Dead Reckoning
Sydney Morning Herald
Friday April 18, 2003
HIH is history and its judge tells us to learn from it, but few past inquiries drew so much blood. Kate Askew reports.
After being immersed for more than 18 months in the complexities of the country's biggest corporate collapse, HIH Royal Commissioner Neville Owen hoped that no one reading his 1500-page report would begrudge him a few personal observations.
``It is not for me to judge whether this commission has faithfully served the public interest and whether it has fulfilled the expectations the public had of it," he mused.
But to the extent he felt permitted to have a view, he would not be influenced in the slightest by the number of prosecutions that followed, nor the severity of the penalties.
The public would hardly be so measured.
Judge they did, the minute the shiny three-volume report rolled off the presses and slid before the glare of public opinion.
``Hunted down like mangy dogs," was how those responsible should be treated, former HIH shareholder Terry Rowney, who lost thousands when the insurer collapsed, told ABC Radio listeners on Thursday.
``Well, the findings of the commission said that HIH was mismanaged. What's that? The polite way of saying we'll let these crooks off the hook when they should really pay. They all should be in jail."
To people like Terry Rowney, prosecutions and penalties are the only measure.
Those assisting Justice Owen in his endeavour to uncover the cause of the HIH collapse came up with about 1000 recommendations for possible breaches of the law, some civil and some criminal.
The judge took 56 of those seriously enough to recommend that the authorities prosecute. Of those, 28 were potentially of a criminal nature.
So if that's the favourite measure, how does Justice Owen's Royal Commission stack up in the sphere of other investigations into corporate collapses?
Compared with the commission into the $2.6 billion collapse of the Victorian merchant bank Tricontinental in the 1990s, it certainly had a much higher strike rate.
In the case of Tricontinental, counsel assisting recommended 121 breaches, of which 74 were criminal. But the commissioner recommended that the Australian Securities Commission pursue just one of those cases.
There were 19 recommendations against the former managing director of Tricontinental, Ian Johns, that were ignored.
And in the case of the $3.15 billion collapse of the State Bank of South Australia, also in the 1990s, no criminal breaches were recommended, though a civil case was pursued against the former managing director, Tim Marcus Clark.
And finally, there was the wide-ranging commission into WA Inc.
Its recommendations into both the corporate and public sectors, were kept secret, a huge contrast in itself to the very open HIH commission.
Several criminal prosecutions did ensue from the WA Inc commission, including those of 1980s high flyer Alan Bond and former WA premier Brian Burke.
Justice Owen, however, didn't want us to become too concerned with prosecutions and penalties.
``I hope that readers of the report will not become preoccupied with blame and that attention will not be diverted from the primary messages," he wrote.
``How the failure of HIH came about and what should be done to diminish the likelihood of such a calamity occurring in the future are at the heart of this report."
So what will prevent a corporate calamity such as the collapse of HIH from recurring?
From this viewpoint, Justice Owen is hardly restrained.
Overall, he blamed the collapse of HIH not on ``fraudsters" and ``embezzlement", but on mismanagement.
At the heart of mismanagement was HIH's unusual corporate culture, which he compares to that of a privately owned business rather than a public company.
The judge has plenty of proposals that he believes will restrict the kind of corporate behaviours that were abundant at HIH.
Among them, he recommends a plethora of reviews into the Corporations Act and the Australian Stock Exchange listing rules.
Those company directors groaning about the prospect of more strident regulation can largely blame the HIH board.
It was that board's decision to retrospectively grant increases to directors' fees that was partly behind Justice Owen's first policy recommendation.
Early in 2001, in an effort to alleviate rising cash flow shortages, the HIH board decided to delay payments to or on behalf of HIH policyholders, resulting in both policyholders and creditors experiencing long delays before being paid. Many were left out of pocket.
``Against that background, there occurred an incident that I find quite startling," Justice Owen said. ``At a meeting of the board's human resources committee on February 26 [HIH collapsed on March 15] it was resolved to recommend to the board retrospective increases in directors' fees."
``. . . given what the directors knew about the cash flow difficulties the company was experiencing, quite how the question of fee increases came to be considered at all let alone approved is a mystery to me."
Grumblers can also blame HIH director Charles Abbott.
The lawyer was paid a 10 per cent finder's fee by the firm to which he consulted Blake Dawson Waldron for bringing in HIH as a client. Blake also advised Abbott on his duties as a director of HIH and HIH paid the bill.
``The director concerned denied there was anything inappropriate in the arrangement and pointed to the disclosure in the annual report," Justice Owen said. ``I found that the level of disclosure was insufficient. Even if it was disclosed fully, that would not address adequately the problems inherent in such an arrangement."
