James Hardie: the asbestos fund left A$1.3 billion short

In February 2001, Australian building materials maker James Hardie restructured so its asbestos liabilities sat in a separate entity: the Medical Research and Compensation Foundation, created with A$293 million in starting assets and owning the two subsidiaries that had made the asbestos products. The parent told the market the fund was fully funded for all legitimate future claims.

In June 2004 an actuarial review by KPMG Actuaries found the fund was short about A$1.3 billion — some A$500 million more than the company had claimed. The revelation prompted NSW premier Bob Carr to order a special commission of inquiry under David Jackson QC, and chief executive Peter Macdonald's defence — that the parent corporation was not liable for the trust — became the symbol of the affair.

After nearly twelve months of negotiations with unions and asbestos support groups, shareholders approved a compensation package in December 2005: total estimated liabilities of about A$3.13 billion, an initial injection of A$154 million, annual contributions from the company, and no cap on individual payments.

The accounting story then became a legal one. In April 2009 the NSW Supreme Court found that the company, the CEO and senior executives had breached their disclosure obligations over the 2001 statements. Some penalties were reduced on appeal in 2010, and ASIC took the case to the High Court, which agreed to hear the appeal in May 2011 — the defining corporate-governance case of its decade in Australia.