HIH Insurance Scandal: Legal, Ethical, and Corporate Governance Issues

This paper discusses the legal, ethical, and corporate governance issues surrounding the HIH Insurance scandal, one of the largest collapses in the Australian insurance sector. It explores the mismanagement, fraud, and breach of director's duties that led to the company's forced liquidation. The paper provides a critical analysis of the scandal and concludes with recommendations to prevent such collapses in the future.

Running head: BUSINESS LAW
Business Law
Name of the Student
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Author Note

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Executive Summary
HIH Insurance, one of the largest Insurance companies of Australian moved into liquidation
after it was charged with gross mismanagement and fraud in 2001. It was considered as one
of the largest collapse in the history of Australian Insurance sector. It was estimated that the
company lost around 5.3 billion Australian dollars approximately (Insurance Journal, 2019).
Several charges of civil and criminal breach were brought against the managers and directors
of the company, yet the most affecting factor was said to be the immense mismanagement
that led to the forced liquidation of the company. In this paper one would find discussion on
the legal, ethical and corporate governance issues that was countered by HIH Insurance that
led to its collapse. A critical analysis follows the discussion of the issues. Finally a
conclusion and a recommendation section sums it all up. A clear picture of the HIH Insurance
scandal can be assured in this study.

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Table of Contents
Introduction....................................................................................................................3
Findings..........................................................................................................................3
Facts of the scandal: Liability of HIH Insurance.......................................................3
Legal Issues................................................................................................................4
Ethical Issues..............................................................................................................5
Corporate Governance Issues.....................................................................................5
Critical Analysis of the Scandal.................................................................................7
Conclusion......................................................................................................................8
Recommendations........................................................................................................10
Reference List..............................................................................................................12

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Introduction
HIH Insurance, one of the largest Insurance companies of Australian moved into
liquidation after it was charged with gross mismanagement and fraud in 2001. It was
considered as one of the largest collapse in the history of Australian Insurance sector
(Westfield, 2003). It was estimated that the company lost around 5.3 billion Australian
dollars approximately (Insurance Journal, 2019). Several charges of civil and criminal breach
were brought against the managers and directors of the company, yet the most affecting
factor was said to be the immense mismanagement that led to the forced liquidation of the
company. The thorough investigation of the incident has resulted to conviction of some of the
members of the company for various reasons involving various charges of mismanagement,
breach of director’s duty and fraud. The Royal Commission reported the collapse of the
company as ‘a shambling journey towards oblivion’ (Westfield, 2003).
This paper would briefly state the facts of the HIH Insurance scandal and who it
affected. It would discuss the legal, ethical and corporate governance issues, if any. A critical
analysis of the issues and the scandal would be carried out to make a critical evaluation of the
situation of HIH insurance. Lastly, it would be concluded along with recommendations which
would have prevented the collapse of the company.
Findings
Facts of the scandal: Liability of HIH Insurance
The Australian Prudential Regulation Authority (APRA) set a notice to HIH
insurance, show causing the company as to why the authority should not appoint an inspector
to investigate the activities of the company under Section 52 of the Insurance Act 1973. On
the last date of expiry of the notice, the insurance company applied for a provisional
liquidation before the court (Lipton, 2003). On investigation it was revealed that the HIH had

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encountered a deficit of asset balance over liabilities for an amount of $5 billion on a balance
sheet of $7 billion (Aph.gov.au, 2019). After balancing the asset to liability ratio, the
company was left with only $133 million worth of net asset. It encountered an estimated loss
of $5.3 billion approximately (Insurance Journal, 2019). One of the most significant reasons
that was cited to be one of the cause of the company’s loss is pointed to the company’s
acquisition of its competitor FAI Insurance along with appointing FAI’s CEO Rodney Adler
as one of its directors. Although HIH has always been considered as a reliable insurance
company, however its internal issues were not highlighted before APRA served the show
cause notice to the company investigating into its asset to liability ratio and finding out its
probability of being insolvent soon enough. Finally the company’s financial situation became
unsustainable and faulty, HIH faced the biggest collapse in the history Australian insurance
sector, facing a loss of over $5 billion (Aph.gov.au, 2019).
Legal Issues
There were a number of legal actions that were constituted against Rodney Adler, the
director of HIH which finally put him behind the bars for two and a half years. He was
accused of the following charges:
 Obtaining HIH’s fund for personal interest by misleading statements.
 Spreading false information about the share price of the company to delude the
investors.
 Failure to carry out the director’s duties in good faith and for the benefit of the
company as directed by the legislation (Betta, 2016).
The manipulation with the company fund and dissemination of wrong information
affected the shareholders, policyholders, investors and several others who were associated
with the company. This was enough to give rise to legal battles against Adler as well as
against the company for failing to control its governance (Betta, 2016).