Thus, in his first policy recommendation, Justice Owen said: ``I recommend that the disclosure and other requirements of the Corporations Act 2001, the relevant accounting standards and the Australian Stock Exchange Listing Rules that relate to directors' remuneration be reviewed as a matter of priority, to ensure that together they achieve clear and comprehensive disclosure of all remuneration or other benefits paid to directors in whatever form."
He stopped short, however, of making a formal recommendation on the area of corporate donations.
HIH founder Ray Williams was, in short, a very generous fellow.
There were millions donated to the Garvan Institute and medical units within Monash University and the University of NSW.
That's not to forget the near $1 million donation to the Australian Aviation Museum.
`Why did you think it was in the interests of the shareholders of HIH to make a donation of that magnitude?" asked counsel assisting the commissioner, Wayne Martin QC, during last year's proceedings.
``Because I think it was an important, I think Australian Aviation Museum is extremely important, I think it is important from the history of Australia, the part that aviation, the naval aviation, made to the protection of Australia during times of war," Williams responded.
Justice Owen, in his findings, said: ``The board of HIH appeared to exert no meaningful control over the amount or direction of the not inconsiderable donations made by the company over the years. Credit for the company was not usually sought for having made the donations and there was little if any disclosure of details of the company's magnanimity to the board, let alone shareholders."
No, that went to Williams, who won an AM and an honorary doctorate courtesy of HIH's generosity.
In his second and final policy recommendation in the area of corporate governance, Justice Owen attempts to tighten the circle around those employees of a company who have to be compliant with duties under the Corporations Act.
In other words, all employees ``performing functions for and on behalf of corporations, whether employees or suppliers of services under contract" should have the duties of the act imposed upon them. That is, in order ``to make sense of, and to extend, what is currently an unnecessarily restrictive and difficult legislative regime applying to the duties of company personnel".
In the case of HIH, outside forces helped to ``paper over the ever-widening cracks that were appearing in the edifice that was HIH".
Justice Owen cracks down on auditors in his policy recommendations. (Not that HIH's auditor, Andersen, stayed around to cop the changes.)
He is recommending that the Corporations Act be amended in several ways. Not only the lead audit partner should be rotated, but also senior audit personnel. Auditors who provide non-audit services should be required to explain why those services do not compromise audit independence.
Under Justice Owen's recommendations, HIH's finance director Dominic Fodera would not have been hired. Audit partners directly involved in a company's audit, like Fodera, would not be hired until four years following their resignation.
Fodera not only got a $400,000 salary, but also a phantom share scheme worth $1.2 million, when he jumped ship from Andersen, where he'd worked on HIH's books for 10 years.
The Corporations Act isn't Justice Owen's only target.
There are four policy recommendations relating to changes in the ASX's Listing Rules.
Not surprisingly, the first relates to the release of announcements to the stock exchange. Those, he recommends, should be approved by at least one board member.
That would help prevent the practice that pervaded HIH head office, which issued no negative information releases to the stockmarket.
HIH's final press release in its dying moments is a shining example.
Announcing its slide into provisional liquidation, HIH noted the losses from its overseas businesses ``would no longer be sustained by the sound Australian operations".
That could not have been further from the truth.
As Justice Owen said in his conservative way, that was an ``unduly optimistic view" of HIH's financial position.
Of course the market didn't always adopt the ``optimistic" view presented by HIH's management.
But there was hell to pay if it didn't.
Williams was renowned for ``blacklisting" analysts cutting them off if they wrote unfavourable research or published unfavourable recommendations.
Justice Owen recommends that so-called `blacklisting' be outlawed under the listing rules.
Finally, in an effort to provide analysts, shareholders and indeed, a company itself, with greater guidance on acquisitions, he is asking that the listing rule dealing with major transactions be clarified.
The purchase of the Allianz personal lines business into an HIH joint venture proved to be one of its great follies ``the harbinger of doom".
If the rules had been clarified so that HIH had to disclose the full details of the transaction, including the change it was going to effect on its future earnings, the deal may well not have gone ahead.
And on top of all that, Justice Owen recommended changes to accounting practices.
Accounts had been ``distorted by questionable entries, heavy reliance on one-off end-of-year transactions and aggressive accounting practices".
Justice Owen would not have us dwell on HIH in terms of prosecutions and penalties.
He would rather it serve as a reminder. A path down which not to travel.
HIH reminds us, according to the Royal Commissioner, that: ``a drastic fall from corporate grace can occur if those in charge lose their way".
© 2003 Sydney Morning Herald