Business Corporate Governance and Stakeholders

Question: Discuss about the Business Corporate Governance and Stakeholders. Answer: 1. Corporate Responsibilities Owed to the Stakeholders Stakeholder Group of James Hardie Corporate governance responsibilities owed Employees According to Section 20 under the 2004 OHS Act, the management has a duty of care towards its employees that eliminates risks to health and safety (Ohsrep.org.au 2016). According to Fair Work Act 2009, the employees must be provided with Workers compensation in the form of insurance payment for the health impact or injuries caused in work (Fairwork.gov.au 2016). Suppliers Contractors The management owes human rights such as being informed, ethical sourcing, labour relations practices and disclosure to the suppliers which is supported by Australian Government. The contractors performing mining activities for asbestos-based products must be informed about the health impacts (Ato.gov.au 2016). Society The management has moral obligations to the society and no misleading information must be provided. The health effects such as cancer and other lung diseases caused by asbestos must be communicated to the society or community as a whole (Hasnas 2013). Government James Hardie has responsibility towards the NSW government as they are responsible for handling claims of the entire community. They are liable for stopping any business that causes harm to the society (Hasnas 2013). Financial Investors The company owes to the financial investors as they make decisions looking at the overall business structure, revenue sources, profit patterns and compliance with corporate social responsibility. They look for the best return on investment (Hasnas 2013). Shareholders Shareholders are the owners in the company who have a right to obtain information. The management has a fiduciary responsibility for disclosing necessary information as they hold interest in the business (Hasnas 2013). Customers Customers consume the products manufactured by James Hardie and they have the right to information. The customers must know about the sourcing and the management must charge reasonable costs by them (Hasnas 2013). Union The Australian Union protects the rights, health and safety of the employees in Australia. The management has a responsibility towards them as they represent the interests of workers (Australianunions.org.au 2016). Legal Bodies The management has responsibility towards legal bodies as they are required to provide corrective justice by conducting in the correct manner and not harm under tort liability (Spender 2003). 2. Key Corporate Governance Issues ASX Principle Key corporate governance issue corresponding to that ASX Principle Lay solid foundations for management and oversight According to the James Hardies case, there is no balance in authority. The individual has unfettered powers because even after health warnings and potential impact of liabilities from compensation due to asbestos, the organization continued to manufacture products thereby jeopardizing lives. Structure the board to add value The business does not have a proper understanding of the current and potential issues of the business. The company does not have a strong board that are committed to their responsibilities and duties. Act ethically and responsibly Evidently, the organization does not act in favour of its stakeholders and harms the shareholders, employees, business partners, creditors, consumers, the environment and the broader community with their work practices. Safeguard integrity in corporate reporting The company does not present a truthful and factual representation of the financial position. The company formed Medical Research Compensation Foundation (MRCF) so that the fund could be used to pay the victims affected by asbestos. However, the MRCF was underfunded and the estimated liabilities rose up to $1044 million from $693 in 2000 (Haigh, 2006). Make timely and balanced disclosure Deed of Covenants between MRFC and JHIL were deliberately hidden by the organization. The information memorandum was misleading as it lacked disclosure about meeting future moral obligations. Respect the rights of security holders The company did not respect the rights of shareholders as the communications were misleading. There was an imbalance between the company and its proposals. Recognise and manage risk James Hardie had no risk management strategy. It does not take any measure to assess or manage the risk that would arise from asbestos mining. There was clear medical implication arising from exposure to asbestos but no mitigation strategies were adopted by the company. Remunerate fairly and responsibly As James Hardie did not stop manufacturing asbestos-based products, the remuneration was paid to the employees for their work. This payment cannot be termed responsible as there was no link between performance and remuneration. Source: (Asx.com.au 2016) 3 Actions to Comply with ASX Guidelines ASX Principle Actions company should have taken to comply with the ASX guideline Lay solid foundations for management and oversight The company must assess the leadership authority of James Hardie and the security holders must decide whether to elect a person or no. As the authority has unfettered powers, there is a need to change the directors so that there is proper functioning. Structure the board to add value There is a need for a board that has proper commitment, size and composition so that they are adequately discharged with roles and responsibilities. James Hardie must have a board that understands and deals with the existing and potential issues. Act ethically and responsibly James Hardie needs to address the interest of its stakeholders including employees, business partners, creditors, consumers, the environment and the broader community. The code of conduct must be established where the directors, employees and executives are expected to act honestly and in the best interest of the organization. Safeguard integrity in corporate reporting The organization must establish an audit committee who would ensure the adequacy of the reporting process. The committee must also obtain a declaration from the CEO that the financial statements are properly maintained and are accurate. Make timely and balanced disclosure The organization must have a written policy for disclosure about financial performance, governance and ownership. The information must not be misleading and media must be used as an appropriate channel. Respect the rights of security holders The website must be used for providing information about the company and its governance. The copies of annual reports, financial statements, current business pattern, structure and effective communication must be established with the security holder. Recognise and manage risk The board