The collapse of the HIH Insurance group of companies was Australia's biggest corporate failure.

In April 2003, the Royal Commission released its report "The Failure of HIH Insurance". The report provided timely insights into many aspects of how a company with award winning corporate governance systems and policies, could get it so wrong. Mr. Justice Owen, the Commissioner, identified that the core reasons for the collapse related more to vanity and inflated egos, poor systems and lack of monitoring rather than wide spread fraud. HIH Royal Commission The Royal Commission was established for several purposes, including ascertaining: Whether, and if so, the extent to which, decisions or actions of HIH, or of any of its directors, officers, employees, auditors, actuaries, advisers, agents, or of any other person: Contributed to the failure of HIH; or (were) involved or contributed to undesirable corporate governance practices, including any failure to make desirable disclosures regarding the financial position of HIH; Whether those decisions or actions might have constituted a breach of any law of the Commonwealth, a State or a Territory and, if so, whether the question of criminal or other legal proceedings should be referred to the relevant Commonwealth, State or Territory agency". One of the major requirements for a fully functioning board is to ensure that roles and responsibilities are clearly understood by all stakeholders, that the company itself is aware of its core responsibilities and that management's roles and powers are clarified in relation to those of the board. Accountability and monitoring are not only the mandate of the board - but for the board and often-senior management 'the buck stops here' for personal liability. When a company fails, not only the company faces the consequences of poor systems and procedures, but also the many stakeholders who have relied on the expertise and skills of the board and the combined effectiveness of the organization, which together, have let them down. Increasingly, directors and senior managers have personal liability for some parts of these failures. The recommendations contained in the HIH Report surprised many by their failure to recommend action against many participants given that counsel assisting the Commissioner, Wayne Martin QC, had previously made over 1,000 adverse findings relating to the Australia's biggest corporate collapse with many expecting hundreds of charges to be laid.

The report fundamentally states that the main reasons for the failure of HIH was poor management and greed characterized by: a lack of attention to detail and skills; a lack of accountability for performance; and a lack of integrity in the company's internal processes and systems.

It is interesting to note that one of the key findings of the Royal Commission was that a culture had developed within HIH that leadership decisions were not to be questioned, and that rather than fraud or embezzlement being behind the collapse, the primary reason for the failure was that HIH was mismanaged in the area of its

core business activity, being insurance. The precarious position in which Mr Cohen finds himself is a timely reminder to all directors that one of their fundamental duties is to question management decisions. Arguably one of the reasonable steps that Mr Cohen should have taken was to ascertain the parameters of the proposed joint venture and also to independently determine if the agreement was in the best interests of the company.

Commissioner Owen identified four Disastrous business ventures, which were critical to the ultimate collapse of HIH. These instances of poor decision-making were caused by and reflect a poor corporate governance culture. The UK operations were established in 1993. HIH board minutes did not disclose any Board consideration of whether the Establishment of operations in the UK was Compatible with the broader strategy of the Company and there was no evidence of Board participation in any business plan. Poor quality management information and Inadequate accounting systems impaired the Australian managements ability to monitor and control the UK operations effectively. The resultant losses in the UK were Estimated at $1.7 billion. The acquisition of a US business was Accepted by the board without analysis of Managements assertion that entry into the US market would be profitable. No due Diligence was carried out and there appeared to be a complete failure to appreciate the Level of risk involved. Losses attributable to the US acquisition were estimated at $620 Million. The board meeting convened to discuss the Acquisition of FAI was not called until earlier on the very day of the meeting with five of 12 directors not present. Of the seven Directors present, four participated by video Conferencing. It was resolved at this board Meeting that the takeover should proceed. The directors did not appear to have had the benefit of board papers, including the report Prepared by HIHs financial advisers.

Topic 1.5 Case study - HIH Insurance Ltd

Added by Gavin Nicholson, last edited by Gavin Nicholson on Feb 20, 2008 http://www.publicaccountants.org.au/media/76426/a00009281.pdf http://www.treasurer.gov.au/DisplayDocs.aspx?pageID=&doc=pressreleases/2003/02 0.htm&min=phc