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					       JAMES HARDIE, NAB AND AWB LTD
          - WHAT HAVE WE LEARNED?

             The hon ChrisTopher sTeyTler QC*
                                    Abstract

      This article examines three corporate scandals, namely,
      James Hardie, NAB and AWB Ltd, and considers what
      lessons can be learned from them.


                             i inTroduCTion
There has been no shortage of Australian corporate scandals over the
past decade. We have seemingly learned little from them. I have
selected three that raise issues that seem to me to be important.


           II Three AusTrAliAn CorporATe sCAndAls
                               A James Hardie

Two companies, Amaca Pty Ltd and Amaba Pty Ltd (‘Amaca’ and
‘Amaba’ respectively), had, for many years, manufactured asbestos
products. Both were large companies. Amaca (formerly known as
James Hardie & Coy Pty Ltd) was the largest manufacturer of asbestos
products in Australia, holding 70 per cent of the market.1 The two
companies were members of the James Hardie Group (‘the Group’).
Another large company, James Hardie Industries Ltd (‘JHIL’) was the
Group’s ultimate holding company. Amaca and Amaba (formerly
Jsekarb Pty Ltd), both wholly owned by JHIL, incurred liabilities in tort
to a large number of persons who had suffered asbestos-related injuries
as a result of use of the asbestos products manufactured by them. So,
too, did JHIL, albeit to a lesser extent.

Between 1998 and 2003 the following transactions were entered into
by the Group.

*   Former Justice of the Supreme Court of Western Australia; Parliamentary Inspector
    of the Corruption and Crime Commission of Western Australia; Professor of Law,
    University of Western Australia.
1   New South Wales, Special Commission of Inquiry into the Medical Research and
    Compensation Foundation, Report of the Special Commission of Inquiry into the
    Medical Research and Compensation Foundation (2004) Annexure J Vol 2, 121.


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The Group set up a trust fund (‘the Fund’), named the Medical Research
and Compensation Foundation, to engage in medical research and to
provide compensation for asbestos victims. The Fund was administered
by a newly created trustee, Medical Research and Compensation
Foundation Ltd (‘MRCFL’). The board of JHIL then made a gift of its
shares in Amaca and Amaba to MRCFL in its capacity as trustee of the
Fund. The Fund consisted of an amount calculated by reference to
the total assets of Amaca and Amaba plus an additional amount of $3
million provided by JHIL (to be spent on medical research). The total
amount was described by the directors in the Group as exceeding the
‘Best Estimate’ contained in an actuarial report dated 13 February 2001
that had been prepared by Trowbridge Deloitte Ltd.2

Amaca and Amaba were, in this way, effectively ejected from the Group
and isolated into MRCFL. A few months later JHIL was also ejected
from the Group. The Fund was the only source of compensation for
asbestos victims who had brought claims against the two companies.

The Fund proved to be far too small, having regard to the number of
asbestos victims and the extent of their claims. A Commission of Inquiry
was set up to investigate the transactions that had led to the setting up of
MRCFL and the creation of the Fund. This was the Special Commission
of Inquiry into the Medical Research and Compensation Foundation,
conducted by Commissioner David Jackson QC (‘Inquiry’).3

Commissioner Jackson found that the actuarial report ‘provided no
satisfactory basis for an assertion that the Foundation would have
sufficient funds to meet all future claims’.4 The Commissioner concluded
that the provision made by the Fund was the smallest amount thought by
the controlling directors of the Group to be ‘marketable’.5 Commissioner
Jackson also found, from board papers ultimately produced by the
Group, that the Group had embarked upon a deliberate ‘communications
strategy’ designed to attract as little attention as possible and to minimise
the prospect of government intervention.6



2     See, New South Wales, Special Commission of Inquiry into the Medical Research and
      Compensation Foundation, above n 1, Vol 1, 9, [1.9]-[1.10]; Australian Securities
      and Investments Commission v Macdonald (No 11) (2009) 256 ALR 199.
3     New South Wales, Special Commission of Inquiry into the Medical Research and
      Compensation Foundation, above n 1.
4     New South Wales, Special Commission of Inquiry into the Medical Research and
      Compensation Foundation, above n 1, Vol 1, 9, [1.9]-[1.10].
5     New South Wales, Special Commission of Inquiry into the Medical Research and
      Compensation Foundation, above n 1, Vol 1, 13, [1.25].
6     New South Wales, Special Commission of Inquiry into the Medical Research and
      Compensation Foundation, above n 1, Vol 2, Annexure K.


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                             JAMES HARDIE, NAB AND AWB LTD - WHAT HAVE WE LEARNED?

It was only towards the very end of the hearing of the Inquiry that
the Group offered to compensate all asbestos victims to whom
former companies in the Group were liable. This led, ultimately, to
an agreement between the Group and the State Government of New
South Wales, entered into in December 2005.7

Since then, a number of former directors and senior executives of JHIL
(including its general legal counsel) have been found by the Supreme
Court of New South Wales in Australian Securities and Investments
Commission v Macdonald (No 11)8 to have breached duties under
the Corporations Act 2001 (Cth) arising out of events surrounding
these transactions. [Since the time of writing this article, this decision
has been overturned by the Court of Appeal in New South Wales:
James Hardie Industries NV v Australian Securities and Investments
Commission [2010] NSWCA 332 (17 December 2010).]

            B The NAB Foreign Exchange Dealers Scandal

In 2003-4, unauthorised trades were effected by four dealers at the
foreign exchange options desk of the National Australia Bank (‘NAB’).
These resulted in losses to the NAB totalling $360 million.

The four traders, Luke Duffy (the head of the foreign exchange desk),
David Bullen, Gianni Gray and Vince Ficarra, were young men at the
time of the trades, having been 34, 31, 34 and 24 years old respectively
and supervised by Gary Dillon, a Joint Head of the NAB’s Global Foreign
Exchange Division. They had begun concealing trading losses in
September 2001, and possibly earlier. At first, by using incorrect dealing
rates for genuine transactions, the traders shifted profits and losses from
one day to another (a process described as ‘smoothing’). Later, in order
to conceal trading losses, they processed false spot foreign exchange
and false currency option transactions. They had discovered a ‘one-hour
window’ between 8.00am, when the ‘end-of-day procedure’ (known
as ‘Horizon’) was run (this formed the basis for profits and losses in
NAB’s general ledger, from which financial reports were prepared), and
9.00am, when NAB’s Operations Division began checking the previous
day’s transactions. During this window, the traders would amend the
incorrect deal rates and reverse the false transactions in the Horizon so as
to prevent detection of what they had done.9



7   See generally, Peta Spender, ‘Weapons of Mass Dispassion’ (2005) 14 Griffith Law
    Review 280.
8   (2009) 256 ALR 199 [1269], [1285], [1287], [1271].
9   See generally, Report by PricewaterhouseCoopers, Investigation into Foreign
    Exchange Losses at the National Australia Bank, 12 March 2004 (‘PwC report’) 1, 2.


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In October 2003, Mr Duffy told junior staff in the Operations Division
that they need no longer check internal transactions. They stopped
doing so, without telling their managers. This enabled the traders
to record false one-sided internal options transactions which were
‘surrendered’ before maturity so as to avoid discovery of the deception
at the time when there would otherwise have been a cash settlement.10

The currency options desk’s losses increased after 1 September 2003. As a
consequence, exposures grew larger and riskier. Although the traders were
able to partly obscure the position by utilising false option transactions,
many breaches of limits were identified, reported and approved. The
number of breaches grew significantly in late 2003 and in January 2004.11

The losses were discovered in January 2004. Inquiries into the trades
were carried out by the Australian Prudential Regulatory Authority
(‘APRA’) and by PricewaterhouseCoopers (commissioned by NAB). Both
prepared reports suggesting three principal reasons for what had taken
place.12 These were a lack of integrity on the part of the dealers, an
inappropriate risk control framework and too strong a focus on profit.

The NAB’s risk control framework was found by PricewaterhouseCoopers
to have been deficient in four principal respects. Two of these are that:

        (1) There was inadequate supervision of the traders. The
            PricewaterhouseCoopers report (‘PwC Report’) found
            that ‘the Traders took large, complex and risky positions,
            while supervision was limited to headline profit and loss
            monitoring…. Multiple risk limit breaches and other
            warnings were not treated seriously, and no effective steps
            were taken to restrain the Traders’. The NAB’s strategy
            had been one of reduced levels of proprietary trading. This
            policy was unilaterally reversed by the traders. Day-to-day
            involvement and supervision of the traders by Mr Dillon
            was minimal and there was little supervision by other
            management in the Markets Division, other than a review of
            reported profits.13



10    Report by PricewaterhouseCoopers, above n 9, 2. For more details of factual
      background, see Alin Comanescu, An Inquiry into the Nature and Causes of National
      Australia Bank Foreign Exchange Losses, an essay submitted to Department of
      Economics, Queen’s University, Kingston Ontario, Canada, in November 2004.
11    Report by PricewaterhouseCoopers, above n 9, 2.
12    Carolyn Cordery, ‘NAB’s “Annus Horribilis”: Fraud and Corporate Governance’
      (2007) 17 Australian Accounting Review 62, 63.
13    Report by PricewaterhouseCoopers, above n 9, 3, 23.


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                            JAMES HARDIE, NAB AND AWB LTD - WHAT HAVE WE LEARNED?

       (2) There was a culture of non-adherence to risk management
           policies (notwithstanding a number of warning signs).14
           There were flaws in the design, implementation and
           execution of risk management.         While ‘risk was an
           acknowledged business concern, there was a tendency to
           “push the boundary” on risk in pursuit of revenue targets.’15

The PwC report expresses a number of opinions concerning the NAB’s
governance and culture. Some of the more important of these, for
present purposes, are that:16

       (1) The risk management information that was provided to the
           board was incorrect, incomplete or insufficiently detailed to
           alert them to limit breaches or other matters relating to the
           currency options desk’s operations.
       (2) Had the Principal Board Audit Committee read supporting
           papers provided to it, probing of management might have
           revealed the seriousness of some of the control breakdowns.
       (3) Warnings by the NAB’s Market Risk and Prudential Control
           section concerning the currency option desk’s limit breaches
           and other exceptions were not made known to the CEO or
           the Board.
       (4) Importantly, so far as the NAB’s culture was concerned,
           there was ‘an excessive focus on process, documentation
           and procedure manuals rather than on understanding the
           substance of the issues, taking responsibility and resolving
           matters’.17 There was an arrogance in dealing with warning
           signs and management had a tendency to ‘pass on’, rather
           than assume, responsibility.18 The NAB had a culture of
           high risk-taking combined with a bias towards reporting
           good news (and under-reporting bad).19

The executive summary of the PwC Report concludes with the
following paragraph:

       Our investigations indicate that the culture fostered the environment that
       provided the opportunity for the Traders to incur losses, conceal them and


14   See Report by PricewaterhouseCoopers, above n 9, 25, 26 and Comanescu, above n
     10, 38-50.
15   Report by PricewaterhouseCoopers, above n 9, 26.
16   Report by PricewaterhouseCoopers, above n 9, 3, 4.
17   Report by PricewaterhouseCoopers, above n 9, 3, 32.
18   Report by PricewaterhouseCoopers, above n 9, 3.
19   Cordery, above n 12, citing M Maiden, ‘Shareholders May Have Say in NAB
     Board Feud’, retrieved by her on 1 April 2004 from http://www.theage.com.au/
     articles/2004/03/21/1079823238445.html.


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        escape detection despite ample warning signs. This enabled them to operate
        unchecked and flout the rules and standards of the National. Ultimately, the
        Board and the CEO must accept responsibility for the ‘tone at the top’ and the
        culture that exists in certain parts of the National.20


When the scandal became public, NAB’s then CEO, Frank Cicutto, at
first chose not to resign. The Board supported him in this. He resigned
only after management failures became public.21

There is one other fact that deserves comment. The four traders were
paid according to the level of profits achieved by them, providing a
major incentive for them to ignore the limits set on their trading.22
The traders received bonuses ranging from $120,000-$265,000 as a
consequence of meeting profit targets in 200323 (some of the traders
also received bonuses for 2001 and 2002).24 When interviewed on 18
February 2004 by the Australian Securities and Investments Commission,
one of the traders, Ficarra, said, ‘[a]s far as I was concerned a bonus is a
bonus. I’m 25 – only just turned 25 a month ago – a bonus of $100,000
is a lot of money to me’.25

                 C AWB Ltd and the ‘Oil for Food’ Scandal

As a result of Iraq’s invasion of Kuwait in 1990, the United Nations Security
Council (‘UNSC’) imposed sanctions upon Iraq that had the effect of
precluding member states from trading with it. Because these sanctions
ultimately resulted in a shortage of food, the Security Council, in 1995,
adopted Resolution 986, establishing the ‘Oil for Food Programme’.
This programme enabled Iraq to sell oil under approved contracts. The
sale proceeds were paid into a trust account controlled by the United
Nations. Iraq could draw upon funds in the trust account for the
purchase of food.

By 1999, the Australian Wheat Board sold about 10 per cent of
Australia’s annual wheat exports to Iraq.26 The Australian Wheat


20    Report by PricewaterhouseCoopers, above n 9, 4.
21    Comanescu, above n 10, 35, 41; Report by PricewaterhouseCoopers, above n 9, 2.
22    J Stewart, NAB’s media conference, 12 March 2004, downloaded by Cordery, above
      n 12, on 6 April 2004 from http://www.nabgroup.com.au.
23    Wall Street Journal (Eastern edition), 26 January 2005.
24    Report by PricewaterhouseCoopers, above n 9, 2.
25    Australian Broadcasting Corporation, ‘Former NAB Traders Jailed’, The 7.30 Report,
      4 July 2006.
26    See generally, John Agius SC, ‘The Cole Inquiry into Certain Australian Companies
      and the UN Oil for Food Program: Lessons for Government’ (2007) 57 Australian
      Institute of Administrative Law Forum 1; Linda Botterill, ‘Doing it for the Growers
      in Iraq?: The AWB, Oil-for-Food and the Cole Inquiry’ (2007) 66 Australian Journal
      of Public Administration 4.


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                             JAMES HARDIE, NAB AND AWB LTD - WHAT HAVE WE LEARNED?

Board was privatised in 1999 and it became a company, listed on the
ASX, known as AWB Ltd (‘AWB’). Although privatised, AWB retained
the statutory monopoly that it had previously held by the Australian
Wheat Board.

