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CORPORATE CITIZENSHIP NEWSLETTER
August 2005 : Issue No.20
ANNUAL ACSI CONFERENCE
Contents
―Finding the Balance – managing risk,
STOP PRESS! 1 returns, reputation and responsibility‖
Do corporations have a responsibility to the
ACSI ANNUAL CONFERENCE 1
community over and above making a profit
Sustainable performance and Long term
and returning dividends to shareholders? The
wealth creation 2
answer at the Fourth Annual ACSI
Perspectives on managing risk, returns,
Conference held on 8 June 2005 from a wide
reputation and responsibility 4
range of speakers including directors,
Pushing the legal limits for directors 6
executives, charities, academics and unions
Sharing the research on CSR 7
was a resounding yes. In listening to views
Lessons from a crisis 9
about the intrinsic value of corporate social
responsibility as well as its ability to deliver a
AUSTRALIAN NEWS 13
competitive edge, speakers examined the
Penalties for corporate criminals 13
topic from the perspective of stakeholders,
Enquiries into CSR 13
how to define it, and the legal context within
which CSR resides or should reside.
INTERNATIONAL NEWS 14
Cisco plans on employee stock options 14
As to whether companies should embrace
FASB lobbied to repeat past mistakes 14
corporate social responsibility, a common
CSR delivers long term growth 14
theme emerged, that is it is the community
ABA Discussion Paper 15
that bestows the legitimacy and purpose for
corporations to exist. Society grants a
licence to companies to operate in return for
STOP PRESS! the fulfilment of expectations such as jobs
and economic development. Also the
ACSI TO LAUNCH REVISED changing expectations people have from
CORPORATE GOVERNANCE GUIDELINES their workplace is a significant driving force in
the evolution of the concept of CSR.
All ACSI members, Trustees and staff are
invited to attend the launch of ACSI‟s revised Both attendees and those who were unable
corporate governance guidelines on to attend the ACSI conference will find the
Wednesday 24 August 2005 at Water and following record of the key outcomes from
Grass Restaurant, 32 Bourke Street, the conference, a valuable source of
Melbourne, Vic 3000 from 4.30 – 6.30pm. information about directors and shareholders
obligations in relation to CSR and “Finding
Refreshments and finger food will be served the Balance – managing risk, returns,
following the launch. RSVP by Friday 19 reputation and responsibility”
August 2005 to Chris Dardoumbas,
cdardoumbas@mail.ifs.net.au or 03 9657
4386.
Attendance is free.
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CORPORATE CITIZENSHIP NEWSLETTER
August 2005 : Issue No.20
“The way I see it is, the primary obligation of
SUSTAINABLE PERFORMANCE AND companies today is to maximise returns for
LONG TERM WEALTH CREATION shareholders in perpetuity. Not just
In her keynote address Carolyn Hewson, shareholders of today, but also the
Director, Westpac asked very poignant shareholders in the future.”
questions with regard to the value of the
pursuit of CSR: whether a company profits CSR was incorporated into sustainable
from it; whether it delivers innovation, new business practices at Westpac through
markets and cost reduction to a company; transparency, identifying values and
and if it is sustainable for a company to measuring its performance against them.
ignore adherence to CSR principles. Ms Embracing CSR at top level was imperative
Hewson‟s presentation provided the as was building socially responsible
audience with an insightful case study on a objectives into its business plan, vision,
financial service firms approach to CSR. customer service mission, values, business
objectives and strategy.
At the commencement of her presentation
Ms Hewson stated that: Westpac established a Consultative Council
Forum for stakeholders to drive sustainability
“Clearly, it is no longer satisfactory to simply priorities. Council members include ACOSS,
talk about corporate performance just in ACF, ACTU, HREOC, Dept Family and
terms of profit or shareholder value. Community Services and Australian
Consumers Assoc. Westpac pays attention
Corporations must focus on more than just a to sustainability ratings indices such as Dow
narrow view of shareholder value, or profit, Jones sustainability index, Corporate
because social, environmental and other Reputation Index and FTSE. It also engages
non-financial or „extra-financial‟ issues are with its supply chain of 10,000 and
integral to corporate success. In fact, these implements a six-phase program to work with
factors can signal changes needed to the suppliers to improve mutual social, ethical
strategic direction of a company and the and environmental performance.
management of the non- financials is
fundamental to the sustainable delivery of In pondering the question of whether the
shareholder value.” incorporation of CSR principles into overall risk
management lead to more sustainable
Ms Hewson made it clear that in her view performance, Hewson counters with the
good companies perform better. This is question:
evidenced by the results of Westpac in
various indices and in its case it has enabled Can companies sustainably enhance
Westpac to attract and retain a talented shareholder value if they ignore the
workforce. Increasingly employees value legitimate interests and needs of their
more intangible rewards such as recognition,
key stakeholders?
appreciation, and integrity from the
company they work for as well as tangible Relying purely on generating short-term
rewards such as more effective work/life profits at all costs could alienate the
balance. It adds innovation and diversity to community upon which the business is
a company; and relying on short-term dependent. Importance is placed on the
measures alone will not deliver long-term boards to manage the short-term
gains or shareholder value. expediency of pursuing the CSR agenda and
the long-term prosperity and value creation
that can be achieved by applying trade-offs
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CORPORATE CITIZENSHIP NEWSLETTER
August 2005 : Issue No.20
similar to what one would apply to staff arise are likely to be less systemic because
training or brand marketing. of that culture.”
