Gardener and Australian Prudential Regulation Authority
[2009] AATA 990
•24 December 2009
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2009] AATA 990
ADMINISTRATIVE APPEALS TRIBUNAL ) No: N 200600846
GENERAL ADMINISTRATIVE DIVISION ) No: 2008/2692
ReJustin Herbert GARDENER
Applicant
AndAustralian Prudential Regulation Authority
Respondent
DECISION
TribunalMr RP Handley, Deputy President
Mr SE Frost, Senior Member
Mr TC Jenkins, Member
Date24 December 2009
PlaceSydney
DecisionThe decisions under review are set aside and in substitution for those decisions, the Tribunal determines that Mr Gardener is not disqualified from acting as a director or senior manager of a general insurance company.
...................[sgd]...........................
Mr RP Handley
Deputy President
CATCHWORDS
JURISDICTION - jurisdiction to review decisions — whether jurisdiction to review decision made beyond power — administrative error in application for internal review – error in the process should not disentitle applicant to relief – jurisdiction intra vires
INSURANCE - prudential regulation – disqualification as a director or senior manager of a general insurance company – conduct as non-executive director - fit and proper person – diligence - competence – standards applicable at the relevant time – conduct in the period since – other relevant evidence – decision under review set aside
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RELEVANT ACTS
Insurance Act 1973: ss 2A, 24, 25A, 63
Administrative Appeals Tribunal Act 1975: ss 25
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CITATIONS
Re Stitt and Australian Prudential Regulation Authority [2009] AATA 601
Re Abbott and Australian Prudential Regulation Authority (2008) 108 ALD 420; (2008) 71 ATR 945; [2008] AATA 641
Re Gardener and Australian Prudential Regulation Authority (2007) 99 ALD 141; (2007) 47 AAR 42; [2007] AATA 2041
Secretary, Department of Social Security v Alvaro (1994) 50 FCR 213; (1994) 34 ALD 72; (1994) 19 AAR 460; (1994) 81 SSR 1191
Re Brian Lawlor Automotive Pty Ltd and Collector of Customs (NSW) (1978) 1 ALD 167
Collector of Customs (NSW) v Brian Lawlor Automotive Pty Ltd (1979) 24 ALR 307; (1979) 41 FLR 338; (1979) 2 ALD 1
Hughes & Vale Pty Ltd v New South Wales (No 2) [1955] HCA 28; (1955) 29 ALJR 129; (1955) 93 CLR 127
Australian Broadcasting Tribunal v Bond [1990] HCA 33; (1990) 170 CLR 321
Re Slee and Australian Prudential Regulation Authority (2006) 14 ANZ Ins Cas 61-704; [2006] AATA 206
Shi v Migration Agents Registration Authority (2008) 235 CLR 286; (2008) 248 ALR 390; (2008) 82 ALJR 1147; (2008) 103 ALD 467; (2008) 48 AAR 345; [2008] HCA 31
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OTHER AUTHORITIES
The Failure of HIH Insurance Vol I “A Corporate Collapse And Its Lessons”, Royal Commission Report, April 2003
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REASONS FOR DECISION
| 24 December 2009 | Mr RP Handley, Deputy President Mr SE Frost, Senior Member Mr TC Jenkins, Member |
Justin Gardener has applied to the Tribunal for the review of decisions of the Australian Prudential Regulation Authority (APRA) that he should be disqualified from acting as a director or senior manager of a general insurance company on the ground that he is not a fit and proper person to act as such a director or senior manager.
Background
Mr Gardener is a chartered accountant, now aged 73, who was a partner in Arthur Andersen Australia (Andersen) from 1972 until his retirement on 30 June 1998. Andersen was a major accounting firm providing auditing, tax, and consulting services to large corporations. On 2 December 1998, Mr Gardener was appointed a non-executive director of HIH Insurance Ltd (HIH), a company engaged in general insurance underwriting through its subsidiary companies. He retained this position until HIH went into provisional liquidation on 15 March 2001. Mr Gardener served as a member of the HIH Audit Committee from 2 December 1998 until 15 March 2001, serving as chairman of that Committee from 26 February 2001 to 15 March 2001. He also served as a member of HIH’s Human Resources Committee from 2 December 1998 until 15 March 2001. Formal winding up orders for HIH were made on 27 August 2001.
APRA is the prudential regulator of the financial services industry and oversees, among other things, the conduct and operations of insurance companies in Australia.
In June 2001, the then Prime Minister, John Howard, announced a Royal Commission to inquire into the reasons for and the circumstances surrounding the collapse of HIH and its associated companies and, on 29 August 2001, Justice Neville Owen of the Supreme Court of Western Australia was appointed Royal Commissioner by Letters Patent. The Royal Commission’s final report was tabled in Federal Parliament on 16 April 2003. According to the report, the deficiency of the HIH Group was estimated to be between $3.6 billion and $5.3 billion, probably the largest corporate failure in Australian history. The failure had far-reaching consequences for many individuals, the insurance industry and the community as a whole. Many individuals suffered significant hardship. Addressing the reasons for failure, Justice Owen said:
Where did the money go? Some of it was wasted by extravagance, largesse, paying too much for businesses acquired, and questionable transactions. There were some trading losses. But in the main the money was never there. The deficiency of several billion dollars has arisen because claims arising from insured events in previous years were far greater than the company had provided for. Past claims on policies that had not been properly priced had to be met out of present income. This was a spiral that could not continue indefinitely. In the language of the industry, the failure to provide adequately for future claims is called ‘under‑reserving’ or ‘under‑provisioning’. This, in my view, is the primary reason for HIH failing—and not only failing but doing so in such an egregious way.
