HIH Insurance

How your chosen organisation/business addresses contemporary approaches to governance

Background Information

HIH Insurance

Corporate governance is considered to be the internal methods in which an organisation governs itself. (Cadbury, 1992).

Transaction costs need to be included in evaluating practicality of theories.

In Relation to HIH

• (Cross, DC,et.al, 2004):
• Began with Ray Williams and Michael Payne under the name MW Payne Underwriting Agency in early 1968
• In 1971 it became known as CE Health Pty Ltd
• In 1992, CE Health international holdings was listed on the ASX and its code name HIH
• The board committed to a policy of expansion to gain market share.
• HIH purchased FAI insurance, the purchase was ensured by Rodney Adler (non- executive director of HIH)
• HIH had to write off investment in FAI ($400 million) in September 2000
• • On the 27th of February 2001 the ASX suspended trading in HIH
• • An investigation by the Australian securities and Investment Commission (ASIC) began.
• • KPMG was appointed as a liquidator and the company declares a provisional loss of $800,
• • The accumulated loss from the collapse amounted to $5.3 billion which was Australia’s largest corporate collapse.

The governance within HIH is evidently based on stewardship for senior executives based on the fact that they are capable of moving money to accounts of their choosing. However, has agency theory been used this may not have occured due to higher monitoring. (Bahili and Richard, 2003).

In regards to remuneration their was a large issue at HIH in regards to discloser. This was seen in the KPMG (2003) report which highlighted the lack of transparency.

The Issue: Stock Market Manipulation

Ethics in relation to market manipulation

Types of Stock Market Manipulation

HIH's Stock Market Manipulation

1. Action based manipulation (Bagnoli & Lipman, 1996)

2. Information based manipulation

3. Trade based manipulation (Allen and Gale, 1992)

Criminal charges for stock market manipulation were laid against Rodney Adler (non-executive director of HIH) after an investigation by the Australian securities & investment commission (ASIC) into the purchase of HIH shares pacific eagle equities Pty Ltd, an Adler controlled company. Pacific Eagle Equities purchased 1,873,661 HIH shares on 15th of June 2000, 951,330 HIH shares on 16th of June 2000 and 425,000 HIH shares on 19th 2000 (ASIC, 2004). Adler was a director of HIH at the time; his company Pacific Eagle Equities borrowed $10 million from HIH. Some of the money was used to buy 3.25 million shares in HIH to prop up the insurer's share price (Lampe, 2004).

Egoism

Kohlberg’s stages of cognitive moral development (CMD)

• Egoism views that an act is morally right if and only if it best promotes an agent’s self interests.
• People should make decisions that maximise their self-interest

Sustainability of HIH

Board structure & Remuneration

Audit committee

Roles of audit committee:

• Reviews the scope and outcome of the audit
• Ensures the objectivity of auditors is maintained
• Reviews audit fees and fees paid for any non-audit work
• Provides a bridge between internal and external auditors
• Reviews concerns from whistle-blowers
• Manages financial and non-financial risks of company

Structure of the HIH

References

Corporate governance committee

• Less common, but gaining more importance

• In some companies, the governance committee is responsible for strategy: corporate vision, mission, values and relationships with stakeholders.

• In others the committee is more focused on legal compliance

The structure of HIH can be viewed as tall, hierachical organisation. The board is a traditional unitary board, meaning it has the potential to comprise of multiple types of directors. However, The board was made up entirely of senior executives and people who have invested interest with the company so nobody stood to ensure ethics were of importance.

Implementation of rules relating to ethical behaviour of the Board of Directors

• Rules may or may not have been in place relating to ethical behaviour of the board of directors within HIH

• HIH board of directors did not function properly; they breached rules of behaving ethically as board members (Vinten, 2005).

Allen, FA & Gale, DG, 2000, Financial Contageon, The Journal of political economy, Vol.108, no.1, pp. 1-33.

ASIC, 2004, Rodney Adler criminal stay application dismissed, ASIC, viewed October 2013, <http://www.asic.gov.au/asic/asic.nsf/byheadline/04-056+Rodney+Adler+criminal+stay+application+dismissed?openDocument>

Bagnoli, MB, Lipman, BL, 1996, Stock Price Manipulation through Takeover Bids, RAND Journal of Economics, Vol.27, pages 127-147

Cadbury Sir Adrian (2002) Corporate Governance and Chairmanship: A Personal View, Oxford University Press, Oxford.

Carroll, AB 1998, 'The Four Faces of Corporate Citizenship', Business and Society Review, vol. 100, no. 1, pp. 1-7.

Friedman, M 2007, 'The social responsibility of business is to increase its profits', in WC Zimmerli, M Holzinger & K Richter (eds), Corporate Ethics and Corporate Governance, Springer Berlin, pp. 173-8.

HIH, 2000, HIH privacy policies and procedures, HIH, viewed 11 October 2013, < http://www.hih.com.au/pdf/PrivacyPolicy.pdf>.

Kohlberg, L 1976, 'Moral stages and moralization: The cognitive-developmental approach', in T Lickona (ed.), Moral development and behavior, Holt, Rinehart and Winston, New York, pp. 31-53.

Lampe, A.L., 2004, Adler trial is ASIC's second go, Sydney Morning Herald, viewed October 11 2013, <http://www.smh.com.au/articles/2004/03/07/1078594233138.html?from=storyrhs>

Marrewijk, M. and M. Were, 2003, ‘Multiple Levels of Corporate Sustainability’, Journal of Business Ethics

Phillips, R, Freeman, RE & Wicks, AC 2003, 'What stakeholder theory is not', Business Ethics Quarterly, vol. 13, no. 4, pp. 479-502.

Vinten, GV, 2005, The development of accounting regulation in the GCC, Managerial Auditing Journal, vol.20, no.3, pp. 280-281

Yaftian, AM, Cross, CD, Mirshekary, SM, 2005, Australian corporate collapse: The case of HIH Insurance, Journal of Financial Services Marketing, vol.9, no.3, pp.249-258.

Corporate social responsibility in relation to stock market manipulation

Corporate Social Responsibility

• Normative Stakeholder Theory
• Phillips, Freeman & Wicks (2003), argues that CSR should address morals and values as a central feature of managing organisations
• It examines the ends of corporate activity and the means of achieving those ends

Cadbury (2002), argues that the broadest way of defining social responsibility is to say that the continued existence of companies is based on an implied agreement between business and society

Policies and Procedures governing HIH

Rodney Adler violated:

• Carroll's CSR Model
• and the Normative Stakeholder Theory

Carroll (1998) argues that there four stages to CSR, the first is the economic, legal, ethical and philanthropic responsibilities

However, Rodney Adler did try make as much money as possible, even if it was through stock market manipulation

Insurance Counsel Australia

Australian Prudential Regulation Authority

Australian law

Australian Securities and Investment Comission

After the liquidation of HIH, a new privacy legislation was passed in 2001, where HIH had to follow 10 NPP's (HIH, 2000):

• Collection

• Use and disclosure

• Data quality

• Data security

• Openness

• Access and correction

• Identifiers

• Anonymity

• Trans border data flows

• Sensitive information