HIH Insurance Collapse: A Case Study on Corporate Governance Failures

This case study examines the collapse of HIH Insurance, analyzing the failures in corporate governance and the breaches of director's duties as per the Corporations Act 2001 (Cth) and ASX Corporate Governance Principles. The assignment, written from the perspective of a newly appointed Chair of the board of directors of JR Services Pty Ltd, explores the responsibilities of the board, the cognitive moral development of key figures like Ray Williams, Rodney Adler, and Dominic Fodera based on Kohlberg's model, and the importance of adhering to ethical and legal standards. It highlights violations of the Corporations Act, particularly sections 180-183, and emphasizes the need to avoid repeating the mistakes that led to HIH's downfall. The study references the case of ASIC v Adler (2002) and concludes with recommendations for JR Services Pty Ltd to ensure sound corporate governance, proper director oversight, and adherence to ethical practices to prevent similar failures. The assignment also includes a reflection on the characteristics of cognitive moral development.

Running head: A CASE STUDY FOR THE HIH INSURANCE
A Case Study for the HIH Insurance
Name of the Student
Name of the University
Author Note

2A CASE STUDY FOR THE HIH INSURANCE
Table of Contents
Introduction................................................................................................................................3
ASX Corporate Governance Principles.....................................................................................3
Duties and Responsibilities of the Board of Directors...............................................................5
A Reflection on the cognitive levels of the directors of HIH as per Kohlberg’s Model of
Cognitive Moral Development...................................................................................................6
A Reflection on whether to repeat the inactions of the Directors..............................................7
Conclusion..................................................................................................................................8
References..................................................................................................................................9
Appendix..................................................................................................................................10
A Reflection on the Characteristics of Cognitive Moral Development...............................10

3A CASE STUDY FOR THE HIH INSURANCE
Introduction
As appointed to be the Chair of the board of directors of JR Services Pty Ltd, it would
be of utmost importance to abide by the ASX Corporate Governance Best Practice Principles
along with following the provisions of Corporation Law. The management needs to steer
clear from the mistakes and wrongdoings that most companies have committed and for that
reason the case study of the collapse of HIH Insurance shall be discussed in the following
report. The board of directors shall be made aware of their duties that they shall be bound to
follow as per the Corporations Act 2001(Cth). Personal opinion on Ray William, Rodney
Adler and Dominic Fodera’s approach in HIH Insurance in terms of the Kohlberg’s Model of
Cognitive Moral Development shall be shared in order to provide a guideline for the
appropriate behaviour of the company executives and board members. Lastly, certain
reflections about the critical analyses of the case study on HIH, the inactions of its directors,
the overall characteristics of Cognitive Moral Development and an opinion on the position of
Chair of the board of directors of JR Services Pty Ltd.
ASX Corporate Governance Principles
The ASX corporate governance principles (4th edition) acts as a guideline of values,
culture and trust for the listed corporations on the Australian Securities Exchange, which is
recommended by the ASX Corporate Governance Council. It strives to guide the listed
companies so that they achieve good governance outcome and thereby meet the expectations
of the investors. The eight principles of ASX Corporate Governance revolves around
(Corporate Governance Principles and Recommendations 4th Edition, 2020):
 Clearly mentioning the duties and responsibilities of the board of directors and non-
executive members along with a regular scrutiny of their performance.

4A CASE STUDY FOR THE HIH INSURANCE
 Structuring the board as per an appropriate size, which should comprise of
committing and skilful people having knowledge about the corporation and the
industry.
 Instilling and enforcing a notion of ethics, lawfulness and responsibility in the
organisation.
 Verifying and safeguarding the integrity of the reports of the corporation.
 Disclosing certain matters of the corporation in order to give a clear notion of its
internal situation to any reasonable person who may be associated or interested to
know.
 Furnishing facilities and information to the security holders so that they could
exercise their rights in the corporation.
 Establishing a sound risk management system and keep a check on the effectiveness
of such system.
 Paying fair remuneration to the directors and senior executives in order to retain and
align their interest with the best interest of the corporation and its security holders.
In this regard, it is recommended that along with the overall corporate governance
principles, as the Chair of the board of directors of JR Services Pty Ltd, it is recommended
that the corporation should emphasise on scrutinising the activities of the directors so that
they do not dominate over the company in bad faith and divulge sensitive information to
outside sources as per the ASX corporate governance principle.
Given the example of the collapse of HIH Insurance, the directors has been responsible
for the fall of the company. The CEO has been the strongest influence over the company who
brought over his friends on board who have been supportive of his decisions without raising
any question on his actions and performances, which is a clear violation of the ASX corporate
governance principles (Lipton 2003). The company’s fund was intertwined with the CEO’s

