Please do a detailed answer and please complete by the due date and I have attached here the referencing materials
i HIH Case Study on Corporate Governance Round 1 20 August 2000 A Core Curriculum for Insurance Supervisors Copyright © 2006 International Association of Insurance Supervisors (IAIS). All rights reserved. The material in this module is copyrighted. It may be used for training by competent organiza- tions with permission. Please contact the IAIS to seek permission. 1 HIH Case Study on Corporate Governance (Round 1) The primary objective of this case study is to assess the state of corporate governance at HIH before its collapse; to analyze the warning signals, if any, that were provided by the information that was available to the supervisory authority; and to determine what actions, if any, would be appropriate for an authority in the face of such information. Your position is general manager of a branch within the Diversified Institutions Division (DID). DID is responsible for supervising all (approximately 350) systemi- cally significant institutions and financial conglomerates, including HIH. Many of the institutions supervised by DID are significantly larger than HIH. The division is divided into four branches, one of which (yours) has sole supervisory oversight of HIH, along with 4 very large conglomerates and another 20 smaller institutions. DID’s total super- visory staff has about 50 members, of which your branch has 8. Attached is a briefing note prepared by the senior manager of your branch respon- sible for HIH. Your tasks for the first round are to: • Assess the information provided • Identify any issues of concern in relation to the governance or control structure of HIH • Prepare a strategy for addressing these concerns with HIH, with specifics about any information you wish to receive from HIH or other sources. Insurance Supervision Core Curriculum 2 MEMORANDUM FOR GENERAL MANAGER BRIEFING NOTE ON HIH INSURANCE LIMITED 20 August 2000 You will be aware that there has been a great deal of media attention on the governance of HIH over the past few months, focusing on the management and board performance of the company. Governance issues were also uncovered during the recent on-site visit by our asset risk team. These, together with our ongoing concerns about the accuracy of HIH’s financial returns, suggest that we need to focus some attention on the governance of HIH. In particular, the asset risk visit to HIH in July revealed that, in addition to taking on inappropriate levels of asset risk, HIH also suffers from some possibly serious breakdowns in internal controls. I have attached the following for your information: • Attachment 1 – Biographies of the directors, senior management and auditors of HIH; • Attachment 2 – Corporate chart of HIH; • Attachment 3 - Relevant extracts from a briefing note prepared in March for APRA’s first prudential visit to HIH; • Attachment 4 - A file note prepared in July by the head of the specialist asset risk team. The team inspected a sample of loan files, conducted interviews with both junior and senior management at HIH; • Attachment 5 - A briefing note prepared by the analyst responsible for HIH in relation to the accuracy of quarterly reporting; • Attachment 6 - A summary of the corporate governance regulatory framework; and • Attachment 7 - A sample of relevant media clippings referring to HIH. You will note from recent press that Mr Adler has been building up his stake in HIH to become one of the four largest shareholders (including family interests). Mr Adler’s role in the company is therefore an interesting mix of non-executive director, major shareholder and, according to industry rumor, a businessman using his connections to further his own personal business interests. I would appreciate an