Book Review: HIH – The Inside Story of Australia’s Biggest Corporate Collapse

I’m just back from a week’s holiday up in far north Queensland, so I’ve got a few books to review.

First cab off the rank is HIH: the Inside Story of Australia’s Biggest Corporate Collapse. by Mark Westfield, who is the journalist who kept the pressure on HIH for most of its last two years, when it was an open secret in the insurance industry that they were in trouble – nobody really realised how much, though. Ironic that I was reading this book at the same time as the world’s capital markets were imploding.

In the month or so before they sank, I remember suggesting to a colleague that we should start a book on how much the eventual deficit would be. Mercifully he suggested it wasn’t the wisest thing to do, even if a bit of fun. My guess would have been $500m at the time – the limit of my imagination for an Australian company. The posted losses were $5.3 billion.

I had been eyeing this book since it was published five years ago, as I had met a few of the players (most of the merchant bankers, plus a few others), and had watched the liquidation and subsequent Royal Commission with horrified fascination (actuaries were bit players, mostly, but the publication of many of their flippant emails as part of evidence has made me re-read my code of conduct a few times since).

It must be difficult, writing a book like this. Most corporate failures have a multitude of problems, by their end. As the company gets into more and more trouble, it becomes chaotic, management realises they have problems, and is willing to take bigger and bigger risks (often digger themselves deeper into the original hole). Sorting out the underlying problems from the desperate measures is nigh on impossible. And in HIH’s case, there are so many unbelievably dodgy deals involved, which are fascinating in their own right, it’s hard to sort the wheat from the chaff.

I came away from the book astonished by the chaos and mismanagement that existed inside HIH, but disappointed that Westfield spent so little time on what I saw as HIH’s underlying issue – it had been a pyramid scheme from the very beginning. HIH sold mostly “long-tail” insurance – where the premiums are received many years before the claims are paid (workers compensation, public liability, mostly). If the company keeps growing, it is possible to sell that kind of business at a substantial loss and continue to pay claims from the new premiums.

The actuary who was valuing the liabilities, and the auditors reviewing the value, allowed the company to appear solvent when was quite a long way from it for (Westfield says) probably the last two years, but my guess is much longer than that, at least by today’s standards. And when the music stopped – the company stopped growing because it could no longer keep up with the growth required – the house of cards quickly collapsed.

There were a whole lot of other issues on top of this, of course. Ray Williams appeared to treat the company as his personal fiefdom – buying presents for his favoured staff, giving money to his favourite charities, etc. etc. And mates of his who had helped him on the way up were given large slabs of overseas operations to do pretty much what they liked with. The acquisition of FAI added Rodney Adler, and many of his dodgy investments (the discussion of Brad Cooper, and his bankrupt security company is worth a book of its own), as well as another insurance company with similar marginally profitable business that relied on growth to pay the claims (although it appears to have been in better shape, which is saying something).

Williams seemed to avoid any real oversight from the Board of HIH. Even when a reputable Swiss company, Winterthur, had majority ownership, they were unable to find out what was going on because Ray Williams managed to control the Board, as the majority of directors did whatever he wanted.

The directors didn’t ask many questions. When HIH decided to take over FAI (after Williams had got rid of Winterthur),

“only seven of HIH’s twelve directors were at the meeting to rubber stamp Williams’ proposal to launch the takeover at 75c a share. There was no discussion about the price, and Williams informed his fellow directors that as FAI had refused to provide any confidential information HIH would proceed using only publicly available material. This was perfectly acceptable, Williams explained. None of the other directors dared question him.”

Reading the dodgy conditions that Williams, and his pet merchant banker, Colin Richardson, managed to put inside the FAI deal, and the capital raising HIH did at the same time, made me wonder why anyone would ever want to be a non-executive director. While they didn’t ask many questions (and they should have), they were also seriously misled by omission many times.

This book should be required reading for any aspiring non executive director. Ray Williams was able to get away with what he did for many many years because he had a compliant Board, who said yes to anything he asked.  It’s quite a technical book, and my eyes did glaze over at some of the more complex (and dodgier) parts of the various deals that HIH did to prop up the company in the last year or two. But if you want to be a non executive director (an ambition that I’ve had from time to time) you need to be able to follow all the twists and turns of this book.

It’s a text book in appallling corporate governance, and financial management.