The Collapse of HIH Insurance - Case Study Example

The collapse of HIH Insurance Student Name: Student ID: Assessment Name: Date: Introduction Management communication plays an integral in any organization. In effect, communicating effectively often makes a big difference between achievement and failure thus managers and workers need to create efficient channels of communication. Moreover, management communication is a vital deliverable for every prosperous company or project as cooperation and working together entails communicating. Every client expects to experience good communication when interacting with company representatives or managers. Management works hand in hand with communication as one has to send and receive information in order for business to run smoothly. Even the best-managed projects or organizations will often be perceived as a failure if the management does not communicate adequately to their stakeholders. As such, this paper seeks to analyze the failure of HIH insurance, in relation to various management communication concepts that were ignored prior to its demise. In addition, the paper will analyze how the company handled the issue before it escalated. The company background According to Tomlinson and Tilley (2011), HIH insurance company was established in 1968 by Michael Payne and Ray Williams. Before its demise, the HIH insurance was considered the second leading insurance firm in Australia. Originally, the company was known as “MW Payne Underwriting Agency Pty Ltd,” having been named after the two founders. Further research indicates that in 1971, the British company CE health PLC acquired the company and later renamed it “HIH.” In one of the Australian Broadcasting Corporation’s program, Kerry O’Brien gathered that the company was involved in various insurance segments before its collapse (Abc.net.au, 2011). Furthermore, the report established that the insurance segment included commercial insurance, worker’s compensation, property, private and public liability as well as industrial insurance. The Australian Broadcasting Corporation (ABC News) also gathered that the company’s continuous success led to the opening of branches globally. Accordingly, the company managed to expand in both the U.S and U.K markets. In 1989, CE Health PLC transferred some of its operations to CE Health International Holding Ltd as it retained ninety percent of the company’s equity (Clarke et al., 2007). Twelve years later, the CE Health International Holdings had immensely grown that its shares were floated on the Australian Stock Exchange. In 1996, HIH acquired CIC insurance as well as Utilities Insurance thus making the Company to expand rapidly. Later in 1997, the company became Australia’s biggest underwriter of Bank Insurance Model (BIM) right after it had obtained the Colonial Mutual General Insurance (Buchanan Bonnie, 2003). The HIH Insurance Crisis Prior to its downfall, the company was captured in the news headlines when it blacklisted a stock broking analyst who had disputed the company’s assessment growth. The stock-broking analyst suspected some faultiness in the company’s annual report, which depicted an unrealistic assessment growth. However, the company’s management withheld valuable information regarding their financial report and instead gave misleading financial analysis (Buchanan Bonnie, 2003). In other words, the management deceived the public as well as the employees regarding its performance in the stock market. In early January 1998, the company was lucky to win a $A 300M Any-and-All Bid for FAI Insurance. However, the company admitted that it had paid more than it had expected for the Bid as the real value for FAI was $A 100 million (Nail Lance, 2003). In March, the same year, HIH recorded a thirty-nine percent fall in net profit equalling to $ 37.6 million, which the company blamed to damage claims. Furthermore, in July 1998 the company’s routine external audit conducted by Arthur Anderson failed to raise an alarm over the worrying trend. Interestingly, regulators were disillusioned by the company’s justification for the fall of net profits and accepted the company’s declaration with $A938M in asset. In October 1998, HIH sold part of its domestic personal lines of about $A 500M to an insurance giant in German known as Allianz. Unbelievably, HIH shares tumbled to an all-time low level two days after the deal. Evidently, the company’s performance deteriorated, which forced Ray Williams to resign as HIH managing director taking home a five million dollar severance agreement. In 2000, the company’s deteriorating trend forced the Australian Securities and Investments Commission to consider it not solvent. These strings of events also made many shareholders quit the company thus obstructing the company’s