‘Possibly the worst job in the market,’ is how one analyst describes the IR position at building products company James Hardie. How things change. Only 18 months ago, James Hardie was held up as an example of best practice, winning multiple awards for its IR and management of its public affairs function. Now its reputation is on life support and its share price has plummeted from a high of around A$8 ($6.08) in January 2004 to its current price around the A$5.50 mark. The cause? The company’s management of liabilities associated with asbestos products.
A heads up
In 2001 James Hardie established a foundation to compensate people who had diseases caused by contact with the asbestos products its former subsidiaries produced. An announcement made it clear that the creation of the foundation resolved James Hardie’s ‘asbestos liability favorably for claimants and shareholders’ and the foundation it was setting up to compensate asbestosis sufferers was ‘fully funded’.
The news was well regarded by investors, although broker reports at the time indicated not everyone in the market believed long-term liability issues had been entirely averted. In the years following the launch of the foundation, James Hardie successfully negotiated several significant corporate events, including the sale of its gypsum business and thmajore relocation of its domicile from Australia to Holland. The share price improved considerably on the back of these successful transactions and on the strength of the company’s underlying fiber cement business. It was during this time that the firm gained its reputation for best practice IR.
The tide turned dramatically, however, when the foundation issued a statement indicating it was liable to run out of funds some time before the end of the decade. This information, released in late 2003, caused pandemonium for James Hardie, its shareholders, the foundation and asbestosis sufferers. The story has dominated Australian business news ever since and is prompting a government-led special commission into the matter.
The role IR has played in this story is significant. The strictures of being a listed company mean James Hardie is obliged to report all material information through the Australian Stock Exchange in the first instance. This fact was instrumental in shaping the communications strategy. So far, James Hardie has signed a preliminary compensation agreement with trade union representatives and the New South Wales government that will form the basis of a permanent settlement later. But while the episode is far from over, there are already several important IR lessons to learn from James Hardie’s experience.
One of the firm’s central problems was that although it sought to give the market the guidance it craved about the impact of the liabilities, providing any meaningful information on the issue was near impossible as symptoms of asbestosis can take years to emerge, making it hard to quantify the true limits of the asbestos-related liabilities.
This pressure on companies to give the market guidance when there is no clear limit to their liabilities is not just a problem for James Hardie; it’s a key challenge for many firms. According to Stephen Matthews, a director of the Australian Shareholders Association (ASA), companies in this situation must ‘tell it how it is’, even when full information is not available.
Admittedly the market will likely discount a company’s shares during a period of uncertainty. But being in this situation is much better in the long term than artificially inflating the share price, either by misleading the market or failing to properly disclose material information.
Indeed, Matthews recognizes James Hardie is not in a position to give the market certainty, but he does expect the new chair, Meredith Hellicar, to ‘tell it like it is’ as soon as she can. ‘Shareholders we have spoken to are not interested in receiving dividends at the expense of victims,’ Matthews notes.
Major shift
The James Hardie crisis underlines just how important it is for all stakeholders to be considered equally, especially in a business environment where activist groups are becoming increasingly savvy. Activist stakeholders, particularly unions and small special interest groups, can have a huge impact on a company’s operations and reputation. These groups’ messages have dominated the airwaves, with James Hardie’s messages receiving relatively little attention.
‘These groups can often organize quickly and have an impact completely out of proportion to their small size,’ says Andreina Garofali, principal at specialist IR consultancy Karma Communications. ‘They are also often perceived as more credible by the general public and media and are usually favorably positioned in the mainstream media, with the corporation positioned as the baddie.’
This can be frustrating for IROs at companies in this position because, no matter what the firm says, the media will usually deliver favorable coverage for the perceived victim. ‘All you can do is maintain consistent messaging and wait for public opinion to swing,’ Garofali advises.
Despite the flack James Hardie received, the company has maintained its commitment to good IR. According to one analyst who has a long association with the stock, ‘James Hardie has been renowned historically for being one of the better companies in terms of IR; its disclosure is best practice.’ Another says the firm provides a ‘professional service in terms of its IR. [Vice president of investor relations] Steve Ashe gives a balanced view and responds in a timely manner.’
It’s also worth recognizing that James Hardie was one of the first companies to embrace electronic communication, developed a comprehensive disclosure policy well ahead of its time and has always included its top IR executive in the management team. Unfortunately, these positives have been overshadowed by the events of the past year and the company is now charged with rebuilding its reputation.
One change the market is looking for from an IR perspective is a greater focus on providing a balanced view, rather than spinning good news too hard. Traditionally, James Hardie has had an aggressive management culture and analysts think developing a more balanced culture will be a key challenge for the new CEO. ‘An external CFO will also help,’ says one.
Once James Hardie resolves its asbestos-related liabilities, the market wants big changes at board level. According to one analyst, ‘two thirds of the board needs to go during the next year, although Hellicar should stay for continuity.’ The ongoing IR strategy also needs to include comprehensive qualitative research of the investment community to find out what the market wants from James Hardie. Management then needs to act on the findings of this research so that investors buy into the company’s plan for the future.
Where to now?
At present, the IR team at James Hardie is still in the thick of the crisis. As well as dealing with day-to-day activities, those responsible for IR at the firm are heavily involved in tense negotiations currently taking place with various stakeholders.
Many in the market are sympathetic toward the IR team and appreciate how difficult it has been for the company to issue regular updates, given the continuing uncertainty of the situation. Analysts are also upset with the mainstream media’s portrayal of the situation. In the words of one, ‘The mainstream media have not provided a balanced view, which is frustrating for someone who does understand the issues.’
So is a job in IR at James Hardie really the worst in the market? Ashe says his days are ‘full and intense, and prioritizing is a key issue for me. My priorities at the beginning of the day usually change as the day progresses.’ It’s probably not the worst job in the market, but it’s surely the most frantic – and arguably the most interesting.