“(At Westpac) It became clear that restoring
our community licence to operate was
Facilitating the focus on CSR
increasingly fundamental to our longer-term Ms Hewson‟s presentation also provided an
business prospects.” overview of the structures that Westpac has
introduced to facilitate focus on CSR
“…Like it or not, meeting legitimate including ensuring that the board has the
community and stakeholder requirements requisite information to understand how they
and expectations is now a necessity for are performing on a range of measurers; and
sustainable performance. And this is at the assisting the board to create the right culture
core of the business case.” and values mindset in the organisation.
The Board receives a range of non-financial
Do companies that embrace CSR
information on a quarterly basis. They look at
enhance their product or service OH&S statistics, customer and employee
opportunities and find ways to reduce satisfaction ratings, and environmental
costs? measures. The Board also signs off on an
The key driver for Westpac has been annual basis, on an external Stakeholder
employee and customer attraction and Impact Report, which lists the leading
retention evidenced by: indicators and a subset of social, ethical, and
environmental performance indicators, that
Offering flexible work practices to help Westpac monitors. The effectiveness of
employees balance work/life has Westpac‟s underlying sustainability processes
contributed and lowered staff turnover are also assessed using the AA1000
by 13% since 2001. Assurance Standard.
The return to work rate for women on
maternity leave has increased from 30% “I think finally and probably most crucially at
to above 80%. Westpac our approach is driven by principles
The vast proportion of customer and values rather than by compliance and
complaints are resolved directly with the rules. In creating these conditions is not
customer. something boards can simply delegate to
Westpac paying special attention to the management. The chairman, the board, the
environment and as such having CEO and senior management are all crucial
significantly lowered their energy, fuel in building and maintaining an appropriate
and paper consumption and reduced its culture. They must set the right risk parameters,
own CO2 emissions by 32%. give employees the permission to do the right
thing, drive fear out of the workplace, and
Ms Hewson argued that these factors drive ensure that it‟s safe to speak up, safe to differ.
shareholder value. This also strengthens This culture is a non negotiable piece in
relationships with government and regulators having corporate social responsibility
by developing a strong reputation for taking accepted in an organization. ”
a social charter and obligations to customers
seriously. “So to conclude, for all the complexities of
what we‟ve talked about CSR actually boils
“…Major regulatory risks seem to be better down to companies simply doing the right
managed when staff operate in a culture thing and giving their people permission to do
where doing the right thing pervades and so. It‟s an investment in the company today
regulators understand that issues that do for the stakeholders of today and tomorrow.”
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CORPORATE CITIZENSHIP NEWSLETTER
August 2005 : Issue No.20
Ms Hewson challenged the audience – to One of the greatest challenges Oilsearch
more fully engage in the CSR agenda; to use faces is managing the competing demands
our influence; and to engage with of its various stakeholders.
companies directly around the implied social
contract and sustainability. “… if we try to broaden the scope of what
should directors consider you‟re opening up
A complete copy of Carolyn‟s presentation is Pandora‟s Box. The law at present is very
available from the ACSI Secretariat. clear, it requires directors to have a primary
responsibility to shareholders who provide the
capital but if you broaden the scope of the
PERSPECTIVES ON MANAGING, RISK, director‟s responsibilities you say well which
RETURNS, REPUTATION AND stakeholders have a priority to be considered
RESPONSIBILITY above others. For example in our case
should a local village have the right to have
We were fortunate to have this session
a hospital built for them or should our
chaired by the well-qualified and
employees, another stakeholder group have
experienced Amanda McCluskey of BT
a right to a pay rise? And should those two
Financial Group. The panel session,
groups have priority over shareholders who
Perspectives on managing, risk, returns,
want a dividend?”
reputation and responsibility featured a
range of specialist views on how corporations
(This is the challenge that both the
balance their commercial interests with
Parliamentary Joint Committee (PCJ) and
social responsibilities. Speakers explored the
the Corporations and Markets Advisory
questions from cultural/environmental,
Committee (CAMAC) are grappling with
human capital and stakeholder perspectives.
when considering whether the Corporations
Act should be amended to take account of
Managing social risk in oil and gas stakeholder views other than shareholders.)
exploration in PNG and the Middle East
Brian Horwood, Chairman, of Oilsearch How companies that better manager
provided an insightful view on how Oilsearch their people enhance their returns
manages risks when operating in far-flung
Craig Bingham, Managing Director, Portfolio
communities in Yemen and PNG.
Partners provided us with passionate view of
his firms approach to asset management.
