The High Court's decision on the James Hardie case is not just a huge victory for the Australian Securities and Investments Commission. The court has backed ASIC in a way that re-arms all government regulators in civil court cases.
It's also a lighthouse decision for directors and boards. There's no new precedents for them. But the confirmation of the NSW Supreme Court's finding that Hardie directors breached their duties by approving the release of a stock exchange announcement that contained misleading information combines with last year's Centro decision in the Federal Court to make it crystal clear directors must have a detailed understanding of their companies.
There are lessons for the chairmen of boards, too. Boards that comprise a suite of individual experts, which is most of them, have embedded risk: all directors need to be able to be competent in all matters that land on the boardroom table.
Board papers need to be accurate and exhaustive, and they must be read, from top to bottom, and understood. Processes for putting information in front of directors must also be improved: the size of the directorial talent pool will be reduced by these changes, but they are essential.
The Hardie case has been a marathon, and a little history is needed.
Hardie decided in 2001 to legally relocate to the Netherlands, and leave behind a new and separately funded company, the Medical Research and Compensation Foundation, to meet future asbestos-related claims flowing from the days when it made and sold products that contained asbestos.
Hardie's board approved the split on February 15, 2001, and the following day told the stock exchange the new vehicle's funding of $293 million was sufficient to meet the best estimate of future asbestos liabilities. The statement was not even close: by 2003 estimated liabilities had risen to more than $1.5 billion.
ASIC launched its case against former directors and executives of Hardie in 2007, claiming they had breached their duties when they approved the draft of the stock exchange statement.
Minutes of the board's February meeting were tendered by ASIC. They had been approved by the board at its next meeting in April 2001, and recorded that a draft of the stock exchange announcement had been tabled and approved.
A potential witness, David Robb, the lawyer who had supervised the preparation of the board minutes, was not called by ASIC, but the court rejected arguments the board had not reviewed and approved the draft statement, and found the directors had breached their duties by approving it.
That decision was then overturned in the NSW Court of Appeal. It found ASIC owed a special duty of fairness when it ran court cases, and had breached it, fatally undermining its case, when it did not call Mr Robb. The High Court yesterday allowed ASIC's appeal of the Court of Appeal's decision. There was no basis for inferring Mr Robb might have given evidence favourable to the directors, it found, and no unfairness had been caused by ASIC's decision not to call him.
That's a crucial finding for ASIC and other regulators who run civil cases, including the Australian Competition and Consumer Commission. Government agencies all have a ''model litigant'' duty to run fair legal actions. The High Court has, however, restored the status quo for that duty, and rejected the Appeals Court's finding the duty extends to the calling of all material witnesses in cases government agencies run.
It has, in effect, removed a handicap on ASIC as a litigant, and done so in a way that flows right through the system. All government agencies must be model litigants. But they can once again shape their witness lists without running the risk their cases will be torpedoed on appeal.
For directors and non-executive directors in particular, the High Court case makes several things even clearer than they were after the Centro decision in June last year.
In Centro, Federal Court judge John Middleton found directors had breached their duties in 2007 by signing off on accounts that failed to recognise Centro needed to repay billions of dollars of debt within a year - a task that defeated it after the global crisis erupted.
The directors had not ''understood and applied their minds'' to the accounts, he said, adding that a board sat at the apex of a company and had the greatest responsibility to do so.
The NSW Supreme Court decision on James Hardie that the High Court has resurrected goes further, by making clear directors need to not only be able to dissect company accounts, but be able to dissect and understand any complex corporate manoeuvre.
In the case of Hardie, that required a detailed understanding of the actuarial assumptions behind reports the building group had commissioned into its asbestos liabilities, for example.
The decisions impose very high standards on all directors.
They need to have a range of skills, not just a specialty, and they must satisfy themselves their companies have processes in place to bring information before directors enabling them to sign off on a proposal with confidence.
ASIC's chairman, Greg Medcraft, correctly noted yesterday these requirements had always existed. Hardie makes them more explicit, however - and it's now cast in stone.