAC is still
considering the submissions on ‘long-tail personal injury claims’.
The extent of companies’ obligations to stakeholders other than their members is the core issue
in this case – particularly those in society to whom a moral obligation is owed. Without changes
to corporate law, it seems unlikely that many corporates will accept an ‘overriding’ obligation to
society, despite owing their existence to the social contract. The actions of the New South
Wales Government in the Hardie case, the revisions introduced in the (UK) Companies Act
2006 , and legislation introduced in a few other jurisdictions indicate an increasing willingness
by political representatives to legislate for (at least) serious consideration of social and moral
obligations. Directors, executives and, potentially, shareholders should heed this change in
societal norms.

Like many companies in the asbestos industry, Hardie had been aware of the health and safety
risks to employees, installation and demolition contractors, neighbours and the wider community
of its mining, manufacturing and distribution activities. From the 1970s it was faced with growing
social concern over the health impacts, and by the 1980s rapidly increasing incidence of
mesothelioma and lung cancer cases was generating significant potential financial liabilities
under compensation claims. During the 1980s and 1990s, several major companies adopted
various means, including bankruptcy and restructuring strategies, to limit their financial
exposures. Until the late 1990s, Hardie maintained a policy of denial and, largely, out-of court
(secret) settlements of undeniable claims. By 2001 Hardie has devised a scheme to isolate its
asbestos-linked subsidiaries from the core business units and established, and claimed to have
”fully funded” the MRCF with access to the net assets of these subsidiaries – without recourse
to the remainder of the group. Reinforcing their policy to ‘quarantine’ the operating group from
asbestos ‘contamination’, Hardie relocated to The Netherlands – as JHI NV.
Faced with increasingly vociferous opposition – from victims groups, unions, media, customers
and politicians – to their ‘denial’ and ‘avoidance’ strategies, Hardie’s actions surrounding the
establishment of the MRCF were referred to a Commission of Inquiry. This Inquiry found that
Hardie had, with the exception of the “fully funded” statement, acted within the law, but in a
socially unacceptable manner that left the victims and public to bear the cost of its activities.
Towards the end of the Inquiry, Hardie was faced with increased public and political threats to
its markets and business base in Australia and the US. The company then ‘voluntarily’ entered
negotiations with the NSW Government to establish a Special Purpose Fund to compensate
victims and fund medical research – funded from its on-going business activities. This is now in

15   See Exhibit 2.

the form of the Final Funding Agreement (2006) and is to be put to shareholders for approval in
February 2007. The conditions under which Hardie accepted the FFA, however, limits the
acknowledgement of the company’s moral obligations to exposures arising in Australia, and
provides protection for Hardie personnel from all civil actions related to the asbestos activities.
This raises continuing questions over the genuineness of Hardie’s acceptance of responsibility
for the personal and social damage from its activities.
Like all commercial companies, Hardie operates under a mandate from society that is enshrined
in company law: to increase financial wealth for its shareholders and to meet its economic
obligations as a corporate citizen. It is argued, in social contract theory, that this mandate also
implicitly requires companies to respect the ‘fundamental rights’ (for example to life, health and
justice) of individuals and society while pursuing their commercial objectives. In this case
Hardie, through its directors, senior executives and their professional advisors, clearly breached
this social contract – over several decades.
Hardie entered into the FFA ‘voluntarily’ in that it was not compelled by legislation, regulation or
binding contract. However, as the company has acknowledged, the market and political
pressures effectively forced its participation in this compensation scheme. This ‘public revolt’
can be interpreted as enforcement of an implied social contract [‘partnership’ (Cragg, 2002) or
‘licence to operate’ (Black, 2004)] that is the ultimate source of corporate authority and, hence,
of accountability and liability – in both financial and moral terms. Responding to public reaction,
society’s political representatives introduced proposed legislation to ‘wind back’ aspects of
Hardie’s mandate to operate, despite the company having complied with the relevant legal
This case highlights the existence of an ‘expectation gap’ between recent corporate behaviour
and contemporary society’s standards of ethical conduct. Such disparities underlie recent
moves in Australia to review the legal framework of corporate governance regimes and, in
particular, the duties of directors (CAMAC 2006b & d). Similar concerns prompted revision of
the duties of directors now incorporated in the UK Companies Act 2006.
In addition, the Hardie case raises serious practice implications for shareholders, directors and
officers and professional advisors, as well as for company law and financial reporting regimes.
Specifically it raises doubts about:
        the use of the ‘corporate veil’ in evading legal and moral obligations;
        the recognition and measurement of moral (‘equitable’) liabilities and of ‘future
         creditors’ where their identity is unknown but actuarially a quantifiable risk exists;
        the use of insolvency regulations (and ‘limited fund’ vehicles) to avoid liabilities in
         solvent entities; and
        the adequacy of national laws and regulations in controlling the behaviour of
         supranational corporations.
Hardie’s history of neglect, denial and avoidance of their social obligations in relation to
asbestos-related activities, apparently in single-minded pursuit of profit and shareholder wealth,
became a national scandal in Australia. However, it may serve as a warning to other companies
(at least in Australasia) of the dangers of ignoring society’s expectations of ethical standards of
corporate behaviour. Organisations, their governors and professional advisors must now be
alert to the dangers inherent in flouting the ‘general will’ of their society, under an implied social
contract – and not simply observing the interests of immediate stakeholders including the capital
We note, however, that despite the public opprobrium and the ‘unfunded’ financial cost of the
final settlement, Hardie’s share price dipped only temporarily and that the senior executives
involved received substantial severance payments and others remain in senior positions within
the group. This leaves questions over the efficacy of simply financial penalties where serious
breaches of ‘hypernorms’ are identified. It also raises doubts about the depth of support for
socially responsible investment (SRI) in developed capital markets. Society, clearly evidences
‘double standards’: while pointing the finger at Hardies’ directors and senior executives, other
corporate and private investors were taking advantage of the financial gains from Hardies’ and
other companies’ ‘amoral’ corporate activities.
This case raises many issues and questions to be addressed in continuing research, including:

        the longer-term impacts of society’s reactions when moral norms are breached and the
         effectiveness of any subsequent penalties;
        the criteria for the recognition of moral and ‘future creditor’ liabilities in financial
        fuller analyses of cases, across theoretical perspectives, to assist in identifying
         effective ‘drivers’ of corporate decisions in situations of moral conflict;
        whether recently strengthened corporate governance regimes will have any significant
         effect on long-term corporate social responsibility and accountability reporting; and
        whether the Hardie outcome has set a precedent that will indeed ‘pierce the corporate
         veil’ and establish a ‘successor liability’ doctrine outside of the US.
Consideration should also be given to these issues in the education of the next generation of
managers and their professional advisors. At present, … “in spite of the enormous power these
state created, purely legal, (corporate) entities possess, there is a mindless acceptance of the
status quo that permeates accounting education” (Association for Integrity in Accounting, 2004,
p.5). The Hon Justice Owen (in the HIH Royal Commission Report) exhorted “(t)he education
system - particularly at tertiary level - should take seriously the responsibility it has to inculcate
in students a sense of ethical method” (Owen, 2003). Failure to do so, following the issues
highlighted by the Hardie case, would appear to be irresponsible – and unethical.
At the very heart of the Hardie case is the issue of whether the responsibilities to the members
of companies should have so clearly dominated over fundamental moral obligations to their
community – particularly those of the life and health of individuals. As expressed by Owen:
   “(r)ight and wrong are moral concepts, and morality does not exist in a vacuum. I think all
   those who participate in the direction and management of public companies, as well as
   their professional advisers, need to identify and examine what they regard as the basic
   moral underpinning of their system of values. They must then apply those tenets in the
   decision-making process” (Owen, 2003).
Having heard all the evidence in the HIH Inquiry, Justice Owen (2003) stated “(f)rom time to
time as I listened to the evidence about specific transactions or decisions, I found myself asking
rhetorically: did anyone stand back and ask themselves the simple question - is this right?” This
question could be asked with even more force of the human consequences of suffering and
death in the asbestos industry and of the ‘governors’ of such ‘amoral’ corporations.
While ‘good’ corporate governance now entails a responsibility to ensure that social
responsibility is considered, without the force of law to back the social contract companies like
JHI NV may well continue to deny their moral obligations – unless society ‘revolts’ and enforces
their standards under the implied social contract or ‘licence to operate’.