For Oilsearch, a mining company with a
business objective of achieving a TSR
Mr Bingham commenced his presentation by
comparable to the top 25% ASX listed
outlining the experience of Levi Strauss,
companies, its success is deeply affected by
which used sewing sub-contractors in
how effectively it interacts with the local
Bangladesh which hired child labour. If Levi
community in which its oil and gas operations
Strauss had taken the kids out of the factory
take place.
there was a high likelihood that they‟d finish
up on the street in prostitution. What do you
Oilsearch depends on local community
do? What Levi Strauss did was to take the
approval for its activities and employs 35 staff
children out of the factory, continue paying
to engage with the local community to
their wages on the condition that they went
ensure mutually beneficial outcomes. It also
to school and guaranteed them full-time
deals with a range of stakeholders including
employment when they reached 14, which
its 800 employees, 1800 contractors and local
was the local age of maturity.
residents.
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CORPORATE CITIZENSHIP NEWSLETTER
August 2005 : Issue No.20
The same company instead of laying off clear rewards and accountability and
people during the recession got their staff to investment in learning and development in
actually re-lay the factory floor in San occupational health and safety.
Francisco. This period being talked about
was 1984 – 1996, when its share price went
What it means to be a responsible
from $2.35 to $265 per share. corporate citizen
Rev Tim Costello, Chief Executive of World
He suggested that the success of the Vision, provided a stakeholders‟ perspective
company was a direct relationship to the to the debate about whether observing CSR
success of getting staff engaged and also and in particular managing reputation is
believing not only in themselves and their profitable for companies.
contribution but to what the team can do.
Rev Costello reiterated the view adopted by
In Mr Bingham‟s view in addition to the Hewson that the community grants a
traditional lag and financial indicators corporation legitimacy to operate and
revealing whether a company is likely to be a challenged the commonly held assumption
successful investment, asset managers and that business is morally neutral and operates
investors will now need to include a on the premise that shareholder wealth is to
company‟s performance in corporate be maximised in any way. Over the past 40
governance, sustainability and human years the number of those that hold the view
capital as the key criteria of assessment and that a company only has a responsibility to
differentiation. Mr Bingham said that what maximise profit has never risen above 40% in
they search for is “companies that produce the US, a country in which the highest
profits with principles”. proportion of managers believe in the “profit
is King perspective”.
Portfolio Partners is a proponent of a growing
body of evidence demonstrating the positive He observed that through the nineties
links between human capital and attitudes towards workplaces changed with
organisational performance. A company people becoming more conscious that
can gain effective competitive advantage business is not a value-free area and that
by harnessing the intangible resources of its staff should not leave their consciences at
human capital such as employees‟ the door. It is not just about earning a salary,
capabilities, motivation, engagement and people are recognising that values
knowledge. These have a huge impact permeate their workplace and as such
upon organisational success or failure and become more sensitive of what their work
ultimately deliver higher returns to environment revealed about themselves.
shareholders over the longer term.
Business has always operated within the
Analysis that reveals how effectively a community. The reasons for the current
company uses human capital will improve debate are straightforward: 1) increased
the transparency of investment decisions just transparency of business affairs 2) improved
as financial analysis currently does. Portfolio communications globally; 3) sign of the times,
Partners utilises surveys to rate human capital most CEOs were born around emergence of
and those with the lowest rating performed feminism and interest in environment 4)
poorly. The criteria used to determine a high global business does not stand apart from
performing human capital company include society.
vision and values, focus on ethical behaviour,
information sharing internally, senior Rev Costello finished by saying that CSR is a
executive commitment to human capital, bridge to connect business with the
alignment to people management practices, community.
attraction, induction and retention of staff,
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CORPORATE CITIZENSHIP NEWSLETTER
August 2005 : Issue No.20
PUSHING THE LEGAL LIMITS FOR exceptions such as when a company is
DIRECTORS insolvent or nearly insolvent, Courts have
stated that the interests of creditors rank
A discussion considering the question of how higher than the interests of shareholders and
far directors‟ obligations extend to and to have ruled the interests of creditors be
whom they are accountable for the ranked higher than the interests of
corporate decisions was led by, Professor Ian shareholders.
Ramsay, Director of Centre for Corporate
Law and Securities. Illustrative of a Courts traditional view of the
paramount duty of directors to shareholders
Given that companies have increased so Prof Ramsay referred to a 1919 US case
markedly in size, power and influence where the Dodge Brothers major
(internationally of the 100 largest economic shareholders in the Ford Motor Company
entities, 71 are countries, 29 are corporations), sued the Ford Motor Company, effectively
the impact of their successes or failure has Henry Ford for payment of an insufficient
grown markedly. dividend. Henry Ford had tried to return
lower dividends to shareholders in favour of
Prof Ramsay referred to UK law reducing the costs of cars to customers and
developments where a draft bill has been therefore making cars accessible to the
submitted which extends directors‟ duties in average person on the street.
Corporations Law to address “enlightened
shareholder value” – that whilst directors must Prof Ramsay explained that the judges
act in a way that is considered to be in good classified Henry Ford‟s testimony in the
faith and likely to promote the success of a following way – “… by his testimony we
company for the benefit of shareholders, understand that Henry Ford thinks that Ford
directors must also take other considerations Motor Company has made too much money,
into account including regard to the interest has made too large profits and that although
of employees, fostering business relationship large profits might still be earned in the future
with suppliers, customers and others, the a sharing of them with the public by reducing
impact of a company‟s operations on the the price of the output of the company
community, environment and maintaining a ought to be undertaken. The Court forced
reputation for standards of business conduct. Ford Motor Company to pay additional
dividends.”
