Impact of HIH Collapse

Impact of HIH CollapseThe March 2001 collapse of HIH Insurance sent shockwaves d unrivaled the Australian business community. The countrys bet on-largest employer, HIH was at the tail-end of a major(ip) acquisition spree that had seen the club purchase major insurance trading operations in New Zealand, Argentina, Switzerland and the US since 1997. Most significantly, in 1999 HIH had purchased one of its primary(prenominal) competitors, FAI Insurance, taking on that conjunctions chief executive Rodney Adler as one of its integrated directors. With an estimated $8.1bn asset base at the end of 2000, HIH was wide perceived as an extremely robust and reliable partnership however, hush-hush internal reports had begun to demonstrate that the connections debt leverage and insurance liabilities were so high that in that respect was a real risk of insolvency. Ultimately, in early(a) 2001 the beau mondes precarious pecuniary situation became untenable and HIH endured the larges t integrated collapse in Australian history, going down with losses of more than $5bn. With the company continuing to function purely so as to receipts old claims, with no new business being taken on mount up, Australias financial regulators set out to determine the precise chain of events that had light-emitting diode to the HIH collapse. (M. Westfield. 2003)A Royal commission, examined the chain of events that led to the collapse of HIH. Reporting in April 2003, the commission put together that there wasnt just a single bowel movement of the companys collapse. But that there was systematic failure in almost every area of its operation (hihroyalcom.gov.au 2003), and the extent of this failure was so great that criminal charges were brought against key members of the companys board much(prenominal) as William Howard, Ray Williams, Geoffrey Cohen and Rodney Adler. (ASIC 2005) In particular, Rodney Adler was convicted on four separate charges one count of obtaining money by dec eption one count of cheating in the discharge of his duties and two counts of intentionally disseminating false information. In particular, Adler was found to cave in falsely claimed, in a tally of interviews, that he had personally purchased HIH shares in mid-2000. (D. Elias .2005) By fashioning such claims, and specifically by claiming that HIH is undervalued in terms of its share price, Adler was guilty of willfully disseminating financial information that they knew, or had good author to know, was false. However, there were separate calls for an inquiry into how HIHs collective governing systems had failed to prevent Adler abusing his position in such a manner. In a separate claim, Adler was accused of persuading HIH to invest a $2m loan in Business Thinking Systems (BTS), a company in which Adler had an interest.(Karen Percy 2005)The other major failing identified in the downfall of HIH was a failure to take into account comme il fautly for future claims, and all oth er problems essentially stemmed from this issue. cover future claims is one of the most fundamental aspects of any insurance companys business, yet by the end of its existence HIH was in a position where a negative shift of as little as 1.7% would be enough to bring the company to the point of insolvency(M Westfield,2003) . The primary reason for this failure was reported to be a mismanagement of changing grocery conditions, which increased HIHs liabilities massively and were non covered by strategic planning initiatives that might move over been expected to absorb such changes. changing market conditions can cause serious destabilization for any insurance company, but the risks are well-known and most companies take extra finagle in order to minimize their exposure to such changes. The fact that HIH dramatically over-exposed itself was for the most part due to the companys extremely speedy expansion (Brendan Bailey 2003).As noted earlier, HIH acquired a number of companies d uring its final years and was making a major push for international expansion. Such expansion, mend very much a toughened business move, often brings greater liabilities than would otherwise be the case, and HIH appears to have acted based on the belief that the liabilities would merely be comparative to its expansion. The company appears to have fundamentally misunderstood the degree to which extra sustenance need to be made for changes in its market environment. This is a major mistake that could in my opinion, if addressed at the time, have been resolved. The fact that the board of HIH apparently went unchallenged when pursuing this strategy shows that there was a failure of governance at HIH, with no real oversight being apply to check whether the companys strategy was correct or financial sustainable.In the aftermath of the HIH collapse, the Australian Securities and Investments Commission (ASIC) made a number of changes to chink that the same problem could not be repeat ed. In particular, ASIC inaugurated a strict new set of corporate governance rules designed to ensure that companies stay closer to the regulations in this area. ASIC acted on the belief that the core governance procedures and rules were fundamentally sound during HIHs final months, but that ultimately the companys board was able to find ways to achieve good compliance while still engaging in the kind of action that the regulations were designed to prevent.