Legislative instruments for insurance companies in relation to governance breaches include: ASIC Corporations ( Life Insurance Commissions) Instrument- calculation of value payable under different circumstances of changes in the contract; Basic deposit and general insurance product distribution instrument- authority to act on behalf of the insurance policy holders through providing financial services; Class order instrument- deals with the insurance company offering of different insurance products; ASIC Corporations (capital reductions and reconstructions- technical disclosure relief) instrument- gives exemptions from disclosure requirements under the corporations Act 2001; ASIC Corporations (Financial Reporting: Natural Person Licensees ) Instrument-gives the exemptions on financial information reporting (legislation, 2018)
Relationship exists between the company directors and the corporation in which they are employed. Therefore, directors must act with utmost good faith in their dealings with or on behalf the company (KAKABADSE & KAKABADSE, 2009).
According to TOMASIC, BOTTOMLEY, & MCQUEEN, (2012), the following are the statutory duties and obligations of directors:
The duty to act bona fide for the company’s benefit: directors should act for the benefit of the company as a whole. Moreover, Shareholders interests must be taken into consideration by the directors when discharging their duties.
The duty to exercise powers for proper purposes: requires director’s proper use of their powers in discharging their duties. This refers to an application of the good faith test.
Statutory duty not to make improper use of position: improper use of office position by a director for his or her own personal gains or someone else’s is prohibited and considered illegal.
The duty not to fetter a discretionary power: the director should not fathom his or her powers to serve the interests of his patron at the expense of the company.
The duty to avoid a conflict of interests: directors are not allowed to enter into activities or commitments in which they can have personal interests conflicting or which possibly might conflict with the interests of those whom they are bound to protect.
The duty not to misuse confidential inside information of the corporation: information obtained by the director as a result of his or her position should not be used for the director’s own selfish interests.
Statutory duty not to make improper use of information: improper use of information obtained by virtue of his position as a director, for the purpose of gaining himself an advantage of for any other person’s advantage, is wrong.
The duty not to usurp a corporation’s business opportunities: a director is not allowed to use his position to take business opportunities which belong to the company, and the company still has interest in them.
The duty to account to corporation for any undisclosed profits which are made as a result of the breach of duty: directors are obliged to account for any profits derived as a result of the company operations under their directorship positions, unless the company was fully informed and has properly ratified the receipt of profits.
A corporation is an association of persons, created by the law, forming part of the society. Corporations have mutual rights and obligations to discharge. These are: national interest- development of the corporation’s country of existence; political non alignment- corporation should not in any way directly or indirectly support any political party or any candidate for political office; legal compliances company management should comply with the laws and regulations of the country of existence; rule of law- protection of minority shareholders’ rights; honest and ethical conduct; corporate citizenship; ethical behavior; corporate social responsibility; social concerns; maintaining environmental friendliness; creating and maintaining healthy and safe working environment; assisting in the establishment and support of open market economy and promote aggressive and judicious trade liberalization; protecting and enhancing shareholder value; accountability and ensuring effectiveness and efficiency in its governance (FERNANDO, 2009).
In Australia, the corporate governance framework, not only entails complying with the regulatory requirements, but also includes such elements as legally binding case law and legislative requirements, for instance the Corporations Ac 2001; the rules for listing of the Securities Exchange Limited of Australia; and the Corporate Governance Council Principles and Recommendations (JACQUES DU PLESSIS, HARGOVAN, & BAGARIC, 2010). Some of the key stakeholders in the governance of a company include:
a. Shareholders –they provide capital through share investments in the company. The company directors are appointed by and accountable to the shareholders. The shareholders have a role to exercise the powers that are reposed in them by the Corporations Act and the corporation’s constitution, to make sure that they responsibly elect the board of directors and keep an eye in the company to ensure that the directors act in the interest of the corporation.
b. Employees- An integral ingredient of wealth creation relies on the development of firm-specific skills by loyal and happy employees. Employees have a role in the governance of the corporation to remain loyal to the company so as to ensure that the corporation works at its best to attain the company’s objectives through the directors governance (Slideshare.com, 2015)
c. Creditors- Credit providers need to obtain trustworthiness in the corporation with regards to debt repayment. They want to be confident that the company will be able to repay its debts before lending to the company. Therefore, it in the company’s best interest to maintain the confidence of the finance providers. On the other hand, suppliers have an interest in the company on the grounds that the company will be able to pay for the goods supplied in time and that the company will continue in operation so as to have a sustainable outlet for their goods and services.
d. Customers- customers demand to be supplied with goods by a corporation that is acting in a corporately socially responsible manner. Therefore, the corporation should have customer interests’ central to the daily operations of the company.
e. Community- Companies will be employing most of the people from the local communities. Moreover, these communities also form a greater part of the company’s customers. Therefore the corporation has to act in a socially, ethically and environmentally responsible manner in order to be able to operate peacefully in its region of location (Bartleeby.com, 2008).
f. The environment- the corporation should ensure that it employs the services of an environmental committee that is responsible for the implementation of the company environmental policy throughout the organization.
g. Government- the government, through setting rules and regulations, ensures that companies act in socially responsible way considering the social, environmental and ethical aspects.