AWB entered into an arrangement with the Iraqi Grain Board (‘IGB’).
Under this arrangement, AWB agreed that, from July 1999, IGB should
be paid a fee of US $12 per tonne for ‘inland transportation to all
governorates Iraq’. The fee was payable through a Jordanian company,
Alia for General Transportation and Trade (‘Alia’). Alia was 49 per cent
owned by the Iraqi Government.

Those parties making the arrangements on behalf of AWB knew that
the fee was a means of extracting money from the UNSC trust account
and that the funds were to be paid to another Iraqi entity, the Iraqi
State Company for Water Transport. They also knew that Alia was not
receiving the money as transportation fees for services provided by it
and that the money was, in effect, a bribe.

In April and May 2000, IGB demanded that AWB pay an additional
ten per cent ‘after sales service fee’. This had the effect of raising the
transport fee to US $44.50 per tonne. AWB executives were aware
that this charge, too, had nothing to do with the provision of transport
services and was in effect, a bribe.

John Agius SC, counsel assisting the subsequent Cole Inquiry into these
events,27 writes that:

       Between November 1999 and March 2003 AWB paid Alia USD$224,128,189.98.
       That sum comprised USD$146,101,906.59 in transportation fees and
       USD$78,026,283.39 in after sales service fees which was paid in breach of UN
       sanctions. Alia deducted a commission of 0.25% and the balance was transferred
       to Iraqi entities. Documents uncovered after the fall of Iraq indicate that
       approximately two-thirds was paid to the Ministry of Finance and one-third split
       between “land” (presumably being for land transportation), 4% to “ports” and 1%
       to water. The two-thirds which went to the Ministry of Finance was otherwise
       not accounted for.28

A UN Inquiry conducted by Paul Volcker, the former US Federal Reserve
Chairman, in 2004 revealed that money paid by AWB constituted 14 per




27   Australian Government Attorney-General’s Department, Report of the Inquiry into
     Certain Australian Companies in relation to the UN Oil-For-Food Programme
     (2006) (inquiry conducted by Terence Cole QC).
28   Agius, above n 26, 5.


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cent of the illicit funds channelled to the Iraqi regime.29 Mr Volcker
identified almost 2400 companies from more than 60 countries that
had paid $1.8 billion in ‘kickbacks’ to the regime.30 However, AWB’s
contribution was the largest, by far, to this total.31

AWB deliberately misled the United Nations and the Australian
Department of Foreign Affairs and Trade concerning the true nature of
the arrangements entered into by it. Knowledge of the true arrangements
was restricted to a small group in AWB’s International Sales and Marketing
Division. Other officers of that company, and its Board, were seemingly
unaware of what had taken place. When questions began to be asked,
AWB consistently denied that it had acted inappropriately.32

Once suspicions had been aroused, AWB conducted internal enquiries
and engaged Arthur Andersen to investigate activities of employees
working in its International Sales and Marketing Division. In June 2003,
it established ‘Project Rose’, a comprehensive investigation into what
had occurred, involving external lawyers.

The results of the ‘Project Rose’ investigation were withheld from the
Volcker Inquiry. AWB also resisted production of relevant documents
to the Cole enquiry on the basis of legal professional privilege. Other
documents were produced late, including some that were highly
relevant. In his report, Commissioner Cole said that ‘AWB presented
a facade of cooperation with the enquiry’ but that, in truth, it had not
cooperated at all.33

Commissioner Cole also described the consequences of AWB’s actions
as ‘immense’. They included an annual loss of over $385 million worth
of trade with Iraq. He said that AWB had ‘cast a shadow over Australia’s
reputation in international trade’.34

On 23 February 2006, AWB held an annual general meeting. Six of the
directors who had been on the board at the time of these events put
themselves up for re-election by the shareholders. All were re-elected.35

29    Paul Volcker, Report of the Independent Inquiry Committee into the United Nations
      Oil-for-Food Programme: Manipulation of the Oil-for-Food Programme by the Iraqi
      Regime (2005), quoted by A McConnell, A Gauja and L Botterill, ‘Policy Fiascos,
      Blame Management and AWB Limited: The Howard Government’s Escape from the
      Iraq Wheat Scandal’ (2008) 43 Australian Journal of Political Science 599.
30    Then Australian Prime Minister, John Howard, writing in the Asian Wall Street
      Journal, 25 April 2006.
31    Botterill, above n 26, 4.
32    Botterill, above n 26, 8, 9.
33    Volcker, above n 29, 235, quoted by Botterill, above n 26, 11.
34    Quoted by the Economist, 12 February 2006, ‘Australians Who Bribe’.
35    Derek Parker, ‘Lessons learned?’Management Today October 2007, 28.


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                              JAMES HARDIE, NAB AND AWB LTD - WHAT HAVE WE LEARNED?


           iii Why do Things of This Kind hAppen?
The answer to this question requires consideration of a number of
contributing factors.

             A Separate Personality and Limited Liability

Corporations have long been given separate personality by the law.
The principle was well-established by the time that Lord Macnaghten
wrote his well known dictum in Salomon v Salomon & Co Ltd:36

       The company is at law a different person altogether from the subscribers ... and,
       though it may be that after incorporation the business is precisely the same as
       it was before, and the same persons are managers, and the same hands receive
       the profits, the company is not in law the agent of the subscribers or trustee for
       them. Nor are the subscribers as members liable, in any shape or form, except to
       the extent and in the manner provided by the Act.

Section 124(1) of the Corporations Act 2001 (Cth) now provides
that, once registered, a company has ‘the legal capacity and powers
of an individual’. Section 516 provides for the limited liability of
shareholders, who are personally liable for the debts of the company
only to the extent of their investment in the company.

Notwithstanding their status as ‘persons’, most companies are not
influenced by emotions such as compassion or guilt to anything like
the same degree as their flesh and blood cousins (or most of them).
When company managers make decisions, they do so upon a corporate
basis, with diminished personal responsibility. Company profit is their
principal focus.

The film, The Corporation,37 suggests that corporations are legally created
psychopaths, diagnosable as such by applying standard clinical diagnostic
criteria for that condition. These include a callous lack of concern for
the feelings of others, an incapacity to maintain enduring relationships
and an incapacity to experience guilt. The makers of the film argue that
this corporate psychopath is a product of the law because it provides for
separate corporate personality and limited liability and requires directors
to give priority to the interests of the company’s shareholders above all
other interests, including the public good.38




36   [1897] AC 22, 51.
37   Mark Achbar, Jennifer Abbott (directors) and Joel Bakan (writer), The Corporation
     (Big Picture Media Corporation, 2003), referred to by Spender, above n 7, 288.
38   Achbar, Abott and Bakan, above n 37; see also Joel Bakan, The Corporation: The
     Pathological Pursuit of Profit and Power (2004); Spender, above n 7, 288.


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Peta Spender, writing in the Griffith Law Review, suggests that:

        [C]orporate law is dispassionate because its doctrine is built on articles of faith
        and utilitarian assumptions about our economic happiness. Consequential
        arguments reinforce this by focusing upon the dire repercussions which will
        flow from even minor tinkering with this legal architecture. Law and economics
        also imbue corporate law with a narrow conception of human nature which not
        only concentrates upon self-interest but lacks emotional depth. What follows
        from the dispassion is policy stagnation.39

She puts the principal arguments for and against the notions of limited
liability and separate personality as follows:

        Structures such as limited liability and separate entity are morally risky, and have
        always given rise to debate about moral hazard. For example, from the early days
        of its development, critics opposed limited liability on moral grounds. Because it
        allowed investors to escape unscathed from their companies’ failures, the critics
        believed that it would undermine personal moral responsibility … For example,
        an article published in the Law Times in 1858 argues that the community would
        provoke dishonesty ‘by exempting men from liability to pay their debts, perform their
        contracts and make reparation for their wrongs’. It will ‘taint the moral character of
        those who adopt it.

        However, limited liability has a strong utilitarian justification because it puts a
        ceiling on an investor’s potential losses. This ceiling promotes economic activity by
        giving the risk-averse investor an incentive to invest. Limited liability also facilitates
        a separation of ownership and control. It recognises that shareholders are not in
        a position to monitor the actions of large companies, and therefore should not be
        subjected to personal liability for something they cannot control.40

She goes on to suggest that the fact that corporate law distances itself
from human suffering enables companies such as James Hardie to do
the same. She refers to material presented to the Special Commission,
which ‘shows that the James Hardie board focused on actuarial studies
of potential mass claims which it called “legacy issues”, and effective
marketing of unpopular transactions rather than the potentially
awkward pain of asbestos victims’.41

The same might be said of AWB. The responsible officers in its Sales and
Marketing Division must have known that the bribes paid by AWB would
find their way to the leaders of a despotic regime and would undermine
the sanctions imposed by the UNSC, but seemingly did not care.




39    Spender, above n 7, 291.
40    Spender, above n 7, 291.
41    She refers to the Report of the Special Commission of Inquiry into the Medical
      Research and Compensation Foundation, above n 1, Vol 1, 13, [1.25] and Vol 2,
      Annexure K.


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                              JAMES HARDIE, NAB AND AWB LTD - WHAT HAVE WE LEARNED?

                              B Corporate Groups

The position is exacerbated when the owner of a corporation is another
corporation. It is further exacerbated if the parent corporation is one
of a large group of corporations. As Professor Tom Hadden wrote,
some 19 years ago:
       Businessmen, and accountants and investors all think about corporate groups
       rather than individual companies as the main focus of their activities. Only
       lawyers and legislators … cling to the tradition that individual companies are
       the only proper focus of attention and that corporate groups are no more than
       simple or complex combinations of individual companies.42

Nothing much has changed since then. The following comments made
by Professor Hadden also remain substantially true:
       The traditional rules on the duties of the directors and officers of individual
       companies make little sense within corporate groups. There are no clear rules
       on the liability of the group for the obligations of its constituent companies.
       And there is virtually no legal control at all on the complexity of the group
       structures which may be established with a view to concealing the true state
       of affairs within a complex group. The only major recognition of the existence
       of the group has been the requirement for the consolidation of group accounts,
       though … the established rules have not proved particularly effective. All this
       makes it too easy for complex corporate groups to be used to confuse or defraud
       the business or investment communities. The fact that most of the spectacular
       corporate failures and frauds in recent years both in Australia and elsewhere have
       been carried out within or by means of complex corporate groups is in itself an
       indication of the need for more effective regulation.43

Groups are a well-established form of large corporate enterprise in
Australia. A study of the top 500 companies in 1997 showed that 89
per cent of them had at least one controlled entity.44 The median
number of controlled entities was 11 (90 per cent of these were wholly
owned by other companies in the group).45

This brings with it another set of problems. In Re Southard and Co
Ltd46 Templeman LJ said:
       A parent company may spawn a number of subsidiary companies … If one of
       the subsidiary companies … turns out to be the runt of the litter and declines
       into insolvency to the dismay of its creditors, the parent company and other
       subsidiary companies may prosper to the joy of shareholders without any liability
       for the debts of the insolvent company.



42   Tom Hadden, ‘The Regulation of Corporate Groups in Australia’ (1992) 15 University
     of New South Wales Law Journal 61, 61.
43   Hadden, above n 42, 62.
44   Ian Ramsay and Geof Stapledon, ‘Corporate Groups in Australia’ (2001) 29 Australian
     Business Law Review 7, quoted by Spender, above n 7, 285.
45   Ramsay and Stapledon, above n 44, 285.
46   (1979) 1 WLR 1198, 1208.


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In her article, Spender applies this reasoning to what was done by
James Hardie and, changing the metaphor, concludes that ‘members
of a corporate group may cast out elderly, troublesome and costly
relatives after passing the family debt on to them’.47 She points out
that, consistently with this, Commissioner Jackson found that the
James Hardie reorganisation was in accordance with the letter of
the law and that companies within the Group would not be liable
for the torts of any other company, with the consequence that
asbestos victims’ claims for compensation were confined to a limited
fund.48 It was this that led the Commissioner to conclude that there
were ‘significant deficiencies in Australian corporate law’ and he
added that the circumstances ‘raised in a pointed way the question
whether existing laws concerning the operation of limited liability
… within corporate groups adequately reflect contemporary public
expectations and standards’.49

The issue also raises its head in other contexts.

Directors might, in some cases, be inclined to pay more regard to the
interests of the group than to those of the individual company. That can
lead to decisions being made by the company that are not in its interests, for
example, guaranteeing the debts of other companies in the group, which
are of questionable solvency, or lending money to those companies.50

Also, persons dealing with one company in a group may be misled by
the strength of the group into making no enquiries concerning the
financial viability of the particular company, causing them to be left
unpaid, on the insolvency of that company, in circumstances in which
they would never have done business with the company were it not for
the strength of the group.

While the law does, in some circumstances, allow the corporate veil to


47    Spender, above n 7, 286.
48    Spender, above n 7, 285, suggests that the rules about liability in corporate groups
      interfere with the objectives of tort law because, although the tort victims become
      creditors to the extent of any damages that are awarded, the principle of limited
      liability denies them access to members’ assets. She points out that this can result
      in inadequate compensation, interfere with the tort law’s objective of compensation
      and undermine corrective justice and deterrence.
49    New South Wales, Special Commission of Inquiry into the Medical Research and
      Compensation Foundation, above n 1, Vol 1, [30.66].
50    Although there are constraints on their doing so, particularly in the context
      of possible insolvency: see Reid Murray Holdings Ltd (in liq) v David Murray
      Holdings Pty Ltd (1972) 5 SASR 386, 402; Charterbridge Corp Ltd v Lloyd’s Bank
      Ltd [1970] Ch 62; ANZ Executors and Trustees Co Ltd v Qintex Australia Ltd (recs
      & mgrs appointed) [1991] 2 Qd R 360.


