Top To Tail Trouble: A Catastrophic Result For Everyone Involved
Sydney Morning Herald
Thursday April 17, 2003
Poor corporate governance became part of the culture of HIH, writes Brian Robins.
The problems at HIH began at the top, with the royal commissioner criticising the company's chairman, Geoff Cohen, for being ``ineffective" and a ``grave impediment" to the company's operations.
The board of directors at HIH rarely questioned or rejected a recommendation from management, leaving the board heavily dependent on the advice of senior management and thus the independence of the board of directors compromised, Justice Owen concluded in his final report to the royal commission, released yesterday.
At the same time, senior management of HIH did not appear to have ``any clearly defined statement of duties or limits on authority", Justice Owen found.
He also castigated the board for having little clear understanding of conflicts of interest, nor how to resolve them.
``I am drawn to the conclusion that Cohen was ineffective in his role as chairman," Justice Owen concluded. ``Given the critical importance of this office, Cohen's performance in this regard was a grave impediment to the proper functioning of the board."
The HIH board of directors failed to exercise appropriate supervision over expenses of executive directors, Justice Owen found, so that the company had not made the transition from an entrepreneurial company dominated by senior management to a public company run for shareholders.
``There was blind faith in a leadership that was ill-equipped for the task . . . risks were not properly identified and managed," Justice Owen found.
In the case of FAI, Rodney Adler had been advised by one of the senior managers of the potential for significant under-reserving in 1997. After asking for a report on the matter, it was never pursued a ``serious deficiency" on the part of management at FAI, Justice Owen said.
``HIH had similar problems, and the under-provisioning problems and practices it inherited from FAI interacted with and compounded those it was already experiencing," he found.
``The result was catastrophic."
In the case of Pacific Eagle Equities, which received funds from HIH to buy shares in the company, Justice Owen found management sought to bury key issues away from the board.
The only way the issue came to the attention of Australian Securities Investment Commission (ASIC) was due to the insistence of the auditor.
``This reveals a sorry state of affairs," Justice Owen noted. ``Senior management not attentive to their true responsibilities; external legal advisers not providing the services the board was entitled to expect; and an ineffective board."
``I formed the view that the board had such a degree of respect for management that the recommendations of management were assumed to have been carefully thought out and therefore to be correct . . . there were very few occasions when the board either rejected or materially changed a proposal put forward by management."
© 2003 Sydney Morning Herald