Business Law Assignment: Corporate Governance Failure of HIH Insurance
Question
Task: To prepare this business law assignment, students are to select a recent corporate governance failure in Australia. Students are required to write a detailed and properly structured business report that a legal expert would provide to management. The report requires students to use laws, regulations and theories covered in this unit to explain the organisation's governance structure, the governance failure, how the organisation's policies, culture and ethics contributed to this failure and evaluate the responses by the organisation and relevant regulatory actors.
Answer
Legal, environmental and commercial harms that led to the collapse of HIH Insurance:
According to the research on business law assignment, in the year 2001, HIH had to be liquidated with losses within the range of 3.6 Billion dollars to 5.3 Billion Dollars. Likewise, right before the organisation was collapsed, One Tel which is one of the significant and known telecommunications company operating in Australia and one of the fastest growing companies as part of ASX list, posted loss of 291 million dollars in the year 2000. Both the company had shared their problems including weak corporate governance and business strategies that were unsustainable in nature. Other factors that were included in the losses of the company are aggressive reporting of finance, poor auditing and ineffective capital working. HIH registered a failure and the importance having proper governance and making sure that it is implemented in a rigorous way by not just being part of the lip service was re-established (Jackling et al. 2007).
HIH collapse was one of the biggest failures of Australia resulting in incumbent Liberal Federal Government establishing a Royal Commission to examine the reasons for the failure of HIH. Most importantly, the RC had made unlimited recommendations that led to the changes in the Australian Corporate Law landscape. The RC had provided different insights into how the company having ostensible corporate governance systems could fail in a peculiar manner (Mirshekary, Yaftian& Cross, 2005). In the opinion of Justice Owen, the collapse of HIH was an outcome related to lack of proper examination and inflated egos leading to the formation of a systematic fraud. It was seen in the case of HIH, that many directors had breached the duties that they had as directors under the Corporations Act. These directors were also banned from any type of involvement in the management of the company for an important period with penalties (Clarke et al., 2003).
The HIH had been often described as having one of the most conservative corporate culture and the deficiencies in governance has resulted in the downfall that was seen as a surprise for many (Mak et al., 2005).The organisation had a dynamic CEO and practices that were very engaging even in the high risks competitive market. The BOD however lacked independent directors; there were few independent directors who claimed that they were misled in comparison to the financial position of the company.
One of the biggest factors that contributed to the problems of HIH was the strategy related to acquisition and growth at all costs mentality and a culture which was like a never giving up attitude. It was because of these factors that the company finally collapsed (Low, Davey & Hooper, 2008).
Three most important factors to form corporate governance:
Build a strong and qualified board:
Size: The board of directors should comprise of knowledgeable directors who have expertise in the relevant business and are competent and qualified enough having ethical understanding and proper integrity. Moreover, they also have proper skill sets and enough time to commit the duties. The HIH Insurance did not keep up with this important factor and breached with the same. The organisation was not able to identify the gaps in the Board of director and that is why it failed in keeping up with the corporate governance element (Donaldson, 2008).
Independent and Diversity: Directors in the company should be independent and should not be a member of the manager this means that directors in the company should not have any direct or indirect relationship with the other management of the company (Thoms, 2008).
Engagement and Education: The Board of Directors should be properly trained and should be familiar with the business they are involved in. It is important that the organisation mandates and assesses the fulfilling of their obligations and at the same time also undertakes meaningful understandings of the performance (Armstrong & Francis, 2008).
Subject Knowledge: The board of directors should have proper subject knowledge on the issues that they are dealing with such as finance, tax etc. The organisation should make sure that the directors have the much needed knowledge on the relevant subject (Reinstein et al., 2006).
Clearly define the shareholders rights: The shareholders of the company are those who manage their shares for others to know their rights as a shareholder so that they can make responsible investment. This requires a lot of time and proper access to reliable resources about the matter that may impact the investments. To properly use the rights, the shareholders should know about the limitations on their rights and what is the process used by the company to elect the directors. Thus, the organisation should clearly state and define the rights of the shareholders so that they are well aware of their limitations along with their rights. CLERP9 was an important legislative reform from the policy makers that was formed that was established to respond to the sad incident of HIH Insurance having a major impact on the corporate governance in Australia. The proposals that were laid in CLERP 9 showed increased independence of auditor. The auditors would answer questions imposed on them by the auditor. Thus, the legislation allowed the shareholders to participate in company meetings. Therefore, it can be said that HIH Insurance did not allow its shareholders to exercise their rights in a proper manner as it was not clearly defined for them (Jackling et al., 2007).
Transparency: It is very important that an organisation has enough transparency so that the real facts can be reported on time. In such a scenario, the stakeholders shall have confidence in the management. Resultantly, they shall be willing to invest in the company more and more at the cost of reducing the capital. Transparency is helpful for those in charge so that fraud and other measures are put in place in a proper manner. All of the given factors are laid together to allow the firm to produce effective measures so that improvement can be made (Mirshekary, Yaftian& Cross, 2005).
