Over two decades ago, on 15 March 2001, a provisional liquidator was appointed to HIH Insurance, which was then Australia’s second-largest insurance company. This event precipitated Australia’s worst ever corporate failure including losses in excess of $5 billion, with thousands of employees losing their jobs, shareholders left holding worthless equity and insurance contracts effectively being invalidated.
A subsequent Royal Commission shone a light on the role played by the company’s board of directors, and the authors of many books and scholarly articles have since attempted to piece together how a group of directors whose main role was to oversee the company’s management could have failed so spectacularly to fulfil their obligations. The Royal Commission identified numerous reasons for the collapse of HIH, including mismanagement, incompetence, bad accounting, and fraud.
But it was the company’s governance failures which the Royal Commission highlighted as a key feature of the HIH collapse, whereby the board of directors became a mere rubber stamp for the bad decisions of management.
Family companies often struggle with the separation of governance and management. Here are my Top 5 Lessons for Family Company Directors arising from the collapse of HIH Insurance.
- Directors must hold management to account
The HIH board rarely held to account the management team, led by long-term CEO Ray Williams. Effectively, the board was answerable to Williams and failed to ask questions when they should have. This contributed to a litany of bad decisions, including the doomed acquisition of FAI Insurance, and ill-fated excursions into the UK and USA markets.
Family company boards are also at risk of becoming an extension of the decision-making by management, rather than its proper role to oversee senior management and ask probing questions. Sometimes this is because senior managers are also family members or shareholders, and the board may be reluctant to initiate conflict with family members. In this situation, developing a Board Charter can help clarify the role that directors have, and set out guidelines for the board to follow; also, many family companies find that appointing non-family non-executive directors to the board can enhance management accountability.
2. Culture must be “owned” by the board
Over many years, a corporate culture had developed at HIH whereby the interests of shareholders or external stakeholders were routinely ignored, in favour of the personal financial interests of the CEO, management and selected directors. One outcome of this culture was that deteriorating financial results were covered up by management, including deliberately misleading the company’s auditors, and keeping the board in the dark regarding the true financial position.
Multi-generational family companies typically inherit a culture from their founders, which can be a strength where the culture supports strong moral or ethical values, but a potential weakness where the culture does not properly regard the interests of other family shareholders. Development of a Family Charter which clarifies the family values involved in operating the business, can assist a family company board in upholding the culture that the family has identified as important.
3. Directors can’t abdicate responsibility
Many of the HIH directors were routinely absent from board meetings where major decisions were ratified; for example, five of the twelve directors were not present when the board approved the doomed $300m purchase of FAI Insurance. The Royal Commission highlighted many other situations where the board appeared to be “asleep at the wheel” and was particularly critical of the role of the Chair in failing to properly guide his fellow directors.
In my experience, many family company directors lack a full understanding of the fiduciary duties involved in their appointment. I would recommend that new directors in this situation consider appropriate self-education, such as governance courses run by the Australian Institute of Company Directors.
4. Board must provide clear risk management and strategic direction
While HIH had a written risk management policy, there was little evidence that this was ever adhered to, or that it was considered at all by the board; according to the Royal Commission, risks were not properly identified or managed. For a company operating an insurance business, whose business model required that risks be managed for all of its customers, this was a major flaw which contributed to many poor investment decisions. Similarly, the company’s strategic direction was the sole domain of the CEO and the management team, with little input from the board.
Family company boards should ensure that they are involved in setting the risk appetite of the company, and that they are involved in ratifying the key strategies recommended by management.
5. Experience and qualifications aren’t everything
The HIH directors were considered highly experienced and qualified for the role, holding directorships in other companies, senior positions in law, and demonstrated expertise in insurance matters. Despite this, they became subservient to the company CEO, failed to probe management when they should have, and were ineffective in providing competent governance. Family company directors should remember that a lack of governance experience or qualifications can be balanced by a willingness to learn, a strong commitment to the family owners’ values, and exhibiting an “enquiring mind” prepared to ask questions and seek explanations where needed.
Robert Powell FCA GAICD is the founder and Managing Director of Family Boards Pty Limited, a specialist consultancy helping family companies achieve best practice in board governance and risk management. He is a Chair of the business leader peer support group Leadership Think Tank Australia, an accredited specialist adviser member of the Family Business Association (AU), a Graduate of the Australian Institute of Company Directors, and a Fellow of Chartered Accountants Australia and New Zealand.