Corporate governance is considered as the driver of the performance of the organization, and these terms is wide in nature and includes number of components in its ambit. From last two decades, this concept becomes very important for the organizations to understand and recognized. As it plays important role in the business environment of Australia. After the number of high profile corporate collapses and after the adverse effects of the global financial crises, government, organizations, and shareholders play active role in the adoption of the new regulations of the corporate governance in the organization.
This paper mainly compare the two high profile corporate collapses in Australia from the late 90’s to early 00’s, and it also discuss the common issues in context of the corporate governance which results in the corporate collapse. For the purpose of this paper, tow case studies related to the corporate collapse are HIH Insurance and Dick Smith (Retailer).
Structure of this paper includes the brief discussion about the major corporate collapse and also the evaluation of those situations because of which these collapse occurred, corporate governance approach of both the companies, role played by directors, breach of directors’ duties, and mechanism which can be used by the organizations for preventing the organization from collapse or from reducing the damage.
In the early years of the 00’s, number of organization collapsed in Australia, which clearly reflects that accounting and governance standards adopted by the organization are less good as compared they are supposed to be. Because of these corporate collapses, approach of the corporate governance becomes more important in the business environment of Australia. There are number of issues in terms of the governance of the organizations in context of directors and officers of the organization, and it is necessary to examine these issues for the purpose of determining the irregularities, management responsibilities, internal control, etc.
Correct implementation of the corporate governance standards can help the management in resolving this issue and prevent the organization from the corporate collapse.
There are very less number of surprises when it deals with the insurance company, but whenever these surprises come, they definitely bring the bad news. Corporate collapse of HIH insurance was one of them, as this collapse brings surprise and bad news for maximum number of policy holders. On 15th March 2001, approval was received by the HIH from the NSW Supreme Court in terms of placing the HIH into the provisional liquidation. The collapse of HIH was considered as the largest corporate collapse in the history of Australia at that time, and losses of HIH were totalled up to $ 5.3 billion. Tony McGrath of the KPMG was appointed as the provisional liquidator to HIH which was accompanied with 17 of its controlled organizations. Provisional liquidators were considered as the temporary administration which assess and review the operations and financial positions of the HIH.
There are number of people who get affected from this loss such as shareholders of the organization bear huge loss in context of their investments, policy holders of the organization, and community at large.
HIH Insurance
Reasons of Collapse: As per the reports published by press, actual adviser of the HIH had already warned the management of the HIH a year before the collapse of the organization, that accounting policies and approach of the organization could result in severe consequences. These accounting practices were related to the amount of assets owned by the organization in terms of paying back the future claims. Instead of opting for prudential margin, organization takes the risk of buying some reinsurance from other insurance organizations. As per the HIH actuarial adviser, organization by the year 2000 run out of its reinsurance cover and company also fail to maintain the sufficient assets or prudential margin for the purpose of paying the claims.
In context of the economic theory, failure of the Australian retailer will be connected with the dynamic economy. Those organizations which fail to utilize the economic resources and govern their business in efficient manner will not able to survive in the long run. Failure of the Dick Smith is considered as good example of this approach, as organization fails to govern its business in efficient manner. On 4th January 2016, value of Dick Smith Holdings was fall down by 80%, and management made request of halt in trading. Later that day, organization was placed into administration by its major creditors. The last store of the organization was closed on 3rd May 2016. On 25th July 2016 Company finally goes into the liquidation.
This collapse effect number of peoples such as creditors of the organization bears the loss of estimated A$260 million ($277m) and shareholders A$344.5m. This loss is combines and cost A$604 million, and o individual or group was held responsible in context of this loss. Moreover, almost 3224 employees of the organization bear huge loss as they lost their earnings, and include almost 446 New Zealanders.
Reasons of collapse: Following are the reasons of corporate collapse of Dick Smith:
- There was high competition in the market and rapid changes in the consumer preferences.
- Store network of the organization was larger as compared to its competitors, and this increase the cost base of the organization.
- Organization was losing its market share by experiencing the declining comparable sales.
- Expansion plan of the organization required the considerable financial commitment, and because of this organization utilize all its cash resources, considerable commitment of supplier, and also needed borrowings of bank.
- Investment decisions of the organization fail to match with the consumer demand.