Response by relevant regulatory actors to the failure of corporate governance in HIH Insurance:
CLERP9 was an important legislative reform having a major impact on the corporate governance in Australia. The proposals that were laid in CLERP 9 showed increased independence of auditor. The auditors would answer questions imposed on them by the auditor. Thus, the legislation allowed the shareholders to participate in company meetings (Clarke et al., 2003).
Due to the collapse of HIH and another famous organisation, One Tel. the corporate governance council had formed rules and recommendations for those entities that are listed. The same is reflected in the best practice as per the international standards. In the year 2003, the AZX had published the principles of corporate governance in which recommendations were presented and some of the existing rules were changes requiring full inclusion of the principles in the annual reports (Mak et al., 2005). The ASX had advised the companies that the recommendations were not advice rather guidelines that would help in producing outcomes leading to improvement in efficiency, integrity and quality. Therefore, it can be said that the rules that were made as part of corporate governance were principles of good corporate governance advise the listed organisations about how to implement the rules of good corporate governance practice, adding value to the activities of the company and proper structuring of the BOD (Low, Davey & Hooper, 2008). Moreover, it would also help in promoting ethical and responsible reporting, well protected rights of the shareholder and making proper balanced disclosures by ensuring that there is proper remuneration policy for the senior managers as well as the BOD. The Royal Commission of Australia stated that good governance can be achieved with a combination of proper regulatory interference and rules of best practice and also the implementation of the charters and ethics. It has also been found that there were great amount of differences in the quality of manger oversight and control measures that can be applied in the BOD. The objectives of the reforms made in the field of legislation and codes were to help in the promotion of effective rules related to corporate governance. The RC had recognised rules related to corporate governance that would create an environment of success and explained the main reason for the failure of the HIH that was poor management and lack of proper attention and skills needed for performance as well as accountability (Donaldson, 2008). The RC stated that it is very important to have the corporate governance rules in which the senior managers understand the difference between directing and managing. Despite the fact that the manager is part of the BOD, he or she is still supposed to act in the best interests of the company and there are clear lines of delegations and imposing authority to others. The code of conduct should be formed and also be implemented to the directors. Therefore, it can be said that the directors of HIH had breached their directorial duties under section 184 of the Corporations Act, 2001. Section 180 provides the general rule as per which the office holder of the company should exercise their powers and discharge the duties with proper diligence and care. Section 181 to 18 further enumerates the general duties of the director and other officers of the company. They should act in good faith and in the best interests of the company so that they follow the duty for which they have been appointed. They are not allowed to use the position in a way that is not suitable for the company or to make personal profits leading to cause detriment to the company (Thoms, 2008).
Corporate governance reforms for the business based on ten key principles:
Best practice in corporate governance is important to ease good financial performance and also maximise their returns of the shareholders. The case of HIH is an example that shows that the rule of corporate governance is very important that simple compliance with the list of tick tock boxes. The HIH had an award winning corporate governance rules however it became ineffective. The BOD of HIH failed in performing their duty in a periodical manner and understands the importance and effectiveness of their rules. Resultantly, HIH collapsed and the rules and other regulatory framework that was formed forced the directors to review their functions properly. Mechanisms such as the CLERP 9 were a voluntary self code of practice that would allow the guidelines for the directors to be followed in a manner that would ensure that the corporate governance rules are effective and secure. Moreover, the organisation should also develop risk management strategies and judge the effectiveness of the Board from time to time.
References:
Armstrong, A., & Francis, R. D. (2008). Loss of integrity: the true failure of the corporate sector. Journal of Law and Governance, 3(3).
Clarke, F., Dean, G., Oliver, K. G., & Oliver, K. (2003). Corporate collapse: accounting, regulatory and ethical failure. Cambridge University Press.
Donaldson, L. (2008). Ethics problems and problems with ethics: Toward a pro-management theory. Journal of Business Ethics, 78(3), 299-311.
Jackling, B., Cooper, B. J., Leung, P., &Dellaportas, S. (2007). Professional accounting bodies' perceptions of ethical issues, causes of ethical failure and ethics education. Managerial auditing journal.
Low, M., Davey, H., & Hooper, K. (2008). Accounting scandals, ethical dilemmas and educational challenges. Business law assignment Critical perspectives on Accounting, 19(2), 222-254.
Mak, T., Cooper, K., Deo, H., & Funnell, W. (2005). Audit, accountability and an auditor's ethical dilemma: A case study of HIH Insurance. Asian Review of Accounting.
Mirshekary, S., Yaftian, A. M., & Cross, D. (2005). Australian corporate collapse: The case of HIH Insurance. Journal of Financial Services Marketing, 9(3), 249-258.
Reinstein, A., Moehrle, S. R., & Reynolds?Moehrle, J. (2006). Crime and punishment in the marketplace: Accountants and business executives repeating history. Managerial Auditing Journal.
Thoms, J. C. (2008). Ethical integrity in leadership and organizational moral culture. Leadership, 4(4), 419-442.