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                                 JAMES HARDIE, NAB AND AWB LTD - WHAT HAVE WE LEARNED?

be lifted so as to enable the operations of a subsidiary to be regarded as
those of its parent, such cases remain comparatively isolated.51

                                C Corporate Culture

Corporate culture is critical to corporate behaviour. One writer, T
Tierney, defines corporate culture as ‘what determines how people
behave when they are not being watched’.52 Another, E Schein, defines
it as the ‘sum total of all the shared, taken-for-granted assumptions that
a group has learned throughout its history’.53

Employees within a corporation tend to act according to its ethical
culture.54 That culture, in turn, takes its shape from those who run the
corporation and from how the corporation is run. This is so regardless
of what might appear in written ethical guidelines. If there is too
strong a focus on profit, and an inadequate focus on ethics, unethical
behaviour by employees becomes more likely. M Young writes that:

       We have learned the same thing again and again; financial fraud does not start
       with dishonesty, your boss doesn’t come to you and say, ‘Let’s do some financial
       fraud’. Fraud occurs because the culture has become infected. It spreads like an
       unstoppable virus.55

This happens even if the company’s employees behave ethically in
other contexts.56



51   See the comments of Rogers CJ in Qintex Australia Finance Ltd v Schroders
     Australia Ltd [1990] ACSR 267, 268-269 and in Briggs v James Hardie & Co Pty
     Ltd (1989) 7 ACLC 841 and see Hadden, above n 42. In James Hardie & Co Pty Ltd
     v Putt (1998) 43 NSWLR 554 the NSW Court of Appeal held that, absent evidence
     that a subsidiary company was a mere facade, exercise of control and influence by a
     parent did not, of itself, justify lifting the corporate veil so as to create a duty of care
     owed by the parent to an employee of the subsidiary. Cf CSR Ltd v Wren (1997) 44
     NSWLR 463 and see generally, ASIC v Macdonald (No 11), (2009) 256 ALR 199.
52   T Tierney quoted in The Economist 364, Issue 8283, 61, in turn quoted by H and
     J Rockness, ‘Legislated Ethics: From Enron to Sarbanes-Oxley: The Impact on
     Corporate America’ (2005) 57 Journal of Business Ethics 31, 48.
53   E Schein The Corporate Culture Survival Guide (1999) quoted by H and J Rockness,
     above n 52, 48.
54   Lynne Dallas, ‘A Preliminary Inquiry into the Responsibility of Corporations and their
     Directors and Officers for Corporate Climate: the Psychology of Enron’s Demise’
     (2003) 35 Rutger’s Law Journal 1, 10; Christine Parker, The Open Corporation (2002)
     32; Matthew Harvey and Suzanne Le Mire, ‘Playing for Keeps? Tobacco litigation,
     Document Retention, Corporate Culture and Legal Ethics’ (2008) 34 Monash Law
     Review 163, 175; Suzanne Le Mire, ‘Document Destruction and Corporate Culture: A
     Victorian Initiative’ (2006) Australian Journal of Corporate Law 304, 312.
55   M Young, quoted by P Sweeney, ‘What Starts Small Can Snowball’ (2003) Financial
     Executive, in turn quoted by H and J Rockness, above n 52, 47.
56   Parker, above n 54, 33; Harvey and Le Mire, above n 54, 175: Le Mire, above n 54,
     312.


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Professors Howard and Joanne Rockness57 refer to a number of studies
in this regard. They say:58

        The tone at the top has been cited as the primary driver of corporate ethical
        conduct by many professional sources (e.g., AICPA: 2002;59 COSO, 1992;60
        Treadway Commission, 198761). Ethicists have long argued that tone drives the
        corporate culture (Buchholz and Rosenthal, 1998,62 p.177). Sweeney (2003)63
        argued that the tone at the top sets the corporate culture and in many cases was
        a root cause of the unethical conduct and fraudulent activities. He cites two
        common characteristics: overly aggressive financial performance targets and a
        can-do culture that did not tolerate failure...

        In this culture, what often began as questionable accounting adjustments grew
        into massive fraud in an attempt to fix each quarter’s numbers to close the
        variance between income targets and actual results. The classic slippery slope of
        unethical behaviour prevailed as otherwise honest people came to believe they
        were acting in the best interest of the company and consented to participating
        in unethical and fraudulent behaviour. Personal gain, ego and survival were
        perhaps all motivating factors for the individuals involved. The impact of
        senior management on the corporate culture and resulting frauds are illustrated
        by taking a closer look at three of the biggest scandals: Enron, WorldCom and
        HealthSouth.

For present purposes, it is unnecessary to look closer at the three well-
known scandals mentioned in this extract. The AWB and the NAB
scandals are sufficient to illustrate the point.

AWB had a set of ethical guidelines that, unsurprisingly, prohibited
the payment of bribes. This was ignored by senior employees in its
International Sales and Marketing Division. The company’s culture
was one of maximizing returns to growers.64 One of AWB’s former
employees, Mark Rowland, provided a statement to the Cole Inquiry
that included the following:

        There was certainly a culture of pushing the business of AWB as far as possible
        for the highest return. My perception was that on occasion, this might mean
        that the company moved into what some might describe as “grey areas”, where



57    H and J Rockness, above n 52.
58    H and J Rockness, above n 52.
59    AICPA: 2002, ‘Consideration of Fraud in a Financial Statement Audit’, Statements on
      Auditing Standards 99, AICPA, Professional Standards, Vol 1, AU sec.316.
60    COSO (Committee of Sponsoring Organisations of the Treadway Commission): 1992,
      ‘Internal Control and Integrated Framework’ (Institute of Internal Auditors, New
      York); Treadway Commission.
61    Treadway Commission (National Commission on Fraudulent Financial Reporting):
      Report of the National Committee on Fraudulent Financial Reporting (Committee
      of Sponsoring Organizations of the Treadway Commission, New York).
62    R Buchholz and S Rosenthal, Business Ethics: The Pragmatic Path Beyond Principles
      to Process (1998).
63    Sweeney, above n 55.
64    Botterill, above n 26, 11.


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                              JAMES HARDIE, NAB AND AWB LTD - WHAT HAVE WE LEARNED?

       the legality of the position adopted by AWB might be open to doubt. If the
       commercial imperative justified the position adopted, in my experience, the
       company adopted that position in order to vigorously protect its customers and
       markets from overseas competitors. All of AWB management, as far as I could
       discern, were driven to ensure that the company maximised its trading capacity
       on behalf of Australian wheat growers.65

NAB had corporate governance codes that ‘seemed exemplary’.66
Largely because of too great a focus on profit (although there were other
contributing factors), these failed to prevent unauthorised secret dealings
resulting in the announcement of $360 million in foreign exchange
losses, less than four months after reporting a profitable year.67

A company’s board can play a large part (good or bad) in setting a
corporate culture. H and J Rockness make this point in their article on
corporate ethics.68 After giving a number of illustrations, they go on to
suggest that the board must be responsible for ethics and must ensure
that there is ‘a culture that supports, nurtures and attracts individuals of
high personal integrity’.69 They say that this can be done by noticing,
and rewarding, ethical behaviour; by encouraging the departure of
those who violate ethical principles, no matter how valuable their other
contributions may be; and by ensuring that there is an appropriate
control environment involving oversight by senior management.

AWB provides a good (or bad) example of what can go wrong when
there is a board that lacks an incentive to question management policies
and oversight. AWB’s board remained unaware of what had happened
for far too long and, even when its suspicions were eventually aroused,
it took far too long to discover the truth.70 Much the same was true of
NAB, where the emphasis on profit led to a failure to look closely at risk
and to ensure that there were adequate risk control measures in place.

James Hardie provides an illustration of a different kind. The Group
claimed that it had been restricted in its ability to put aside enough
money for outstanding asbestosis liabilities because of the requirement,
imposed by the Corporations Law, that directors should act in the
interests of shareholders.71 However, the interests of shareholders
presented no justification for defeating the lawful claims of asbestosis
victims against the company.

65   Exhibit 0009 AWB.5035.0337, quoted by Botterill, above n 26, 11.
66   Cordery, above n 12, 62.
67   Cordery, above n 12, 63.
68   H and J Rockness, above n 52.
69   H and J Rockness, above n 52, 49-50.
70   See Botterill, above, n 27, 10.
71   See Dr Rodger Spiller, ‘Investing in Ethics - Future Patterns and Pathways’ (2006)
     New Zealand Management 46.


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Directors are entitled to assume that shareholders expect them to act
ethically. The interests of shareholders should not be protected by
the unethical acts of the company’s board of directors. Nor should
they be protected by acts that are significantly damaging to the wider
community, even if they are within the strict letter of the law. Acts
of that kind can have a very significant impact in social cost. Mark
Schwartz, a lecturer of business ethics in The Wharton School,
University of Pennsylvania, writes that:

        One estimate is that the total social costs of US corporations and other businesses
        that must be borne by employees, customers, communities and society (including
        such categories as worker accidents, consumer injuries, pollution, and crime)
        comes to approximately 2 1/2 trillion dollars per year (Estes, R: 1996, Tyranny of
        the Bottom Line (Berrett-Koehler Publishers, San Francisco, CA, p 178).72

Ethical behaviour involves more than putting the interests of
shareholders first, subject to the requirements of the law. It requires
that consideration be given to interests, norms and values regarded as
important by the general community. Mollie Painter-Morland, in her
book on business ethics, writes that:

        Both legality and morality are concerned with establishing criteria for acceptable
        behaviour. Both make these judgements on the basis of existing social norms and
        values. These norms and values are expressions of those things that the members
        of a particular community consider important enough to protect and nurture. The
        protection of our lives and property, for instance, is guaranteed by law. Naturally
        these primary security needs are exceptionally important, but there are things that
        speak to the very core of our self-understanding as human beings that we don’t
        necessarily want to secure through legislation or regulation. Consider, for instance,
        the implications of legally enforcing things like fidelity, trust, responsibility and
        care. The world would be a sad place indeed if we felt compelled to adopt a law
        to ensure that friends cared for one another and trusted each other. However,
        it would be an even sadder place if we didn’t think these things important at all.
        Ethics is, in a sense, the practice of such things in everyday life.73

There is no reason why the practice of such things should be less
important, in the case of directors giving effect to corporate personality,
than they are to any other persons, even if we accept Milton Friedman’s
claim that ‘the business of business is business’.74

                     D Directors and Conflict of Interest

Distinctions are often drawn between ‘inside’ and ‘outside’ directors.
The former category includes current or former executives of the
company or persons related to current executives. All other directors


72    M Schwartz, ‘The Nature of the Relationship between Corporate Codes of Ethics and
      Behaviour’ (2001) 32 Journal of Business Ethics 247, 247.
73    Mollie Painter-Morland, ‘Business Ethics as Practice’ (2008) 3.
74    Painter-Morland, above n 73, 144.


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                               JAMES HARDIE, NAB AND AWB LTD - WHAT HAVE WE LEARNED?

fall into the latter category.75 Outside directors, in turn, might be ‘grey’
directors or ‘independent’ directors. ‘Grey’ directors are those who
have connections with the company apart from their role as directors.
They might, for example, be existing or former consultants to the
company or executives of businesses dealing with the company.76

Studies have revealed that independent directors generally protect the
interests of shareholders better than ‘inside’ or ‘grey’ directors. Some
of these studies are summarised by Andrew Felo as follows:77

       Extant empirical evidence gathered in a variety of situations is generally consistent
       with [the] idea [that independent directors protect the interests of shareholders
       more effectively than other directors]. For example, Rosenstein and Wyatt78 …
       find evidence of positive abnormal returns surrounding the appointment of an
       independent director to a firm’s board. Also, Mehran79 … finds evidence that the
       proportion of equity-based management compensation is significantly positively
       related to the proportion of independent directors on a firm’s board. Cotter et
       al80 … find that takeover targets having boards with a majority of independent
       directors earn statistically significantly higher returns during takeover periods than
       do other firms. Brickley et al81 … find that the market reaction to the adoption of
       poison pills … is significantly positively related to the proportion of independent
       directors on a firm’s board. Finally, Weisbach82 … finds that firm value significantly
       increases when boards dominated by independent directors replace CEO’s.

       Extant evidence also supports the notion that inside and grey directors may be
       more closely aligned with a firm’s managers than with a firm’s shareholders. For
       example, Lee et al83 … find evidence of significantly lower abnormal returns
       surrounding management buyouts when boards are dominated by inside
       directors. Brickley et al84 … find that market reaction to the adoption of poison
       pills is significantly negative for boards dominated by inside and grey directors.




75   See Andrew J Felo, ‘Ethics Programs, Board Involvement, and Potential Conflicts of
     Interest in Corporate Governance’ (2001) 32 Journal of Business Ethics 205, 208.
76   Felo, above n 75.
77   Felo, above n 75, 208-209.
78   S Rosenstein and J Wyatt, ‘Outside Directors, Board Independence, and Shareholder
     Wealth’ (1990) 26 Journal of Financial Economics 175, 191.
79   H Mehran, ‘Executive Compensation Structure, Ownership and Firm Performance’
     (1995) 38 Journal of Financial Economics 163, 184.
80   J Cotter, A Shivdasani and M Zenner, ‘Do Independent Directors Enhance Target
     Shareholder Wealth During Tender Offers?’ (1997) 43 Journal of the Financial
     Economics 195, 218.
81   J Brickley, J Coles and R Terry, ‘Outside Directors and the Adoption of Poison Pills’
     (1994) 35 Journal of Financial Economics 371, 390.
82   M Weisbach, ‘Outside Directors and CEO Turnover’ (1988) 20 Journal of Financial
     Economics 431, 460.
83   C Lee, S Rosenstein, N Rangan and W Davidson III, ‘Board Composition and
     Shareholder Wealth: The Case of Management Buyouts’ (1992) (Spring) Financial
     Management 58, 72.
84   Brickley, Coles and Terry, above n 81.


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        Additionally, firms filing for bankruptcy have significantly higher proportions of
        inside and grey directors five years prior to the filing than do similar firms not
        filing for bankruptcy (Daily and Dalton85…).

Felo points to another problem.86 This is that directors might be
reluctant to discipline ineffective managers if the directors have an
affiliation with the company or its management team other than as a
director. This is particularly true of inside directors, although it is also
likely to be true in the case of grey directors.

Independent directors will usually be less influenced by the bottom
line than those with a more personal stake in the company. The kind
of problem that might follow from too great an emphasis on profit is
illustrated by the AWB scandal. The majority of AWB’s board comprised
people with a background of wheat farming. Not surprisingly, this
led to a culture of maximising returns to growers of wheat. Stephen
Bartos, formerly Professor of Governance at the University of Canberra,
suggests that the board ‘saw themselves as working on behalf of
Australian wheat exporters’ and that ‘they had no incentive to question
their managers, so long as wheat kept being sold’.87

The attitude of AWB’s directors was reflected in that of wheat growers.
Botterill88 points out that, when they heard of the scandal, growers,
rather than being horrified by the activities of AWB on their behalf,
rationalised what had been done by saying that this was the way that
business was done in the Middle East and by emphasising the need to
prevent loss of the market to American competitors. Her comments in
this respect are graphically supported by the fact (mentioned above)
that, when put up for re-election on 23 February 2006, six of the
directors who had been on the board during the period in which bribes
of more than $300 million had been paid were re-elected.