needs to establish an appropriate risk framework by identification and managing the risks. The management must oversee the risk involved in asbestos-based products and the compensation it needs to pay to the victims. The risks must be disclosed in every reporting period. Remunerate fairly and responsibly The management needs to disclose its remuneration policy for the non-executive directors, executive directors and other seniors. The compensation must be responsible and fair. James Hardie needs to set up a performance management system to ensure fair remuneration. Source: (Asx.com.au 2016) 4 Effect on Long Term Interests of Stakeholders between 1930s-1987 Stakeholder Group of James Hardie How long term interests of stakeholder groups were affected or exacerbated Employees The employees working for James Hardie were observed having asbestos-related diseases such as asbestosis, mesothelioma, and lung cancer (Ramazzini 2016). Suppliers Contractors The health impact was not limited to the employees, but also the demolition contractors who worked in neighbouring manufacturing plants (Chen and Zorigt 2013). Society The community and environment was damaged due to asbestos-mining. Asbestos can easily travel through air into the water supply, settle at the soil surface and can be picked up by the wind. The entire society faced significant threat as asbestos as inhaled by the human lungs (Frank and Joshi 2014). Government As government is obligated to protect the rights, safety and security of the common public, the government reputation was affected as they let James Hardie conduct business while jeopardizing lives (Heenetigala and Lokuwaduge 2014). Financial Investors There were misleading statements presented regarding cash flow and cap percentage. The investors may have invested in the company while they were disclosing the social issues. Their money was used to conduct unethical business (Harrison and Smith 2015). Shareholders The shareholders were not informed about the working of the company. As the claim was stated as high as A$1.5 million, the money was decided to be taken from the shareholder fund of $30 million thereby affecting long-term interest of the shareholders (Haigh 2006). Customers As claims were being paid by the company, eventually it was added as cost paid by the customers. Due to unethical business practices, the customers had to bear the compensation paid to the victims (Frank and Joshi 2014). Union The union was affected as they are responsible to provide safety and security to the employees. However, the union could not provide security to the employees thereby causing harm to the Australian workers (Fooks et al. 2012). 5 Ethical Decision Making According to the legislative body Safe Work Australia, the Safe Work Australia Act 2008 defines a workers compensation as a form of insurance providing wage and medical benefits to the employees. The first case of providing the first workers compensation occurred in 1939 (Hills 2005). The disease related to asbestos exposure is termed as a deemed disease (Safeworkaustralia.gov.au 2015). Lung cancer is one of the common diseases caused to the workers due to asbestos exposure. However, the people may be exposed to asbestos as occupational or non-occupational reasons. The case-study clearly states that even back in 1930s, asbestos was known for giving harmful and deadly lung diseases. The actual discovery of health impact and liabilities was known in the 1960s (Spender 2003). Therefore, to continue manufacturing asbestos-based products after knowing its deadly impact on lung cannot be termed as ethical decision making by the board. The products continued to be manufactured till 1987 eve n after the liabilities arising from compensation was mentioned to the organization (Spender 2003). The main difference between moral and business ethics is that in case of moral ethics, a person makes decision knowingly or unknowingly based on own beliefs. However, in case of business ethics has normative elements when the business owners understand the impact of their decision on others. In this case, James Hardie ignored both moral and business ethics. The profit motive was prioritized at the expense of a social contract (Chell et al. 2014). The decision of continuing to manufacture asbestos-based products were made knowing the potential health impact. This questions the moral ethics of James Hardie as they decided to continue jeopardizing the lives of employees and entire community. Considering their stakeholders funds sufficient and significant enough to pay the victims affected by asbestos, argues the relevance of business ethics. All the employees and customers have different social and economic backgrounds. The facts regarding health impacts were hidden from the stakeholder s that question the business ethics. Misleading information was provided to the stakeholders that question the ethical principles followed by the company (Donaldson, Werhane and Cording 2012). 6. Actions of Stakeholders Threatening Corporate Sustainability Specific Stakeholder Group How did actions threaten James Hardies corporate sustainability Board of Directors and Senior Management The board of directors and senior management are responsible to set objectives for the employees and look after the organizational goals. There were health warnings and potential impact of liabilities from compensation. By continuing to manufacture asbestos-based products, the concept of corporate sustainability was ignored. The environmental concerns such as damaging land, air and water was continued. Further, the societal point of view was ignored in which the mining activities damaged the health of society (Moerman and Laan 2015). Not just the employees of the organization were affected, but the neighbouring communities and contractors were affected. Therefore, James Hardie could not achieve corporate sustainability as the moral obligations to the society were ignored deliberately (Mohrman and Shani, 2011). Shareholders The shareholders agreed for the fact that the victims of asbestos shall be paid from the funds agreed with the NSW state government (Spender 2003). Giving away the money from shareholders funds based on the formula on percentage of capital and free cash flow, led to economic viability. Such compensations dwindles the economic effectiveness of the company. It can be argued that the profit motive of the company was at the expense of a social contract and irresponsible practices were not a sign of economic or social sustainability (Davies 2014). References: Davies, S., 2014. The legal framework for corporate social responsibility.Governance Directions,66(11), p.693. Moerman, L. and van der Laan, S., 2015. Exploring Shadow Accountability: The Case of James Hardie and Asbestos. 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