In the US a majority of States have introduced
corporate constituency statutes that require There is also a general acceptance or
directors to consider the interests of acknowledgment by the Courts that the
stakeholders. However there is scepticism Courts are ill equipped to second-guess the
that this is just to protect directors and judgement of directors. They are reluctant to
executives from hostile takeovers. step into the shoes of directors. Courts have
usually focussed on the process of decision-
In Australia, Sec 181 of the Corporations Act, making, i.e. have the directors properly
makes reference to directors exercising their informed themselves of the subject matter,
powers and discharging their duties in good have they undertaken due diligence, rather
faith, in the best interests of the company than focussing on the merits of the decision
and secondly for a proper purpose – itself?
needless to say, this is very broad ranging Therefore considerable discretion is given to
responsibility. directors on how they should act and how
the should advance interests of shareholders
Australian Courts usually define the interests as long as a proper process of consideration
of company as being the interests of has been undertaken.
shareholders. There are some limited
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CORPORATE CITIZENSHIP NEWSLETTER
August 2005 : Issue No.20
Prof Ramsay argued in light of the PJC and been around for more than 100 years and
CAMAC inquiries by changing the relates to the purpose, responsibility and
corporations law to allow directors to consequences of business.
prioritise non-shareholder interests over the
interests of shareholders may have the ironic Whether you think CSR is primarily a response
result of making directors less accountable. to business failure or part of a broader
A potential exists for accountability to be response to global governance failures there
lessened where directors have so many is a single unifying idea, which Dr Black
masters to choose from, and so much suggested, that underpins both perspectives
latitude to pick and choose. and that is the notion of the social contract.
“So to conclude, let me leave you with three The social contract provides that there is an
short points. First, in my view our existing law implicit or implied agreement between
does provide for an effective review of the business and society in which society
actions of directors, second the existing law provides legitimacy and consent for business
does allow directors to consider the interests activity in exchange for the satisfaction of
of stakeholders other than shareholders … needs, i.e. provision of jobs, products,
the management of the company and its services.
directors may be justifiably concerned to
ensure that the company is a good Reasons for companies wishing to become
corporate citizen and that is perfectly more socially responsible are 1) that is in
consistent with our existing law. Third, while response to a crisis and the solution involves a
it‟s appropriate for directors to continually substantial change in behaviour; 2) that the
consider the interests of all stakeholders company has incorporated this behaviour in
including shareholders we should be cautious its founding philosophy or values; 3) that
about any reform of our corporate law that other companies within the industry are
elevates the interests of other stakeholders raising the expectations of others and there is
above the interests of shareholders. This therefore an industry push.
might result in directors being less
accountable.” It is a voluntary concept and not regulated
and concerns questions of justice. For
example, who has rights, who have
SHARING THE RESEARCH ON CSR responsibilities and what is fair? Dr Black
During this session two prominent researchers provided us with a broad-brush idea about
provided an overview of the preliminary the differences and similarities,
findings of two research papers ACSI has complementarities between sustainability
commissioned in relation to CSR. and CSR.
“…sustainability is really about assuring
Crystalising and evaluating CSR sufficiency for future generations and so you
Dr Leeora Black, Director, Australian Centre might think of the operating principle of
for Corporate Social Responsibility co-author sustainability as being consume the income
of a discussion paper on CSR provided a and not the capital. So, keep the capital
summary of the findings to date. intact, increase the capital if you can
In defining CSR, Dr Black explained that whether that capitals economic, ecological
although it would appear to be something or social but don‟t leave less for the future
relatively recent, in response to the increased than what we have now. Whereas in
power and influence of corporations and an contrast the social responsibility principle
attempt by global institutions to create would be share the income fairly. So they‟re
responses to international dilemmas, CSR has very complimentary concepts on the one
hand consume the income and not the
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CORPORATE CITIZENSHIP NEWSLETTER
August 2005 : Issue No.20
capital and the income that you have make It is not known whether this is because they
sure that when you do consume it that it‟s have the money to invest in CSR or are doing
shared around fairly.” well because they are investing in CSR.
There are several ways of measuring CSR “…the bottom line conclusion was certainly
which all have advantages and that you‟re not going to do worse by being
disadvantages: good.”
1) reputation rankings - these are based on Dr Black also tackled the issue of what is the
broad surveys, of the reputation of a relationship of CSR to trustees fiduciary duty.
company on various dimensions. Some In her view given trustees are obliged to act
writers suggest that there are really three in the best financial interest of members their
drivers of reputation – financial key consideration has to be an investment
performance, quality of products and risk and return profile.
services and CSR but whether they
account in equal proportions for the So how does CSR affect the risk and return
reputation will depend on which profile? In Dr Black‟s view the most significant
reputation ranking being considered. The issue is the globalisation of money markets
problem is that they may not actually be that will be a powerful driver of the
measuring reputation for CSR increasing attention to corporate social
responsibility in the future.