Why was there such serious under‑reserving and why were the risks not properly priced? The answer here is that HIH was mismanaged. The factors contributing to the mismanagement of the group—and hence the reasons for the failure—are many, varied and complex. They are also interrelated. They are epitomised by a lack of attention to detail, a lack of accountability for performance, and a lack of integrity in the company’s internal processes and systems. Combined, these features led to a series of business decisions that were poorly conceived and even more poorly executed. …
The problematic aspects of the corporate culture of HIH - which led directly to the poor decision making - can be summarised succinctly. There was blind faith in a leadership that was ill‑equipped for the task. There was insufficient ability and independence of mind in and associated with the organisation to see what had to be done and what had to be stopped or avoided. Risks were not properly identified and managed. Unpleasant information was hidden, filtered or sanitised. And there was a lack of sceptical questioning and analysis when and where it mattered.
Justice Owen noted that concerns about the governance of HIH were raised by two non-executive directors, Neville Head and Mr Gardener, in May 1999. Mr Head wrote to the Chairman of the Board, Geoffrey Cohen, “to express his unease about HIH’s corporate governance procedures”. Mr Gardener:
… was concerned that the board was not dealing appropriately with a number of important strategic considerations and was dealing only with issues brought to its attention by management. He prepared, for discussion with Williams, an analysis of matters that covered the desired attitudes of the board; matters to be reviewed with management, including HIH’s vision, purpose and strategy; oversight of management performance; and accountability. He met Williams to discuss his concerns, but it was apparent to him that Williams did not intend to take action in response to his concerns.
Justice Owen noted that in June 1999, Ray Williams, the Chief Executive Officer (CEO) of HIH, called a meeting of non-executive directors to see if other non-executive directors were similarly concerned. It appears that at that meeting, the other directors backed Mr Williams:
The reaction to Head’s letter and the subsequent meeting was at least part of the reason why Head resigned from the board in August 1999. As for Gardener, I gained the impression that he concluded that his suggestions were not going to be acted on and he did not pursue them or raise them again. This was an opportunity lost to HIH, which should have grasped it and reviewed its entire management and directorial philosophy. The chairman should have seen to it that the opportunity was grasped.
Justice Owen made no specific findings as to any lack of fitness or propriety of Mr Gardener in his conduct as a non-executive director. He stated, “Where there is no finding in this report against the person or company, the reputation of that person or company emerges entirely free of any adverse implications”.
The Tribunal reviewed a decision by APRA to disqualify another non-executive director of HIH in Re Stitt and Australian Prudential Regulation Authority [2009] AATA 601 (Stitt). We agree with the comment made by the Tribunal, at [14], referring to the report of the Royal Commission, that:
The observations, findings and conclusions of that inquiry are not binding on this Tribunal, but are referred to by APRA by way of general background to furnish a broad understanding of the context in which the incidents relied on by APRA are said to show lack of diligence.
A similar approach was adopted previously in Re Abbott and Australian Prudential Regulation Authority (2008) 108 ALD 420; (2008) 71 ATR 945; [2008] AATA 641 (Abbott).
Following publication of the Royal Commission report, APRA conducted a review of Mr Gardener’s fitness and propriety to act as a director or senior manager of a general insurance company. By letter dated 6 January 2005, an APRA officer invited Mr Gardener to ‘show cause’ why he should not be disqualified from acting as a director or senior manager of a general insurance company. Mr Gardener’s solicitors responded by letter dated 24 February 2005. On 3 May 2006, Peter Kennedy, a delegate of APRA, decided to disqualify Mr Gardener from acting as a director or senior manager of a general insurance company on the ground that he was not a fit and proper person to act in such a position.
Mr Gardener’s solicitors sought a review of this decision by letter dated 26 May 2006. The letter did not set out Mr Gardener’s reasons for requesting the review. On 26 May 2006, an APRA officer telephoned Mr Gardener’s solicitors to point this out. His solicitors replied that Mr Gardener relied on the reasons set out in his response to the ‘show cause’ letter dated 24 February 2005. The APRA officer agreed that APRA would reconsider the decision on that basis. On 15 June 2006, another delegate of APRA, Susanne Tongue, confirmed the decision and, on 7 July 2006, Mr Gardener applied to the Tribunal for a review of the decision dated 15 June 2006 “containing confirmation of APRA’s decision to disqualify him under subsection 35A(1) of the Insurance Act 1973 from holding a senior insurance role”.
On 12 November 2007, APRA filed an application with the Tribunal seeking orders dismissing Mr Gardener’s review application on the ground that the Tribunal lacked jurisdiction. A hearing of this interlocutory application was conducted by Deputy President Walker on 26 November 2007 and, on 12 December 2007, DP Walker’s decision concluding that the Tribunal has jurisdiction and denying the application was published: Re Gardener and Australian Prudential Regulation Authority (2007) 99 ALD 141; (2007) 47 AAR 42; [2007] AATA 2041. (See the discussion of this decision and the jurisdictional issue below.)
