Background

The James Hardie civil proceedings have attracted considerable coverage and commentary to date.  For further information on the factual background, please see our article The James Hardie decision – some lessons for directors and senior management published in May 2009.

On 3 May 2012, the High Court handed down two judgments in relation to the James Hardie civil proceedings:  

  • dismissing the appeal brought by Peter Shafron, former general counsel and company secretary of James Hardie Industries Ltd (JHIL), against the finding of the NSW Court of Appeal1; and
  • overturning the NSW Court of Appeal decision that ruled in favour of seven former non-executive directors of JHIL and Mr Shafron2.  This means that there is now a final decision that the non-executive directors breached their duties to JHIL. 

The key findings of the Shafron decision were that:

  • Mr Shafron was an officer of JHIL because he participated in significant decision making (in addition to being company secretary);
  • the statutory duties applied to all of his responsibilities at JHIL, not just those which were the same as the other company secretary within JHIL; and
  • he had contravened section 180 of the Corporations Act by failing to advise:
    • the CEO and the board that they should consider whether JHIL was required to disclose to the ASX the Deed of Covenant and Indemnity it had entered into with the Medical Research and Compensation Foundation (MRCF); and
    • the board that the assumptions of the actuarial report underlying the asbestos liability cash flow model tabled at the relevant board meeting did not take into account "superimposed inflation" – the potential for the cost of asbestos claims to increase over time at a rate above the general rate of inflation – and that prudence warranted making an allowance for it. 

Who might be an officer?  And which of their functions are covered by the statutory duty?

The decision places the spotlight squarely on when a general counsel will be an "officer", but also who else might be an "officer" and not realise it.

A general counsel who also holds the role of company secretary will be subject to the statutory duties of care and diligence in all of their capacities in the corporation because they hold the named office of "company secretary". The scope of Mr Shafron's role as company secretary was indivisible from his role as general counsel and therefore his responsibilities were viewed as a composite whole.  It is common for chief financial officers and financial controllers to hold the office of company secretary. They should also be mindful of the standard of care that they will be held to in conducting all of their duties, not just the company secretarial role.

Senior executives (including general counsel who are not the company secretary) are at risk of having their conduct measured against the statutory standard of care and diligence if they can be described as a person who "makes, or participates in making, decisions that affect the whole or a substantial part, of the business of the corporation" (from the definition of "officer" in section 9 of the Corporations Act). This assessment includes considering the role the person plays in the corporation generally, not just how they acted in relation to the particular situation that gives rise to an alleged breach, and the relationship between the individual's actions and the relevant decision (in the Shafron case, the decision to adopt the proposal to establish the MRCF). 

The High Court found that Mr Shafron was a senior executive of the company and one of three executives responsible for promoting the proposed project to separate asbestos liabilities from the operating cash flow of the James Hardie group. He helped shape and develop the proposal, decided what would be put to the board and presented successive proposals to the board. This was the process and the material on which the board ultimately based its decision. There was a clear relationship between Mr Shafron's actions and the decision of the board. 

It will not be uncommon for senior executives of large or small corporations to participate in the board's strategic decision making. There is a real risk for senior executives operating in such a role that they will be exposed to liability as an officer, if they do not discharge their responsibilities with the requisite degree of care and diligence. The standard is the standard of a reasonable person, with those responsibilities in the relevant company. 

Practical Implications

There are some practical steps that senior management and companies can use to protect themselves or their employees from being exposed to liability.

Be clear about roles and responsibilities

The responsibilities of an executive can be inferred from the person's behaviour, as much as from any formal role description. Members of senior management need to be clear about the role they play in the organisation and what the role entails (and doesn't entail). If you assume certain responsibilities and act as if the scope of your role encompasses those responsibilities, a court will expect that you will perform to the relevant standard, so clarity about the scope of each role is important. 

Anyone involved in or contributing to strategic decision making should make sure that they are clear about their limitations and not take on functions which are clearly beyond their area of competence. Otherwise, they risk being held to the standard of a reasonable person with those responsibilities, and may well fall short. 

Who should be appointing and briefing external consultants?

Make sure the people with relevant expertise are involved in briefing external consultants and in reviewing and presenting any work from external consultants, so that all relevant limitations are identified and addressed at an appropriate level. 

By taking responsibility for commissioning the actuarial consultants on behalf of JHIL and presenting their material to the board, Mr Shafron accepted responsibility to draw the board's attention to relevant matters (including limitations in the actuary's assumptions) which were within his knowledge. By failing to do this, he failed to satisfy the required standard of care and diligence.

Decision maker or governance and legal adviser?

The case is a timely reminder for general counsels that it is their responsibility, and the responsibility of lawyers reporting to them, to bring an independent mind to the commercial table. Because of their qualifications and the position in which they are employed, they have a duty to protect the company from legal risks, if they are an officer of the company. 

It would be prudent for the role of driving a transaction or project to be separated from the objective role of governance officer or legal advisor. A person advocating for a project or transaction may be unlikely to be able to simultaneously, and diligently, raise possible weaknesses or provide impartial advice, whether legal or otherwise, to the decision makers assessing the proposal. 

If an in-house lawyer or company secretary is given operational responsibilities to drive a complex or potentially controversial transaction, the objective role of a legal advisor and governance advisor should be allocated to someone else. This can be a challenge in a resource constrained environment (and who doesn't work in one of those?). Ultimately, this is a question of risk allocation for the company and its executives. 

Seek specific external advice

For the protection of the board, as well as for individual executives, the company should obtain specific external advice that the board can rely on when making necessary decisions. Obtaining external advice can give the in-house advisors impartial support for the conclusions that they have drawn, or raise relevant matters of consideration that may not have been addressed.

In instructing external advisors, companies need to be specific in what is required in any scope of work.  Mr Shafron argued that he was entitled to assume that JHIL's external lawyers would have advised him if the disclosure of the Deed of Covenant and Indemnity to the ASX was required. However, the factual finding that the law firm's retainer neither expressly nor impliedly extended to considering the question of JIHL's continuous disclosure obligations was not in doubt by the High Court, so he could not rely on the external lawyers.

Review D&O insurance

Companies should review their Directors and Officers (D&O) insurance policies to check that they provide suitable coverage for all senior executives and management, in addition to directors and company secretaries. If feasible, companies should consider extending D&O insurance to all of their employees who may fall within the definition of an officer.