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Exhibit 1 – The principal James Hardie Companies
 James Hardie Industries Ltd (JHIL) – the former public holding company floated in 1951
 (initially James Hardie Asbestos, named changed in 1971). Now ABN 60 with two
     James Hardie & Coy Pty Ltd (JH & Coy) –the initial family company incorporated in
      1918 and the principal asbestos trading company. Subsequently Amaca Pty Ltd.
     Jsekarb Pty Ltd – formerly James Hardie Brakes and Hardie-Ferodo – now Amaba Pty
 James Hardie Industries NV (JHI NV) – the Dutch parent of the current Hardie group listed
 as JHX on the Australian Stock Exchange (ASX) and operating through subsidiaries in US,
 Australia, New Zealand, The Philippines, Chile and Europe.

Exhibit 2 Companies Bill (House of Lords) 2006

 Sec 173    Duty to promote the success of the company
  (1) A director of a company must act in the way he considers, in good faith, would be
      most likely to promote success of the company for the benefit of its members as a
      whole, and in doing so have regard (amongst other matters) to–
      (a) the likely consequences of any decision in the long term,
      (b) the interests of the company’s employees,
      (c)   the need to foster the company’s business relationships with suppliers,
            customers and others,
      (d) the impact of the company’s operations on the community and the environment,
      (e) the desirability of the company maintaining a reputation for high standards of
            business conduct; and
      (f)   the need to act fairly as between members of the company.

Exhibit 3 FFA (2006) – Funding Structure
                 Appoints 3 board members                            Appoints 2 board
                     (including Chair)                                  members
        JHI NV                      Asbestos Injuries Compensation                      NSW Government
                                        Fund Limited (Trustee)

 100% owner       Funding           100% owner        AICF has statutory             Makes claim payments
                                                      indemnity for claim
  Performing Subsidiary                Amaca, Amaba & ABN601                               Claimants

                                                         Adapted from JHI NV Explanatory Memorandum (2006) p. 49.

Exhibit 4 FFA (2006) – Clause Recitals A (l) and (m)

 (l)   (T)he JHINV Group has asserted that it has suffered damage to business operations and sales
       from boycotts and other actions in relation to the distribution and sale of its products in Australia
       and in other places throughout the world and is or was subject to a number of threats relating to
       future action (including those described in Recital (m)) and sought to establish that its business
       operations and sales would no longer be affected by those boycotts and other actions or the
       threat of them;
 (m)   JHINV asserts that a principal purpose of the JHINV Group in entering into this deed is to avert
       threats from the NSW Government, the federal government and other state and territorial
       governments (and perhaps governments of other countries in which the JHINV Group is, or the
       ABN 60 [formerly JHIL] group was, active), that it or they would act, or support the NSW
       Government acting, to legislatively impose liability upon one or more members of the JHINV
       Group in relation to Asbestos-related personal injury liabilities of the Liable Entities in excess of
       the available assets of the Liable Entities unless James Hardie reached a voluntary settlement in
       relation to such liabilities, which threats were evidenced inter alia by:
       (i)    the announcement on 28 October, 2004 by the then Premier of New South Wales, the Hon.
              Robert John Carr, that the NSW Government would seek the agreement of the Ministerial
              Council, comprised of Ministers of the Commonwealth and the Australian States and
              Territories, to allow the NSW Government to pass legislation to “wind back James Hardie’s
              corporate restructure and rescind the cancellation of the A$1.9 billion in partly paid shares”,
              which partly paid shares JHINV had previously held in ABN 60;
       (ii) the announcement on 5 November, 2004 by the Federal Attorney General and the
              Parliamentary Secretary to the Federal Treasurer that the Ministerial Council for
              Corporations (“MINCO”) had unanimously agreed to “support a negotiated settlement that
              will ensure that victims of asbestos-related diseases receive full and timely compensation
              from James Hardie” and that if “the current negotiations between James Hardie, the ACTU
              and asbestos victims do not reach an acceptable conclusion, MINCO also agreed in
              principle to consider options for legislative reform”; and
       (iii) the announcement on 21 November 2005 by the Premier of New South Wales, the Hon.
              Morris Iemma, that the NSW Government would, in the week following the week of that
              announcement, introduce legislation to the Parliament of New South Wales to “secure
              compensation for the victims of James Hardie’s asbestos products” if JHINV did not settle
              the terms of a binding funding agreement with the NSW Government forthwith, and JHINV
              understands that, while the precise terms, enforceability and full consequences of such
              proposed legislation if enacted have not been made public nor disclosed to JHINV or any
              other member of the JHINV Group, such legislation if enacted may be likely to have a
              material adverse effect on the profitability, financial position or reputation of JHINV and/or
              other members of the JHINV Group.