To the Editor Letters to the Editor

  • Date:01 Feb 2005
  • Type:CompanyDirectorMagazine
There has been a lot of comment on the saga relating to how James Hardie has dealt with its asbestos liabilities. Here is our take on the issues raised using predictive risk analysis.

Concentrating Too Much on The'Risks'

There has been a lot of comment on the saga relating to how James Hardie has dealt with its asbestos liabilities. Here is our take on the issues raised using predictive risk analysis.

When the recent interest in James Hardie arose over its questionable handling of asbestos compensation, it appeared the CEO, CFO and directors had been "managing the risks" associated with the company's product liability arising from asbestosis-related injuries and illness.

For example, there was a (perceived) risk of liability associated with jurisdiction, so they shifted the company to the Netherlands. There was also a risk of future liabilities for damages of an uncertain, and possibility very large, amount. So first they attempted to be "certain" about the amounts (through actuarial estimates) and second they tried to cap them. And although apparently following good corporate "risk management" guidelines, none of this worked.

Now James Hardie are being dealt with as if they are subject to Australian jurisdiction (and they are complying).

The only legal liability, according to the special commission of inquiry established by the NSW Government, seems to be the possibility that the CEO and CFO "misled" their own board. But now the CEO and CFO are gone, without any legal proceedings. And the company is vulnerable to the outcome of binding negotiations with unions and the NSW Government.

So although they were managing what they thought were their risks, it turns out they had either failed to identify their vulnerabilities or they had ignored them - and it is their vulnerabilities they should have been watching. In the process they have put the whole company at risk.

Risks are no longer what is managed. They are the result of management: the sum of identifying and protecting vulnerabilities and identifying and managing strategic responses to threats. Risks are the residue of what can't be managed.

In this case, vulnerability to liabilities arising from asbestos claims. Had they correctly understood how the risk worked, they would have avoided giving the NSW Government purchase on the company's leadership, via arguably immoral behaviour, and then any NSW government would have been a toothless tiger; any government threat just that, an empty threat.

But now what James Hardie is going to be made to do is, in effect, accept a "transfer of vulnerability" from the future victims to the present company. This has effectively materialised all potential future liabilities and James Hardie can only resolve this by paying for, and very publicly undertaking to pay for, future claims and damages.

Ironically, the trust arrangement they had devised to compensate victims would have continued to provide security of compensation, requiring only a drip-feed of company funds year-on-year.

In effect, James Hardie outsmarted themselves by thinking they could be certain about their risks. It appears that when they realised they could no longer be certain of their "exposure" to future asbestos claims, they attempted to impose certainty on their risk by in effect removing their company funds. Their assumption was that (only) their funds were vulnerable, and therefore "at risk". As we see now, the company itself is now at risk.

John Scott, GAICD,

and Larry Cromwell

Principals, ScottCromwell

Editors note: Scott presented at the joint AICD/Institute of Internal Auditors professional development conference on: Public Sector Governance and Audit Committee on 5 August 2004

Would 'widened boards' actually work

Richard Leblanc, in December/January Company Director, recommends widening "the pool of directors in this competency and skills base to include women, government, academics, HR people, industrial relations, communications and IT. This should include people below the CEO levels such as CFO and chief information officer."

One would not quibble with this, provided the board has an appropriate balance for the size of the company involved.

There was a time, I believe, when the boards of state government instrumentalities, such as public hospitals, would consist of representatives of legal and accounting practices, a staff representative, representatives of the unions, ethnic groups and environmental groups, among others, but I may have been misinformed. If so, however, one might question, given the size of their budgets, whether such a grouping was in the best interests of the hospital and the state.

In this era of corporate governance, it would be helpful if some of your readers could share their observations with you as to whether these "widened boards" actually worked, or it might even warrant an article at a later date.

John Randall

Growing the poolof director competencies

"We need to widen the pool of directors ... to include women, government, academics, HR people, industrial relations, communications and IT." (Company Director, December/January 04/05)

Why is that when Australia is often seen as an early adopter in many areas of endeavour we have been so slow to embrace the concept of expanding the range of suitable directors for Australian businesses.

One can read almost on a weekly basis the appointment of a director from the omnipresent merry-go-round of predictable candidates. While not questioning the calibre of these people it does seem to reflect a shortfall that runs throughout our economy, a shortfall of creativity and innovation in our approach to business.

I agree with Leblanc when he suggests that the notion of board performance expectations needs to incorporate director evaluations that are authentic and actually focus on providing a holistic evaluation process of a director's contribution.

The Business/Higher Education Round Table (B-HERT) - the only national organisation jointly comprising leaders from both the academic and business sectors - has added its voice in an effort to broaden the pool of potential candidates.