On 3 March 2008, Mr Gardener’s solicitors applied to APRA for a revocation of the disqualification decision. On 28 April 2008, a delegate of APRA decided not to revoke the disqualification. By letter dated 15 May 2008, Mr Gardener’s solicitors sought a review of this decision and, on 6 June 2008, another delegate confirmed the decision. On 18 June 2008, Mr Gardener’s solicitors applied to the Tribunal for a review of the decisions of 28 April 2008 and 6 June 2008.
The Legislative Framework
At the time of the decisions under review, s 25A of the Insurance Act 1973 (the Act) provided relevantly:
(1)APRA may disqualify a person if it is satisfied that the person is not a fit and proper person to be or to act as someone referred to in paragraph 24(1)(a), (b) or (c).
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(3)APRA may revoke a disqualification on application by the disqualified person or on its own initiative. A revocation takes effect on the day on which it is made.
Section 24(1) provides that “A disqualified person must not be or act as: (a) a director or senior manager of a general insurer …”
Section 63 of the Act provides for the review of decisions made pursuant to s 25A(1) and (3). Section 63(2) provides that a person who is affected by such a decision and who is dissatisfied with the decision may give notice, in the case of such decisions, to APRA within 21 days after becoming aware of the decision or within such further period as APRA allows, requesting APRA to reconsider the decision. Section 63(3) states, “There shall be set out in the request the reasons for making the request”. Section 63(4) provides for APRA to reconsider the decision and confirm, revoke or vary the decision. Section 63(7) states:
(7)Applications can be made to the Administrative Appeals Tribunal for review of decisions of the Treasurer and decisions of APRA that have been confirmed or varied under subsection (4).
jurisdiction
At the hearing, Mr Wheelhouse, for APRA, submitted that DP Walker’s interlocutory decision in this matter was to the effect that the Tribunal has jurisdiction to determine whether the decision in respect of which an application is brought was made with or without power. DP Walker did not decide whether the decision in respect of which a review was sought was intra vires. This is a matter that should now be determined by the Tribunal in hearing the substantive application.
Mr Wheelhouse noted that Mr Gardener’s first AAT application stated that the decision in respect of which a review was sought was the decision dated 15 June 2006 confirming the decision to disqualify Mr Gardener. He submitted that the (internal review) decision dated 15 June 2006 was ultra vires and therefore a nullity because the request dated 26 May 2006 for the reconsideration of the (original) decision of 3 May 2006 did not set out Mr Gardener’s reasons for making the request as required by s 63(3) of the Act and was not, therefore, a valid request for reconsideration. Because the internal review decision was a nullity, the Tribunal has no power to stand in the shoes of the decision-maker and determine whether that decision was the correct and preferable decision and exercise its powers to affirm, vary or set aside the decision. Thus, the original disqualification stands.
Mr Wheelhouse also noted that Mr Gardener’s first application to the Tribunal sought a review of the internal review decision rather than of the original decision. The wording of s 63(7) indicates that it is the original decision and not the internal review decision in respect of which a person has a right to apply to the AAT for a review.
Mr Kelly, for Mr Gardener, submitted that the issue of jurisdiction was decided by DP Walker. He said that while APRA has adopted a literal approach to the interpretation of s 63(7), a purposive approach should be preferred. He noted DP Walker’s reference, at [22], to von Doussa J’s decision in Secretary, Department of Social Security v Alvaro (1994) 50 FCR 213; (1994) 19 AAR 460; (1994) 81 SSR 1191 (1994) 34 ALD 72 (Alvaro), at 78-79, where His Honour said:
The person or tribunal to whom application for each of the reviews was made had jurisdiction to undertake that review so long as the preceding decision-maker had made what purported to be a decision in exercise of powers conferred by the Act affecting the interests of the person seeking review. It mattered not whether the ground of complaint made about the preceding decision was merely that it is wrong on the merits, or that in law it was not an effective decision because it was made by someone without authority, or in excess of authority, or for improper purposes, or was vitiated through procedural irregularity such as a failure to accord natural justice.
The purpose of a review provided for by the Act is to allow the reviewing authority to correct error and substitute a new decision where error is detected.