chances of reclaiming its past glory. In March 2001, losses worth $800M made the Australian Securities and Investment Commission (ASIC) to consider HIH for provisional liquidation. Consequently, ASIC was forced to commence an investigation related to HIH’S tumble. With a liquidator revision deficiency between $A3.7B and $A 5.3B, HIH became Australia’s biggest corporate collapse. On 14th April 2005, former HIH’s director, Rodney Adler was found guilty of four criminal charges thus being sentenced to a four and a half year jail term. Ultimately, the ASIC investigation found that Rodney had been involved in obtaining money through misleading statements. Moreover, ASIC established that Rodney was dishonest throughout his tenure, as he had failed to discharge his duties with good faith. Analysis of How the Crisis was Handled According to Seeger and Hipfel (2007), an organization will often keep its financial information secret because of its possible damage to the company’s reputation. Consequently, most companies often consider their financial information private and therefore should not be subjected to public disclosure. However, this is against the business communication ethics, as an organization is charged with giving the public the correct information. Accordingly, Belasen (2008) posits that a company’s financial report should be communicated to the public in a concise, conclusive a well as well consistence manner. He further adds that the company should convey information in a manner that is responsive and proactive. Belasen (2008) also points out that a public listed or traded company must present updated financial reports to the public as stipulated by the standard or typical financial accounting practices in any. Accordingly, stockholders among other stakeholders have the right to know the company’s financial situation as the financial information is the key indicator of success or failure. Conversely, Westfield (2001a), a financial revealed that the stock exchange traded HIH shares in an information vacuum for more than seven months before it suspended the trading. The financial commentator also outlined one of HIH’s biggest mistakes: failure to disclose its worsening financial situation publicly. Like in many countries, a listed company in Australia is required by law to caution the market about material information that could have a potential impact on its share price (Westfield, 2001b). However, HIH Insurance management did not abide by this law, which aims at promoting efficient management through effective communication. Instead, the C.E.O, Ray Williams often deceived the stakeholders through letters informing the insurance brokers that the HIH Insurance Company was in a stable financial situation and that it was there to stay. Rindova (2000), points out that a company must depict two important aspects: transparency and openness. Rindova (2000) argues that openness and transparency ensure that stakeholders get reliable information concerning the company’s value at any given time. Moreover, he points out that all major decision should always consider the stakeholders’ needs thus involve them. Similarly, Westfield (2001b) is of the opinion that transparency is inevitable for any company with the objective of being successful financially. In effect, Westfield (2001b) posits that expressive communication with the stakeholders is the chief mechanism to transparency. Rindover (2000) further indicates that all successful transparent companies avail all information that is legally releasable to the public. He further points out that transparent companies reveal both negative and positive information to the public in a manner that is unequivocal, timely, accurate and balanced. Equally, Oliver Kyle (2007) argues that transparency involves accountability, communication and openness. He further indicates that openness is an essential requirement as far as financial reporting is concerned if the system is to function properly. Thus, statements as well as numbers made should be honest and consistent. Initially, the C.E.O, Ray Williams claimed that he was devastated by HIH insurance collapse, that he previously thought the company was heading in the right direction. He also claimed that he was unaware of the enormous financial disaster that was facing HIH. However, his sentiments were not sincere as he was involved in the mismanagement of the organization and keeping the public in the dark. According to Eddy Mayer, ABC News reporter, Williams’s denial was a failed strategy aimed at convincing the public that the company never withheld any information. However, Sellnow and Seeger (2007) posit that denial is not likely to work in cases where the crisis is based on the company’s fault. In addition, they assert that in case of an organizational