Management is there to drive the business both on a strategic and functional level. The board operates from an overview perspective and therefore a broadening of perspective would be a welcomed benefit. A person with a detailed expertise and industry knowledge would appear to be more efficacious than simply appointing someone with a profile and discretional independence. However, such attributes do need to be accompanied by integrity and commitment, and a committee structure capable of performing its duties diligently.

B-HERT has recognised the need and recently established a pathway specifically for academics, research staff, engineers and ICT professionals. We believe such a pathway will encourage people from these areas to offer themselves as board candidates. The skills, knowledge, expertise and experience such people may provide needs to be used.

The on-line system B-HERT has established offers a free facility for those organisations seeking to attract new directors from the academic, research, engineering and ICT sectors, with B-HERT facilitating the initial scanning process.

Interested parties will find more information at www.bhert.com

Christopher Goldsworthy

Assistant executive director

Business/Higher Education Round Table

Guidelines for selection

There has been much debate in your pages recently about the role of the board and the appointment of directors.

The appointment of a director is a task faced by all companies, be they large or small. For sizeable publicly-owned corporations, it is a crucial activity.

When considering such an appointment these questions come to mind:

  • What is the role of the board of directors?
  • How is it different from the role of the operating management committee?
  • How many directors should a company have?
  • What should be the ratio between executive and non-executive directors, between "insiders" and "outsiders"?
There are specific legal and financial responsibilities that are straightforward and well understood. That is why accountants and lawyers are well represented on most boards of directors.

One of the most important, if not the most important, role of the board is with regard to management succession. It has a prime responsibility in selecting the CEO and if necessary, in arranging his/her dismissal, as well as in the placement of the other top executives.

This role should not be confined to the selection of operational management but also be involved in the orderly succession to board positions. In particular, it is important to plan for a balanced board so that a wide range of skills and experience are available around the board table.

Day-to-day management should clearly be left to the chief executive officer and the operational management of the enterprise.

However, the board has a major responsibility for the overall financial performance of the company and will require regular reports on the financial results of the business. But the board's responsibilities extend far beyond this monitoring role since these should be a system in operation that ensures prior board approval before any major commitment of corporate resources. All of these decisions should be part of a wider strategic corporate plan for the enterprise, which takes into, account projected cash flow and overall corporate financial capability.

Strategic planning, therefore, and as part of it the review of business objectives, becomes the foundation stone of this responsibility.

Another important role is corporate social responsibility. This is the consideration of the social impact of corporate activities on other substantial groups (apart from shareholders) who may be significantly affected by such activity.

Nowadays it is becoming increasingly difficult to direct the activities of a substantial business without some consideration of the political and social environment in which the company is operating. This is not to say that boards of directors should become dewy-eyed philanthropists and divert the corporation's dollars to their own pet charities. Corporate social responsibility is very hard headed and is a realisation that shareholders and directors alike have a vital interest in ensuring that their companies behave as good corporate citizens since this will ensure their corporate long-term survival.

Nevertheless it should be emphasised that the corporation's major corporate social responsibility is to survive in the short term and make a profit. It would be socially irresponsible to do otherwise.

Obviously the board of directors, despite the maze and the labyrinth of laws and regulations, will want to ensure that there are policies and procedures in place which have been designed to ensure compliance with the law. In this connection the importance of policies and procedures to identify and deal with board and management conflicts of interest cannot be overstressed. Nevertheless despite good and proper policies and procedures in this area there is no real substitute for the individual integrity and sense of professionalism of the directors and managers.

Added to this is the importance of mutual trust and understanding between the board and top management.

So where do outside directors come from and how do you find them?

Do you limit the selection shortlist to friends and acquaintances of the chairman and other board members? Do you find another accountant or lawyer with the time to spare? Or having analysed the situation do you go out and search for someone with the qualities and experience required to provide a balanced board?

My earlier comments on the role of the board suggests that the qualities of a director should be integrity, independence, an inquiring mind, vision, an ability to work with others, and broad experience. The overall effectiveness of the board will depend upon the collective strength of its membership and not just the individual qualities. However the broader the range of views expressed in the boardroom the more likely that the ultimate decisions made will be in the best long-term corporate interest. In view of the particular nature of a business enterprise a managerial position in another business is a particularly relevant background for a director. It is invaluable for a chief executive officer and the senior group of executives to have a central core of experienced business executives on the board with whom they may consult as necessary. However, it is also important to have a mix of backgrounds to achieve the balance and breadth of experience required and therefore it will be necessary to look for candidates from the professions, consultancy, the academic world, and public life as well.