Mr Kelly said the effect of adopting a literal approach is an absurdity depriving the Tribunal of the power of review. At [30], DP Walker also referred to the decision of the then President of the Tribunal, Brennan J, in Re Brian Lawlor Automotive Pty LtdandCollector of Customs (NSW) (1978) 1 ALD 167 (Brian Lawlor), at 178:
If a literal construction of s25(1) were adopted, the non-fulfilment or non-observance of the conditions governing the valid exercise of powers would go without correction by the Tribunal. Further, its remedies would be excluded if the decision-maker took irrelevant considerations into account in exercising a discretion or used his discretion to thwart or run counter to the policy of the statute (Padfield v Minister of Agriculture and Fisheries [1968] UKHL 1; [1968] AC 997), or, misunderstanding the nature of the matter for his decision, failed to decide it (Green v. Daniels (1977) 13 ALR 1) or did not act fairly in exercising his power (Heatley v Tasmanian Racing and Gaming Commission [1977] HCA 39; (1977) 14 ALR 519). The inconvenience of this construction would appear even more manifest if the invalidity should appear only in the course of a hearing before the Tribunal. Then the Tribunal, perceiving the injustice done by the excess of power, would be constrained to send the applicant away without remedy, comforting him with the advice that if he should bring proceedings in a court of competent jurisdiction to challenge the validity of the decision, and if the court should determine the issues in the same way as they appeared to the Tribunal, the decision would be held invalid, and the applicant might then expect that the decision-maker should start again and, provided the decision-maker did not make a similar error, a fresh unfavourable decision could be brought up for review before the Tribunal once more. It seems absurd that immunity from review could be secured by proof that the decision-maker's exercise of power so far miscarried as not to be a valid exercise of the power at all.
Mr Kelly said DP Walker rejected the application of the literal approach in the interpretation of s 63(7) and his decision was not appealed by APRA. Mr Kelly submitted that s 63(3) should not be treated as a pre-condition to a valid reconsideration. It is not a vital step in the procedure and non-compliance is not intended to invalidate a decision. Section 63(7) provides for review of decisions of APRA that have been confirmed or varied under s 63(4). It should be read as including decisions that APRA has purported to confirm or vary under s 63(4). In Mr Kelly’s written submissions to DP Walker, he also contended in the alternative that non-compliance with s 63(3) was expressly waived by APRA before proceeding to conduct the review. Furthermore, the reasons for seeking the review were made known to APRA in the course of a telephone conversation in which reference was made by Mr Gardener’s solicitors to Mr Gardener’s response to APRA’s invitation to show cause why he should not be disqualified.
At the hearing on 23 November 2009, the Tribunal expressed its preliminary view that it does have jurisdiction to review the disqualification decision. We note DP Walker’s discussion of the decisions in Brian Lawlor and Alvaro where a purposive approach was adopted in finding that the Tribunal has jurisdiction to review a decision not only where the complaint is that the decision is wrong on its merits but also where the decision was made by someone without authority (see von Doussa J in Alvaro quoted above). At [25], DP Walker also referred to s 25(1) of the Administrative Appeals Tribunal Act 1975 (the AAT Act) which states that an enactment may provide that applications can be made to the Tribunal for review of decisions made in the exercise of powers conferred by that enactment or by another enactment:
… it is impossible to see how s 25 of the AAT Act could not be part of the basis for the tribunal’s jurisdiction in the present case. That section declares that an enactment may provide that applications may be made to the tribunal for the review of decisions made in the exercise of powers conferred by that enactment. Section 63(7) precisely answers the description of such an enactment, providing as it does that applications may be made to the tribunal for review of decisions of the Treasurer and APRA that have been confirmed or varied under s 63(4). The tribunal’s jurisdiction to hear the application thus stems from both those provisions together, not simply from s 63(7).
DP Walker quoted the majority judges in the Federal Court (Bowen CJ and Smithers J, Deane J dissented) on appeal from the President, Brennan J, in Brian Lawlor. In Collector of Customs (NSW) v Brian Lawlor Automotive Pty Ltd (1979) 24 ALR 307; (1979) 41 FLR 338; (1979) 2 ALD 1, at 22-23, Smithers J said, referring to the Customs Act 1901:
In construing these provisions what may be seen as the objective of the Administrative Appeals Tribunal Act is I think of paramount importance. It is clear that in enacting the Act, Parliament had in mind to provide for the review by an independent Tribunal of certain administrative decisions by reference to standards of good government: cf. Sullivan v. Department of Transport (1978) 20 ALR 323, at p 326 . True it is that administrative errors may well occur in the performance of valid and legally effective administrative acts. And of course it might have been the intention of Parliament to empower the Tribunal to review only those decisions which are legally effective. In that case the function of the Tribunal would be restricted to considering whether or not in exercising its legal power validly the administrator making the decision had acted in accordance with the principles of fairness and good government. But to construe the Act as providing for the review of only such errors would leave untouched those administrative acts which are invalid and legally ineffective for one reason or another, but were performed in the course of action falling within the general purposes of a statute. To my mind such a situation would not be compatible with the objective of the Administrative Appeals Tribunal Act. If administrative decisions are to be subjected to review in the course of good government exclusion from review of decisions made without power would remove from review those decisions most in need of review. The very absence of guidelines as to the exercise by the Tribunal of its powers of review is a most significant feature supporting a conclusion that review is to proceed by reference to the standard of good government. It is a short step to infer that the overriding purpose of the Act is to promote good government by those carrying out the actual practical task of administering Acts of Parliament and making decisions incidental to that task.