opportunity to discuss the strategy we should be adopting to address these concerns. Senior Manager HIH Case Study on Corporate Governance (Round 1) 3 Attachment 1 HIH Board of Directors GEOFFREY ARTHUR COHEN AM NON-EXECUTIVE CHAIRMAN (AGED 66) APPOINTED 20/1/1992 Chairman of Audit, Human Resources and Investment Committees. Mr Cohen has an extensive background in corporate financial management and was formerly a senior partner of Arthur Andersen. Mr Cohen’s directorships include Foster’s Brewing Group Limited and Diversified United Investment Limited. RAYMOND REGINALD WILLIAMS AM DEPUTY CHAIRMAN AND CHIEF EXECUTIVE (AGED 64) APPOINTED 2/12/1988 In 1968 Mr Williams, together with Mr Michael Payne, founded the Company that ultimately became HIH Insurance in Australia. He has held senior executive positions in the insurance industry for 40 years and is currently a Board Member of the Insurance Council of Australia Limited. Within the HIH Group Mr Williams is also a director of HIH Underwriting, HIH Casualty, HIH U&A, CIC, WMGI, FAI, FAI General, FAI Traders, FAI Reinsurance, FAI Finance, FAI Investments, FAI Leasing, FAI Overseas, Lanlex, United Body Works CHARLES PERCY ABBOTT NON-EXECUTIVE DIRECTOR (AGED 61) APPOINTED 30/8/1995 Member of Audit Committee. Mr Abbott, a former partner and now consultant to the major law firm Blake Dawson Waldron, is also a director of a number of other companies including Flinders Capital Ltd and Bass Capital Ltd. Insurance Supervision Core Curriculum 4 RODNEY STEPHEN ADLER AM NON-EXECUTIVE DIRECTOR (AGED 41) APPOINTED 16/4/1999 (FAI FROM 11/1/1988) Member of Investment Committee. Mr Adler is Chairman and Chief executive of Adler Corporation Pty. Limited. He is a Fellow of the Institute of Chartered Accountants in Australia. Mr Adler is a Governor of the Sydney Institute, and Adjunct Professor in the Faculty of Business at the University of Technology, Sydney, and is a director of other companies including Anaconda Nickel Limited, One-Tel Limited, and a director and major shareholder of Abacus Funds Management Limited, Pacific Capital Partners Pty. Limited and Pacific Mentor Pty Ltd. He is chairman of Medicine Quantale Limited and Home Security International, and joint chairman of Juvenile Diabetes Australia. (Note: Mr Adler came onto the HIH Board when HIH took over FAI Insurance Ltd, a company dominated by Adler family interests.) JUSTIN HERBERT GARDENER NON-EXECUTIVE DIRECTOR (AGED 64) APPOINTED 2/12/1998 Member of the Audit and Human Resources Committees. Mr Gardener had been a partner in Arthur Andersen since 1972 and ultimately was a Managing Practice Di- rector with responsibility for the Asia Pacific Region over which he has developed a high level of expertise. He is chairman of Ashton Mining Limited and his other direc- torships include Austar United Communications Limited, Combined Communications Network Ltd, Hillgrove Gold NL and Hutchinson Telecomm (Aust) Ltd. ROBERT REGINALD STITT Q.C. NON-EXECUTIVE DIRECTOR (AGED 59) APPOINTED 20/1/1992 Member of the Audit and Human Resources Committees. Mr Stitt has practiced as a barrister extensively since 1968 and was appointed a Queen’s Counsel in 1983. Mr Stitt has been a legal adviser to the Company since it commenced business in Australia. HIH Case Study on Corporate Governance (Round 1) 5 HERMANN FRANZ RANDOLPH WEIN CHIEF EXECUTIVE, ASIA (AGED 47) APPOINTED 13/7/1995 Member of Reinsurance Committee. Mr Wein is an attorney-at-law and has had 20 years operational experience in the insurance industry, a substantial part of which is in the Asia Pacific area. Before joining the Company, he had been a senior executive of Winterthur Swiss Insurance Company for 8 years, with the last 4 as its Regional Chief Executive, Asia Pacific. In addition to the above, 3 other members of the HIH