Geoff Hines, FAICD

Managing director

Hines Management Consultants, Brisbane

Change is the law of life

IT Governance and the Corporate Governance Revolution (December issue) are a step in the right direction, but they barely cover the tip of the iceberg.

The "Perspective on workplace death/industrial manslaughter" is a reality and if existing OH&S regulations are enforced, then the unthinkable would be a reality much more often.

We live in an electronic world - driven by the electronic industry; thus corporate governance needs to deal with computer based business critical systems used to "manage" the internal and external business environments. Examples are: ICT, IT, automation, SCADA, control systems, robotics, inter/intranet, phones, security, financial, HR etc.

The key issue is the knowledge required for each segment. There are divergent knowledge explosions and the knowledge gaps are growing wider with each new innovation. The consequences are the board is less informed, has less transparency, is at higher risks and ensures an unequal distribution of the power throughout the organisation.

In the words of John F. Kennedy: "Change is the law of life. And those who look only to the past or the present are certain to miss the future" applies today more so than in the 60s.

Standards are essential documents in reducing the level of uncertainty in the services provided by corporations. However when standards are listed in legislation their application is fraught with danger.

Legislators use "standards" as guidelines that are in fact "benchmarks of performance" and set precedence through the OHS Act. This is the case when legislators listed I/C 1508 - functional safety; published as IEC 61508/AS 61508 into the Code of Practice Plant July 1995 for computer based safety related systems. What's remarkable, legislators had the foresight to hold everyone involved in the decision making process accountable for their part in the decision. ASIC will have a ball in the future and many financial/legal advisers should be nervous for their past and present advice.

The future is full of electronic "Go to Jail Cards" - who will go to jail is for the future and will be determined by someone in the future. However these obligations are still below the corporate radar. Ignorance is no excuse and the board needs to provide assurance of the long term sustainability of the company to the outside world - as in the case of James Hardie.

However standards are written by committees made up of technical experts from each industry. Knowledge gaps are widening and this is reflected in "standards" and industry jargon is causing confusion. To produce a standard takes a lot of time; thus standards lag behind technological innovation and all fail to address the people and integration issues that arise from innovations.

AS 8015 ICT governance & AS 61508 functional safety, raise more people issues which the board will most likely delegate to the "experts" - thus there is a vicious circle that can only be broken by the board. Time is the enemy of good corporate governance and time has run out.

A piecemeal approach to corporate governance is a thing of the past and present - OH&S regulators have moved the accountabilities of the board of directors into the future.

Good corporate governance needs to establish a "community of knowledge workers" that detect and correct their own errors to forestall the law of unintended consequences - in the case of computer-based safety systems polit-ical/social, environ-mental, physical and legal conse-quences must be identified in the concept phase and then managed for the life cycle.

Stormclouds on Mankind's Horizon is a reality right now; it will be governments and corporations that will be held accountable. Boards need training in managing the rate of change in technological innovation such that people can deal with the law of unintended consequences. Training in how to bridge the gaps between past/present management systems and move corporate governance into the future to ensure the long term sustainability of corporations can be provided by the AICD.

Kurt Rieger

Principle Consultant business integration strategy, planning, implementation & review

ATP Management Design

Hernes Oak, Victoria

Independence is a vital attribute

I was very interested in your article on The Corporate Governance Revolution in the December Company Director, from both the perspective of a practising director and as member of the Corporate Governance Council.

Much as been said about independence and the performance of boards, and Richard Leblanc makes some very valuable points.

Too often corporate governance analysts speak of the independence of directors as though its current emphasis is based on the assumption that independence is a sufficient condition in determining the composition of the board. Having a proportion of directors being independent is necessary but not sufficient. Boards need to be chosen so that they can lead companies into long-term value adding performance.

A variety of skills is needed around a board table to achieve these results, including independence.

Too many companies have shown the signs of corporate success only to subsequently demonstrate that it was paper-thin and based upon the manipulative practices of senior executives whose activities were not challenged by independent directors and their independent thinking. Reference in the article to Hollinger International is a good case in point.

If a board believes it can achieve this required level of independence of thought and process without meeting the recommendations of the Corporate Governance Council then it has the opportunity to argue its case to its shareholders and the market place through the "if not, why not" principle.

Let us not too readily dismiss the importance of independence or companies may be left open to abuse and manipulation by an unscrupulous and self interested few. Even Jim Kennedy's now legendary gardener may add value to a board if he were able to persistently challenge the foundation of a board's thinking and planning and uncover and remedy the unintended or the unscrupulous.

Stephen Harrison AO

Cremorne, NSW

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The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.