Bowen CJ, at 4, was of the same opinion:
The context of the Act appears to me to point against the adoption of interpretation (a) [that the Tribunal could only review legally effective exercises of power]. The Act is clearly intended to give a person whose interests are affected by an administrative decision an effective appeal, free of technicalities, against that decision on questions of fact and of law: see ss. 25, 27, 28, 31, 33, 42 and 44. The adoption of interpretation (a) would remove the most significant area involving questions of law from the jurisdiction of the Tribunal. It would render the appeal in many cases useless. Whenever it appeared in proceedings before the Tribunal that there was an error of law by reason of which the decision was legally ineffective and that the applicant certainly needed relief, the Tribunal would at that point be obliged to refuse relief on the ground that it had no jurisdiction to entertain the application. It is a feature of administrative decisions that once made, even if unlawful, they have consequences which may adversely affect citizens, until such time as they are withdrawn due to a change of mind on the part of the administrative official himself or are set aside by the determination of a court or tribunal. It appears to me that the Act is designed to give a simple remedy in all such cases. I would reject interpretation (a).
DP Walker concluded that the Tribunal has jurisdiction to entertain the substantive application in respect of the disqualification decision. We agree with that decision. In our view, it is clear that s 63(7) of the Act is intended to enable a person affected by a reviewable decision of APRA to apply to the Tribunal for a review once that decision has been reconsidered by APRA in accordance with s 63(4). Such a reconsideration took place here and we take the view that the fact that there was an administrative error in the process should not disentitle the applicant to relief. In this instance, an APRA officer had telephoned Mr Gardener’s solicitors to point out that the request for a review had not included the reasons for making the request, as required by s 63(3). Mr Gardener’s solicitors replied that Mr Gardener relied on the reasons stated in the response, dated 24 February 2005, to APRA’s ‘show cause’ letter, and the APRA officer agreed that the decision would be reconsidered on that basis.
We also reject APRA’s argument that Mr Gardener’s application to the Tribunal sought a review of the wrong decision, since it referred to the reconsideration decision. In our view, APRA is seeking to rely on what Bowen CJ might label a technicality, and it is clear enough that Mr Gardener is seeking a review of the decision to disqualify him from acting as a director or senior officer of a general insurance company.
In our view, DP Walker’s decision is consonant with the decisions of the courts on this issue: that the purpose of the review provisions of the enactment, in this case those set out in s 63 of the Act, when read in conjunction with s 25(1) of the AAT Act, are to provide a review of administrative action and that this should not be defeated by ‘technicalities’ in the taking of the administrative action.
Is Mr Gardener a Fit and Proper Person?
As stated above, the issue for the Tribunal is whether Mr Gardener is a fit and proper person to be a director or senior manager of a general insurance company.
The meaning of the phrase ‘fit and proper person’ was discussed by the High Court in Hughes & Vale Pty Ltd v New South Wales (No 2)[1955] HCA 28; (1955) 29 ALJR 129; (1955) 93 CLR 127, at 156, where Dixon CJ, McTiernan and Webb JJ found the word ‘fit’, in relation to an office, to involve honesty, knowledge and ability. The meaning of the phrase ‘fit and proper person’ was also discussed in Australian Broadcasting Tribunal v Bond[1990] HCA 33; (1990) 170 CLR 321, where Toohey and Gaudron JJ said, at 380:
The expression ‘fit and proper person’, standing alone, carries no precise meaning. It takes its meaning from its context, from the activities in which the person is or will be engaged and the ends to be served by those activities.
As their Honours recognised, at 388, whether a person is a fit and proper person involves a value judgment to be made in the context of the activity in question. The context in this case is that of a director or senior manager of a general insurance company. Section 2A(1) of the Act states:
(1)The main object of this Act is to protect the interests of policyholders and prospective policyholders under insurance policies (issued by general insurers and Lloyd's underwriters) in ways that are consistent with the continued development of a viable, competitive and innovative insurance industry.
One of the principal ways in which this objective is achieved is by requiring “the directors and senior management of general insurers, to meet certain suitability requirements” (s 2A(2)(a)), and by “imposing primary responsibility for protecting the interests of policyholders” on them (s 2A(2)(b)): see Stitt, at [21]. In Re Slee and Australian Prudential Regulation Authority (2006) 14 ANZ Ins Cas 61-704; [2006] AATA 206, at [113-114], the Tribunal noted that there was no attack upon the honesty, integrity or character of the applicant. Rather, the attack was on his competence, skill and ability and whether he undertook an appropriate degree of care in performing his work.
In our view, Mr Gardener’s case is similar. One of the questions for the Tribunal is whether he exercised sufficient diligence in performing his work as a non-executive director of HIH as could reasonably be expected from a person of his background, skills and experience. We note that the test here is a subjective one. The Tribunal must take into account Mr Gardener’s qualifications, knowledge, skills and experience at the time of the relevant events between December 1998 and March 2001. Moreover, it is the standards applicable at that time by which his conduct should be judged. We must take care to evaluate his conduct without the benefit of hindsight: Abbott at [179]. The Tribunal has been assisted in evaluating Mr Gardener’s conduct by expert evidence from three witnesses: Henry Bosch, company director, corporate regulator (including as Chairman of the National Companies and Securities Commission) and consultant; Ian Ramsay, the Harold Ford Professor of Commercial Law at the University of Melbourne and Director of the Centre for Corporate Law and Securities Regulation; and Peter Hullah, consultant and former auditor, including in the insurance industry.
