Australian Case Study in Corporate Governance – Hih Insurance

4824 Words Jun 2nd, 2008 20 Pages
1. INTRODUCTION
“The collapse of the HIH Insurance group (“HIH”) resulted in a deficiency of up to A$5.3 billion, making it Australia’s largest corporate failure. The ensuing Royal Commission report released in April 2003 provides a rare detailed dissection of a spectacular corporate implosion and a very useful case study from which corporate governance lessons may be learned. This is particular so because HIH was not unusual case of major fraud or embezzlement. The failures identified by Commissioner Owen were by and large failures stemming from mismanagement. Most breaches of the law were designed to cover up the consequential increasing financial difficulties which were engulfing HIH” (Lipton, P., 2003, p.273, Retrieved 19th December
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In summary, without those one-off adjustment entries, the underwriting loss would have been worse and thus the financial position and performance of HIH was in fact deteriorating.

(iii) Independence
The HIH directors failed to exercise sufficient oversight over the management of HIH. The board failed to adopt a generally questioning and independent approach to all the material presented by management. The board’s independence was compromised by the influence of management in relation to its deliberations. This has lead to the existence of several conflicts of interests. For example, Robert Reginald Stitt, one of the lawyers on the board was a significant supplier of legal consulting services to HIH, and was also a consultant to the firm hired by the company as its legal adviser.

(iv) Accountability
The chief executive was able to exercise unchallenged influence and authority over the other senior executives and board directors. Even as his business judgment faltered in the second half of the 1990s he remained unchallenged. Business proposals, once duly approved him before going to the board were never changed or rejected by the board. There was also a lack of accountability among senior management and the board of directors. In the acquisition of FAI Insurance (“FAI”),
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