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Ethical Issues
As per the reports of several insurance journal and the report of the APRA, there were
several suits and actions brought by the policyholders and shareholders. The investigating
officer of the APRA, Neville Owen pointed out that there has been serious breach of duty by
the Australian insurance regulators who missed out the internal issues that HIH had been
facing and thus failing to take an appropriate measure. It was also argued that the company’s
fraud was not the actual cause behind the collapse; it was more affected by the gross
mismanagement of the directors (Okoye, 2013). The lack of examination of the company
accounts and taking precaution to balance the asset and liability ratio made the company face
liquidation, affecting the shareholders and policyholders. The mismanagement of the
company by its managers and directors have been highlighted to be the most significant blow
to the condition of the company.
In addition, Rodney Adler was accused of inducing the investor to buy shares of HIH
Insurance by spreading false information of him buying the company shares himself stating
that the shares have been unvalued and that he assures that the share price of the company
would soon earn quick profit. This is another instance of ethical issues that forced the
company to collapse (Mirshekary, Yaftian & Cross, 2005).
Corporate Governance Issues
HIH Insurance’s former director, Rodney Adler had been held to be accused of
manipulating company’s stock market rate by the Australian Securities and Investment
Commission (ASIC) (Aph.gov.au, 2019). It was found out that Adler fraudulently made HIH
sell its shares to Pacific Eagle Equities Pty Ltd, a company that was controlled by Adler
himself. It was also found out that Pacific Eagle Equities Pty Ltd bought HIH shares thrice in
the year 2000, with HIH’s fund only, as directed by Rodney Adler who ordered Ray
Williams, a manager of HIH to transfer HIH’s fund to Pacific Eagle Equities Pty Ltd. Such

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stock manipulation affected the company’s reputation as well as speaks for a faulty and
corrupt corporate governance (Okoye, 2013).
Rodney Adler was also found to have tampered with HIH’s fund when he made an
investment of $2 million on a company, Business Thinking Systems (BTS) in which he was
personally interested (Aph.gov.au, 2019). Adler intimated Ray Williams and John Ballhausen
about investing $500,000 in BTS personally and $2 million from HIH’s fund (The Sydney
Morning Herald, 2019). This decision was approved by the board of directors of HIH in
November 2000. However, Adler did not mention about his personal interest of investment in
BTS and also about his knowledge about the financial situation of the company in the board
meeting. This amounts to a gross violation of director’s duties under the Corporations Act
(Cth) 2001. Concealment of information significant for the benefit of the company is
violative of the director’s duty under the Corporations Act (Cth) 2001 (Okoye, 2013).
In addition, Ray Williams was held guilty of manipulating the shareholders pertaining
to the financial condition of HIH, along with Brad Cooper who was found to have bribed
HIH officials to clear his misdeeds before the Insurance Company collapsed. Geoffrey
Cohen, the former Chairman of HIH was also accused of mismanaging the company and
violating his duties under the Corporations Act. Cohen was particularly held accused by
ASIC for not taking reasonable precautions for ensuring that the information shared related to
the joint venture between HIH and Allianz Australia Ltd to the shareholders were not false
and misleading. It was also added to the list of accusation that he was involved in misleading
the investors (Leung & Cooper, 2003). To the following allegations, Cohen replied that he
acted to the best of his knowledge and according to his discretion in good faith. However,
the charges against Cohen was dropped as it was investigated and found that he had
addressed the corporate issues related to the manipulation of the shareholders at the general
meeting of the company.