                     E The Approach to Remuneration

There are two pertinent aspects of the issue of remuneration, for
present purposes. The first relates to the size of payments authorised
by boards. The second relates to incentive payments. The two aspects
often go hand in hand.



85    C Daily and D Dalton, ‘Bankruptcy and Corporate Governance: The Impact of Board
      Composition and Structure’ (1994) 37 Academy of Management Journal 1603,
      1617.
86    Felo, above n 75, 205.
87    Stephen Bartos, ‘Against the Grain: The AWB Scandal and Why It Happened’, quoted
      by Derek Parker, ‘Lessons learned?’Management Today October 2007, 28-29.
88    Botterill, above n 26, 11.


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                              JAMES HARDIE, NAB AND AWB LTD - WHAT HAVE WE LEARNED?

In its recent report, released on 4 January 2010 (resulting from its 2009
Inquiry into executive remuneration in Australia), the Productivity
Commission found that the remuneration of chief executives of the 50-
100 largest Australian listed companies had increased by 300 percent
between 1993 and 2007. Since 2007, this trend has been reversed to
some degree, with pay returning to 2004-05 levels. The remuneration
of chief executives of the top 20 listed companies averaged $7.2 million
in 2008-09, 110 times the average wage. The Productivity Commission
found that almost all recent growth in remuneration had resulted
from the approach of linking remuneration with performance. It
remarked that, in principle, boards will be prepared to pay executives
a risk premium if they consider that the associated incentives (at least)
improve company performance commensurately over time. It said that,
in this sense, ‘incentive pay can be a positive sum game, with rewards
accruing to both the executive and shareholders’.89

However, the Productivity Commission also said:

       [W]hile greater use of incentive pay has almost certainly led to higher
       reported pay over time, in practice, it might not have translated to improved
       company performance. Compliant boards, or the difficulties posed for them
       by very complex incentive pay arrangements, could allow executives to mould
       performance measures and hurdles in their favour, so that ‘at risk’ pay becomes
       a virtual certainty, perhaps even rewarding and encouraging poor performance.90

The Productivity Commission also discussed the advantages and
disadvantages of short-term and long-term incentives. It said, in this
respect:

       The complexity of some incentive pay arrangements in more recent times ... could
       have allowed unanticipated upside (especially during the share market boom prior
       to 2007-08), yet weakened or distorted the incentive effects for executives.

       Short-term incentives linked to inappropriate performance metrics in the
       finance industry in some instances encouraged excessive risk-taking, although
       they appear to have been far less pervasive in Australia than overseas. Such
       practices are the focus of the Australian Prudential Regulation Authority’s new
       remuneration guidelines.

       The Commission understands that executives view some complicated long-term
       incentives linked to share market performance as akin to a lottery, such that they
       have little (positive or negative) incentive effect, yet could end up delivering
       large payments to the executive at large cost to the company.91




89   Australian Government Productivity Commission, Executive Remuneration in
     Australia, Report No 49 (2009), xxi.
90   Australian Government Productivity Commission Report No 49, above n 89, xxii.
91   Australian Government Productivity Commission Report No 49, above n 89, xxv.


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People have become accustomed to the massive pay rates awarded
to senior executives. But, by any rational measure, it is impossible
to justify a salary of $7.2 million per annum. The only persuasive
justification is that this is the ‘going rate’ for chief executives in other
similar companies. However, that establishes no more than that
the malaise is widespread. When pay rates are linked to short term
profitability, already money oriented executives are given an incentive
to maximize reported profits. As the NAB scandal reveals, the problem
may not be limited to senior executives.

                                F Legal Amorality

Amorality of legal advisers also plays its part. The practice of law
requires, to a degree, the suspension of ordinary moral values. Lawyers
are required to put the interests of their clients ahead of those of
other people, subject to the overriding duties owed by them to the
administration of justice and to the courts. Their training encourages
them to look at what the letter of the law permits or forbids, rather
than what morality requires. It is not their role to make moral
judgements on behalf of their clients. It is their role to advise their
clients concerning the law.

A respected US commentator, Richard Wasserstrom says that:

        Where the attorney/client relationship exists, it is often appropriate and many
        times even obligatory for the attorney to do things that, all other things being
        equal, an ordinary person need not, and should not do. What is characteristic
        of this role of a lawyer is the lawyer’s required indifference to a wide variety of
        ends and consequences that in other contexts would be of undeniable moral
        significance. Once a lawyer represents a client, the lawyer has a duty to make
        his or her expertise fully available in the realisation of the end sought by the
        client, irrespective, for the most part, of the moral worth to which the end will
        be put or the character of the client who seeks to utilise it. Provided that the
        end sought is not illegal, the lawyer is, in essence, an amoral technician whose
        peculiar skills and knowledge in respect of the law are available to those with
        whom the relationship of client is established.92

Other commentators have identified this feature of legal practice and
its potentially serious consequences. One of them, Professor Gerald
Postema, writing in the New York University Law Review, suggests that:




92    Richard Wasserstrom, ‘Lawyers as Professionals: Some Moral Issues’, in Luban (ed)
      The Good Lawyer: The Lawyer’s Role and Lawyers’ Ethics (1984); also published
      in Richard Wasserstrom, ‘Lawyers as Professionals: Some Moral Issues’ (1975) 5
      Human Rights 1.


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                               JAMES HARDIE, NAB AND AWB LTD - WHAT HAVE WE LEARNED?

       the artificial reason of professional morality, which rests on claims of specialised
       knowledge and specialised analytical technique, and which is removed from the
       rich resources of moral sentiment and shared moral experience in the community,
       tempts the professional to distort even the most serious of moral questions.93


                                    G Auditors

Auditors have sometimes played a significant role by failing to identify
indicators of impending corporate collapses, in some cases because
they lacked the incentive to do so.

In their article on ‘legislated ethics’,94 Professors H and J Rockness
quote from a speech made by A Levitt of the US Securities and
Exchange Commission (‘SEC’) on 10 May 2000. They record him as
saying, ‘too many auditors are being judged not just by how well they
manage an audit, but by how well they cross-market their firm’s non-
audit services.’ 95 H and J Rockness go on to say that all of the ‘Big
Five’ CPA firms were criticised during the 1990s ‘for inadequate audit
procedures, a strong focus on increasing the breadth and volume of
consulting services, providing internal audit services to external audit
clients, and utilising the accounting rules to the advantage of audit
clients rather than focusing on underlying economic substance’.96

Criticisms of this kind led the SEC to push for new regulations on auditor
independence, imposing limits on services that might be provided to
audit clients so as to avoid conflicts of interest. This push was opposed
by the (then) ‘Big Five’, by the American Institute of Certified Public
Accountants and also by many corporations.97 Ultimately, there was a
legislative response by way of the enactment of the Sarbanes-Oxley Act
2002 (discussed briefly below).

H and J Rockness mention that, after the coming into effect of the 2000
SEC regulations, but before the enactment of the Sarbanes-Oxley Act,
one of the big accounting firms, Arthur Andersen, continued providing
significant consulting services to the Enron Energy Group in addition to
external audit services. They say:

       Total Enron-based revenue was $55 million in 2000 with $27 million from
       consulting services. As Enron collapsed, so did Andersen. Within six months of
       the Enron bankruptcy filing, Andersen was found guilty of obstruction of justice
       but they also admitted failures in internal processes to ensure quality audits


93   Gerald Postema, ‘Moral Responsibility in Professional Ethics’ (1985) 55 New York
     University Law Review 63, 65.
94   H and J Rockness, above n 52.
95   H and J Rockness, above n 52, 40.
96   H and J Rockness, above n 52, 40-42.
97   H and J Rockness, above n 52, 42.


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       and professional integrity …. The tone at the top and culture in Andersen had
       parallels to the previously discussed corporate cultures. Anderson had placed
       great emphasis on growth with evidence suggesting that client satisfaction and
       growth may have been more important than ethical financial reporting (J A
       Byrne: 2002, ‘Fall From Grace’, Business Week, August 12, 51-56).

       The remaining Big Four continue to have ethical and financial reporting
       problems. A critical question is, can the US and global economic systems afford
       to lose another major accounting firm? If not, can the Sarbanes-Oxley Act
       promote the ethical behavior necessary for survival? 98

One factor that is pertinent to the last of the questions posed by H and
J Rockness is that auditors will always have a basic conflict of interest
arising out of the fact that they are paid for what they do, with the
consequence that the bodies audited are their clients, often important
clients. The following extract appeared in the Economist on 18
November 2004:

       The Sarbanes-Oxley Act [was] passed in the wake of the Enron and other
       scandals. … Yet more needs to be done. Accountancy firms remain riddled with
       conflicts of interests. The most basic is that they are responsible for auditing
       managements that, ultimately, pay them to do so.99

Other commentators have expressed similar opinions. Carolyn Windsor
and Bent Warming-Rasmussen say that:

       This regulatory arrangement had an inherent critical flaw identified by …
       [RK Mautz and HA Sharaf, ‘The Philosophy of Auditing’, New York: American
       Accounting Association (1961)]. They questioned the ability of professional
       auditors to maintain an independent mind to ‘present fairly’ in the judicial sense…
       [SA Reiter and PF Williams, ‘The Philosophy and Rhetoric of Auditor Independence
       Concepts’, (2004) 14 Business Ethics Quarterly 355] when they are economically
       dependent on the client management. This regulatory flaw predisposes conflicts
       of interests because auditors have to negotiate compensation and employment
       conditions with the regulated, the auditee company.100

They go on to suggest that ‘regulatory capitalism was instrumental
in the reinvention of the audit as a commodity driven by economic
considerations of the “client”, the corporate auditee and its
management…’.101 They criticise the regulation of the profession,
saying that:

       [It] has seen massive corporate scandals where auditors gave clean opinions to
       companies that ended in bankruptcies and brought on the catastrophic collapse


98  H and J Rockness, above n 52, 42.
99  Quoted by Carolyn Windsor and Bent Warming-Rasmussen, ‘The Rise of Regulatory
    Capitalism and the Decline of Auditor Independence: A Critical and Experimental
    Examination of Auditors’ Conflicts of Interest’ (2009) 20 Critical Perspectives on
    Accounting 267, 268.
100 Ibid.
101 Ibid, 269.


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                              JAMES HARDIE, NAB AND AWB LTD - WHAT HAVE WE LEARNED?

       of the once reputable accounting firm, Arthur Andersen. The community
       including investors, employees, creditors, bankers, and retirees has suffered
       significant financial loss, employment and future economic security…. Further,
       the benefits of competition are illusive, as the competitors in the market for
       audits has [sic] shrunk in a flurry of mergers over the last three decades and
       acquisitions that have swallowed several smaller professional audit firms into a
       transnational oligopoly of the “Big 4”…102

They conclude, pessimistically, that ‘merely prescribing more rules in
the professional code of ethics will fail to achieve actual and perceived
auditor independence’.103 They add, even more pessimistically, that:

       The code assumes the humanly impossible, that all members of the profession have
       the ethical predisposition to consistently perform the altruistic requirement of
       pulling the public interest ahead of self-interest…. Kane … [EJ Kane, ‘Continuing
       dangers of disinformation in corporate accounting reports’, (2004) 13 Review of
       Financial Economics, 149] … concluded:
            ‘The strategy of relying on the personal honour, professional ethics and
            reputational risk aversion of watchdogs to refute dishonest reporting has
            failed dramatically.’

       The reality is that auditors are dependent on corporate clients in a contrived
       competitive, marketized environment imposed by the state and controlled by
       regulatory capitalism. In turn regulatory capitalism relies on the accounting
       profession’s expertise and legitimate power to spread the regime’s neo-liberal
       policies of deregulation and privatization worldwide through the transnational
       network of professional services firms. Thus, the transformed profession has
       become the transformer but at a price, the loss of public confidence and the
       decline of ethicality necessary for auditor independence. Conflict of interests
       still abound.104



                        iV is There An AnTidoTe?
All of this adds up to a potentially poisonous mixture. It is difficult,
even impossible, to find a single antidote. However, it is worth
examining some of the measures that have been taken, and considering
others that might be taken.

                           A Legislative Responses

Legislative responses provide an answer, but they are not the answer
to the problem of corporate misbehaviour. They are able to travel only
part way down the road of creation of a culture of ethical compliance.
Moreover, overregulation becomes constricting, even paralysing.




102 Ibid.
103 Ibid, 285.
104 Ibid.


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The United States of America provides a good example of the failure of
legislation to provide a complete answer. H and J Rockness, summarise
some of the corporate scandals in that country, and the legislative
responses to them.105

They describe the 1920s as a time of greed, resulting in a number of
famous frauds in the period leading up to the crash of 1929. The US
Congress responded by enacting the Securities Acts of 1933 and 1934.
These established the SEC (US Securities and Exchange Commission),
regulated trading in securities, imposed common accounting standards
and required publicly traded companies to be audited by Certified
Public Accountant (CPA) firms.

However, the problems remained. H and J Rockness record that
the 1960s ‘were marked by real estate scandals filled with creative
accounting, and the 1970s saw international fraud and bribery resulting
from numerous unethical behaviours’.106

The US Congress responded by enacting the Foreign Corrupt Practices
Act 1977. This imposed ethical standards on companies having
dealings in foreign countries and attempted to curtail fraud and bribery,
resulting in increased audit procedures.

Again, problems continued. The 1980s

       experienced the failure of real estate driven savings and loans, as well as
       widespread Wall Street corruption, fraudulent reporting, insider trading and
       junk-bond schemes … By 1991, the Federal Bureau of Investigation (‘FBI’) had
       budgeted more than $125 million to pursue cases of financial fraud in the S & L
       industry (US Congress: Senate, 1992) and the (then) Big Six CPA firms paid $1.6
       billion to settle fraudulent reporting charges levied against them by the federal
       government …107


Another legislative response followed. In 1991 the US Congress enacted
the Federal Deposit Insurance Corporation Improvement Act, which
addressed fraud in respect of savings and loans. In 1995 the Private
Securities Litigation Reform Act limited the liability of CPA firms (as a
result of litigation arising out of savings and loan failures) and required
auditors to report fraud to the SEC. Also, in 1987 the Treadway
Commission prepared a report making a number of recommendations
designed to prevent fraud in financial reporting.




