Further reflections on the James Hardie case: a corporate governance structure set up to fail?

Our update in December 2010 reported on the James Hardie appeal decision¹.  Since then, there has been a lot of commentary about what the Court of Appeal decided - particularly in relation to Peter Shafron, who was both company secretary and general counsel of James Hardie.  Reflecting on the governance aspects of the James Hardie saga, we wonder if the real lesson is this: you shouldn't give one person two jobs that conflict with each other. 

Let's take a close look at the facts in James Hardie.  Mr Shafron wasn't only the company secretary and general counsel.  He was one of the most senior executives in the company, and the executive (or one of the executives) responsible for implementation of Project Green (the project to separate asbestos disease liabilities from the operating cash flow).  So he was a project driver, and it was his job to make the project happen.

At the same time, he was company secretary and general counsel.  The Court of Appeal made it clear that as holder of these offices, he was expected to play a transactional governance role.  He was responsible for warning the Board about continuous disclosure issues, and about weaknesses in the material presented to the Board in support of Project Green.

How realistic is it to expect the same person to be the advocate and driver of a complex and potentially controversial project, and simultaneously to be the objective governance monitor of the project, diligently raising possible governance weaknesses for the attention of the Board?

We think this is a structure set up to fail.  For the protection of the Board, as well as for the protection of the individual executives involved, the role of driving a transaction should be separated from the role of transactional governance.

This is not to say that an executive who is company secretary and/or general counsel cannot have operational responsibility for driving a transaction.  But if he or she does take on this subjective role, then the objective role of transactional governance should be clearly allocated to someone else.

For further information please contact:

Leigh Warnick                                                                      Caroline Brown
Partner                                                                                Partner
+ 61 8 9288 6771                                                                 + 61 8 9288 6977   
leigh.warnick@lavanlegal.com.au                                         caroline.brown@lavanlegal.com.au