5A CASE STUDY FOR THE HIH INSURANCE
personal fund in terms of employees’ remuneration, investments, gifts, donations, et cetera.
The board lacked clear policy in terms of administration of the company matters that had
given rise to chaos and mismanagement among the different hierarchy of the company.
Moreover, the CEO failed to propose a long term plan for the company’s growth and
development before the board, which raises question about the intention and faith of the CEO
and is a clear violation of section 181 of the Corporations Act 2001 (Nettle 2017).
Duties and Responsibilities of the Board of Directors
Section 180 to 183 of the Corporations Act 2001 (CA 2001) lays down the duties of
the directors of Australian corporations. Section 180 of the Act asks the directors to hold care
and diligence for the benefit of the company, thereby making an exception of the ‘business
judgement rule’ that allows directors to make risky decisions for the benefit of the company
(Nettle 2017). The directors are supposed to working in good faith for the best interest of the
corporation, serving towards a proper purpose as per Section 181 of the Act. Section 182
refrains the directors from misusing the power and strength of their position in order to gain
benefit or harming the company. Lastly, Section 183 restricts the directors from using
internal information improperly for personal gains or for harming the company. Apart from
these, there are several other director’s duties that are laid down in the Act that mainly talks
about the honest intention of the director in terms of good governance of the company (Nettle
2017).
In this context, it could be critically commented that the inactions of the CEO of the
HIH Insurance are a clear violation of the corporate governance principles and the provisions
of the Corporation Act as he had neither laid down a long term policy for the company’s
overall development, nor did the board set clear limits of the authority of the CEO, thereby
making provisions for him to misuse his powers; a clear violation of director’s duties under

6A CASE STUDY FOR THE HIH INSURANCE
the CA 2001. Moreover, intermingling the company fund with personal fund is a gross
violation of section 182 of the CA 2001.
A Reflection on the cognitive levels of the directors of HIH as per
Kohlberg’s Model of Cognitive Moral Development
The HIH Royal Commission held the three directors Ray Williams, Rodney Adler and
Dominic Fodera liable under civil proceeding for gross violation of director’s duties under
the CA 2001. An in-depth analysis of the case study gives a clouded overview of the
cognitive levels of the executive and non-executive directors of the company, which could be
interpreted on the basis of the Kohlberg’s Model of Cognitive Moral Development. The
Kohlberg’s Model talks about six stages of cognitive development in humans (Elm 2019).
The first two stages gives a clear view of the cognitive growth of people where they
start desiring to obey rules in the beginning and then start looking for personal interests in it,
which is quite similar to the present scenario where the non-executive director and the
executive directors have been looking for personal gains by misusing company fund. Rodney
Adler, the non-executive director brought Ray Williams and Dominic Fodera into the picture
and made them an accomplice of the wrongful act, thereby seeking ‘approval’ of fellow
significant others as talked about in the stage 3 of the Kohlberg’s model. Stage 4 of the model
suggest that the subjects follow the path of ‘morality’, which does not fit in this case as the
directors have been immoral since they misused their position for personal gains (Mathes
2019). Stage 5 and 6 of the model that suggest respecting individual opinion of others and
that moral reasoning is associated with ethical principles are also a mismatch in this situation
where the directors was violating their duties as a director under the Corporation law and as
per morality. Therefore, the given case gives a clear view of the non-compliance with the

7A CASE STUDY FOR THE HIH INSURANCE
ASX corporate governance principles, corporation laws as well as the Kohlberg’s model of
cognitive moral development.
A Reflection on whether to repeat the inactions of the Directors
Rodney Adler, the non-executive director and Ray Williams and Dominic Fodera, the
executive directors grossly violated their duties as a director under the Corporation Act 2001
and the corporate governance principles for personal interest (Bourke and Béchervaise 2017).
There is a violation of section 180 that asks the directors to act diligently for any responsible
director would not have given a loan of $10 million to Pacific Eagle Equity (PEE) without
taking the approval of the investment committee of the company or any other board
members. No proper security was even issued in lieu of the loan given to PEE, which
suggests that the concerned directors colluded the entire transaction for personal gains.
Violation of section 181 of the CA 2001 is apparent as the directors did not make decisions
for the company in good faith and neither for the best interest of the company. Rodney Adler
did not disclose the details of expenditure of the company fund, thereby not bearing the best
interest of the company. Rodney Adler and the two other executive directors clearly misused
their position as the director of HIH Insurance for personal gains and causing detriment to the
company, thereby violating section 182 of the CA 2001 (Sadique et al. 2019). Lastly,
misusing insider information for tampering with the company fund for personal gain by the
directors is a violation of section 183 of the Act, thereby establishing the fact that the
directors colluded among themselves and contravened the duties of directors (Banerjee and
Humphery-Jenner 2016).
Therefore, the case of Australian Securities and Investment Exchange (ASIC) v Adler
(2002) 41 ACSR 72 has been a landmark case which has been set up as an example of breach
of director’s duties and therefore must be paid attention to by any Chair of a board of

