.The chair has an important responsibility to identify and resolve conflicts of interest and
cannot just rely on directors to make disclosure and assume there is no conflict of
interest in the absence of disclosure.
The chair must take responsibility for taking the lead in securing full disclosure by all
directors.
The failure of the chairman to discharge his responsibilities can be illustrated by his
failing to bring the CEO to account when he by-passed the board in a key transaction.
As pointed out by Austin J in ASIC v Rich [2003] NSWSC 85, the chairman’s
responsibilities include the general performance of the board and the flow of information
to the board on matters such as key transactions. Concerns about governance were
raised by two non-executive directors who expressed concern to the chairman that the
board was not properly involved in important strategic matters and was dealing only with
matters brought by management. The chair did not bring these important concerns to
the board because the CEO indicated that he did not wish this matter to be raised. This
again reflects the recurrent theme of a board held captive by a dominant CEO.
The board that did not ask questions
The Royal Commission report clearly considered that the board did not properly carry
out its role. This is not surprising considering the dominant role played by Ray Williams
as CEO and the ineffective role of the chair. There was little if any documentation or
analysis of future direction or strategy. While management is best able to propose
strategy, it is part of the role of the board to understand, test and endorse the
company’s strategy. This meant that the board was unable to monitor management
performance and proposals by reference to endorsed strategy. Where a board functions
properly, any deviation in practice should be challenged and explained. The board must
regularly test and review the strategy’s appropriateness and monitor and assess
whether the strategy is being achieved and, if so, to what extent.
Ray Williams as CEO never clearly expressed to the board his plan for dealing with a
difficult competitive commercial environment. It was a damning indictment of the board
that the directors were unable to identify the strategic directions of the company. A longterm
strategy or plan was never formally submitted to the board for critical analysis. This
resulted in investment decisions being made which were opportunistic and lacking in
direction. The failure to understand strategy led to a failure to appreciate the risks
involved and the board then could not ask the right questions to ensure the strategy
was properly executed. Even if the right questions were asked, the board would have
been unable to assess the responses. This dysfunction led to the major failures of
operations in the UK and US and the FAI acquisition which were ultimately crucial in the
collapse of HIH.
Non-executive directors were blamed for failing to understand the outstanding claims
provisioning. This is crucial to the financial health of an insurer and was the most critical
part of HIH’s financial statements. This lack of understanding meant the directors were
unable to identify and deal with looming problems before it was too late.
The crucial question of determining the amount of reserves was set in reliance on
actuaries’ reports. However, these reports never came before the board or audit
committee, nor were an actuary invited to a meeting to answer questions on how the
figures were arrived at.
The board was heavily dependent upon the recommendations of senior management
and there were few occasions when proposals put forward by management were
appropriately tested by the board.
.The chair has an important responsibility to identify and resolve conflicts of interest and
cannot just rely on directors to make disclosure and assume there is no conflict of
interest in the absence of disclosure.
The chair must take responsibility for taking the lead in securing full disclosure by all
directors.
The failure of the chairman to discharge his responsibilities can be illustrated by his
failing to bring the CEO to account when he by-passed the board in a key transaction.
As pointed out by Austin J in ASIC v Rich [2003] NSWSC 85, the chairman’s
responsibilities include the general performance of the board and the flow of information
to the board on matters such as key transactions. Concerns about governance were
raised by two non-executive directors who expressed concern to the chairman that the
board was not properly involved in important strategic matters and was dealing only with
matters brought by management. The chair did not bring these important concerns to
the board because the CEO indicated that he did not wish this matter to be raised. This
again reflects the recurrent theme of a board held captive by a dominant CEO.
The board that did not ask questions
The Royal Commission report clearly considered that the board did not properly carry
out its role. This is not surprising considering the dominant role played by Ray Williams
as CEO and the ineffective role of the chair. There was little if any documentation or
analysis of future direction or strategy. While management is best able to propose
strategy, it is part of the role of the board to understand, test and endorse the
company’s strategy. This meant that the board was unable to monitor management
performance and proposals by reference to endorsed strategy. Where a board functions
properly, any deviation in practice should be challenged and explained. The board must
regularly test and review the strategy’s appropriateness and monitor and assess
whether the strategy is being achieved and, if so, to what extent.
Ray Williams as CEO never clearly expressed to the board his plan for dealing with a
difficult competitive commercial environment. It was a damning indictment of the board
that the directors were unable to identify the strategic directions of the company. A longterm
strategy or plan was never formally submitted to the board for critical analysis. This
resulted in investment decisions being made which were opportunistic and lacking in
direction. The failure to understand strategy led to a failure to appreciate the risks
involved and the board then could not ask the right questions to ensure the strategy
was properly executed. Even if the right questions were asked, the board would have
been unable to assess the responses. This dysfunction led to the major failures of
operations in the UK and US and the FAI acquisition which were ultimately crucial in the
collapse of HIH.
Non-executive directors were blamed for failing to understand the outstanding claims
provisioning. This is crucial to the financial health of an insurer and was the most critical
part of HIH’s financial statements. This lack of understanding meant the directors were
unable to identify and deal with looming problems before it was too late.
The crucial question of determining the amount of reserves was set in reliance on
actuaries’ reports. However, these reports never came before the board or audit
committee, nor were an actuary invited to a meeting to answer questions on how the
figures were arrived at.
The board was heavily dependent upon the recommendations of senior management
and there were few occasions when proposals put forward by management were
appropriately tested by the board.
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