Governance issues in Insurance companies
Insurance companies, like other companies, are prone to mismanagement and misappropriation of funds. Such governance issues as conflict of interests by the directors, incompetence management, poor reporting or false representation of the company’s financial status, fraudulent activities, embezzlement of policyholders’ funds and poor investment decisions that lead to loss of company’s capital, are all governance associated issues that affect insurance companies.
Preventive and corrective measures
In cases where insurance companies fail to meet the corporate governance requirements or they continually have solvency issues, the supervisory authority intervenes for the protection of policyholders. Remedial measures include: business activities restriction; with-holding approval for new activities or acquisitions; stopping writing of new business; giving directions to the insurer to stop the unsafe practices; putting the assets of the insurer in trust or restricting disposal of those assets; revoking the insurer’s license; directors and managers removal and barring the concerned individuals from the business of insurance (united Nations Conference on Trade and Development, Mashayekhi & Fernandes, 2008).
Before, its collapse, HIH was the second largest company in the Insurance industry in Australia. A deficiency of up to a$5.3 billion was realized from the collapse of the HIH Insurance group that according to the Royal commission resulted from mismanagement. The company tried to cover up the resulting financial difficulties from the poor management acts through breaches of law.
Factors that led to the collapse of this organization include:
a. Failure of financial risk management- a combination of under-reserving policy (provides for setting aside financial resources for future claims payments), poor investment decision and inferior risk pricing ability (reflected by the weak underwriting performance of the company), contributed to the company’s failure.
b. Lack of independent audit institution- independence of audit guarantees the provision of reliable results. The chairman of the company also doubled up as the audit committee chairman. The internal audit committee failed to take into consideration such factors of importance as internal control and risk management. HIH should have had an audit committee majorly constituted of non-executive directors, thus getting rid of the conflict of interests, to supervise the reporting process of management and communicate with external auditors.
c. Rapid expansion of the company
d. Unsupervised delegation of authority
e. Extensive and complex reinsurance arrangements
f. Reckless management
g. Incompetency of managers
h. Fraud
i. Greed
j. Self-dealing-where the directors operated at their own interests not the corporation’s.
k. Accounting method failure- the company failed to provide enough reserve margins for settlement of future claims. It instead used reinsurance for that risk’s coverage. Reinsurance could possibly cause a reduction in the reported profits and instead increase the company liability, since it is in essence, a loan. Furthermore, a false representation of the company’s financial situation was made by the company’s financial report.
l. Lack of independence of non-executive directors- two of the non-executive directors of the company happened to be former partners of the company’s major advisor and auditor, Andersen. Moreover, a member of the audit committee, was also a the former auditor of FAI in the earlier ages, a company, whose acquisition contributed to HIH collapse as a result of misjudgment of FAI’s financial perspective.
Some of the internal control policies and procedure that the company would have put in place as early warning signs of the problems include: first, establishing an independent auditing department – this would have helped in improving the company’s audit committee ability to analyze its financial situation, thereby enabling the company realize the problem as early as possible.
Secondly, the company should have engaged effective supervision so as to avoid situations of insolvency. Through effective supervision, the company’s ability to pay its debts when they fall due, an indicator of sustainable development would have not been compromised. Therefore, the company should have strengthened the supervision of the board of directors to detect any embezzlement of the company’s funds.
The supervisory authorities, as well would have assisted in detecting the problems before the situation worsened. As such, these authorities too did not carry out their roles effectively. It was like a mystery how the financial losses in the company materialized to actual cash losses that led to company insolvency and collapse, without the supervisory authorities sensing any danger.
Scope of investigations on HIH collapse
Royal Commission investigations were to inquire into such aspects as contributions and the extent of the actions or decisions of HIH or any of its directors, employees or any other person to the company’s failure or undesirable corporate governance practices; breaches of any law of the Commonwealth, a State or Territory; appropriateness in exercising of powers, responsibilities and obligations under the Commonwealth laws; the appropriateness of exercising powers and discharging of obligations and responsibilities under the State or Territory laws; and if availability of adequate and appropriate arrangement for regulation and prudential supervision of general insurance at Commonwealth, State and Territory levels.
From the investigations done, HIH and its management was found to have breached certain legislative requirements such as full disclosure of company’s financial information; accountability of the directors; obligation of the directors to avoid conflict of interest and other corporate governance principles ( Nortonrosefulbright.com. 2018).
