Strategic Management Issues that Led to the Collapse - Essay Example

1. Executive Summary The fall down of the insurance group, HIH, was one of the Australia’s infamous business failures. The reasons behind this stunning business implosion make it a very useful case study from which learning of various fields of management and commercial jurisprudence may be derived. This is predominantly because failure of HIH is not just a matter of a big fraud or misappropriation; rather the failure was a complete managerial or organizational collapse. This assignment endeavors to highlight these issues. It would logically co-relate the strategic issues regarding the company and its operations which ultimately led to the failure of the company. At the end it would also summaries various steps which would have saved the company from such a drastic down fall. 2. Introduction The imminent and the most conspicuous reason which lead to the failure of HIH was the enormous financial deficits which came up because the insurance claims filed against quite a few of the earlier insured events accounted for more than the provisions carved out for them. The payouts for such claims were made from the revenue received from the newer business and ultimately it led to the deficit situation which became unsustainable (Royal Commission Report, 2003). Though the whole affair seems a case of mere under reserving, the reason for this sinful mal-practice which led to this failure was inherently that of mis-management, poor strategic decision and its execution. Further, the whole affair points towards absence of any corporate governance practices in the organization altogether (Maltas, 2005). The poor corporate governance is evident in this case from the perspective of poor decision making. It is very pitiable to observe the transition of HIH from such an entrepreneurially run company to a benchmark in corporate failure. The analysis of this case will now be done by peeling off various layers which are associated with the strategic issues pertaining to the operations and the company as a whole. 3. Overriding CEO Ray Williams was the Chief Executive of the company since the beginning of its operations till October 2000. Williams subjugated HIH and he was influential in bringing his associates and acquaintances to the governing board of the company. This led to a situation where the senior management lacked appropriate accountability to the governing board and a situation which resulted in governing board getting dependent on the management altogether. Hence, there was no neutral and fair evaluation of the performance of business operations, even when the financial results were deteriorating. The approach of the governing board and the top management towards Ray was unjustifiably reverent. The lack of intellectual autonomy doomed that the governing board of the company was distinctly disposed to agree for whatever it was asked to do, without any suitable inquiry. Further, the board often resorted to waiver of rules and guidelines. As a dominant chief executive, Williams had vaguely unlimited authority especially in areas of strategic importance which needed review by the governing board. Private and business funds were intermingled and the board was kept aloof. The board never used to decide the matters for debate in the board meetings, rather issues were being forwarded to the board at the discretion of the CEO. As an aspect of poor strategic management and in absence of any clear vision, the board often failed in risk identification and risk management, which is a core issue for any insurance company. 4. The Ineffective Chairman of the Board The chairman of the governing board of the company, Geoffrey Cohen, evidently failed in many respects to hold his responsibility properly. He failed to execute his primary responsibility to supervise free, fair and efficient functioning of the board. He also failed in ensuring that all relevant issues were being taken up for discussion during the board meeting. The board schema largely became ad hoc. Most of the board members hardly use to contribute to the agenda. Agenda items were mostly management driven. The chairman hardly had any contribution in determination of any issues which needed review by the board. Thus, the so called independent directors on the board were highly dependent on management for any such information. It is evident that the board was being used by the management as a mere rubber stamp. As such, the board seemed to be only concerned with the performance figures provided by the management. It was not at all involved is discussions for the future course of action. However, the chairman failed in his key accountability to recognize and resolve conflicts of interest. He is not supposed to merely count on board members to make revelation and presume that everything is going as per the standards. The chairman here failed to carry out his responsibilities earnestly, which is evident from the fact that he failed to call the CEO for explaining his habit of bypassing the governing board on almost all important issues. The strategic vision of HIH was not a matter of concern for the board as the chair himself was sightless by the halo created by the management regulated present state of affairs. 5. The board that hardly asked questions The Royal Commission, which was set up to enquire this case, in its report noticeably considered that the board was useless in carrying out its role. This observation is not at all surprising, considering the fact that the chief executive was dominating the board where the chairman was totally ineffective. Though, the management is best able to suggest strategies, it is in fact the accountability of the governing board to recognize, analyze and consent the organizational strategies. The governing board failed to supervise management performance and to endorse organizational strategies and corporate governance issues. Would the board have been functioning effectively, managerial malpractices and strategic mis-management would have been challenged and restricted. The board must periodically review the suitability of the laid down strategies and should also scrutinize and evaluate whether the targets laid down are realized or not. Moreover the extent of realization should also be scrutinized. Williams as chief executive hardly used to appraise the board, company’s plan for dealing with complicated and competitive business situations. It was an uncomplimentary condemnation of the governing board that the members were unable to recognize the strategic vision of HIH. A long-term approach of the company was never formally proposed to the members for decisive analysis. As a result, the company took investment decisions which lacked strategic foresightedness. The inability to develop a long term plan led to the non-realization of the business risks involved. Thus, the members were unable to inquire whether the strategy was properly executed or not. Even if the board would have enquired, it would have been unable to appraise the responses from the management. This inability led to the failures of business operations in United Kingdom, United States and in FAI acquisition which were eventually decisive in the collapse of HIH. All the members were highly dependent upon the recommendations of top management and there were hardly any occasion when propositions put forward by senior executives were properly tested by the members. 