In addition to an evaluation of Mr Gardener’s conduct as a non-executive director of HIH, the Tribunal must also consider his conduct in the period since the collapse of HIH. This is because in making its decision as to whether Mr Gardener is a fit and proper person the Tribunal must take into account all the relevant evidence before it at the time of making its decision. The legislation does not limit the Tribunal’s review to deciding the question by reference to a particular point in time: Shi v Migration Agents Registration Authority [2008] HCA31; (2008) 248 ALR 390; (2008) 82 ALJR 1147; (2008) 103 ALD 467; (2008) 48 AAR 345; (2008) 235 CLR 286 at 328 (per Kiefel J). The evidence is that he has worked as a non-executive director of a number of public and private companies and not for profit organisations, and is still working as a non-executive director of at least one public company. Thus, this conduct must also be considered in our overall assessment of whether he is a fit and proper person to act as a director or general manager of a general insurance company.
In relation to the subjectivity of our assessment, the Tribunal’s view is that the evaluation of Mr Gardener’s conduct as a non-executive director of HIH is necessarily different from that of Mr Stitt. While Mr Stitt was also a non-executive director of HIH in the period December 1998 to 15 March 2001, and Mr Stitt was, moreover, a member of the Audit Committee, his qualifications, knowledge, skills and experience are different from those of Mr Gardener.
Conduct as a Director of HIH
(a)General
Mr Gardener qualified as a chartered accountant in 1961, when he joined Andersen as a senior accountant. He became a manager in 1966 and a partner in 1972. In the course of his career, Mr Gardener has had a long involvement in professional education, training and recruitment, both for Andersen and also for the Institute of Chartered Accountants Australia. From 1980 to 1989, he was the partner in charge of the Financial Services section in Andersen’s Sydney office with responsibility for audit assignments involving large and small companies in a variety of industries including finance and insurance.
Mr Gardener’s involvement with HIH and its predecessor companies began when he became the audit partner on the audit of CE Heath Underwriting Agencies (Australia) Pty Ltd from 1973. It was at this time that he first came to know Ray Williams, later the CEO of HIH, for whom he developed a high regard.
From 1989 until his retirement from Andersen on 30 June 1998, Mr Gardener said he was principally involved in quality control for Andersen’s offices in the Asia/Pacific region – ensuring the right people were in the right jobs, with appropriate input and a proper consultation process, so that the firm was operating as effectively as possible in each country. In Australia, his role included risk management. He was also the concurring partner in the audit of the HIH group of companies in the years 1990 to 1993 and 1996 to 1997, which involved his ensuring that the proper process had been followed, including checking that the auditors had consulted with HIH and that the financial statements were reasonable. His role was not, however, to check whether the end results were correct and nor was his role to provide a second opinion on technical issues.
In August 1998, Mr Williams invited Mr Gardener to join the Board of HIH as a non-executive director.
Mr Gardener said that after retiring from Andersen, he had decided to make himself available for Board appointments and, when approached by Mr Williams, he considered this “an honour and was very keen to accept”. He was appointed to the Board of HIH on 2 December 1998. He said he accepted the position “because HIH was a major financial institution and I knew and trusted its Board and management”. Apart from Mr Williams, he knew Mr Fodera, the Chief Financial Officer, from the time Mr Fodera had begun working for Andersen in 1979. Mr Fodera became a partner in 1990 and they had worked together in auditing CE Heath (the predecessor of HIH), with Mr Fodera succeeding Mr Gardener as audit partner for CE Heath. Mr Gardener said “from my direct dealings with him it was obvious he was a person of immense intellect and ability” (supplementary affidavit dated 27 October 2009, at [9]).
Mr Gardener also knew the Chairman of HIH’s Board, Geoffrey Cohen, who had previously been a fellow partner at Andersen and, for much of the 1980s, the firm’s managing partner. Mr Gardener said he had “had the benefit of working closely with him and had the highest regard for his abilities” (supplementary affidavit 27 October 2009, at [9]).
Mr Gardener said prior to his being elected to the Board, he spoke with Terry Cassidy, the Managing Director of HIH Casualty and General Insurance Ltd, the largest underwriting business within the HIH Group, who provided him with a copy of HIH’s Underwriting Guidelines to review. Mr Gardener also read the publicly available financial statements of the HIH Group, such analyst reports relating to HIH as he could find, and a binder of material provided to him by HIH’s Company Secretary, including a Director’s Manual, organisational charts, the constitution of the company, the terms of reference of sub-committees of the Board, recent financial reports and other guidelines and policies.
Because Mr Gardener had no prior experience as a director of a listed company, he also began to read texts, business publications and journal articles concerning directorships, directors’ duties and matters of corporate governance generally. Of these, he found particularly valuable a book entitled The Fish Rots From the Head: The Crisis in Our Boardrooms: Developing the Crucial Skills of the Competent Director, by Bob Garratt, which he later drew upon in preparing for a meeting with Mr Williams in May 1999 to discuss what Mr Gardener had identified as a lack of strategic focus for HIH.
In undertaking this ‘due diligence’, Mr Gardener said he did not speak with HIH’s auditors about their internal risk characterisation of HIH. Andersen’s assessment of HIH as a maximum audit risk client is discussed below.