culpability, refutation often increases the harm by limiting credibility as well as creating an impression that information is being withheld. Seeger (2007) also posits that it is futile for the management to distance itself from an organizational crisis when in the real sense the catastrophe was due to their irresponsible actions. Just as William and his management did, organizations are often reluctant to respond to an escalating event or crisis for the fear of creating legal liabilities (Seeger, 2007). In effect, Ray Williams was aware of the escalating situation but never raised alarm, as he knew the blame would be spread to the highly qualified board of directors. He knew well that in case of a crisis, he would refute any blame on the pretext that he was one member with one vote out of ten others. In fact, William claims that the company was not to be blamed, as it was unable to raise enough money that would help the company cope with the appalling market conditions then. The C.E.O further refuted the claims that he had withheld information about HIH Insurance’s losses from the board of directors. Good management skills involve owning up responsibility in case of organizational an culpability. On the contrary, Williams failed to take liability for the decline as well as the liquation of the company. He strongly argued that the company was unfortunate to find itself in worst global market conditions in the modern times as far as the insurance industry was concerned. Seeger (2007) criticized William’s argument claiming the worst mistake, that the C.E.O did was to withhold vital information regarding the company’s financial position from the public. The theory of management communication encourages individuals at the top-level management to communicate whenever there is a problem to avoid the future blames in case of a crisis. Unlike Williams, a senior member of a company’s management ought to be remorseful and show contrition. Williams was criticized for being insensitive in the HIH insurance debacle. A video interview posted by Boston Group Channel on YouTube indicates that employees as well, as policyholders suffered a great deal. Many policyholders are the moment living in poverty due to defaulted loans (YouTube, 2011). Conclusion Management cannot be effective without communication as every department in any organization is managed through sending and receiving of information. Moreover, transformational leadership remains the best strategy in management, as the communication channels are not typical of the top-bottom channel of communication. In summary, the paper has comprehensively delineated the major crisis that hit the once renowned insurance company, HIH as well as highlighted the mistakes that led to the situation. Moreover, the paper has analyzed the crisis in relation to various management concepts and indicated where the management went wrong. References Abc.net.au,. (2011). 7.30 Report - 14/05/2001: HIH collapse prompts questions over insurance industry regulation. Retrieved 14 January 2015, from http://www.abc.net.au/7.30/content/2001/s296611.htm Belasen, A. T. (2008). The theory and practice of corporate communication. Thousand Oaks, CA: Sage Publications. Buchanan Bonnie, Arnold Tom, Nail Lance, (2003). “Beware the Ides of March: The Collapse of HIH Insurance”, in Batten J, A and Fetherston T. A. (eds.), Social Responsibility: Corporate Governance Issues, JAI, Sydney, pp.199-221. Clarke Frank, Dean Graeme and Oliver Kyle, (2007). Corporate Collapse: Accounting, Regulatory and Ethical Failure, Revised Edition, Cambridge University Press. Fombrun, C. J., & Rindova, V. P. (2000). The road to transparency: Reputation management at Royal Dutch/Shell.In M. Schultz, M. J. Hatch, & M. H. Larsen (Eds.), The expressive organization (pp. 77-96). Oxford University Press. Seeger, M. W., & Hipfel, S. J. (2007). Legal versus ethical arguments: Contexts for corporate social responsibility. In S. K. May, G. Cheney, & J. Roper (Eds.), The Debate over Corporate Social Responsibility, (pp. 155166). New York: Oxford University Press. Tomlinson, D., & Tilley, K. (2011). HIH collapse roils regulators. Businessinsurance.com. Retrieved 14 January 2015, from http://www.businessinsurance.com/article/20010325/ISSUE0101/10003653 Ulmer, R. R., Sellnow, T. L., & Seeger, M. W. (2007). Effective crisis communication: Moving from crisis to opportunity. Thousand Oaks, CA: Sage Publications. Westfield, M. (2000a, July 18). HIH hype can’t hide grim reality: Future of HIH is too grim to ignore. The Australian, p. 21. Westfield, M. (2000b, August 22). Friendless HIH between a rock and a vicious circle. The Australian, p. 21. YouTube,. (2011). The Collapse of HIH 1. Retrieved 14 January 2015, from https://www.youtube.com/watch?v=iEVo0L3jjWA Read More