Asbestos case: James Hardie directors banned, fined


James Hardie Industries (ASX: JHX) directors have been fined $25,000 each and disqualified from serving on boards until April 30 2013, for misleading the market, investors and shareholders.

Seven former directors of the building materials group were found guilty of misleading the market more than 10 years ago, by saying that an asbestos compensation fund was fully funded. It was later found to be short around $1.3 billion, according to a report in the Australian Financial Review.

The bans imposed by the Court of Appeal are significantly less than the five years the High Court had originally imposed back in May, and the fines are also less than the $30,000 originally imposed. For the Australian Securities and Investment Commission (ASIC), this represents a high profile win – something it hasn’t had for a long time. Andrew ‘Twiggy’ Forrest, major shareholder of Fortescue Metals Group (ASX: FMG) won a case against ASIC earlier this year, while ASIC and the Commonwealth Bank of Australia (ASX: CBA) settled the bank’s  Storm Financial case in September.

James Hardie has had a long running battle over asbestos, although it was by no means the only company that was involved in the production of asbestos related products.

The modern asbestos industry began in the 1880s, but there was no medical understanding of the dangers of asbestos until 1930, when the British factory inspectorate published a report acknowledging the dangers of asbestos. Industrial and public health officials began pressing for dust controls among workers in the industry shortly after.

Despite incontrovertible proof of the issues asbestos fibres caused, it wasn’t until 2003 that the importation of any form of asbestos into Australia was banned.

James Hardie ceased using asbestos in any of its products by 1986, and setup the Medical Research and Compensation Foundation (MRCF) in 2001, transferring former subsidiaries involved in asbestos manufacture to it and established a dedicated organisation to manage and deal with asbestos liabilities of those former subsidiaries. The foundation was established with $293 million of cash funds and income producing assets.

In 2004, the company established a special purpose fund to compensate asbestos victims and James Hardie agreed to make annual payments to the fund of up to 35% of the company’s free cash flow, based on actuarial estimates of future compensation claims.

In 2006, the Asbestos Injuries Compensation Fund was formed and James Hardie committed to funding compensation awarded against three former subsidiaries. James Hardie has contributed around $550m to this trust since 2007 – according the fund’s latest annual report. While the number of claims are falling – in the year ending March 2012, there were 456 claims against the three subsidiaries, compared to 494 the previous year  – James Hardie may still be paying compensation for some time to come.

The Foolish bottom line

The outcome of the court case shows that directors need to make sure they read and agree with any statements that are issued publicly and to the ASX. The alternatives – such as James Hardie has faced, especially for companies operating with potentially dangerous materials, don’t bear thinking about.

If you only invest in one company this year, make it our “Top Stock for 2012-13”. Operating in two hot markets — one set to double by 2012, the other predicted to grow 5x over the next five years — this stock is a solid growth play that also boasts strong recurring revenue, zero debt, and lots of cash. Get its name and full research case in this brand-new FREE report.

More reading

Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

OUR #1 DIVIDEND PICK FOR 2016...

Forget BHP and Woolworths. This "dirt cheap" company is growing like gangbusters, and trading on a 5.6% dividend yield, FULLY FRANKED (8% gross). With interest rates set to stay at these low levels for years to come, for hungry investors, including SMSFs, this ASX company could be the "holy grail" of dividend plays for 2016.

Enter your email below to discover the name, code and a full investment analysis in our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2016.”

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our https://www.fool.com.au/financial-services-guide">Financial Services Guide (FSG) for more information.