105   H and J Rockness, above n 52.
106   H and J Rockness, above n 52, 32.
107   H and J Rockness, above n 53, 32.


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                               JAMES HARDIE, NAB AND AWB LTD - WHAT HAVE WE LEARNED?

Still, the problems continued. H and J Rockness go on to say:
        The 1990s brought an unprecedented era of fraudulent reporting and unethical
        corporate management behaviour. The dot.com phenomena, a new economy of
        technology, communications, day-trading, a roaring bull market, and a surge of
        initial public offerings often creating instant wealth made this period unlike any
        time in history. The use of incentive-based compensation schemes provided the
        incentives, and continued development of computer technology and the transfer
        of records from paper to machine paved the way to countless opportunities for
        fraud in financial reporting.

        A new round of corporate failures began in the late 1990s and early 2000s. The
        unethical actions of corporate leaders led to bankruptcies and restatements of
        a magnitude unimagined in prior decades. Since 1997, more than 10% of US
        public companies have restated their reports resulting in market capitalization
        losses in excess of $100 billion … In the twelve-month period ending June 30,
        2003 alone, 354 companies restated earnings… The sheer size of the failures
        dwarfed previous scandals.108

There followed the enactment of legislation (the Sarbanes-Oxley Act
2000) described by then US President, George W Bush, as ‘the most
far reaching reforms of American business practices since the time of
Franklin Delano Roosevelt’.109 He went on to say, optimistically, that
the era of low standards and false profits was over.

It is beyond the scope of this article to summarise the extensive
provisions of the Sarbanes-Oxley Act.110 However, it substantially
increased the responsibilities (and independence) of corporate audit
committees, introduced a number of measures designed to ensure
auditor independence and efficiency and substantially raised penalties
for various forms of corporate misconduct.

In addition, in November 2003 the Federal Sentencing Commission
promulgated guidelines (to which I will return below) that were
designed to ensure that sanctions were sufficiently severe to deter,
prevent and punish corporate criminal offences.

President Bush’s optimism concerning the end of an era of low
standards and false profits was misplaced, as recent events have
graphically demonstrated. Even before those events, H and J Rockness
wrote, in 2005, that:
        Almost two years have passed since the signing of the Sarbanes-Oxley Act …
        and the scandals and restatements continue. We are still witnessing corporate
        misconduct and failure, as well as unethical actions in hedge funds, the stock
        exchanges, and mutual funds.111


108 H and J Rockness, above n 52, 35.
109 Quoted by H and J Rockness, above n 52, 51.
110 Its key features are identified by H and J Rockness, above n 52, 45-48.
111 H and J Rockness, above n 52, 42.


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Experience in Australia has been similar. Scandals involving such persons
or entities as Alan Bond, Christopher Skase and the HIH Insurance Group
are said by Mike Lotzof, the CEO of the Australasian Compliance Institute,
to have resulted in ‘a regulatory avalanche that threatened to drive
compliance back into the land populated only by aggressive regulators,
defensive lawyers, and reactive corporations’.112 Included in this
‘regulatory avalanche’ are the amendments introduced by the Corporate
Law Economic Reform Program (Audit Reform and Corporate
Disclosure) Act 2004 (CLERP 9 Act). These encompassed a number
of measures (some of which are discussed below) that were designed
to ensure a reasonable level of independence by auditors.113 The Act
also introduced provisions requiring additional disclosure, particularly
concerning remuneration of board members and senior managers.

Legislative interventions of this kind are undoubtedly of some assistance,
but most commentators agree that they do not provide a complete
answer, or anything approaching it. H and J Rockness say that:

       [T]he almost one hundred year history of US legislation attempting to impose
       transparency, integrity and honesty as underlying values in corporate management
       and financial reporting has failed to prevent periodic systemic ethical failure.
       They often have proved effective for a time. However, management and their
       external auditors have responded to legislated behaviours by finding new ways
       to obscure results; defraud shareholders, customers, or suppliers; and hide
       failure. In the latest wave of corporate fraudulent reporting, the SEC history of
       fines for offending corporations and civil proceedings against senior management
       evidently were not effective deterrents.114


R Solomon, in his book on ethics,115 suggests that legislative responses
will only help prevent behaviours already viewed as inappropriate
by those subject to the laws and regulations. They consequently
complement an appropriate ethical culture rather than replace the
need for one.

Painter-Morland contends, similarly, that:

       Despite its widespread implementation, [a] legislative approach does not seem to
       be working as well as its proponents might have hoped. News of fresh business
       scandals continues to arrive at our doorsteps almost every morning. Judged on



112 M Lotzof, ‘Compliance in Australia Has Continued to Evolve Over the Last 20 Years’
    (2006) 8 Journal of Health Care Compliance 73, 74.
113 These resulted from recommendations made in the October 2001 Ramsay report,
    ‘Independence of Australian Company Auditors: Review of the Current Australian
    Requirements and Proposals for Reform’ and ‘The Report of the Royal Commission
    into the Collapse of the HIH Insurance Group’ (April 2003).
114 H and J Rockness, above n 52, 47.
115 R Solomon, The New World of Business: Ethics and Free Enterprise in the Global
    Nineties (1994), quoted by H and J Rockness, above n 52, 51.


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                              JAMES HARDIE, NAB AND AWB LTD - WHAT HAVE WE LEARNED?

       the basis of their performance, then, rules and legislation alone appear to be poor
       substitutes for the kind of practical wisdom that is inscribed in the notion of
       ethics as practice. In fact, efforts to formulate unambiguous normative guidelines
       for the conduct of business may paradoxically cause us to neglect those very
       aspects of human life that both legality and morality attempt to protect.116

She expresses a similar opinion concerning the US Federal Sentencing
Guidelines (‘FSG’):

       According to the FSG, if a business organization charged with corporate
       misconduct has [prescribed] elements [of structured ethics and compliance
       programs] in place and cooperates fully with investigating authorities it might be
       given a reduced fine, or even avoid prosecution altogether. Many organizations
       did the math and realized that investing in an ethics program would probably
       cost them less than they stand to lose in the event of a lawsuit. The problem,
       of course, is that when ethics programs are motivated by this kind of logic, they
       can end up being no more than relatively cheap insurance policies against costly
       lawsuits.117


       B Calls for Ethical Governance and the Development of
                           Codes of Conduct

There are many ‘motherhood’ statements calling for ethical governance
of large companies.

One of the Organisation for Economic Co-operation and Development’s
(‘OECD’) revised Principles of Corporate Governance is that corporate
boards should apply high ethical standards.

ASX Listing Rule 4.10.3 has, as one of the items in its list of corporate
governance matters, the establishment and maintenance of appropriate
ethical standards.

In 2003, the ASX Corporate Governance Council developed a set
of ‘Principles of Good Corporate Governance and Best Practice
Recommendations’, revised in 2007 under the title ‘Corporate
Governance Principles and Recommendations’ (‘ASX Principles’),
which recommends the development by corporations of codes of
conduct designed, amongst other things, to ‘promote ethical and
responsible decision-making’.118 Public companies are required by
the ASX Listing Rules to comply with the ASX Principles or to explain
their reasons for not doing so. Principle 3 of the ASX Principles is that
companies should actively promote ethical and responsible decision-
making. Recommendation 3.1 of the ASX Principles is that companies
should establish a code of conduct and disclose relevant aspects of it.


116 Painter-Morland, above n 73, 3.
117 Painter-Morland, above n 73, 8.
118 Recommendation 3.1 and Principle 3, ASX Principles.


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Guideline 18 of the Investment and Financial Services Association’s Guide
for Fund Managers and Corporations Corporate Governance suggests
that listed companies should have a company code of ethics and conduct
that is adopted by the board and is available to shareholders on request.

Most large corporations around the world have responded to calls such as
these and have developed codes of ethics. Research conducted by Mark
Schwartz119 reveals that the percentage of large corporations having a
code of ethics is over 90 per cent in the USA, 85 per cent in Canada, 57
per cent in the UK, 51 per cent in Germany and 30 per cent in France
(although some of these statistics date back as far as 1990).

Codes of ethics are becoming increasingly common in Australia,120
perhaps because of the emphasis placed on them in a number of reports
concerning corporate governance. For example, the Bosch Committee’s
report on Corporate Practice and Conduct (now in its third edition)
recommends guidelines for the conduct of directors and also a company
code of ethics addressing such matters as responsibilities to shareholders,
customers and even to the community (for example, with respect to an
environment policy).

Schwartz suggests that companies use codes for a number of reasons,
‘including the provision of consistent normative standards for employees,
avoidance of legal consequences, and promotion of public image’.121 He
goes on to say that, despite their prevalence, many still question the need
for them.122

A number of commentators regard codes of conduct as having only
a limited deterrent effect. Others regard them as having a negative
effect. One commentator123 goes so far as to say that codes of ethics
have been shown to be insufficient and unnecessary and might mask
failures in organisational structures that will influence behaviour.

H and J Rockness are among the doubters.124 They illustrate what they
take to be the limited deterrent value of codes of conduct by reference
to CEO salaries (on the assumption that greed overcomes integrity).
They say in this respect that, despite codes of conduct and penalties,


119 Schwartz, above n 72, 248; M Schwartz, ‘A Code of Ethics for Corporate Code of
    Ethics’ (2002) 41 Journal of Business Ethics 27.
120 See in this respect the discussion by Le Mire, above n 54, 314.
121 Schwartz, above n 72, 248.
122 Schwartz, above n 72, 248.
123 H S James Jr, ‘Reinforcing Ethical Decision Making through Organisational Structure’
    (2000) 28 Journal of Business Ethics 43, quoted by Cordery, above n 12, 65.
124 H and J Rockness, above, n 52, 50.


150
                              JAMES HARDIE, NAB AND AWB LTD - WHAT HAVE WE LEARNED?

‘greed, personal gain, and pursuit of power prevailed in many of the
cases of the 1990s’.125 They mention that the average CEO pay was 42
times average production-worker pay in 1982 but had grown to 530
times average production-worker pay by 2000 and that stock options
or other performance-based pay had grown to 80 per cent of CEO
compensation. Their premise is that ‘legislation, controls, and cultural
norms did not deter corporate unethical behavior by some because of
the potential for enormous personal gain’.

Andrew Felo126 refers to empirical studies concerning the relationship
between ‘negative behaviour’ and ethics programs. One of these,127
using managers and corporate controllers as subjects, found no
significant relationship between the likelihood of fraudulent financial
reporting and codes of conduct.

Painter-Morland128 says that codes of conduct are often perceived by
internal and external stakeholders as window dressing or as public
relations exercises that have no real effect on ‘business as usual’. She
goes on to say:

        The objections that are raised against codes in business ethics discourses range
        from a critique of their intent and the implications of their promulgation, to
        realistic assessments of their use… Researchers point out that since many codes
        are promulgated to comply with regulatory demands, or to reduce companies’
        legal risks, they induce only routinized compliance… Codes that are primarily
        drawn up to limit a company’s legal liabilities therefore tend to reflect little
        of what is really valued by, or expected of, those who participate in an
        organizational system. Schwartz concurs that codes are mostly inward-looking,
        i.e. aimed at behavioral conformity… As such, they do little to stimulate
        moral discretion. In fact, the kind of behavioral conformity that they advocate
        discourages moral responsiveness by undermining individual autonomy.129

She refers to a study130 that found that the presence of an ethical code
had a negative effect on individual ethical decision making. She says,
in this respect:



125 H and J Rockness, above, n 52, 50
126 Felo, above n 75, 207.
127 A Brief, J Dukerich, P Brown and J Brett, ‘What’s Wrong with the Treadway
    Commission Report? Experimental Analyses of the Effects of Personal Values and
    Codes of Conduct on Fraudulent Financial Reporting’ (1996) 15 Journal of Business
    Ethics 183.
128 Painter-Morland, above n 73, 12; see also Joshua Newberg, ‘Corporate Codes
    of Ethics, Mandatory Disclosure, and the Market for Ethical Conduct’ (2004) 29
    Vermont Law Review 253, 265.
129 Painter-Morland, above n 73, 23.
130 A Pater and A Van Gils, ‘Stimulating Ethical Decision Making in a Business Context:
    Effects of Ethical and Professional Codes’ (2003) 21 European Management Journal
    762, 772.


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        Their explanation for this counter-intuitive finding is that the existence of control
        mechanisms and rules don’t [sic] affect the ethical attitudes that actually inform
        behavior. The fact that code content is often commonsensical may indeed insult
        employees’ intelligence. Providing more detail in codes of conduct may also
        be counterproductive, as it leaves no room for individual discretion. In fact,
        a heavy reliance on rules and policies may bring individuals to the conclusion
        that if something is not strictly forbidden, it is permissible. There are various
        other authors who attribute the indifferent attitudes of employees to codes to the
        fact that people believe themselves capable of distinguishing right from wrong
        without the guidance of a code.
        ...
        A further problem regarding codes relates to the way in which they are used.
        Research has shown that though a very large percentage of organisations have
        codes, a much smaller percentage of employees are aware of their existence and
        an even smaller number are versed in their content…This study also found that
        the existence of a code was unlikely to have an effect on an employee’s decision
        to report observed unethical behaviour…131

She suggests that placing too much emphasis on deliberate, principled
reasoning in ethics training programs limits the ability to insert ethics
into the normal, everyday concerns of business practice and effectively
enforces a separation between theory and practice.132 She says that
this kind of approach ‘contributes to the impression that ethical
considerations are checks on business practice, rather than a normal part
of everyday business practice’.133 She argues that ‘these developments
have created a US corporate environment in which compliance takes
precedence over ethics’ and that the ‘heavy emphasis’ placed on
compliance ‘has significantly colored many people’s perception of the
value of ethics and has left it with a very narrowly circumscribed role.’ 134

In 2003, the US Conference Board’s Commission on Public Trust
and Private Enterprise published a report with respect to corporate
governance issues. The report concludes that ethical codes, alone, are
not enough. The report stresses the importance of the development and
enforcement, by board committees, of an ethical working environment
and suggests that ethics should feature in performance evaluation.