executive, George Sturesteps, Terrence Cassidy, and Dominic Fodera served on the Board, as did an ex-employee, Mi- chael Payne. Brief Biographies of Key Management and Auditors HIH MANAGEMENT George Sturesteps • HIH Deputy Chief Executive and Managing Director, International (1995 – 2001) • Executive Director of HIH from 2/12/1988 to 12/9/2000, Member of Reinsur- ance Committee (1995 – 1999) • Director of HIH Underwriting (24/9/1971 – 12/9/2000), HIH Casualty (24/4/1989 – 12/9/2000), CIC (13/7/1995 – 12/9/2000), WMGI (21/1/2000 – 27/2/2001) • Employed by HIH since its inception in 1968 Terence Cassidy • HIH Managing Director, Australia (1995 – 2001), Member Investment and Rein- surance Committees HIH (1996 – 1999), Executive Director of HIH (2/12/1988 – 12/10/2000) • Director of HIH Underwriting (from 1/1/1997), HIH Casualty (from 21/10/1977), HIH U&A (from 1/1/1977), CIC (from 13/7/1995), WMGI (17/12/1999–15/3/2001), FAI (from 25/2/1999), FAI General (from 30/3/1999), FAI Traders (from 26/3/1999), FAI Reinsurances (from 26/3/1999), FAI Fi- nance (31/3/1999–12/1/2000 & 10/5/2000–15/3/2001), FAI Investments (from Insurance Supervision Core Curriculum 6 26/3/1999), FAI Leasing (from 26/3/1999), FAI Overseas (from 26/3/1999), Lanlex (from 26/3/1999) and United Body Works (26/3/1999–15/3/2001) • Employed by HIH since 1972 Dominic Fodera • HIH Finance Director/Chief Financial Officer (1995–2001), HIH Chief Oper- ating Officer (2001), Member Investment and Reinsurance Committees HIH (1997–1999), Member of Due Diligence Committee HIH (1999), HIH Execu- tive Director (9/5/1997–12/10/2000) • Director of HIH Underwriting (from 7/4/1997), HIH Casualty (from 31/1/1996), HIH U&A (from 31/1/1996), CIC (from 27/5/1996), WMGI (17/12/1999 – 15/3/2001), FAI (from 25/2/1999), FAI General (from 31/3/1999), FAI Traders (from 26/3/1999), FAI Reinsurances (from 26/3/1999), FAI Finance (31/3/1999– 15/3/2001), FAI Investments (from 26/3/1999), FAI Leasing (from 26/3/1999), FAI Overseas (from 26/3/1999), Lanlex (from 26/3/1999) and United Body Works (26/3/1999–15/3/2001) • Employed by Arthur Andersen from 1979–1995, Partner of Arthur Andersen (1990–1995), involved in HIH audits from 1990–1994, • Joined HIH in 1995 as Chief Financial Officer William Howard • General Manager, Financial Services/Investments for HIH (1999–2001) • Director of FAI Finance (from 31/1/2001) Frederick Lo • Secretary of HIH (from 4/11/1991), HIH Underwriting (from 2/12/1991), HIH Casualty (from 9/12/1988), HIH U&A (from 9/11/1988), CIC (13/7/1995– 15/3/2001), WMGI (from ), FAI (from 25/2/1999), FAI General (from 31/3/1999), FAI Traders (from 26/3/1999), FAI Reinsurances (from 26/3/1999), FAI Finance (31/3/1999—15/3/2001), FAI Investments (from 26/3/1999), FAI Leasing (from 26/3/1999), FAI Overseas (from 26/3/1999), Lanlex (from 26/3/1999) and United Body Works (26/3/1999–15/3/2001) • Joined HIH in 1987 and focused exclusively on secretarial function since 1995 Ray Gosling • Group Reinsurance Manager for HIH (1995–2001) • Employed by HIH since 1989 HIH Case Study on Corporate Governance (Round 1) 7 John Clarke • General Manger, Public Affairs for HIH (1984–2001) Paul Abela • Group Tax Counsel for HIH (1999–2001) • Employed by HIH since 1994 William Ballhausen • HIH General Manager Investments (1992–2001) • Secretary for HIH Underwriting (11/11/1986–7/4/2000) and HIH Casualty (13/3/1989–7/4/2000) • Employed by HIH since 1982, Investment Manager since 1985 Greg Waters • HIH General Manager, Internal Audit (1995–2001) • Internal audit function within HIH since 1988 Auditors – Arthur Andersen Alan Davies • Partner of Arthur Andersen (since 1980) • Associate of Institute of Chartered Accountants in England & Wales (1968), As- sociate of Institute of Chartered Accountants of Australia (1972), Fellow of ICAA (1983), Fellow of CPA