(ASIC 2003) In my opinion this can be seen as a failure of the regulations as much as a failure of the company, although intelligibly it was the decision of individuals such as Adler to deliberately move against these regulations that led to the companys downfall because there was no proper oversight on the actions of the board. However Adler and other members of the HIH board were in no way bring forth or encouraged to act in the way that they did. Rather, they chose to go against the opinion of the rules and act in a manner that was clearly against the best interests of the company.Ultimately, its clear that HIH should have been much more cautious when pursuing its expansion, and should have taken greater steps to ensure that its liabilities were covered. By expanding so rapidly, the company was entering markets in which it had little or no experience, yet no provision appears to have been made for the need to leave extra margins while entering these new markets. This is clearly a case of major mismanagement and of over-confidence during a period of major expansion. These problems were increased, by the companys chemical reaction to its bad financial position, and specially by Rodney Adlers decision to get to secure investment based on false statements. Even when the companys enhanced liability was made apparent, in my opinion there still could have been a chance for HIH to recover by introducing a major cost-cutting program and ensuring that future operations would eventually make up for the losses . Adler chose to try to cover up the financial problems in the short-term and want that his misstatements might ultimately bring the company back onto a strong financial footing that would allow it to cover over his mismanagement so that it would never become public. This approach by Adler was designed to fix the sign over-expansion error, but actually compounded that problem and represented a second serious mistake. The fact that the regulatory authorities were unaware of what was happening in my opinion does not indicate major problems with those authorities, since any company that engages in the level of deception orchestrated at HIH will always have a chance of getting past the rules. Although lessons can be learnt, particularly in terms of the apparently concentration of power in Adlers hands, theres clearly a limit to the ability of regulatory groups to cover companies where the directors set out on a determined way of life to commit fraud and to mislead observers. Although this does not mean that the authorities should not be vigilant, its clear that in the case of HIH, ensuring full and proper punishment for Adler and other executives in the aftermath of the collapse, as a precedent to others, was in my opinion one of the best options.BibliographyAmerta Mardjono (2005). A tale of corporate governance lessons why firms fail. Managerial Auditing Journal, vol. 20, no. 3 p. 272-283ASIC (2003). Current corporate governance issues an ASIC perspective. Retrieved from http//www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/nt_busprof_women_corp_gov190903.pdf/$file/nt_busprof_women_corp_gov190903.pdf on the 06.04.2010Brendan Bailey (2003). Report of the Royal Commission into HIH Insurance. Retrieved from http//www.aph.gov.au/ library/Pubs/RN/2002-03/03rn32.htm on the 07.04.2010David Elias (2005). Adler guilty on 4 charges. Retrieved from http//www.theage.com.au/news/ case/Adler-guilty-on-4-charges /2005/ 02/16/ 1108500154731.html on the 03.04.2010 on the 04. 04.2010David Kehl (2001). HIH Insurance Group Collapse. Retrieved from http//www.aph.gov.au/library/INTGUIDE/econ/hih_insurance.htm on the 30.03.2010hihroyalcom.gov.au (2003). The failure of HIH insurance. Retrieved from http//www.hihroyalcom.gov.au/finalreport/Front%20Matter,%20critical%20assessment%20and%20summary.HTML_Toc37086537 on the 05.04.2010Karen Percy (2005). Rodney Adler receives prison sentence. Retrieved from http//www.abc.net.au/worldtoday/content/2005/s1345296.htm on the 07.04.2010M .Westfield , (2003) HIH The Inside Story of Australias Biggest Corporate Collapse. Sydney John Wiley Sons Australia,Philomena Leung Barry.J. Cooper (2005). The maladjusted Hatters corporate tea party. Managing Auditing Journal, vol. 18, no. 6/7 p. 505-516