The NAB foreign exchange trading scandal graphically illustrates the
proposition that codes of conduct are inadequate, by themselves, to
prevent unethical conduct. The bank’s employees were required to sign
codes of conduct requiring ‘the highest level of honesty and integrity’
and also compliance with any ethical requirements of regulatory or
professional bodies to which they belonged. It also had a 10 page set of
governance guidelines. Its corporate governance structures were given

131   Painter-Morland, above n 73, 24.
132   Painter-Morland, above n 73, 29.
133   Painter-Morland, above n 73, 30.
134   Painter-Morland, above n 73, 31.


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                               JAMES HARDIE, NAB AND AWB LTD - WHAT HAVE WE LEARNED?

a five star rating by the Howarth Corporate Governance Report 2003.135
Cordery comments that, ‘despite its code of ethics and accolades for
board structures, the NAB board was criticised for an emphasis on
profit and asking few questions about risk when ready profit seemed to
be available’.136

I have earlier mentioned that AWB was not protected by its code
of conduct, which disapproved of illegal payments and instructed
employees not to make payments that were unethical or likely to
‘cause embarrassment to the Company’.137 Derek Parker suggests that
one of the lessons of corporate governance that can be learned from
the AWB scandal is that ‘a written set of guidelines means nothing if it
is not supported by the implicit signals from the board and the senior
management’. He says that if there is ‘a clash between a code of conduct
and ingrained corporate culture, the latter is nearly certain to prevail’.138

Others have complained about the cost of adopting corporate codes
and the compliance programs that inevitably accompany them.139
Robert Cameron, an Auckland based investment banker, has been
quoted as saying that New Zealand’s equity capital markets are robust
and responsive, with institutional investors, market analysts and
shareholder advocates taking an increasing interest in the quality of
firms’ governance; that the corporate controlled market is ‘alive and
well’; that the market, in New Zealand, for managerial and director talent
is ‘thin’; that its corporations are small by international standards, with
compliance costs having a relatively large impact on profitability and value;
and, consequently, that there should be caution about further regulating
corporate governance.140 He has been quoted as going on to say:

        Simply put, specific regulation of corporate governance practices holds major
        risks for the open corporation compared to an environment which provides and
        enforces adequate rights and protection for all shareholders and clearly specifies
        responsibilities, fiduciary duties and liabilities of directors, requires accurate
        and timely reporting, and supports robust and responsive equity capital and
        corporate control markets.141




135 See Cordery, above n 12, 65.
136 Cordery, above n 12, 65.
137 Le Mire, above n 54, 313.
138 Parker, above n 35, 30.
139 H Pitt and K Groskaufmanis, ‘Minimising Corporate Civil and Criminal Liability: A
    Second Look at Corporate Codes of Conduct’ (1990) 78 Georgetown Law Journal
    1559 and others, all of whom are quoted by Schwartz, above n 72, 248.
140 See Reg Birchfield, ‘Corporate Governance; Private Thoughts - Is the Tide Turning?’
    (July 2005) New Zealand Management 70.
141 Birchfield, above n 140.


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He is said to have warned that private equity poses a ‘real threat’ to
public corporations and that the ability of private organisations to
attract top-level talent is enhanced by their ability to reward them well,
to operate away from the glare of publicity and (implicitly) to avoid the
consequences of overregulation suffered by public companies.

         C More (and Better Qualified) Independent Directors

I have said that independent directors generally protect the interests
of shareholders better than ‘inside’ or ‘grey’ directors. They are also
more likely to give effect to the needs of corporate social responsibility
in the sense of taking into account interests and values regarded by the
general community as important. Finally, there is evidence to support
the proposition that there are less cases of fraud in financial reporting
when companies have independent directors.142

There has consequently been general acceptance of the proposition
that listed companies should have a majority of independent
directors.143 This is the recommendation made by the ASX Principles.
Recommendations 2.1 and 2.2 respectively provide that a majority
of the board and the chairperson should be independent directors.
Recommendation 2.3 suggests that the positions of chairperson and
CEO should be held by different individuals. For the purposes of these
principles, an independent director is a non-executive director who:

        (1) is not a substantial shareholder of the company or officer of,
            or otherwise associated directly with, a substantial shareholder
            of the company;



142 See, M Beasley, J Carcello, D Hermanson and P Lapides, ‘Fraudulent Financial
    Reporting: Consideration of Industry Traits and Corporate Governance Mechanisms’
    (2000) 14 Accounting Horizons 441; P Dunn, ‘The Impact of Insider Power on
    Fraudulent Financial Reporting’ (2004) 30 Journal of Management 397; these
    are cited by H Kang, M Cheng and S Gray, ‘Corporate Governance and Board
    Composition: Diversity and Independence of Australian Boards’ (2007) 15 Corporate
    Governance 194, 197.
143 See, for example, the report prepared by the Cadbury Committee in the UK
    (Committee on Financial Aspects of Corporate Governance) on 1 December 1992,
    the Bosch Committee report on Corporate Practices and Conduct, the Higgs report
    in the UK, Review of the Role and the Effectiveness of Non-Executive Directors,
    January 2003, the UK Financial Reporting Council’s Combined Code that came
    into effect on 1 November 2003, the OECD’s Principles of Corporate Governance
    approved in April 2004, the Investment and Financial Services Association’s corporate
    governance guide titled Corporate Governance: A Guide for Fund Managers
    and Corporations (all of which are referred to in Austin, Ramsay and Ford, Ford’s
    Principles of Corporations Law [7.650]) and the Australian Government Productivity
    Commission Report No 49, above n 89.


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                               JAMES HARDIE, NAB AND AWB LTD - WHAT HAVE WE LEARNED?

        (2) within the last three years has not been employed in an
            executive capacity by the company or another group member,
            or been a director after ceasing to hold any such employment;
        (3) within the last three years has not been a principal of a
            material professional adviser or a material consultant to
            the company or another group member, or an employee
            materially associated with the service provided;
        (4) is not a material supplier or customer of the company or
            other group member, or an officer of or otherwise associated
            directly or indirectly with a material supplier or customer;
        (5) has no material contractual relationship with the company
            or another group member other than as a director of the
            company;
        (6) has not served on the board for a period which could, or
            could reasonably be perceived to, materially interfere with the
            director’s ability to act in the best interests of the company;
        (7) is free from any interest and any business or other relationship
            which could, or could reasonably be perceived to, materially
            interfere with the director’s ability to act in the best interests
            of the company.144

Helen Kang, Mandy Cheng and Sidney Gray recently conducted a
study of 100 of the largest publicly listed Australian companies by
market capitalization.145 Assessing the independence of each director
according to the seven point definition just referred to, they found
that, of a total of 820 directors, 530 were independent. Seventy-three
companies had an independent chairperson and another 16 had a
non-executive chairperson.146 These figures are encouraging. (Less
encouraging is their finding that only 85 of the 820 directors were
female, 15 of them holding positions in more than two companies and
seven holding positions in more than four companies.)147

More recently, in 2008, Korn/Ferry International and Egan Associates
released a study of 300 leading Australian companies and 50 leading New
Zealand companies.148 This revealed that, in the case of the Australian
companies (all of which were listed), the boards had an average of seven
directors, 74.1 per cent of whom were non-executive (and 8.3 per cent
of whom were women). Ninety-five per cent of these companies had an
audit committee and 88 per cent had a remuneration committee.



144   See Kang, Cheng and Gray, above n 142, 205.
145   Kang, Cheng and Gray, above n 142, 205.
146   Kang, Cheng and Gray, above n 142, 199.
147   Kang, Cheng and Gray, above n 142, 200.
148   See, Austin, Ramsay and Ford, above n 143, [7.640].


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Even a minority of independent directors will tend to act as a brake
on corporate misfeasance, assuming, of course, that they are capable,
informed, active and strong. Unfortunately, that is not always the case,
even when independent directors are in the majority. Jane Simms,
writing about the recent financial crisis that threatened the banking
community in the city of London, mentions that the UK Financial
Reporting Council’s Combined Code on corporate governance (which
came into effect on 1 November 2003 and applied to non-executive
bank directors, amongst others) stated that:

        where directors have concerns that cannot be resolved about the running of
        the company or a proposed action, they should ensure that their concerns are
        recorded in board minutes. On resignation, a non-executive director should
        provide a written statement to the chairman, for circulation to the board, if they
        have any such concerns.149

She quotes a former bank director as explaining the absence of
resignations by non-executive directors in the run up to the banking
crisis ‘as a result either of their capitulation to bullying executives or to
a lack of understanding about the products banks were selling and the
risks they were running’.150 She also quotes an expert151 in corporate
governance as going so far as to say:

        A big issue is that boards are in thrall to the chief executive. And because there
        is insufficient diversity, group psychology sets in and there is no incentive to rock
        the boat. Every big organisation, including banks, should have a psychotherapist
        on the board to stop people becoming ‘captive’ and losing their objectivity.152


I have said that independent directors (assuming that they are of the
necessary calibre) are more likely to be conscious of the need to be
socially responsible. The importance of this is illustrated by the
1996 study, mentioned earlier,153 into the massive social costs to the
community arising out of US corporate and other business activity.
Another example is provided by the need to minimise emissions in an
attempt to counteract, or at least reduce the consequences of, global
warming. A society in which good moral behaviour is regarded as
necessary only when legislated for is as undesirable in the corporate and
business world as it is in the case of ordinary people. The Aristotelian
ideal that the ultimate aim of human existence is a happy life and that
a happy life is one that is achieved by doing good things154 might be
far removed from ordinary corporate ideology in a competitive and


149    J Simms, ‘Flaws at the Top’, Director, London, December 2008, Vol 62, Issue 5, 46.
150   Simms, above n 149, 47.
151   Sarah Wilson, chief executive of corporate governance expert, Manifest.
152   Simms, above n 149, 48.
153   R Estes, Tyranny of the Bottom Line (1996), quoted by Schwarz, above n 72, 247.
154   Discussed by Painter-Morland, above n 73, 75-76.


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                                JAMES HARDIE, NAB AND AWB LTD - WHAT HAVE WE LEARNED?

profit oriented world, but there is a balance to be struck - and those
directors who are less dependent on the bottom line are more likely
to strike it. However, they will only do so if they have the requisite
moral values, if they are not under the spell of the CEO and if they
understand the business of the company. They are also obliged to
think for themselves. As James Hardie shows,155 they cannot abdicate
responsibility by delegating to a fellow director.

Of course, even independent directors are answerable to shareholders.
However, the notion of ethical investment has gained some ground. For
example, in Australia, over 40 per cent of the top 20 superannuation
funds have an SRI (sustainable and responsible investment) strategy.156
One of these, VicSuper, has formed a consortium called ‘Investors
Group on Climate Change’.157

                     D More Effective Audit Committees

It would be wrong to treat all unanticipated corporate failures as audit
failures. The principal responsibility for the provision of accurate
financial information rests squarely with management.158            The
importance of internal auditing has consequently been increasingly
recognised.159

Joe Christopher, Gerrit Sarens and Philomena Leung, writing in the
Accounting, Auditing & Accountability Journal, mention that the
primary goal of an internal auditor is objectivity. They go on to say:

        This can only be achieved if the internal audit function is appropriately placed
        in the organisational structure. …[C Chapman, ‘Raising the bar - Newly revised
        standards for the professional practice of internal auditing’, Internal Auditor, Vol
        58 No 21, 55] describes organisational independence as the placement of the
        internal audit function in the reporting structure so that it is free to determine the
        audit scope and perform audit work without interference. … [M Bariff, ‘Internal
        Audit Independence and Corporate Governance’, Institute of Internal Auditors
        Research Foundation, Altamonte Springs, FL (2003)] underlines the way in
        which the internal audit function can maintain independence from management
        by noting the following quote from a PricewaterhouseCoopers report:



155 Australian Securities and Investments Commission v Macdonald (No 11) (2009)
    256 ALR 199, [260]-[261].
156 Spiller, above n 71, 47.
157 Spiller, above n 71, 47.
158 Section 296 of the Corporations Act 2001 (Cth) imposes a duty on directors to
    ensure that financial records comply with accounting standards. See also V Nguyen
    and P Rajapakse, ‘An Analysis of the Auditors’ Liability to Third Parties in Australia’
    (2008) 37 Common Law World Review 9, 14-15.
159 See, for example, Joe Christopher, Gerrit Sarens and Philomena Leung, ‘A Critical
    Analysis of the Independence of the Internal Audit Function: Evidence from Australia’
    (2009) 22 Accounting, Auditing and Accountability Journal 200, 201.


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               ‘Internal audit departments need to ensure an organisational posture
               which allows them to operate successfully on strategic issues. This
               means both the independence and mandate to deal with significant
               strategic business risks and issues. If inappropriately positioned within
               the company, internal audit deals with tactical issues and is viewed only
               at that level. Inappropriate positioning can also raise serious concerns
               about the overall independence of the function (PWC, 2002).’160

They identify161 a number of threats to independence and
effectiveness. These include using the internal audit function as
a stepping stone to other positions; having the CEO or CFO (Chief
Financial Officer) approve the budget of the internal audit committee
or provide input for the internal audit plan; treating the internal
auditor as a ‘partner’; having chief audit executives not reporting
functionally to the audit committee; the audit committee not having
sole responsibility for appointing, dismissing and evaluating the chief
audit executives; and not having all audit committee members, or at
least one of them, qualified in accounting.

                                   E Auditors

The Corporations Act 2001 (Cth), following amendment in 2004, has
a large number of provisions designed to prevent auditors from acting
as such in cases of conflict of interest. The legislation largely follows
recommendations made by the HIH Royal Commission162 and in the
Ramsay Report.163

A ‘conflict of interest situation’ is defined in s 324CD. The definition
applies to all professional members of the audit team, as defined in
s 324AE. There are also detailed separate provisions (in s 324CH)
prohibiting auditors, and members of an audit firm, from conducting
audits in a relatively large number of specified circumstances (for
example, where an officer or employee of the audited company is
connected with the auditor in such a way as to enable that person to
influence the audit or where the person in question was an officer of
the audited body during the period to which the audit relates, or 12
months prior thereto, or during the period in which the audit is being
conducted or the audit report is being prepared).




160 Christopher, Sarens and Leung, above n 159, 203.
161 Christopher, Sarens and Lueng, above n 159, 214.
162 Commonwealth of Australia, HIH Royal Commission, Report of the Royal
    Commission into the Failure of HIH Insurance (2003).
163 Ian Ramsay, ‘Independence of Australian Company Auditors: Review of Current
    Australian Requirements and Proposals for Reform’ (October 2001), report
    delivered to the Minister for Financial Services and Regulation.


