Managing Stakeholders Assignment

James Hardie Industries Ltd (JHIL) over the past 70 years has struggled to adequately deal with their corporate responsibility for asbestos related injuries and claims.  Management of their stakeholder relationships concerning asbestos compensation has caused legal issues, government intervention and damage to their corporate credibility.

In examining the James Hardie story, the following principle of Stakeholder Management applies:

“Managers should work cooperatively with other entities, both public and private, to insure that risks and harms arising from corporate activities are minimized and, where they cannot be avoided, appropriately compensated”

(Clarkson Centre for Business Ethics and Board Effectiveness n.d.)

By applying this principle of stakeholder management to JHIL, we can evaluate their management of stakeholders in relation to asbestos injury compensation to date.

James Hardie founded James Hardie Industries Limited in Australia in 1888.  In 1895, Andrew Reid joined him as a full partner in the business.  When James Hardie retired in 1911, he sold the business to Andrew Reid, whose family led the business until 1995 when his grandson John B Reid retired.

JHIL was originally a trading company and grew to become one of Australia’s most successful building and industrial products manufacturers.  James Hardie Industries Ltd started manufacturing products using asbestos in the 1920s; they rose to become one of the world’s largest asbestos manufacturers.

The first known asbestos injury claim settled by JHIL dates back to 1939.  The company knew of the risks of mesothelioma and other asbestos-caused cancers from at least the mid-1960s.  This prompted JHIL to phase out the use of products containing asbestos from 1964 ceasing completely in 1987.

Although James Hardie Limited were aware of the dangers of asbestos, they did not put in place adequate safety measures to prevent direct harm to their stakeholders.

The stakeholders affected by JHIL’s use of asbestos are: –

• Asbestos Miners, their families and their communities
• JHIL Employees and their families (Past)
• Trades people
• Government
• Shareholders

JHIL then faced the issue of compensation to asbestos injury claimants, arising from their activities from the 1920’s to 1987.  Due to the nature of various asbestos triggered illnesses, the compensation liability for the company is projected to extend through to 2050.

By 2001, asbestos compensation claims threatened the financial viability of JHIL with an estimated cost of A$50 million per year.  In 2001, the company established the Medical Research and Compensation Fund to manage the compensation of claimants.  The assets of the three affected subsidiaries (James Hardie & Coy, Jsekarb and James Hardie Industries Ltd) were moved into the fund.  This totaled A$293 million.  A safety net of A$2 billion in share options was set aside for any future shortfall of the Compensation Fund.  The aim of the fund was to manage and compensate all future valid claimants of asbestos related illnesses.

The Company then moved its headquarters to the Netherlands, whom Australia does not have a reciprocal court judgment treaty with and in 2002, the share option safety net was abolished by the company.

In 2003, the directors of the compensation fund publicly stated that they were facing an immediate shortfall to compensate claimants.  The following year, this information caused a global backlash against JHIL (NV) resulting in ban of JHIL products.  Australia’s Corruption Commission then started an investigation into Director’s of the company who were accused of making misleading statements to shareholders and breaches of the Company Act, these proceedings are still ongoing.

In February 2007, the shareholders of James Hardie Industries (JHI) approved an asbestos compensation agreement worth AU$4 billion.  The compensation agreement ends a long-running legal and political battle between JHI and various stakeholders.

The following table (F. 1) from a report by KPMG called Valuation of Asbestos Disease Liabilities of Former James Hardie Entities to be met by the Special Purpose Fund (KPMG (2006) p. 174) shows the past and future number of asbestos related claims that JHIL’s may have liability for:

The most appropriate principle for evaluation of the JHILs performance during the asbestos claim issue, in terms of Stakeholder Management is:

“Managers should work cooperatively with other entities, both public and private, to insure that risks and harms arising from corporate activities are minimized and, where they cannot be avoided, appropriately compensated”

(Clarkson Centre for Business Ethics and Board Effectiveness n.d.)

We can break down this principle into three separate parts to evaluate James Hardies adherence and non-adherence to the principle:

• Do no harm
• Minimise Risk of harm
• Compensate when harm is done

Do No Harm

This principle relates to an organisations moral responsibility to ensure that they do no harm to their explicit and implicit stakeholders and consider their externalities when considering risk of harm.

JHIL became aware of asbestos related health issues in the 1930’s, yet they carried on production and distribution of asbestos-based materials until the late 1980’s.  During this fifty year span, thousands more people were exposed to asbestos.

Different stakeholders were placed at risk in various ways: –

JHIL had the following options to allow them to adhere to this aspect of the principle:

• Research and development into new non asbestos building materials
• An immediate closure of mines and asbestos manufacturing to ensure the health of workers
• Research into the illnesses caused by asbestos

The following constraints and challenges would have faced JHIL if they had chosen to follow this principle:

• Market demand
• Market education
• Financial loss
• Job losses
• Lead time of research and development

Minimise Risk of Harm

If harmful consequences on stakeholders cannot be avoided then the risk must be reduced to a minimal level.

JHIL had the knowledge and opportunity to minimize risk for their stakeholders.  They increasingly became more aware of the safety issues related to asbestos.  As more information was available on the risks, also more information became available on how to reduce those risks to humans and the environment.

JHIL had the following options to allow them to adhere to this aspect of the principle:

• Impose and enforce safety standards for dealing with asbestos across their companies
• Work with contractual stakeholders to pressure them to do the same
• Educate their employees and other stakeholders in the risks associated with asbestos
• Lead in research and development of non-hazardous replacement materials
• Liaise and work with government to bring a coherent approach to the issue
• Clean up the environment so that community exposure was limited
• Work with Trade Unions to inform their members and work together for long-term solutions

The following constraints and challenges would have faced JHIL if they had chosen to follow this principle:

• Lack of understanding about environmental affects of hazardous material
• Safe handling knowledge grew with increased asbestos related illnesses
• Trade Unions/Strikes
• Increased costs 

Compensate when Harm is done:

Organisations must address the harm that has already been done to their stakeholders both explicit and implicit.  They have a responsibility to work with their stakeholders in forging solutions to the resulting issues and making compensation for the harm already done.

JHIL have not worked with stakeholders to address the issue of compensation in an open and ethical way.  While it is fair for companies to try to control their liabilities, JHIL made dishonest statements to their shareholders, the claimants, the government, the public and the stock exchange.  This not only deceived stakeholders but also left their executives and directors open to civil and criminal prosecution.

JHIL had the following options to allow them to adhere to this aspect of the principle:

• Coherently work with all stakeholders to reach a long-term resolution at the earliest possible notice
• Work towards a resolution that enabled fair compensation but also company viability at the earliest possible notice
• Be open and honest with their communications
• Take a pro-active instead of re-active approach to company strategies on compensation
• Make a commitment to the harmed stakeholders that they will honour their role as a ethical global organisation

The following constraints and challenges would have faced JHIL if they had chosen to follow this principle:

• Liability issues
• Financial loss

James Hardie Industries Ltd’s decision-making processes concerning the asbestos claim issue could be viewed as re-active and financially motivated.  The company did not consider its credibility, ethics and long-term stakeholder relationships by taking the decisions they did during the course of this issue.

Although financial loss appears as a constraint through all three areas of JHILs adherence to the principle, if the company had worked with other stakeholders and negotiated a long-term deal much earlier, they may have lessened their long-term liability and still have maintained their credibility.