Generally, in terms of the adequacy of the due diligence undertaken by Mr Gardener prior to his accepting an HIH Board position, Mr Bosch commented that Mr Gardener’s due diligence “was a bit on the slight side but I observe there are no requirements then or now that lay down what due diligence should be and it’s a matter of prudence and what is in the director’s own interests” (transcript p 284, line 21). Mr Hullah deferred to Mr Bosch “in having much more experience as a company director”, but considered, nevertheless, that Mr Gardener “should have had some conversations with the auditors” as part of his due diligence (transcript p 282, line 2ff).
The Tribunal had particular regard to Mr Bosch’s evidence in relation to due diligence because of his extensive experience both as a regulator and company director. We accept his opinion that Mr Gardener’s due diligence before joining the Board of HIH could have been more extensive. However, we note this was Mr Gardener’s first board appointment; the company, its management and some of its directors were well known to him; and the requirements as to due diligence appear to have been entirely unclear. We are therefore not satisfied that the shortcomings in the due diligence performed by Mr Gardener are evidence of a lack of competence or diligence on his part as a director.
(b)Specific Matters/Transactions
Although Mr Wheelhouse emphasised that Mr Gardener’s conduct as a non-executive director of HIH should be considered as part of the broad picture as to whether he is a fit and proper person to be a director or senior manager of a general insurance company, APRA's case is framed primarily by reference to eight matters that it contends demonstrate his lack of fitness. While the Tribunal accepts that reference to these matters may reveal a pattern of conduct that shows Mr Gardener to be unfit, the Tribunal notes that no person is without flaw, and the fact of some errors of judgement does not necessarily amount to a lack of fitness. Thus, the totality of the evidence must be considered in forming a view of Mr Gardener's conduct as a director over the period from December 1998 until the time of the hearing.
The eight matters to which APRA referred are listed here and discussed in turn below.
(1)Failure to take reasonable steps in relation to HIH’s entry into the joint venture with Allianz;
(2)Failure to take reasonable steps in relation to an investment of $2m in Business Thinking Systems (BTS);
(3)Failure to take reasonable steps in relation to the Pacific Eagle/Australian Equities Unit Trust (PEE) transaction;
(4)Failure to competently and diligently perform his duties in relation to the significant HIH under-provisioning;
(5)Failure to take reasonable steps with respect to the Ernst and Young (EY) Report of 4 December 2000;
(6)Failure to competently and diligently perform his duties as a member of the HIH Audit Committee;
(7)Failure to competently and diligently perform his duties as a member of the HIH Human Resources Committee;
(8)Failure to disclose Andersen’s assessment of HIH as a maximum audit risk.
Allianz
APRA contends that Mr Gardener failed to competently and diligently perform his duties as a director or act in the best interests of the company by failing to take reasonable steps to familiarise himself with the joint venture proposal with Allianz (Allianz Australia Insurance Ltd) and its implications prior to voting to approve the transaction. The parties have been unable to agree to any facts concerning this transaction.
By way of background, it appears that from the mid 1990s, HIH suffered significant losses stemming from its UK operations, US operations and the acquisition of FAI (Royal Commission Report, pp 15-17). According to Mr Gardener, from March 2000 onwards, APRA held a number of meetings with senior HIH personnel at which its financial position was discussed. Various strategies were subsequently considered by HIH senior management including a restructuring of its operations through the sale of or entering into of a joint venture in respect of part of its insurance business (affidavit dated 7 November 2008, at [191]). In about early June 2000, Colin Richardson of Deutsche Bank was instructed to advise on a proposal involving the sale of personal insurance lines and CTP insurance products with a view to generating capital and reducing capital demands.
In July 2000, Mr Richardson approached a number of insurance companies to gauge their interest in a joint venture retail business with HIH. Various companies expressed interest and negotiations were conducted with some. Mr Gardener states that these events were not communicated to him until the Board meeting on 5 September 2000, and many matters were not revealed to him until the Royal Commission enquiry. The papers for that Board meeting, which Mr Gardener read prior to the meeting, were not specific in relation to a proposal for a joint venture with Allianz.
Mr Gardener states that at the Board meeting on 5 September 2000, Mr Fodera made a presentation on HIH’s financial position and on restructuring the business (affidavit 7 November 2008, at [192ff]). Mr Williams advised the Board (for the first time) that negotiations were in progress with four parties on differing terms. Mr Stitt, with whom Mr Gardener agreed, asked for a further analysis of the advantages and disadvantages of the available options to be prepared and for the meeting to be adjourned until this had been done. The meeting was adjourned until 8 September 2000 when Mr Fodera tabled papers entitled ‘Strategic Options’ and ‘Specific Proposals’ which were discussed. Prior to the Board meeting, Mr Gardener met with Mr Fodera and auditors John Buttle and Jonathan Pye of Andersen when Mr Fodera advised them of the options being considered by the Board (affidavit 7 November 2008, at [205ff]).
Mr Gardener states his recollection is that on 8 September 2000 the Board was in favour of a proposal from Suncorp-Metway. The meeting was adjourned again for further consideration of the issues and resumed on 12 September 2000 (affidavit 7 November 2008, at [228ff]). At that meeting, Mr Williams advised that Suncorp-Metway had reduced their offer and he presented a proposal from Allianz as the only real alternative with merit. Mr Richardson of Deutsche Bank indicated that the proposal had to be considered urgently because the main Allianz Board was meeting that evening in Munich and HIH needed to be committed to the deal prior to then if the matter was to be dealt with at that meeting, it being some time before the next Allianz Board meeting.