The Corporate governance issues that emerged from the collapse of HIH include: lack of accountability on the part of the company’s management- accountability would have helped in ensuring that all the company’s decisions were aligned to the company strategies. This would have helped avoid issues such as poor investment decisions and lack of enough financial bases for future claim settlements. Secondly, conflict of interest was also evident in the company. This was as a result of including the executive members in the auditing committee of the company that resulted into false results. Finally, lack of independence in the governance systems was also an issue. This, for instance led to false representation of the company’s financial status.
From the collapse of HIH, we can learn the importance of observing the corporate governance principles such as accountability of directors, directors’ competency and importance of risk management system in an organization. Moreover, it’s learnt that it is important for every company to institute an independent, competent oversight committee that would monitor the directors and other managers’ actions in the company and enable faster detection of any problem.
a. As early warning signs of problems, the company could have established an internal management oversight committee responsible for monitoring the actions of management; developing a whistleblower policy that would encourage confidential reporting on problems and ensure that employees who make such reports are not retaliated; risk analysis and management procedure that would help identify and hedge potential risks associated with any investment; and ensuring independence of the company’s auditors and accountants; and Installing security systems in the company’s computers and other internet sites so as to detect any fraudulent activity that may be done over the net.
Common governance principles that can help prevent governance issues include: respecting the shareholders rights and facilitation of the exercise rights of shareholders; making timely and balanced disclosures of all material matters relating to the company; high integrity reporting of financial information; recognizing and managing of risks; establishing strong foundations for management and oversight; enhancing ethical and responsible making of decisions; and upholding the legitimate stakeholders interests (Klettner, 2016).
Most companies have established formal accountability systems, oversight and control so as to eliminate any opportunity for employees’ unethical decision making. Oversight helps provide a checks system and balances that limit employees and managers’ opportunities to deviate from policies and strategies aimed at preventing unethical or illegal practices. Accountability aims at ensuring that the firms’ decisions are closely aligned to the company’s strategic direction and are in compliance with the ethical considerations. Control helps in auditing and improving organizational decisions and actions (Corporate governance.com, 2018).
Corporate governance involves strategic decisions and actions by board of directors, top executives, other managers and business owners. This requires high level of accountability and authority. Certain factors such as changes in technology, government attention and consumer activism, along with the recent ethical scandals necessitates scrutiny of the company’s directors, employees and other managers. This is due to the new attention created by these factors on such issues as executive pay, transparency, resource accountability, risk and control, stockholder rights and strategic direction (WILSON, R. (2012).
The following process can be used to manage the above concerns in an attempt to ensure ethical and legal corporate governance practices in the company (Ferrell, Fraedrich & Ferrell, 2012):
Internal audit procedures that enhance corporate governance and internal control
An internal audit procedures that would enhance corporate governance and internal control include: building an adequate internal audit staff to support the business needs; structuring the internal audit function on a flexible framework; designing an enterprise risk- based audit program; broadening the audit scope to address third party and vendor risks; combating fraud through advocating for ethical business conduct across the organization and proactively managing information systems risks and Installing security systems in the company’s computers and other internet sites so as to detect any fraudulent activity that may be done over the net (Razaee, 2008).
Governance policies and procedures that can be used in an organization
ABC INSURANCE COMPANY, (Cork, 2010)
Conflict of interest policy
This conflict of interest policy of ABC Insurance Company: (1) conflict of interest definition; (2) facilitating disclosure of information that may help identify conflicts of interest; (3) identifying the categories of individuals within the organization covered by this policy; and (4) specifying the procedures to be followed in managing conflict of interest.
Whistleblower Policy
This whistleblower policy of ABC Insurance Company: 1) encourages staff and volunteers to come forward with credible information on illegal practices or serious violations of adopted policies of the company; 2) specifies that the company will protect the person from retaliation; and 3) identifies where such information can be reported.
Accountability policy
This policy of accountability of ABC Insurance Company: 1) defines accountability; 2) specifies who is involved; 3) explains the consequences of failure to observe this policy.
Policy of Independence
This policy of independence of ABC Insurance Company: 1) specifies who is involved; and 3) explains further details of this policy in relation to the company.
Governance checklist
The governance checklist entails:
Reporting Mechanisms
An organization is required to implement appropriate reporting mechanisms through which employees and other agents can report criminal conduct without fear of retaliation. These systems may include help-lines, online reporting systems, fax numbers, or email addresses or even post offices. An organization should first encourage employees to report misbehavior or violations of the code to their direct supervisors. To encourage them to report misconduct, employees should be given the option to remain anonymous and high confidentiality being reserved for the information reported (Wulf, 2012).
