Investigating the causes and effects of the demise of HIH


Australia is known as a country with the good financial reporting framework. But several corporate collapses, which occurred recently, have made people reconsider the framework. Heath International Holdings (HIH) Insurance Limited, the second biggest insurance company in Australia, which was also one of the listed companies in financial market in Australia was put into provisional liquidation on 15 March 2001, followed by the liquidation on 27 August 2001( Nobody had ever predicted this previously, as the company always provided good operation results. Medias even competed in publishing this issue to provide the information, the causes, and the other relevant data. This essay will further talk about the history, background, causes and effects of HIH's collapse.

History and Background

In 1968, Ray Williams and Michael Payne set up their small insurance business under MW Payne Underwritting Agency. In this company, both Ray Williams and Michael became the directors. Ray also became the chief executive officer (CEO) of the company. The main service provided by this company was related to the workers compensation insurance. It then became successful and able to expand its business.

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After the acquisition in 1971 by the CE Heath plc, the company then was known with the name CE Heath Underwritting Agencies Pty Ltd, in which Ray still held his positions as director and CEO of the company. He then was also chosen to be the member of the board of CE Heath plc. In 1989 the company changed the name into CE Heath International Holdings Ltd. Williams was the principal executive and then gained the share of 10 percent in the restructuring of the company. Board changes couldn't be neglected. Then Geoffrey Cohen, who was also the senior partner at Anderson, was appointed to become the chairman of HIH.

In 1992, the company started to be listed on the Australian Stock Exchange. The company's name then was changed for several times as it underwent the acquisitions and mergers. With every acquisitions and mergers, the size, ownership of the company then were changed. In 1995, the company went through big acquisition with the CIC Insurance; then also went through the merger with the Swiss company, Winterthur Insurance, which later changed the name of the company into HIH Winterthur Holdings Australia Ltd. But Winterthur later sold its holding in shares to the public. Then the company's name eventually became HIH Insurance Ltd.

But also in 1998, HIH Winterthur tried to expand their business by purchasing FAI Insurance. Rodney Adler who was the CEO of FAI then turned to be a director of HIH. Unfortunately, the assets of FAI then turned to be grossly over-valued, and the premium well in excess of its real value was paid to gain control (Mirshekary, Yaftian, Cross , 2005). HIH then was compelled to write-off its investment with the value of AS 400m. HIH then was suspended for trading in the ASX. HIH was then placed into provisional liquidation in March 2001 because it was unable to pay its debts when they fell due, with the deficiency between $3.6 billion and $5.3 billion. As a big company in Australia, its collapse widey affected the society, the shareholders, the general creditors, the policy holders, and other entities.

Causes of HIH's Collapse

Flawed corporate governance practices

Choi and Meek (International Accounting, 2008) said,

" Corporate governance relates to the internal means by which a corporation is operated and controlled-the responsibilities, accountability, and relationships among shareholders, board members, and managers designed to meet corporate objectives. That is, corporate governance is the system by which companies are directed and controlled. Among corporate governance issues are the rights and treatment of shareholders, the responsibilities of the board, disclosure and transparency, and the role of stakeholders".

The practices of corporate governance in HIH were not strictly controlled, bringing a lot of mess in the company, economic loss, and other issues affecting the operation of the company. The several aspects of the flawed corporate governance are mentioned as following:

There was a shortage of independence in the non-executive directors. HIH's non-executive directors comprised of two people who were previously the former engagement partners of HIH (HIH Royal Commission 2003b,21.16), and one, Geoffrey Cohen, who was both the chairman of HIH's board and also its audit committee. In performing his duties, Cohen was not independent, as he was doing nothing without Williams's orders. Then a question emerges, how would a person, who is not independent, would be able to give and produce independent judgement.

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Ray Williams, as the CEO of HIH, had great dominance over all the people in the company. As mentioned above, Ray was one of the people who established HIH insurance company. He could gain a lot of respect not only for his great abilities in running the company, but also for his loyalty to the company. He perceived the company as his own belonging. He could control all the board members, and he also did lots of manipulations for his own good. HIH's no clearly defined limits of authorities for CEO really benefited him. He also had full control over Cohen, making Cohen have no power to do things without his support (HIH Royal Commission 2003a, p.27).

There was also a dearth of policies and guidelines in HIH to control all the activities in the company, in which policies made were violated and were not followed. Investments policies were also neglected, causing great loss to the company.

There was no good risk managements, no good strategy, and lack of risks understanding in HIH. This affected them a lot, making them suffer great loss in the overseas market entry and expansion (HIH Royal Commission 2003a, p.28).

There was also an inadequate of independent information resources. Good corporate governance system needs reliable and also accurate accounting information which then is used by the directors and other people to make good decisions. In HIH company, the information that was given to the board was misleading with several material ommitted, the reports given to the board had also been manipulated (HIH Royal Commission 2003a, p. 28-29).

There were not enough of understanding and also resolving of the conflicts of interests within the board members, prompting disputes among them, and making a bad corporate governance system.

The audit committee was said to be ineffective. Cohen as the chairman of the audit committee didn't really read all the auditor's presentation. All directors could even attended the audit committee meetings which were supposed to be confidential. There were also insufficient meetings between the auditor and the audit committee due to Ray's dislike of those private meetings (HIH Royal Commission 2003a, p.32-34).