2) content analysis and disclosures - there is
the problem of inconsistency with this “…in Australia riding on the twin engines of
measurement because it is non superannuation growth and globalising
mandatory and the same information is business. Shareholders at least in Australia
not always available to compare are no longer a privileged elite and every
between companies worker since compulsory superannuation was
introduced thirteen years ago is being
3) social audits – include surveys, encouraged through superannuation to
engagement with companies. The make provision for his or her own future… So
indicators collectively may not institutional investors thus have increasing
necessarily give you an indication of the power to set new standards of accountability
overall social performance, stakeholder and it is this particular group of people, the
demands can continue to rise even when institutional investors that are beginning to
a company is meeting its own targets or force new definitions of the boundaries of
even doing better than its target on some corporate responsibility.”
of these hard indicators.
4) Assessing the underlying values in an
Benchmarking the effectiveness of social
organisation that has culture based on reporting practices in Australia
group surveys of perception, these are In 2004, ACSI commissioned Macquarie
difficult to measure and quantify. University to undertake research titled „The
Rhetoric and Practice of Social Disclosures in
Dr Black made reference to the Meta Australian Product Disclosure Statements”.
Analysis by Mark Orlitsky and his colleagues, The research looks at CSR disclosures issued
which has found that markets do not by large public corporations listed on the ASX
penalise companies for poor social and also disclosures found in the product
performance. Accounting measures such as disclosure statements of consumer
earnings per share do tend to show higher investment products.
relationship between companies that
observe good CSR and are high performers.
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CORPORATE CITIZENSHIP NEWSLETTER
August 2005 : Issue No.20
Dr Mathew Haigh, Griffith Business School, It is doubtful if Australian consumers will
Griffith University provided attendees with an understand how to compare investment
overview of the research and the findings to products that market their use of labour
date. standards or environmental, social or ethical
considerations if investment managers can
The study aims to address the concerns define those terms to mean anything of their
about processes used by investment choosing. Given that ASIC‟s guidelines do
managers to assess potential and current not extend to requiring independently
invested corporations on governance, social audited information, Australian investors
and environmental considerations. In cannot assess the integrity of the legislated
particular the research considers the extent disclosures.
to which investment managers considered
corporate governance issues in investment Unless the basis for comparing social
portfolio construction. investment products is improved, Section
1013D of the Corporations Law is destined to
Under Section 1013D(1)(l) of the Corporations produce only a cipher of accountability.
Act (Cth) 2001 (Corporations Law), a PDS Partial potential remedies under the
must disclose the following information: government‟s domain include standardising
reporting formats, mandating recognisable
if the product has an investment
terminology and bringing an external
component—the extent to which labour
auditing requirement into the purview of the
standards or environmental, social or
legislation.
ethical considerations are taken into
account in the selection, retention or
Dr Haigh noted that best practice guidelines
realisation of the investment.
also seem to be begging in this area.
The study made two examinations. The first
documented and analysed processes by ACSI aims to circulate these the two
which institutional investors consider completed research papers to members in
governance practices, environmental the course of the year.
matters, labour standards and other social
considerations in portfolio construction. The
second identified and analysed information LESSONS FROM A CRISIS
disclosures provided to retail investors on In the session Lessons from a Crisis
management processes, particularly in participants were invited to formulate a view
regards to compliance with the Corporations about whether James Hardie‟s directors were
Law. victim to inaccurate information and had
information withheld from them that would
The executive summary provided in the have enabled them to respond to the
conference kits highlighted that there is little shortfall in funding for asbestos victims in a
evidence that the legislation has achieved its calculated and timely manner; or whether it
objective to promote confident and is a legislative vacuum within which all
informed decision making by consumers of corporations operate that enabled it to
financial products. All but one of the minimise its liability towards those it had
managers analysed in this study had ignored responsibility for.
the requirement to define investment terms.
Most Corporations Law s1013D disclosures
that could be compared to pre-s1013D
material had reduced in scope and length.
The scope and content of relevant
information disclosures varied greatly
between managers.
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CORPORATE CITIZENSHIP NEWSLETTER
August 2005 : Issue No.20
Lessons from a Directors Viewpoint In her presentation, Ms Hellicar explained
how the company wanted to break into the
Meredith Hellicar, Chairperson, James Hardie
US market because it could see growth
Industries NV outlined the lessons from the
opportunities in North America. In 1998
James Hardie Crisis as she saw them -
James Hardie had learned that overseas
investors and debt providers would be less
1) Corporate Social Responsibility is essential
inclined to invest in James Hardie if it had
to good corporate governance.
ongoing asbestos liabilities within the
2) Corporate Social Responsibility can be
balance sheet of its group of companies, this
integral to meeting commercial needs.
was particularly the case in the US where
they had experienced a number of
3) In her view James Hardie did
corporate collapses.
demonstrate corporate social
responsibility in its establishment of the
The challenge for the directors was to find a
foundation. “There‟s absolutely no doubt
way to pursue significant rates of growth and
that with the establishment of the
at the same time respond to the fact that
medical research and compensation
certain of JHIL‟s subsidiaries had ongoing
foundation in February 2001, the directors
future liabilities The Board therefore decided
of JHIL believed they had achieved the
to establish the medical and research
goals of fulfilling their duties as directors
foundation. The directors had been advised
both legally and in the context of
that the parent company had no material
corporate social responsibility. By
legal liabilities to such asbestos claimants, the
separating the liable entities and their only legal requirement was to provide the
asbestos liabilities from the consolidated
foundation with net assets of liable subsidiary
balance sheet to enhance the groups
companies.