Assessment 4: Unit Reflection
Corporate governance refers to a set of principles, mechanisms and rules laid down by the regulatory body to ensure that corporations are properly managed and to avoid any cases of potential mismanagement. Major corporate governance obligations include: corporate social responsibility- corporations are obliged to act in a socially responsible way through such activities as building of recreational facilities within the community or building schools; environmental protection through such services as tree planting and proper waste disposal; directors are obliged to avoid conflict of interests in their operations; and the directors’ obligation to act bona fide for the benefit of the organization.
Objectives of internal control system include:
It is important to monitor and evaluate the efficacy and effectiveness of internal control procedures. This enables the organization to find out whether there is need for change in the procedures or not and whether or not these procedures meet the intended objectives. This also helps to expose biases that may be in the control systems. Monitoring further helps determine the risks associated with the procedures. Through a monitoring team, competent evaluators are identified that are able to use various evaluation tools to assess the efficacy and effectiveness of the internal control procedures.
On the other hand, it is important to monitor and evaluate the efficacy and effectiveness of internal control policy so as to ensure long term attainment of company objectives, since policies are formed to serve on a long term basis and they influence the long term performance and sustainability of the company.
To determine employee performance, such record types as sales numbers- reflect the daily transactions in the company; earnings reports-shows whether the company is making profits or not; call records, productivity reports- that reflect the ability of the company to effectively make use of its resources including the human resources; deadline reports- reflect the employees working speed; output and production reports; budget reports- that show employees ability to work within the company’s set budget; and attendance records – these show the actual number of times that the employee reported to work (Delpo, 2017).
To meet legal requirements of corporate governance, some accounting principles should be met by an organization: revenues should be recognized when they are earned not received, this helps to ensure consistency in the accounting of revenues; full disclosure principle- directors have an obligation to ensure that they fully disclose the financial information about the organization for easy comparison and decision making; and consistency principle where the company uses the same accounting methods for treatment of particular company objects. For instance HIH Insurance group breached the law of full disclosure by misrepresenting the company’s financial status.
Ethics refer to a code of conduct that govern the behavior or activities of a given subject such a person or an organization. Ethics governing business activities and management are obtained from such sources as common law, government regulations and personal judgment. For example, by organization acting socially and environmentally responsible, through planting of trees and social creation amenities, it is acting ethically towards the community in the region of its location.
References
Corporate- governance.com, (2018). Available at www.australian-corporate-governance.com.au/hih-royal-commission.pdf
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Bartleeby.com, (2008). Available at https://www.bartleby.com/essay/Australian-case-study-in corporate-governance-Hih-Insurance.
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Company directors.com, (2018). Available at www.companydirectors.com.au/director-resource-centre/corporate-governance-framework
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CORK, S. (2010) Resilience and transformation: preparing Australia for uncertain futures. Collingwood, VIC, Australia, CSIRO Pub.
DELPO, A. G. L. (2017). Dealing with problem employee: How to manage performance & personal issues in the workplace. Ingram Pub.
FERNANDO, A. C. (2009). Corporate governance: principles, policies and practices. New Delhi, Pearson Education.
FERREL, O. C., FRAEDRICH, J. & FERREL. (2012) Business Ethics: Ethical Decision Making & Cases. Cengage Learning.
HAINES, F. (2011). The paradox of regulation: what regulation can achieve and what it cannot. Available at https://www.elgaronlinr.com/[Accessed on 15th May2018]
JACQUES DU PLESSIS, J., HARGOVAN, A., & BAGARIC, M. (2010).Principles of Contemporary Corporate Governance, 2nd Edition. Cambridge University Press.
KAKABADSE, A., & KAKABADSE, N. (2009) Global boards one desire, many realities. Basingstoke, Palgrave Macmillan.
KLETTNER, A. (2016) Corporate Governance Regulation: The changing roles and responsibilities boards of directors. Taylor & Francis.
Nortonrosefulbright.com. (2018). Available at www.nortonrosefulbright.com/knowledge/publications/163123/insurance-regulation-in-australia.[Accessed on 15th May 2018]
REZAEE, Z. (2008).Corporate governance and ethics. Hoboken, N.J., Wiley.
Slideshare.com, (2015). Available at https://www.slideshare.net/corporate-failure-for-hih-insurance[ Accessed on 15th May2018]
TOMASIC, R., BOTTOMLEY, S., & MCQUEEN, R. (2012). Corporations law in Australia. Sydney, Federation Press.
UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT, MASHAYEKHI, M. & FERNANDED, D. (2008) Trade and development aspects of Insurance services and Regulatory Frameworks. United Nations Publications.
WILSON, R. (2012) Legal, regulatory and governance issues in Islamic finance. Edinburgh, Edinburgh University Press.
WULF, K. (2012) Ethics and Compliance Programs in Multinational Organizations [recurso electronico]. Alemania, Gabler Verlag.
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