Ray Williams established the HIH Insurance in 1968, before CE Health PLC, a British company, acquired it in 1971. In 1995, the insurance company was renamed “HIH,” and was among the largest insurance firms in Australia. HIH was able to expand its operations globally due to its large capital accumulation. However, on March 15, 2001, the NSW Supreme Court ordered the company to be placed under provisional liquidation. Several investigations revealed that HIH had been insolvent for a couple of years due to suspect reinsurance schemes, in addition to an enormous dependency on new businesses to repay old debts (Pontell and Geis 524). Rapid expansion, underpricing, greed, and reckless management also contributed to the collapse of HIH. The financial accounts were crafted to assure clients of the company’s high profitability and success.
The collapsing of HIH insurance affected its stakeholders, who included shareholders, customers, employees, suppliers, as well as the company’s neighborhood. HIH had managed to create more than 200 subsidiaries within a decade, a practice that may have compelled the shareholders to invest in either an overcrowded market, or a market without adequate information. The company’s shareholders were affected through the decline in stock prices while employees were uncertain of their destiny if the company was to be closed. The company’s clients lost in terms of premiums and pensions while the neighborhood recorded low business operations due to reduced activities in the company’s offices. Some of the HIH Insurance stakeholders were involved in the scandal by providing false information and poor financial reporting. The unsettled shareholders had tried to push the management to raise more capital when they realized that the company was heading for insolvency.
The HIH scandal incorporated ethical, legal, as well as corporate governance issues because the company lacked business ethics in financial reporting and acquisitions. Lies and dishonesty affected the company’s profitability and accountability, as shareholders were denied full information about the company’s performance. During the expansion, HIH acquired FAI Insurance with Rodney Adler, its chief executive, becoming one of the directors in HIH. During investigation, Adler was valued at 100 million Australian dollars instead of 300 million Australian dollars that HIH paid him. Adler was imprisoned in 2005 for offering false information and failure to attend to his duties in good faith. The scandal led to enactment of legislation to enhance transparency in financial reporting in public companies.
HIH scandal can be compared to another scandal that occurred in Enron in that both scandals occurred in 2001. The Enron scandal resulted to the liquidation of the firm, just like in HIH. The investigations in the Enron Corporation also revealed poor financial reporting that concealed massive debts and unsuccessful deals. In both scandals, the executives were indicted and imprisoned for disseminating false information, manipulation of financial information and stock prices, engaging in fraud, among other charges. Stakeholders in both scandals lost billions of dollars in pensions, as well as in stock prices. The only difference is that HIH is an insurance company based in Australia while Enron dealt in marketing electricity and gas in the US.
Companies should endeavor to apply ethics and be accountable while addressing their clients. Managers can avoid scandals by applying utilitarian concepts, which focus on morality. Humans naturally support their actions based on the consequences that such actions might bring to them. Thus, utilitarianism is essential for making moral decisions that aim at maximizing happiness and avoiding pain. Trust is universal, and since the goodness of a decision is based on economic consequence, managers can instill changes in their companies through observing the core values of humankind. On the other hand, deontology ethics allows individuals to act without thinking about the consequences. According to Kant, some actions are obligatory, regardless of their consequences, since the only good thing in all situations is the good will (Tannsjo 60). Hence, focusing on the good will can bring change in organizations.
Corporate scandals can be avoided if companies are transparent in their operations. Scandals begin as small issues, but become worse as they progress due to ignorance and lack of commitment. One of the best ways to evade scandals in businesses is to reward honesty. Employees should be rewarded when they report any form of fraud, in addition to offering them bonuses based on their performances. Companies should establish effective code of conduct that enables employees to follow certain rules and avoid shortcuts in case of financial pressure. Companies should also avoid too much reliance on auditors, but rather take the responsibility of maintaining proper financial records.
Pontell, Henry N, and Gilbert Geis. International Handbook of White-Collar and Corporate Crime. New York: Springer, 2007. Internet resource.
Tännsjö, Torbjörn. Understanding Ethics: An Introduction to Moral Theory. , 2013. Print.