The conflict(s) of interest relating to Trowbridge (the firm of actuaries) and James Hardie Industries (JHI)

A conflict of interest refers to a set of situations that may cause risk in that an expert’s judgment and actions on primary interest by replacing it with a secondary interest (Davis & Stark 2001). Primary interest constitutes the main goal in an entity; for instance, protection of customers, the health and confidentiality of patients, research integrity, and obligations of a public office. Secondary interest includes financial gain, desire to advance professionally, and the wish to favour family members and friends. Conflict of interest regulations normally put emphasis on financial relations since they are more quantifiable and more objective (Davis & Stark 2001). A conflict of interest happens when a person or organization is caught up in several interests some of which can easily corrupt motives of a professional action in the other. This is a description of conflict(s) of interest relating to David Minty and/or Trowbridge (the firm of actuaries) and JHI Limited.

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The case of JHI involved a number of parties including JHI Limited, the consulting actuaries (Trowbridge Consulting), trade unions, media, politicians and members of the public. The Trowbridge Consulting found itself offering advice to two parties within an organizational restructuring exercise where interests of the two parties were competing and public interests seemed to be ignored (Gunz & Laan 2010).

 

Since the 1980s, JHI witnessed a substantial growth in successful litigations. This led to huge losses that prompted the company to look for ways of minimizing the expensive claims, as well as, risk of workers’ exposure to asbestos. They adopted a strategy that led to the creation of Medical Research & Compensation Foundation (MRCF) to deal with claims and payments of asbestos poisoning from its products. The preparations for the formation of MRCF became the origin of the now well-known case of conflicts of interests involving JHI Limited and Trowbridge Consulting actuaries. In 1990s, David Minty was the Trowbridge’s key representative working with JHI. Here, successful claims lodged against JHI group increased both in value and in number. Minty followed these trends and reported the changing valuations as JHI requested him to calculate them (Gunz & Laan 2010). The Minty estimate of the value of liabilities were alarming from JHI’s perspective.   Even though, JHI management had every right to view Minty’s valuation with a critical eye and question his assumptions, their relationship with actuary placed unduly pressure on the independence of the professional advisor.   JHI management turned to be aggressive and unpleased with Minty estimates. For instance, Minty’s estimates of 2000 that was between $A 200 and $A 350m was revised down by the management to $A 294m (Haigh 2006). The actuary strived to provide an estimate that was a true reflection of the possible value of asbestos liability while on the other hand JHI wanted valuation values that were acceptable to them.

During the preparation of the critical report, Minty did not access the data for 9 months from stretching from March to December 2000. Therefore, he prepared the new evaluation based on data used in previous report.   Irrespective of time constraints imposed upon Minty and initial lack of clarity concerning the purpose of the evaluation report he was preparing, he was held accountable for the underfunding of MRFC that resulted from the use of his report. The commission of inquiry that investigated the funding issues concluded that, during Minty’s presentation of the report he learnt about the intended purpose of the report from one of the incoming directors of MRFC but did not provide the required professional advice. It is also imperative to note that, even though the actuary report was central to proper funding of MRFC, JHI managers and board members generated financial models that corroborated their desired conclusions (Gunz & Laan 2010).

 

In this case, it is apparent that clear and urgent strategic and financial interests on the part of JHI management complicated significant professional issues.   The management placed unduly pressure on Minty to an extent that he allowed them to alter his expert evaluation figures to those that were in harmony with their financial and strategic interests. For this reason public interests, were ignored during the establishment of MRFC.   Eventually, Minty was held accountable and IAA took disciplinary actions against him for breach of Code of Professional Conduct (Gunz & Laan 2010). Minty was accused of failure to exercise the required independent judgment regarding the information needed to prepare the actuarial report.

How Trowbridge should have dealt with these conflicts

There is conflict of interest between Trowbridge as a professional body and at the same time as an employee of JHI. Conflict of interest constitutes a dilemma faced by an individual because of tangled competing loyalties or interests. Here, the situation calls for Trowbridge to make a decision on where to do the right thing – give workers their justice – or become a sycophant to the employer – JHI. The relationship between Trowbridge and JHI is principally governed through law of tort and contract. This relationship is irrespective of numerous elements that raise fiduciary obligations; for instance, obligation of confidence. In case the conflict of interest will have influence of professionalism of one party, it could lead unsatisfactory professional conduct that may call for disciplinary action. Trowbridge is a professional firm of actuaries whose conduct is governed by both law of contract and tort. Trowbridge is operating in a hard environment whereby its employer, JHI underfunds its MRCF with A$293 million instead of estimated A$2.2b required. This proposition implies that MRCF will not manage to allocate affected employees their fair share.

Going by either side, there should be an impact on Trowbridge. However, supporting JHI will eventually make its profession at jeopardy. To salvage its professionalism, it is therefore advisable for Trowbridge to convey the right estimates. Trowbridge’s assertion that the advice provided was restricted to the instructions by JHI management and board could not survive within the Professional Code of Conduct. Actually, Trowbridge ought to have informed the Hardie’s management about the importance of actuarial professional independence vis-à-vis their right to view evaluations critically and question Minty’s assumptions. Doing so would have cautioned the management against unnecessarily tampering with expert evaluation figures. Furthermore, if Trowbridge had raised concern about the unduly management interference with Minty’s professional independence in time, the management would have been discouraged from withholding relevant data from Minty. Therefore, to some extent, Trowbridge’s failure to raise alarm against the unacceptable management actions exposed Minty to unduly pressures.

 

References

Davis, M & Stark, A, 2001, Conflict of interest in the professions. Oxford, UK, Oxford University Press.

 

Gunz, S & Laan, S, 2011, ‘Conflicts of interest and professional independence: the case of James Hardie Industries Limited’, Journal of Business Ethics, vol. 98, no. 10, pp. 583-596.

 

Haigh, G 2006, ‘Asbestos house: the secret history of James Hardie Industries’, Code of Professional Conduct. Institute of Actuaries of Australia, Sydney.

 

Prince, PJ, Davidson, M, & Dudley, S, 2004, ‘In the shadow of the corporate veil: James Hardie and asbestos compensation’, Parliamentary Library, Commonwealth of Australia, Research Note No. 12.

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