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Critical Analysis of the Scandal
A critical evaluation of the collapse of the company needs to be carried out to judge
the different reasons behind its decline.
The major reason behind the downfall of HIH Insurance is blamed on its failure to
address future claims and the subsequent issues just followed it. It can be argued that
covering the claims of the policyholders is the most fundamental duty of a company dealing
with insurance, which HIH failed to carry out just before calling out for provisional
liquidation as it had reached a point where 1.7% of negative shift was left to declare the
company insolvent (Abc.net.au, 2019). The most significant reason that have been reported as
the main downfall of HIH Insurance is the mismanagement of the directors through the
changing scenario of the market condition. It can be argued that such approach has enhanced
the tension as well as the liabilities of the company which were not covered by its planning
and risk management strategies which might have pacified the issues. It is evident that
changing condition of the market causes severe destabilization in the Insurance sector,
however it is expected from the insurance companies to be prepared with risk management
strategies to endure such destabilized circumstances. It can also be pointed out that the
company’s decision to acquire other companies even when its own financial condition was
not right did not prove to be a wise decision and has added up to the several other reasons
behind the collapse of HIH Insurance (Leung & Cooper, 2003). Such major expansion of
business through acquisition or merger is a significant business decision that although help
businesses to expand in the international market, yet can affect the business when taken a
wrong step (Abc.net.au, 2019).
The company essentially misjudged the degree to which it should have taken the
precautions while making major business changes. Such approach should have been carefully

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monitored which might have stopped the issue from cropping up. As argued by the experts of
the insurance sector that the ineffectiveness of the board of directors who failed to stop
Rodney Adler and Ray Williams from acting dishonestly and mismanaging the company.
Additionally, the board and its decisions were never challenged or questioned neither by the
Insurance regulators nor by the shareholders which gradually added up to be a reason of the
failure of the corporate governance machinery of HIH Insurance. The board of director
clearly failed to check the company’s strategy of financial sustainability (Leung & Cooper,
2003).
It is however argued that the company did ultimately find its way to amend its wrong
approaches by applying for a provisional liquidation before the regulatory body. It was held
that the company finally achieved technical compliance even though it continued to breach
certain regulations. Although it is majorly seen to be a dishonest act of individuals like
Rodney Adler and Ray Williams, yet it needs to be critically evaluated and seen that it was
rather a result of mismanagement and negligence of the entire board of directors who failed
to keep a check on the activities of the individual directors and mangers (Lipton, 2003).
However, there is no express oversight pertaining to the negligent actions of the board that
led to the failure of the corporate machinery of HIH Insurance. It can be argued that the board
of directors continued its negligence in the shadow of the misdeeds of people like Rodney
Adler and Ray Williams, finally leading to the collapse of the company. Therefore it can be
held that that the board of directors continued its negligence and gross mismanagement in the
shadow of the dishonest activities of people like Rodney Adler and Ray Williams that led to
the collapse of the company (Abc.net.au, 2019).
Conclusion
The collapse of HIH Insurance has been considered to be the biggest collapse of an
insurance company in Australia, failing to meet the claims of the policyholders, for it saw a

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huge difference in its asset to liability ratio. It was estimated that the company lost around
5.3 billion Australian dollars approximately. Several charges of civil and criminal breach
were brought against the managers and directors of the company, yet the most affecting
factor was said to be the immense mismanagement that led to the forced liquidation of the
company. The thorough investigation of the incident has resulted to conviction of some of the
members of the company for various reasons involving various charges of mismanagement,
breach of director’s duty and fraud. The Royal Commission reported the collapse of the
company as ‘a shambling journey towards oblivion’. One of the major reason behind the
decline of the company is held as its incapability to address the claims of the shareholders
and policyholders. It can be argued that covering the claims of the policyholders is the most
fundamental duty of a company dealing with insurance, which HIH failed to carry out just
before calling out for provisional liquidation. It was also argued that the company’s fraud was
not the actual cause behind the collapse; it was more affected by the gross mismanagement of
the directors. The lack of examination of the company accounts and taking precaution to
balance the asset and liability ratio made the company face liquidation, affecting the
shareholders and policyholders. The mismanagement of the company by its managers and
directors have been highlighted to be the most significant blow to the condition of the
company.
As per the reports of several insurance journal and the report of the APRA, there
were several suits and actions brought by the policyholders and shareholders. It can be
pointed out that there has been serious breach of duty by the Australian insurance regulators
who missed out the internal issues that HIH had been facing and thus failing to take an
appropriate measure. It was also argued that the company’s fraud was not the actual cause
behind the collapse; it was more affected by the gross mismanagement of the directors. The
lack of examination of the company accounts and taking precaution to balance the asset and