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                              JAMES HARDIE, NAB AND AWB LTD - WHAT HAVE WE LEARNED?

Unlike the Sarbanes-Oxley Act in the USA, there is no prohibition
against an auditor providing non-audit services to the company audited,
at least absent a connection of the kind identified by s 324CH. The
legislature was content, in this respect, to impose stringent disclosure
requirements: s 300(11A), enacted after considering recommendations
in the Ramsay and HIH Royal Commission reports. The reason for this
was explained in the Explanatory Memorandum prepared in respect
of the CLERP 9 Bill, which introduced the amending provisions.
Paragraph 4.43 of the memorandum identifies what seems to me to be
a rather doubtful distinction. It suggests that ‘the provision of non-
audit services per se does not compromise independence but rather it
is the possibility of dependence on the financial stream flowing from
those services’. It also mentions the importance of audit firms being
able to attract specialists, stating (para 4.47):

       Attracting and retaining these specialists, and motivating them to provide direct
       audit support, may be hampered if they were to be prohibited from providing
       non-audit services to clients. On some occasions it may be advantageous to
       the company and shareholders for the auditor to provide non-audit services,
       particularly where that service benefits from an intimate knowledge of the
       business. Therefore, an unintended consequence of a prohibition on auditors
       providing non-audit services to their clients could be to reduce the effectiveness
       of business advisory services received by the company.


There are other significant provisions, too numerous to be dealt with
here. These include provisions concerning waiting periods before
retired partners of audit firms, and some retired professional employees
of audit firms, may be employed as a director or officer of the audited
body (s 324CI and s 324CJ, introduced pursuant to a recommendation
by the HIH Royal Commission, although it had recommended a longer
waiting period than that adopted) and provisions requiring rotation, in
the case of audits of listed companies, of persons playing ‘a significant
role’ in the audit for five successive years (s 324DA).

Also, Listing Rule 12.7 requires each company in the Standard & Poor’s
ASX All Ordinaries Index to have an audit committee; and the top 300 of
those companies must ensure that the committee consists only of non-
executive directors, the majority of whom must be independent, and
chaired by an independent person who is not chairperson of the board.
The ASX recommends, in its commentary on Recommendation 4.2 of
the ASX Principles, that the audit committee should include members
who are financially literate, one of whom has relevant qualifications
and experience, and that some members should have an understanding
of the industry in which the entity operates.164

164 See generally, in respect of these and other recommendations and legislative
    provisions, Austin, Ramsay and Ford, above n 143, [10.450]-[10.670].


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                          F Whistleblower Protection

Whistleblower protection is an important part of any ethical
compliance program. In the absence of protection for whistleblowers,
unethical conduct will not be reported. Even then, there is unlikely
to be any report unless the recording of unethical conduct is actively
(and genuinely) encouraged. Paul Latimer and A J Brown165 suggest
that best practice is for the employer to bring whistleblower policy to
the attention of employees, including their duty to disclose illegality,
and to notify them of the existence of protection and support services
for whistleblowers. They go on to say:

       The true value of whistleblowing is often hard to recognise within an
       organisation, especially at the time. Whistleblowers are often more easily seen,
       at least initially, as traitors rather than heroes. Seen as a traitor, a whistleblower
       may suffer discrimination and victimisation, further underpinning why
       whistleblowing legislation focuses strongly on the promotion of a culture where
       honest disclosures are not punished but are respected and valued, and on legal
       protection from reprisal, punishment or retribution.166

A study conducted by Mark Somers found that the existence of a
code of conduct, of itself, was unlikely to influence the decision of an
employee whether or not to report unethical behaviour.167 As early
as 1977 the Treadway Commission in the USA168 recommended that
there be whistleblower programs with access to the board of directors.
A Whistleblowers Protection Act was enacted in 1989. However, a
US study conducted in 1994 by the Ethics Resources Centre169 found,
after interviewing over 4,000 employees, that 30 percent had observed
violations of the law or company policy over the preceding year, but
less than half of them had reported the misconduct to an appropriate
person in the company.

The US 2003 Conference Board’s report (mentioned above, when
addressing codes of conduct) referred to studies that have found
that whistleblowers were often fired or demoted as a result of their
efforts. It stressed the need for a safe environment for the reporting of
ethical issues.

165 Paul Latimer and A J Brown, ‘In whose Interest? The Need for Consistency in to
    Whom, and about Whom, Australian Public Interest Whistleblowers can make
    Protected Disclosures’ (2007) 12 Deakin Law Review 1, 4.
166 Latimer and Brown, above n 165.
167 Mark Somers, ‘Ethical Codes of Conduct and Organizational Context: A Study of the
    Relationship between Codes of Conduct, Employee Behaviour and Organizational
    Values’ (2001) 30 Journal of Business Ethics 185, referred to by Painter-Morland,
    above n 73, 25.
168 Referred to by H and J Rockness, above n 52, 50.
169 Ethics Resource Center (1994), Ethics in American Business: Policies, Programs
    and Perceptions (Washington DC), quoted by Schwartz, above n 74, 247.


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                              JAMES HARDIE, NAB AND AWB LTD - WHAT HAVE WE LEARNED?

Section 301 of the Sarbanes-Oxley Act 2003 made the institutionalization
of whistleblower protection compulsory. However, as Painter-Morland
points out,170 it is one thing to have a whistleblowing line and another to
get employees to use it. She suggests that research has demonstrated that
supervisory status is the most consistent predictor of whistleblowing and
that the existence of a policy that encourages whistleblowing also plays
a role. She concludes that people are more likely to report misconduct if
they feel that it is their responsibility to do so.171

While whistleblower protection exists in Australia,172 there is no reason
to conclude that the position here is any different from that in the USA.

                         G Executive Remuneration

The issue of executive remuneration attracted the interest of The
Group of Twenty (‘G-20’) leaders at their meeting in September 2009.
A statement issued by them concerning the global financial crisis
suggested that excessive remuneration in the financial sector had
reflected and encouraged excessive risk-taking. They regarded it as
essential to reform remuneration policies and practices.

A similar conclusion was arrived at in the Report of the High Level
Group on Financial Supervision in the EU (European Union) published
in 2009.173 One of the problems identified in that report (which
investigated causes of the recent financial crisis) was that remuneration
practices within many financial institutions contributed to excessive
risk-taking by rewarding short-term expansion of risky trading rather
than long-term profitability of investments. (See also the report
prepared by Lord Turner, chairman of the UK Financial Services
Authority, titled ‘A Regulatory Response to the Global Banking Crisis’
(March 2009) and the report prepared by David Walker, ‘A Review of
Corporate Governance in UK Banks and Other Financial Industry
Entities’ (July 2009).)174




170 Painter-Morland, above n 73, 40.
171 Painter-Morland, above n 73, 42.
172 See, for example, s 1317AA of the Corporations Act 2001 (Cth) (introduced, in
    2004, by the CLERP 9 Act), Part 4A of Schedule 1, Chapter 11 of the Workplace
    Relations Act 1996 (Cth) (also introduced in 2004), s 16 of the Public Service Act
    1999 (Cth) and the various State laws with respect to public interest disclosures
    and whistleblowers protection (these are discussed by Latimer and Brown, above
    n 165, 5ff, 20 who conclude that the differences and inconsistencies between
    existing instruments demonstrate a clear need for reform).
173 Referred to in Austin, Ramsay and Ford, above n 143, [7.700].
174 Also referred to in Austin, Ramsay and Ford, above n 143, [7.700].


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As matters stand in Australia, s 300A of the Corporations Act 2001
(Cth) requires that the directors’ report for companies listed on the
ASX to include details of elements of remuneration that depend on the
satisfaction of performance conditions and discussion of board policy
for determining the nature and amount of remuneration of board
members and senior managers.

Also, the ASX Principles encompass the proposition (part of Principle
8) that companies should balance the desire to attract and retain senior
executives and directors against their interest in not paying excessive
remuneration. The Council recommends (Recommendation 8.1) that
the board should establish a remuneration committee.

I have earlier mentioned the Productivity Commission’s January 2010
report. In that report, the Commission ruled out capping executive
pay. It considered that this, or introducing a binding shareholder
vote on pay, would be impractical and costly. Instead, it said that the
corporate governance framework should be strengthened by:

       removing conflict-of-interest, through independent remuneration committees
       and improved processes for use of remuneration consultants;
       promoting board accountability and shareholder engagement, through enhanced
       pay disclosure and strengthening the consequences for those boards that are
       responsible to shareholders ‘say on pay’.175

The Commission made a number of other key recommendations. It is
beyond the scope of this article to list these, save that I should draw
particular attention to Recommendation 15, to the effect that the
Corporations Act 2001 (Cth) should be amended such that:

       • where a company’s remuneration report receives a ‘no’ vote of 25 per cent or
         more of eligible votes cast at an annual general meeting (‘AGM’), the board be
         required to explain in its subsequent report how shareholder concerns were
         addressed and, if they have not been, the reasons why;

       • where the subsequent remuneration report receives a ‘no’ vote of 25 per cent
         or more of eligible votes cast at the next AGM, a resolution be brought that
         the elected directors who signed the directors’ report for that meeting stand
         for re-election at an extraordinary general meeting (the re-election resolution).
         Notice of the re-election resolution would be contained in the meeting papers
         for that AGM. If it were carried by more than 50 per cent of eligible votes cast,
         the board would be required to give notice that such an extraordinary general
         meeting will be held within 90 days.




175 Australian Government Productivity Commission Report No 49, above n 89, xiv.


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                              JAMES HARDIE, NAB AND AWB LTD - WHAT HAVE WE LEARNED?


                     V WhAT More should Be done?
                             A Corporate Governance

Legislative interventions have been beneficial, although, as I have
said, legislation can never provide a complete answer to corporate
misbehaviour and there is a risk of overregulation. The same is true of
codes of conduct, although these can be helpful, if they are part of a
wider internal ethics program.

Harvey and Le Mire suggest176 that the task of developing a code of
conduct can encourage employees of a corporation to focus on ethical
issues and to serve as ‘external and internal signalling devices’177 to
show that ethical behaviour is valued. Schwartz178 refers to several
theorists who have suggested that ethical decision-making or behaviour
can be influenced by a code of ethics (although his conclusion is that
the research remains inconclusive regarding the impact of codes of
behaviour,179 at least if viewed in isolation).

What is needed, though, is a comprehensive ethics program that is
designed to breathe life into a code.

The Federal Sentencing Guidelines for Corporations in the USA
describe seven steps that should be taken when establishing an ethics
and compliance program. These are:180

        (1) formulating compliance standards and procedures such as a
            code of conduct or ethics;
        (2) assigning high-level personnel to provide oversight (eg, a
            compliance or ethics officer);
        (3) taking care when delegating authority;
        (4) ensuring that there is effective communication of standards
            and procedures (eg, training);
        (5) developing auditing/monitoring systems and reporting
            mechanisms and facilitating whistle-blowing;
        (6) enforcement of disciplinary mechanisms; and
        (7) ensuring that there is an appropriate response after detection.

If an ethics program is to succeed, it has to be seen by corporate
employees to be genuine and important. It is consequently essential


176   Harvey and Le Mire, above n 54, 182.
177   They quote Newberg, above n 129, 269.
178   Schwartz, above n 72, 248.
179   Schwartz, above n 72, 249.
180   The summary is taken from Painter-Morland, above n 73, 6.


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that senior management, and the board, are, and are seen to be,
committed to it. Felo suggests that:

       If employees perceive that a firm’s upper management is committed to a corporate
       initiative, then it is more likely that they will “buy into” the initiative. Outside
       parties may perceive that the board’s involvement increases the likelihood that the
       program will be taken seriously within the firm and is not just ‘window dressing’.181

It is not only outsiders who will regard an ethics program as ‘window
dressing’ if it is not taken seriously at board and senior management
level. Employees will also do so. Also, if there is no genuine stress on
an ethical culture as opposed, simply, to reliance on a written code,
there is a real risk that wider ethical principles will be subsumed into
reliance on the wording of the code. Painter-Morland says, in this
respect, that:

       The approach to business ethics that is currently being extolled in many business
       and academic forums may implicitly be contributing to the dissociation of ethics
       with business practice. Ethics is portrayed as a set of principles that must be
       applied to business decisions. In this conception, ethics functions as a final hurdle
       in a deliberate decision-making process. The questions that inform this process are
       usually something along the line of: “May we do this?” or even more cynically: “Can
       we get away with this?” When approached in this way, ethics becomes something
       that people consider after they have interpreted events and determined what
       they want to do. When ethics functions as an integral part of business practice,
       however, it informs individuals’ perceptions of events from the start and plays an
       important part in shaping their responses. This kind of ethics is not based on the
       deliberate application of general principles, but draws instead on tacit knowledge
       and individual discretion. The kinds of questions that ethics as practice would
       have us ask are of a decidedly different order. It asks us to consider: ‘How do we
       want to live?’ and: ‘Who do we want to be?’ When an organization’s investment in
       business ethics becomes a mere insurance policy, really meaningful and significant
       questions such as these are never raised or addressed.182

In the concluding pages of her book, she goes on to say:

       The main argument of this book has been that ethics should be part of everyday
       business practice and not mere compliance with legislation and regulations.
       If ethics is something that has to be attended to only because legislation or
       regulation calls for it, it is positioned as a trade-off, as something that has to be
       done in order to be allowed to get on with business-as-usual. When this is the
       case, organizations simply ask themselves: what do we have to put in place to
       comply? Consequently, they spend as little time, money and effort on their ethics
       programs as they think they can get away with. If ethics programs are designed
       and implemented with this kind of mindset, they are likely to suffer from a
       number of serious defects. In the first place, they will lack legitimacy. Those
       to whom they are supposedly addressed will soon recognize them for what they
       are: mere window-dressing exercises. Such ethics programs are also unlikely to
       influence people’s sense of normative orientation or affect the way in which they
       understand and exercise their moral agency. Finally, there is little chance that


181 Felo, above n 75, 207.
182 Painter-Morland, above n 73, 2.


164
                                JAMES HARDIE, NAB AND AWB LTD - WHAT HAVE WE LEARNED?

        ethical programs of this nature could effect an integration of ethics into people’s
        everyday working lives. Institutionalizing codes, policies and various kinds of
        checks-and-balances may seem reassuring from a compliance perspective, but it
        is unlikely to have any meaningful effect on the moral responsiveness of those
        who participate in organizational systems.183

When considering how to break out of this compliance mindset,
Painter-Morland suggests that the emphasis on money must be shifted.
She says:

        Money, and the things that it can buy, give people a sense of identity and make
        them feel valued and respected. The irony is that many people lose themselves,
        destroy their relationships, and harm their communities in the single-minded
        pursuit of money. We therefore need to rethink the relationships between
        people’s sense of themselves, their sense of urgency, and the things that they
        value in life. It is in, and through, the interactions between our sense of self, the
        power relationships in which we function, and the truths that we tacitly possess,
        that the fabric of morality is woven.184

Michael Lotzof, the CEO of the Australasian Compliance Institute,
adopts a broadly similar approach. He says:

        Compliance will be perceived as an unnecessary burden if it is perceived that
        it exists solely to satisfy regulators; if it operates by impeding growth through
        slowing and even frustrating decision-making; if its systems, processes, reviews,
        and information provide no direct benefit back to the business. A compliance
        framework should be designed to support the organization’s strategic
        imperatives and to help the organization behave in a way that is consistent
        with its core values.