6. Absence of Objective Benchmarks for Performance Review Compensation reviews for senior executives were supposed to be undertaken by the board’s human resources committee. However, all decisions about compensation and performance were taken by CEO. Williams, though formally, was not part of this committee, he use to attend all its meetings on invitation. The human resources committee never used to put forward any proposals. Neither had it rejected any proposal put up by the CEO. A strategic requirement that management should be appraised regarding any Key Result Areas (KRA) was knocked off from the committee’s regulation terms as ordered by Williams. With the amputation of objective standards against which performance could be evaluated, the review of rewards and incentives were carried out at the sole discretion of CEO. 7. Inadequate Budgetary Controls Company’s financial discipline was insufficient, which is being highlighted from the recurring failures to meet the laid down budgetary targets. This was hardly matter for discussions for the board. Inherently, budgetary control of the company was going hay-way in absence of any long term strategic planning. Moreover, the complexity of the organizational structure added to this problem. It was difficult and complex to arrive at a standard control regime. 8. Strategically Ineffective Audit Committee The report on the failure of HIH, submitted by the Royal Commission, also points to the fact that the audit committee of the company was mostly concerned with issues pertaining to the accounts only (Royal Commission Report, 2003). There was hardly any concern for the risk assessment and mitigation strategy. Though, an audit committee should comprise only of independent members of the board, here in HIH audit committee meeting was also attended by senior management executives. Moreover, the independent directors seldom met auditors independently to converse arguable issues or matter of concern. Thus, the audit committee, in presence of management never asked the right questions from the auditors. Further, the auditors’ (Andersen) independent credibility was also questionable on accounts of the facts as under: The board of the company included some ex-partners of the auditing firm. An audit team member was detached from the audit team as he was found meeting with one of the independent directors in the absence of senior executive. Audit firm recovered considerable consultancy income from jobs which were not associated with audit. 9. Conclusion According to my view, the real cause behind the failure of HIH is that the company had a poor strategy and a flawed business plans. On the top of it the company failed miserably on the corporate governance issues. If I had to run this company, it would have been in following manner: The authorities of all the senior management people would have been put in black and white and would also have been ratified by the board. Thus the board would have been aware of the limitations and obligations of the CEO and other senior managers. The CEO’s tenure in the company would have been a matter of his performance subject to the review by the board. The performance parameter would have been in the strategic fit with the company’s vision and mission. Moreover, there would have been a tenure cap on the stint of any CEO with the company. Majority of the board of directors would have been independent and non-executive. Apart from it, the chairman of the board would have been compulsorily an independent director. The board would have selected the issues to be discussed based on broadly two criterions. First the recommendation of the shareholders as inferred from the Annual General Meetings. Second the recommendations from the management based on the prevalent market conditions. However, the selection of the issues by the board has to be validated by the strategic intent of the company. The performance review of the employees would have been standardized based on achievement of various performance objectives aligned with the strategic objectives of the company. There would have been a 360 degree feedback process incorporating reviews from various stakeholders, for every employee including the senior executives. There would have been a risk committee comprising of the non executive directors. This committee would have been solely responsible for assessing the various business risks and putting forward measures for the risk mitigation. The efforts mentioned above are not the entire effort list but is just enumerated to highlight the strategic overview. The mis-management discussed in the case of HIH was actually a lack of adequate strategic intent for improving the performance of the company keeping a long term perspective. This is also broadly and deeply related to the corporate governance. However, planned and systematic the business be, the survival and its long term existence depends on the compliance of the norms laid down, whether strategic or regulatory. Thus the concerns will be an unbiased and fair supervision of the day today affair of the company in accordance with the strategy laid down. This will provide a feedback mechanism if the organization will deviate from the laid plan. Thus the timely feedback can be used for taking appropriate corrective measures. This is going to be an ongoing process as the organization is envisioned as a perpetual entity. 10. References a. "HIH Regulator Steps Down", The Australian, 24 May 2001, p.2; "$30m rescue Plan for ACT HIH Victims", The Canberra Times, 9 June 2001, p. 6. b. Commonwealth, The HIH Royal Commission: The failure of HIH Insurance, Final Report (2003) vols I, II and III. c. Maltas, John Duglus, 2005, “The demise of HIH: What part did failed corporate governance policies play?”, Curtin University of Technology. d. "HIH warned last year: you risk disaster," Sydney Morning Herald, p.1. e. HIH Royal Commission website, Retrieved from http://www.hihroyalcom.gov.au/Documents/Submissions/Insureware.pdf f. www. Ibid.co.uk accessed on 25th April 2011. Read More