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liability ratio made the company face liquidation, affecting the shareholders and
policyholders. The mismanagement of the company by its managers and directors have been
highlighted to be the most significant blow to the condition of the company.
It can be concluded by saying that the board of directors continued its negligence and
gross mismanagement in the shadow of the dishonest activities of people like Rodney Adler
and Ray Williams that led to the collapse of the company.
Recommendations
As a director, it needs to be ensured that the board of director keep a close watch over
the activities of the managers and the directors so that they do not indulge in dishonest or
mismanagement activities. It is the directors who take the major decisions of a company and
in order to safeguard a company from probable risks, the directors should take necessary
precautionary steps from time to time. It is important to check the funds of the company
along with evaluating the asset-liability ratio before indulging into any ventures that might
destabilize the financial condition of the company.
New set of rules of corporate governance need to be set that would ensure that the
insurance companies follow the rules of the ASIC and other regulatory body for better
functioning. It would also ensure that the companies are in compliance with the rules of
corporate governance, diminishing the chances of corporate collapses, giving rise to ethical
issues. It needs to be ensured that the rules and procedure of corporate governance are sound
and feasible for the company to incorporate easily.
The company needs to be more careful while pursuing expansion and should check its
asset to liability percentage in future transactions involving acquisition. It needs to be ensured
that company do not expand at a rapid rate that it would be difficult for it to stabilize in a new
market. More importantly, as a director it needs to be ensured that false promises are not
made to gather investment as it badly affects the goodwill of the company in the market. In

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case the company sustain a loss or a disbalance in its asset to liability proportion, a director
need to implement certain cost-cutting strategies in order to endure the effects of loss.
In addition, a company should always strive to comply with the norms and regulations
laid down by the regulatory bodies so that it can ask for their assistance in times of need
rather than running away from the regulations of such bodies. It is also expected that the
regulatory bodies would also be vigilant about the activities of the companies as sometimes it
becomes difficult to comply with the regulations strictly. In order to keep a company
functioning at a regular pace, along with maintaining regulatory compliance, the directors and
the entire board of directors of the company must work together for the betterment of the
company.

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Reference List
Abc.net.au. (2019). PM - HIH findings: gross mismanagement rather than fraud. Retrieved
from http://www.abc.net.au/pm/content/2003/s833945.htm
Aph.gov.au. (2019). HIH Insurance Group collapse – Parliament of Australia. Retrieved from
https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/
Parliamentary_Library/Publications_Archive/archive/hihinsurance
Betta, M. (2016). Three Case Studies: Australian HIH, American Enron, and Global Lehman
Brothers. In Ethicmentality-Ethics in Capitalist Economy, Business, and Society (pp.
79-97). Springer, Dordrecht.
Corporations Act (Cth) 2001
Insurance Act 1973
Insurance Journal. (2019). HIH Report Cites Mismanagement as Cause of Collapse Retrieved
from https://www.insurancejournal.com/news/international/2003/04/21/28160.htm
Leung, P., & Cooper, B. J. (2003). The mad hatter’s corporate tea party. Managerial Auditing
Journal, 18(6/7), 505-516.
Lipton, P. (2003). The demise of HIH: corporate governance lessons. Keeping good
companies, 55(5), 273.
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.
Okoye, N. (2013). The personality of company directors and behavioural risks in corporate
governance: bridging the unidentified gap. International Journal of Disclosure and
Governance, 10(3), 261-286.
The Sydney Morning Herald. (2019). HIH: The Inside Story Of Australia's Biggest Corporate
Collapse. Retrieved from https://www.smh.com.au/entertainment/books/hih-the-
inside-story-of-australias-biggest-corporate-collapse-20030315-gdgff3.html

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Westfield, M. (2003). HIH: Inside the Story of Australia's Biggest Corporate Collapse.
Wiley.