attraction to foreign capital markets to
fund future international growth and by
The directors wanted to extend above and
meeting the responsibilities towards future
beyond the minimum legal obligations.
asbestos claimants by establishing a fund
Hellicar explained this was evidenced by
to provide for them.”
records, which show that they had rejected
a proposal to set aside in foundation assets
4) Directors need to be alert and responsive
the equivalent to net assets of subsidiaries in
to the possibility that subsequent events
favour of a materially greater amount. This
can significantly alter the outcome of an
figure was based on what directors believed
originally socially responsible decision.
to be the best actuarial advice and that it
would be sufficient funding to meet the
5) Boards should constantly require and
advised actuarial assessment of anticipated
undertake scenario planning including
future claims.
the worst longest lasting scenarios that
could be imagined.
In Oct 2003 in the course of filing its year-end
accounts, directors of the foundation
6) Investment in building strong and open
announced they had obtained revised
communications with all stakeholders is
actuarial advice that predicted future
not just good corporate governance but
funding shortfall of $800 million. James
absolutely vital when you face issues that
Hardie parent company talked to the
entail broad community involvement.
foundation and the NSW Government about
the circumstances, which resulted in an
7) Never underestimate political
increase in exposures in system costs and in
opportunism.
administration of the foundation, which was
subsequently proved to be what contributed
to the revised estimate:
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CORPORATE CITIZENSHIP NEWSLETTER
August 2005 : Issue No.20
“there‟s no doubt that with the benefit of While the Jackson commission was pending
hindsight the board of JHINV could have James Hardie attempted to pursue a
and should have responded far more negotiated solution which would have
quickly and decisively when the included reduced system costs and
foundation announced its results in enhanced affordability and facilitated a
October 2003, including the increase in its proposal of voluntary funding for future
costs and liabilities.” claimants to be put to shareholders. James
Hardie also commissioned a new actuarial
Ms Hellicar then went on to outline the assessment from another organisation which
challenges, which lay before the directors. gave even higher estimate of the future
liabilities of the foundation of $1.573 billion as
1) The future predicted shortfall in at June 2003. This was a dramatic change
funding of the foundation was from the exposure estimated three years
extraordinarily at odds with actuarial previously and even that announced by the
reports the directors had relied upon foundation the previous October.
when establishing foundation
In July 2004 James Hardie made public the
2) The foundation and subsidiaries were largest voluntary funding proposal in
a separate legal enterprise, distinct Australian history. The submission put forward
from the ongoing business of James broad principles to reduce system costs
Hardie. This posed a challenge as to without affecting payments to claimants so
how a company consistent with that directors could ensure they would not
directors‟ duties and a commitment to have to ask shareholders to fund
CSR could contribute further funds to a inefficiencies in making such a voluntary
separate group and ensure that in the payment.
interests of all stakeholders that even if
funds could be paid across validly, As it stands now a legally binding in-principle
that such funds that the foundation agreement as signed on 21 December 2004
would use funds efficiently. was being negotiated with the NSW
Government under which James Hardie will
3) The varying and unexplained shortfall provide voluntary long-term funding to a
in the figures available from the special purpose fund to meet Australian
foundation and the excesses and asbestos-related personal injury claims
inefficiencies in the claims system against former James Hardie group entities.
could not provide directors or This proposal would required shareholder
shareholders with an accurate basis approval and would be put at the next
for assessing the affordability and shareholder meeting.
certainty of funding that the company
may have liked to plan to contribute. Ms Hellicar emphasised shareholders must
support and approve major CSR decisions. In
Ms Hellicar emphasised that although the retrospect delivering a blank cheque to
foundation had a shortfall in the longer make up a funding shortfall that could not be
term, no person entitled to compensation accurately calculated would not have
had gone unpaid, that James Hardie is constituted good governance or effective
only one of a number of companies and corporate social responsibility. Ultimately it is
government bodies against which in everyone‟s interests that the company did
asbestos claims are made and that its after all remain profitable and continue to
former subsidiaries account for only 19% of exist.
total claims.
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CORPORATE CITIZENSHIP NEWSLETTER
August 2005 : Issue No.20
In terms of the broader debate about A more confined solution could be adopted
imposing a positive obligation on directors to “piercing the corporate veil” in
have regard to corporate social responsibility circumstances where extension of liability to
Ms Hellicar was of the view that the answer the ultimate holding company is considered
may be to find some protection for directors appropriate by a Court subject to specific
along the lines of the business judgement rule public interest grounds. This would provide a
for those directors that have regard to discretion to the Courts to consider such an
socially responsible considerations. approach on a case by case basis.