- Clearance sales organized by the organization fail to generate the sufficient sales and margin.
It has been described in number of reports that HIH practiced conservative corporate culture in their organizations, and the deficiencies related to the corporate governance result in the collapse of the HIH. HIH was managed by the compelling and dominating CEO who was engaged in high-risk practices in that market which have high competition. There was lack of independent directors on the board management of the HIH, and this can be sad on the basis of the fact that, almost 3 from the 11 board members including the chairman of the board were the former partners of the company’s auditors. There were number of independent directors who made the allegations that true financial position of the organizations was not disclosed to them. There were number of difficulties which were faced by the HIH because of its aggressive acquisition strategy, and the growth strategy which result in severe consequences to the organization. These strategies resulted in the dispute between the implementation of these strategies and profit maximization, and failed to meet the adequate corporate governance procedures.
However, failure of the HIH was not only because of the business strategies and fundamental issues but also because of the failure of board in ensuring effective corporate governance policies such as false reports was presented to the independent directors, greed, fraud etc.
Reasons of Collapse
Directors of the organization failed to ensure the effective corporate governance approach in their organization and this leads to biggest corporate collapse of the Australian history.
Board of Directors of the HIH failed to exercise the adequate monitoring on the management of the organization, as board fails to adopt the independent approach in terms of conducting their business. Independence of the board was compromised by the management influence in terms of its deliberations..
On the other hand, corporate integrity which resulted from the adoption of the good corporate governance approach was not present in this case. Board of directors of the company fails to ensure the effective corporate governance approach such as they fail to ensure the true representation of the financial position of the organization. Therefore, lack of corporate governance approach accompanied with the false disclosures in the annual reports declines the financial strength of the organization, and this becomes the biggest reason of the collapse of the organization. Further, directors fail to focus on the declining stock prices of the organization, and also in frame the sound policy management for addressing the issues. The senior management of the organization along with the directors failed to manage the risk in effective manner which weakens the capital structure of the organization. Therefore, it can be said that failure of directors in ensuring the fairness under the corporate governance approach results in the collapse of this organization.
In this company, directors of the company fail to ensure the adequate independence in the organization, and also fail in effective management off the company. Lack of Independence on part of board of directors of the company is considered as the biggest reason of collapse of this organization.
In this company chairman fails to fulfil its duty stated under the Corporation Act, as director’s duty to act in the best interest of the company. Director’s avoid the financial position of the company and also fail to ensure the fairness in terms of the corporate governance approach. Therefore, it can be said that directors play important role in the collapse of the HIH insurance.
In this directors breach both fiduciary and statutory duties in the organization, as they fails to ensures the best interest of the company. They also fail to ensure the fairness in the organization present wrong financial position in the annual reports of the organization. The senior management of the organization along with the directors failed to manage the risk in effective manner which weakens the capital structure of the organization. Therefore, it can be said that failure of directors in ensuring the fairness under the corporate governance approach results in the collapse of this organization.
Following are the measures which can be used by the organization in terms of preventing the above stated collapse:
- Directors of the organization must ensure effective corporate governance approach in the organization.
- Directors must adopt the corporate governance standards while conducting business of the organization.
- Directors must ensure independent directors in the organization for the monitoring of the management.
Conclusion:
After considering the above stated facts, it is clear that lack of effective corporate governance result in the collapse of the HIH insurance and Dick Smith. In case of Dick smith, board of directors of the company fails to ensure the effective corporate governance approach such as they fail to ensure the true representation of the financial position of the organization. On the other hand, in case of HIH, there was lack of independent directors on the board management of the HIH, and this can be sad on the basis of the fact that, almost 3 from the 11 board members including the chairman of the board were the former partners of the company’s auditors.
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Journal
Soheila Mirshekary, Ali M Yaftian & Damien Cross, Australian corporate collapse: The case of HIH Insurance, (2005), Journal of Financial Services Marketing, volume 9.
O. Kavrar & B. Yilmaz, Corporate Collapses in Australia: Case of Harris Scarfe, (2017), Journal of Economics, Business and Management, Vol. 5, No. 1.
Reviews
Denis, Corporate Governance and the Goal of the Firm: In Defense of Shareholder Wealth Maximization, (2016). Forthcoming in the Financial Review.
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