8A CASE STUDY FOR THE HIH INSURANCE
directors. The instances of this case are examples of what not to do as a director of a
corporation. Hence, it is needless to say that I as a Chair to the board of directors of JR
Services Pty Ltd would not repeat the same mistakes or rather wrongful actions as Ray
Williams, Rodney Adler and Dominic Fodera.
Conclusion
It could therefore be concluded that the mistakes committed by HIH insurance that
resulted in its collapse shall not be repeated by JR Services Pty Ltd and its directors. I being a
Chair to the board of directors shall ensure that the company and its members abide by the
ASX corporate governance principles and that the directors follow the director’s duties as per
the Corporations Act 2001. It is therefore, recommended that along with the overall corporate
governance principles, the corporation should emphasise on scrutinising the activities of the
directors so that they do not dominate over the company in bad faith and divulge sensitive
information to outside sources as per the ASX corporate governance principle. The inactions
of the CEO should be checked in order to prevent corporate governance failure, as seen in the
HIH case study.

9A CASE STUDY FOR THE HIH INSURANCE
References
ASX Corporate Governance Best Practice Principles (4th edition)
Asx.com.au. 2020. Corporate Governance Principles And Recommendations 4Th Edition.
[online] Available at: <https://www.asx.com.au/documents/regulation/cgc-principles-and-
recommendations-fourth-edn.pdf> [Accessed 16 March 2020].
Australian Securities and Investment Exchange (ASIC) v Adler (2002) 41 ACSR 72
Banerjee, S. and Humphery-Jenner, M., 2016. Directors’ duties of care and the value of
auditing. Finance Research Letters, 19, pp.1-14.
Bourke, S. and Béchervaise, N.E., 2017. Corporate governance, shareholder interests and
managerial accountability in turbulent times. In Something to Believe In (pp. 59-78).
Routledge.
Corporations Act 2001 (Cth)
Elm, D.R., 2019. Cognitive Moral Development in Ethical Decision-making. Business
Ethics, 360, p.155À177.
Lipton, P., 2003. The demise of HIH: corporate governance lessons. Keeping Good
Companies. p. 273-277.
Nettle, G., 2017. The changing position and duties of company directors. Melb. UL Rev., 41,
p.1402.
Sadique, R.B.M., Ismail, A.M., Roudaki, J., Alias, N. and Clark, M.B., 2019. Corporate
governance attributes in fraud detterence.

10A CASE STUDY FOR THE HIH INSURANCE
Appendix
A Reflection on the Characteristics of Cognitive Moral Development
The kohlberg’s model of cognitive moral development could be analysed as a means
of judgement of one’s moral development in a society or within a corporate setup. The three
board levels, each divided into two stages talks about the pre-conventional, conventional and
post-conventional levels of cognitive development. Stage 1 and 2 of the pre-conventional
level talks about the desire of a person to obey rules in the beginning and then starts to query
about personal gains and interest in everything in which they invest their time in. Stage 3 and
4 of the conventional level witness people seeking approval of their perspective and actions
from competent others, thereby avoiding disapproval. The person gradually leans toward
social norms and ‘morality’ by deciding to do what is ‘supposed’ to be done. A cognitive
development could be seen in this phase where an individual could decide for himself the
difference between right and wrong, thereby choosing what to do and what to avoid doing.
Approval, validation and appreciation is what people seek in this phase of cognitive
development model. Stage 5 of the post-convention level is the last stage which is formally
recognised by Kohlberg where individuals develop mutual respect for each other’s opinion
and perspective, even if they differ from their own. Stage 6 is often said to be non-existing by
Kohlberg himself as it talks about the association of moral reasoning with abstract reasoning
with the help of universal ethical principles.
Therefore, by acquiring the cognitive developments, I could prove to be a competent
Chair of the board of directors. Siding with morality and reasonableness would help me take
the right decision for the best interest of the company. As a director, I would be seeking
approval of other board members before taking a significant decision for the company, and
not take any reckless decision on my own. Misusing of position and information of the
company would be strictly avoided. I would respect the decision of fellow executive and non-

11A CASE STUDY FOR THE HIH INSURANCE
executive directors as well as the opinion of my subordinates even if they are different from
mine.