        The systems and process of compliance should wherever possible be part of the
        normal systems of the business. In the ideal world the implemented controls
        should be those that the business would want so it can effectively manage itself,
        and the information provided to compliance should be in the main sub-sets of
        what is normal reporting.

        The culture should be one that business would strive to create to improve
        stakeholder relationships and work practices - to do good business well.185

Good compliance does not equate to bad business. It should lift morale
and improve reputation. A recent study by a European researcher186
concludes that there is a positive relation between the extent of
compliance with international best practices on various governance
dimensions (board structure and functioning, disclosure on corporate
governance) and the operating performance of European companies.



183   Painter-Morland, above n 73, 290-292.
184   Painter-Morland, above n 73, 291.
185   Lotzof, above n 112, 76.
186   H Van der Bauwhede, ‘On the Relation Between Corporate Governance Compliance
      and Operating Performance’ (2009) 39 Accounting and Business Research 497.


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                       B Auditors, Accountants and Lawyers

Corporate misconduct, at least of the more sophisticated kind, becomes
a lot harder if strong (and strongly enforced) rules preclude lawyers
and accountants from lending their aid to it, whether by closing their
eyes (and sealing their lips) or otherwise.187

I have already addressed the issue of auditors. Self-evidently, if they have
a direct or indirect interest in the company they are auditing (whether
through the provision of non-audit services or otherwise), there is an
increased risk that the auditors will have an incentive to scrutinise
corporate records, especially financial records, less closely than they
might otherwise have done. This has led to universal acceptance of
the proposition that auditors should not identify themselves with the
company audited and that companies should have audit committees
consisting of at least a majority of independent directors.188

Legislative and regulatory interventions in respect of auditors have been
beneficial, but, again, they are not enough on their own. Accounting
firms, like the bodies they audit, have an obligation to develop a corporate
culture, starting at the top, which encourages ethical behaviour, that is
supervised by senior management and that requires auditors at any level
to be vigilant in reporting anomalies. There has to be reinforcement
of an understanding that their task is one that is not performed for self-
interest, but in the interests of shareholders and of the wider community.
That simple message has to be drilled into those learning their profession,
from the outset of their studies and again, from time to time, after they
have embarked upon professional practice.

When corporations are guided by their lawyers, the guidance ordinarily
takes the form of advice on the issue of what can or cannot be done
rather than what should or should not be done. I have said that (with
some justification) lawyers see their role as that of advising on the law
and not in respect of moral values. One commentator (formerly a
lawyer) has said that:

        With compliance in the hands of legal advisors…, the question often was ‘what
        can I get away with?’ Rather than ‘what is the right thing to do?’




187 I am not suggesting, here, that the liability of professional advisors to third parties
    should be enhanced. Some commentators suggest that auditors, in particular, are
    already subject to a greater scope of liability in Australia than in other countries: see,
    for example, Nguyen and Rajapakse, above n 158, 9.
188 See, for example, the Combined Code, above n 143, the US Conference Board’s
    Commission Report, ASX Listing Rule 4.10.3 and the ASX Principles, each of which
    is discussed in Austin, Ramsay and Ford, above n 142, [7.660].


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                               JAMES HARDIE, NAB AND AWB LTD - WHAT HAVE WE LEARNED?

       After a breach, lawyers circled the wagons, [and] applied legal “first aid”
       rigorously defending the ‘patient’ against the attacking regulatory hordes.189

Although lawyers are not the keepers of the public morals, or even
expected to give advice concerning issues of morality, and although
it is their duty to defend the ‘patient’ when attacked by prosecuting
bodies, they are officers of the court and their primary duty is owed
to the administration of justice.190 They do not always fulfil this duty.
An illustration of this appears from the judgment of Kessler J in United
States v Philip Morris USA Inc 449 where he said:

       Finally, a word must be said about the role of lawyers in this fifty-year history of
       deceiving smokers, potential smokers, and the American public about the hazards
       of smoking and second hand smoke, and the addictiveness of nicotine. At every
       stage, lawyers played an absolutely central role in the creation and perpetuation
       of the Enterprise and the implementation of its fraudulent schemes. They devised
       and coordinated both national and international strategy; they directed scientists
       as to what research they should and should not undertake; they vetted scientific
       research papers and reports as well as public relations materials to ensure that the
       interests of the Enterprise would be protected; they identified “friendly” scientific
       witnesses, subsidized them with grants from the Center for Tobacco Research
       and the Center for Indoor Air Research, paid them enormous fees, and often
       hid the relationship between those witnesses and the industry; and they devised
       and carried out document destruction policies and took shelter behind baseless
       assertions of the attorney-client privilege. What a sad and disquieting chapter in
       the history of an honorable and often courageous profession.191

It is not difficult to find other illustrations. As Harvey and Le Mire point
out:
       The James Hardie corporate scandal … is another recent example of this
       dynamic. In that case, lawyers were involved in the creation, implementation
       and defence of a scheme which had, at its heart, the desire to shake off liabilities
       to workers who had suffered injuries due to asbestos exposure while working for
       James Hardie subsidiaries: New South Wales, Special Commission of Enquiry into
       the Medical Research and Compensation Foundation, Final Report (2004).192


Harvey and Le Mire193 go on to say, in this context, that:

       It is clients who pay the lawyers’ bills and the ethic of doing what you can for
       your client may mean that lawyers are overly solicitous of clients’ views…

       The primary response where lawyers abuse process is the disciplinary sanctions
       contained in each state’s legislation regulating lawyers. Disciplinary proceedings,
       however, rarely consider breaches of a duty to the administration of justice, as



189 Lotzof, above n 112, 73.
190 See, for example, Giannarelli v Wraith (1988) 165 CLR 543, 555-556 and Rule 2.2(a)
    Law Society of WA Professional Conduct Rules.
191 United States v Philip Morris USA Inc 449 F Supp 2d 1, 4-5 (DDC, 2006), as
    mentioned by Harvey and Le Mire, above n 54, 170.
192 Harvey and Le Mire, above n 54, 178.
193 Harvey and Le Mire, above n 54.


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        the disciplinary process is generally driven by client complaints. In the case
        where a lawyer acts overzealously in the client’s favour there is unlikely to be
        a client complaint. Even if the client is unhappy, as large corporate clients,
        they are likely to have alternative ways of disciplining their lawyers, particularly
        where those lawyers are ‘in-house’. While disciplinary regulators have the power
        to consider complaints from other sources, or indeed to commence proceedings
        spontaneously, this rarely occurs. This may in part be due to the daunting
        complexities involved in pursuing sanctions in cases of this type. Where the
        matter involves lawyers at a large law firm, regulators face opponents with the
        resources and incentives to resist discipline vigorously. Consequently, regulators
        are reluctant to take action. (Geoffrey Hazard and Ted Schneyer, ‘Regulatory
        Controls on Large Law Firms: A Comparative Perspective’ (2002) 44 Arizona
        Law Review 593, 607…) This, in itself, undermines the effectiveness of the
        regulatory system and public confidence in the legal system generally.194

There is a heavy onus on the courts and on lawyers’ disciplinary bodies to
deal quickly, and very firmly, with misconduct, once it has been revealed.
However, because misconduct is not easily uncovered, lawyers, too, bear
a significant responsibility to ensure the creation of an ethical culture
within their firms. That is an aspect of the duty owed by them to the
court, which tends to be expressed in such a way as to emphasise the
public interest in preserving confidence in the administration of justice:
Oceanic Life Ltd v HIH Casualty and General Insurance Ltd.195

The notion that lawyers are officers of the court is not empty rhetoric.
Eugene R Gaetke, an American academic, said:

        Lawyers like to refer to themselves as officers of the court. Careful analysis of the
        role of the lawyer within the adversarial legal system reveals the characterization
        to be vacuous and unduly self-laudatory. It confuses and misleads the public.
        The profession, therefore, should either stop using the officer of the court
        characterization or give meaning to it.196

In Western Australia, lawyers do not have the option of ceasing to use
the characterization. It is imposed by statute.197 They are consequently
obliged to give meaning to it.

                                 VI ConClusion
Experience has demonstrated that, although legislative responses are
necessary, and codes of conduct or ethical guidelines are helpful, they
are not enough. It is impossible to legislate, or even to prepare a code
of conduct, so as to meet every eventuality. Nor, for reasons already
discussed, is it desirable to encourage, or even facilitate, a mindset
whereby people obtain moral guidance in corporate decision making


194   Harvey and Le Mire, above n 54, 177-178.
195   [1999] NSWC 292 [48] (Austin J).
196   Quoted by Nader and Smith, No Contest (1996) xxi.
197   Legal Profession Act 2008 (WA) s 29.


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                              JAMES HARDIE, NAB AND AWB LTD - WHAT HAVE WE LEARNED?

by referring only to the letter of the law, or to a code of conduct,
or both.

Nor is it enough to rely upon the presence of independent directors
and upon strengthened powers, and duties, of audit, remuneration
and nomination committees staffed primarily by independent
directors (although these are essential in the case of listed companies).
Companies must ensure that only men and women with a strong
moral compass are appointed to the board and, importantly that they
include at least some who have expertise that will enable them to
have a sound understanding of the business of the corporation and
of its financial affairs. It is also important that the ‘independent’
directors be truly independent, and persons of sufficient strength
to withstand pressure from the CEO. At the end of the day, this is
the responsibility of the shareholders. It is one that must be taken
seriously by them.

There must also be an atmosphere that encourages and rewards
ethical behaviour and that encourages the reporting of, and disciplines
unethical behaviour.     There should be a strong focus on risk
management and attention to the structure of remuneration packages.
Carolyn Cordery draws the following conclusions from her analysis of
the NAB foreign exchange scandal:

       The ASX corporate governance guidelines encourage boards to recognise
       and disclose risk so that it is managed appropriately. This requires ethical
       and responsible decision-making. If market confidence is to be served by
       such governance guidelines, it is imperative that corporate governors provide
       remuneration systems, internal controls and discretionary decision-making
       structures that reward ethical behaviour. Appropriate remuneration systems
       should reward profits, but be offset by an acknowledgement of the risk
       of unrealised positions. Other internal controls should include hiring and
       orientation procedures that reflect the organisation’s ethical culture. Supervision
       and security restrictions must provide clear guidelines on discretionary decisions
       and facilitate reporting by dealers and their supervisors of risky positions,
       especially negative news.198

It is important, also, not to lose sight of the fact that, although s 181(1)
of the Corporations Act 2001 (Cth) requires directors and officers
of a corporation to exercise their powers and discharge their duties
in the best interests of the corporation (a formulation that does not
encompass only the interests of shareholders),199 that does not mean

198 Cordery, above n 12, 67.
199 See, for example, The Bell Group Ltd v Westpac Banking Corporation (No 9)
    (2008) 70 ACSR 1, [4384]-[4450] (in an insolvency context, although not owing
    an independent duty to creditors, directors are obliged to take into account their
    interests) and the discussion in Austin, Ramsay and Ford, above n 143, [8.100]-
    [8.130].


                                                                                     169
(2010) 12 UNDALR

that directors may not take other interests into account, at least if this
can be done consistently with the best interests of the corporation. The
authors of Ford’s Principles of Corporations Law200 suggests that the
management of a company may be justifiably concerned to ensure that
the company is a good corporate citizen. Institutional investors (who
own around 45 per cent of the capital of listed Australian companies)201
can, and sometimes do, play a role in this respect, by investing only
in companies that have a demonstrated record of good citizenship.
Moreover, there is much to be said in favour of David Walker’s
suggestion (made in his July 2009 ‘Review of Corporate Governance
in UK Banks and Other Financial Entities’,202 commissioned by the
UK Prime Minister) that institutional shareholders should exercise their
voting powers and disclose their policies on voting and their voting
record on their websites, or in some other public forum.

Finally, lawyers and accountants have to play their part. Both
professions must be scrupulous in demanding, and enforcing,
compliance with standards of professional ethics and responsibilities.

As George Bernard Shaw once said, the only thing we really learn
from history is that we never learn from history. This may often be
because it does not suit us to learn from history. But if we want to live
in a society that respects individual rights, and that avoids catastrophic
failures of the kind that have occurred from time to time in recent
history, we have to learn from it.

This requires society, in all of its emanations, to condemn unethical
corporate behaviour, and also extremes of greed of a kind that is so
common (particularly when it comes to rates of remuneration of
corporate executives) as to be now almost respectable. It requires
shareholders to be vigilant and to have no hesitation in getting rid
of directors who behave unethically, whether through greed or
otherwise. It requires directors to remind themselves of their wider
responsibilities as members of a civil society, and to act accordingly. It
requires accountants to be true to the ethical rules that they claim to
espouse. It requires lawyers not to lose sight of the overriding duties
that they owe to the administration of justice.




200 Austin, Ramsay and Ford, above n 143, [8.130].
201 Austin, Ramsay and Ford, above n 143, [7.630], quoting G Stapledon, ‘Australian Share
    Market Ownership’ in G Walker, B Fisse and I Ramsay (eds), Securities Regulation in
    Australia and New Zealand (1998) 245.
202 Quoted by Austin, Ramsay and Ford, above n 143, [7.700].


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