The US is examining a legal response to
Lessons from a stakeholder and under-capitalisation, a proposal that involves
community viewpoint an imposition of liability for debts of a
In response to the argument that directors company setup with insufficient funds on
have no legal liability, Greg Combet, ACTU those who have created the entity. This
Secretary refuted this by arguing that the would be enforceable in circumstances
clear objective of setting up the foundation where such persons are proven to have
separate to the parent company was to engaged in misleading conduct.
place James Hardie‟s assets beyond the
reach of asbestos victims. Mr Combet also identified issues relating to
disclosure. He recognised that the basis of
Mr Combet delivered a list of events that the an efficient market system is the full, timely
ACTU asserts unfolded including how entities and accurate disclosure of information by
were set up to confine assets, accurate companies, which is required by the market
actuarial assessments were withheld, the to make decisions. The Hardie case raised
foundation was made to appear fully funded questions about regulation and enforcement
and that knowledge that the James Hardie of disclosure obligations, but equally it also
parent company was at times liable for raised questions about the ethical and moral
negligence was withheld from stakeholders duties of directors and company officers.
and incoming directors of the foundation.
Mr Combet referred to a corporate culture of
In response to Ms Hellicar‟s argument that strict adherence to the lowest common
Hardie went above and beyond by denominator that focuses on legal
providing funds for asbestos claimants, even responsibilities that could lead to
though its only legal obligation was to questionable commercial behaviour. A
provide the foundation with the net assets of cultural shift of common sense and decency
the liable subsidiary companies, Mr Combet needs to supplement the law when issues are
argued that Hardie adopted the view that it being considered by boards.
would take minimum responsibility for its
impact on stakeholders. Mr Combet noted that in the US there has
been a fourfold increase to $2 trillion over the
As a consequence of the crisis, Mr Combet last decade in socially responsible investment.
argued that there are political and moral There has been a global response with
arguments in favour of legislative action. investment projects concentrating on socially
Council assisting the Jackson inquiry responsible investment by the World
suggested that where death or personal Economic Forum and UN Global Compact
injury is caused by a company that is part of and Environment Program.
a larger corporate group “the limited liability
should be restricted to members of the
ultimate holding company and not the
individual entity”.
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CORPORATE CITIZENSHIP NEWSLETTER
August 2005 : Issue No.20
Yet SRI considerations are still to become Software (a holding of Creative Technology
mainstream. Mr Combet argues that we Investments), Computershare and Keycorp.
need to go beyond voluntary recognition of
CSR if we seriously expect social and Claims of Vizards share trading were first
environment concerns to be properly revealed during a 2003 committal hearing of
integrated into company decision making. It Vizards former bookkeeper, Roy Hilliard who is
is only when these measures are in place that alleged to have stolen $3m from a Vizard
the interests of shareholders/stakeholders company.
can genuinely be taken into account,
directors would have been in stronger The AFR reported that on one occasion CTI
position to take decisions would have tried to offload its Sausage Software holding
preferred to take, but didn‟t feel lawfully they less than three weeks after acquiring it as it
could take: to place sufficient funds and followed Telstra Directors being informed of a
provide ongoing funding stream to the three-way merger involving the internet firm.
foundation in the event it was found to be Other transactions involving Computershare
under funded. and Keycorp were conducted before
Telstra‟s annual half-year results presentations.
In managing risks, returns and reputation
corporations must accommodate conflicting
demands between stakeholders and
Inquiries into Corporate Social
shareholders, determine whether it is enough Responsibility
to simply comply with minimum standards or Two inquiries are being undertaken in relation
rigorously adopt CSR and negotiate to directors‟ obligations in relation to
constantly evolving legal, legislative and Corporate Social Responsibility.
political responses. In turn we the public as
community members, employees and On 23 March 2005 the Parliamentary
shareholders shape the debate by constantly Secretary to the Treasurer Chris Pearce
asking ourselves how do we wish to invest, referred the issue in relation to directors‟
where do we want to work and what sort of duties and corporate social responsibility to
society do we want to create? the Corporations and Markets Advisory
Committee (CAMAC) for consideration and
advice.
AUSTRALIAN NEWS
ASIC too soft on penalties for corporate Secondly the Parliamentary Joint Committee
criminals on Corporations and Financial Services (PJC)
announced an inquiry into Corporate
Justice Finklestein of the Federal Court has Responsibility on 23 June 2005.
called for a review of financial penalties for
corporate criminals and rebuked Australian CAMAC aim to issue a discussion paper late
Securities and Investment Commission for this year early next year and will take into
being too soft after he handed down a account submissions made to the PJC inquiry,
tougher sentence to that which was which are publicly available. They will not
recommended to insider trader Steve Vizard. make a submission to the PJC inquiry.
Steve Vizard has been banned from running The two reviews will be undertaken in parallel.
a company for more than 10 years, twice the It is understood that the CAMAC discussion
amount sought by ASIC which Judge Ray paper would cover broader ground.
Finkelstein deemed „not sufficient‟. Mr Vizard
has also been fined $390,000 for improper The PJC is due to report 29 November 2004.
share dealings in three technology
companies linked to Telstra – Sausage
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CORPORATE CITIZENSHIP NEWSLETTER
August 2005 : Issue No.20
INTERNATIONAL NEWS high-tech industries, to roll back or delay any
rule that may make FASB opinion law.
Cisco plans to put market value on
employee stock options Independent directors must be considered
The US based Council of Institutional Investors more as „unaffiliated‟ than independent
has expressed concerns to the Securities and although one would like to think that they
Exchange Commission over Cisco Systems represent the interests of public investors first
Inc.'s (Cisco‟s) plan to put a market value on and foremost. However as these board
its employee stock options.1 members are frequently directly sought out
by CEOs and if this is not the case the CEO
The derivative instruments Cisco wants to sell generally has a great deal of influence over
may serve to understate the true cost of the selection of independent board
stock-option grants and inflate earnings. members.
Cisco is seeking an alternative to the
valuation standards it currently uses such as In the US Board members are traditionally
the Black-Scholes model. Cisco is betting that very well-rewarded, receiving their own
the price that investors would pay for option grants, good compensation and
derivatives will show the options are worth expense-paid trips, frequently on private
less than models suggest. planes, to board meetings at attractive
offsite locations, where they are wined and
The derivative would operate like Cisco‟s dined.
actual employee stock options, with the
same exercise prices and five year vesting The Sarbanes-Oxley Act will not stop directors
schedule. It would be sold once and from favouring its benefactors. Boards
couldn‟t be traded or hedged. Settlement of generally turn against CEOs only when there
any gains would be with Cisco shares. is great negative publicity, a scandal or fraud.
Few executives are fired because of sub-par
Cisco has asked the SEC to sign off on its performance; it takes years of incompetence
proposal, hoping to avoid potential to raise an "independent" director's hackles.
objections from auditors. Incentive structures motivate behaviour.
Unfortunately, US Congress, regulators and
FASB being lobbied to repeat past investors themselves have created some
mistakes structures that encourage corporate
malfeasance. Until these dysfunctional
In the US many high profile corporate
pressures change, these practices are likely
scandals originated from the bad legislative
to continue.
decisions of 1994 where some lawmakers
lobbied the Financial and Accounting
Standards Board (FASB) to reverse the CSR delivers long-term growth
determination that stock options constituted
For Costco Wholesale (Costco), the US‟s fifth-
compensation and required expensing.2
largest retailer, observing CSR has made
good business sense and delivered low prices,
The FASB is again set to determine that
low staff-turnover, low rate of theft and high
options are compensation and Congress is
degree of employee and customer loyalty.3
again being pressured by its corporate
constituents, especially in the option-laden,
1 “Cisco, SEC Face Pressure to Open Option Plan to
Public Hearings” 15 July 2005 (New York)
2 “A Costly Illusion: "Independent" corporate directors
often are beholden to the CEO”, By David Rocker, 18 3“How Costco Became the Anti-Wal-Mart”, The New
July 2005 York Times, By Steven Greenhouse, 17 July 2005
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CORPORATE CITIZENSHIP NEWSLETTER
August 2005 : Issue No.20
This is in direct contrast to Wal-Mart which at The discussion paper can be found at this
its AGM received a shareholder proposal link:
that Wal-Mart produce a sustainability report
because of concerns “that persistent failure http://www.abanet.org/buslaw/committees/CL270
of Wal-mart to address social, ethical and 000pub/materials/20050621000000.pdf.
environmental challenges in a substantive
manner will adversely impact investment Comments to be submitted by August 15.
returns”.
Costco‟s average pay is $17 per hour, 42 per CONTACT INFORMATION
cent higher than its competitors with a health
plan making them employer of choice. This is Michael O'Sullivan
to the chagrin of Wall Street which believes President
high rates of pay and low prices are being Level 11, 2 Lonsdale Street
delivered at the expense of shareholder MELBOURNE VIC 3000
return. However Costco‟s stock price has Website: www.acsi.org.au
risen more than 10 per cent in last 12 months, Tel: (03) 9923 7136
while Wal-Mart‟s has slipped 5 per cent. Fax: (03) 9657 4378
Mobile: 0418 996 359
Costco takes a long-term view of business Email: mosullivan@caresuper.com.au
prosperity and made a strategic decision to
pay attention to good wages and benefits Phillip Spathis
which is why Costco has extremely low rates Executive Officer
of turnover and theft by employees. Level 11, 2 Lonsdale Street
MELBOURNE VIC 3000
Costco‟s customers are more affluent than Website: www.acsi.org.au
other warehouse store shoppers and stay Tel: (03) 9657 4386
loyal because good value is not at the Fax: (03) 9657 4378
workers‟ expense. This view is therefore not Mobile: 0417 501 065
just altruistic but makes good business sense. Email: pspathis@mail.ifs.net.au
ABA Discussion Paper This newsletter is correct to the best of our knowledge
and belief at the time of going to press. It is, however,
The American Bar Association Committee on written as a general guide so it is recommended that
Corporate Laws, has released a discussion specific professional advice is sought before any action
is taken.
paper „Voting by shareholders for the
election of directors‟ for comment. It
presents several alternatives:
Keep the current plurality vote standard;
Move to a majority vote standard as a
default position unless the company
affirmatively provides for a plurality vote
standard in its bylaws;
Require a minimum plurality vote (such as
one-third) of the votes for a director to be
elected;
Allow the board to vote within 90 days to
remove (or require the board to vote to
elect) a candidate who does not receive
a majority vote.
15