The Minutes of the Board meeting on 12 September 2000 record that Mr Richardson provided an up-to-date report on negotiations with Suncorp-Metway and Allianz to the meeting, and that Mr Williams set out the main terms of the proposed joint venture arrangement with Allianz. The Board “resolved to proceed with the joint venture arrangement with Allianz, and to authorise Messrs Williams, Cassidy and Fodera to finalise the terms of the relevant agreements” (Minutes at [3.1]). On 13 September 2000, HIH entered into the joint venture agreement with Allianz.
Mr Gardener states that he recalls there was discussion of some trust fund arrangement in relation to the joint venture but no information was provided about the cash flow consequences. Mr Gardener understood from the information provided by Mr Fodera that Allianz would pay $200m up-front in respect of the joint venture transaction. Mr Gardener said when he voted to approve the deal he did not understand that all premium income made by the joint venture would be held in a trust account. He did not become aware of this until some time in January 2001. His recollection accords with the Minutes of the meeting (ST 138.1 at p 3633), which refer to the up-front payment of $200m. Further, in voting to approve the deal, Mr Gardener drew comfort from the fact that at his meeting with Mr Fodera and auditors Mr Buttle and Mr Pye of Andersen earlier on 8 September 2000, they had indicated that they viewed the Allianz proposal favourably.
Mr Gardener said it did not occur to him “that premiums earned from new business would be diverted into the joint venture trust account so as to create an immediate short term cash flow problem” (affidavit 7 November 2008, at [239]). Nobody mentioned this at the meeting. Had they done so, he would have recognised the cash flow implications. However, in replying to questions from the Tribunal, Mr Gardener stated that he knew that premium income would be going to the joint venture trust account, along with claims and expenses, existing liabilities and provisions, and assets to cover them. In return he understood that HIH would receive the up-front payment of $200m and expected payments of $10m per annum as HIH’s share of future profits from the joint venture (transcript pp180 -182). Mr Gardener said that it was only later that directors were told that HIH had had difficulty in finding sufficient suitable assets to transfer to the joint venture and that the agreement had been amended to put the $200m payment into the joint venture account (transcript p 183).
In cross-examination, Mr Gardener was asked why he did not look at the Allianz transaction documents tabled at the meeting. He said usually a Board will have a committee to oversee such a transaction, and management and perhaps a legal officer will summarise all the arrangements involved for the Board (transcript p 172). Mr Gardener has no recollection of the joint venture agreement being tabled at the Board meeting although he accepts this since the Minutes of the Board meeting on 12 September 2000 record this.
Mr Bosch commented that, in his opinion, it is extraordinary that such important matters were kept from the Board until 5 September 2000. The Royal Commission Report noted that this reflected poorly on the management of HIH and on Mr Williams in particular. Mr Bosch agreed that it reflected poorly on the Board and demonstrated that it was not in control of the company. However, he said that in his opinion, “in the very short time available, and the very difficult circumstances in which the non-executive directors found themselves, they took reasonable steps to familiarise themselves of [sic] the proposal” (affidavit 27 October 2009, at [3.7.7]). Further, his opinion is that “Mr Gardener’s actions in relation to the Allianz transaction do not demonstrate a lack of fitness to be a director” (affidavit 27 October 2009, at [3.7.9]).
We note the findings of the Tribunal on this issue in Stitt and the comments made there about the draft joint venture agreement tabled at the meeting on 12 September 2000. In that case, the Tribunal said “the agreement raises real and difficult questions of construction” and noted the assurances from management as to the immediate benefits to cash flow (Stitt, at [87]).
We also note Mr Gardener’s support for Mr Stitt in seeking a further analysis of the options available to HIH, his meeting with the auditors prior to the meeting on 8 September 2000, his evidence about these events and also Mr Bosch’s comments. However, we find the discrepancy referred to above at [55] between Mr Gardener’s statement in his affidavit of 7 November 2008 concerning the loss of premium income to the joint venture, and the contrary evidence he gave to the Tribunal, surprising. Nevertheless, in our view, Mr Gardener had a reasonable grasp of the way the arrangement was to operate. That it failed to meet expectations was primarily because HIH’s financial position was weak, and when management could not find sufficient suitable assets to transfer to the joint venture, management diverted the $200m up-front payment into the joint venture, without prior Board approval, in order to make up the shortfall. The arrangement did not fail to meet expectations because premium income was transferred from HIH or because the arrangement approved on 12 September 2000 was defective or onerous as such. In our view, the fact that Mr Gardener did not press for further explanation or did not examine the draft joint venture agreement was not so unreasonable in the particular circumstances as to indicate a lack of competence or diligence on his part.
Business Thinking Systems
APRA contends that Mr Gardener failed to competently and diligently perform his duties in relation to the BTS transaction in so far as he failed to make sufficient enquiries and obtain sufficient information to make an informed and considered decision. He thereby failed to take reasonable steps to enable him to act in the best interests of HIH.
The following facts are not in dispute. On 4 October 2000, Rodney Adler, who was a director of HIH, requested of Mr Williams that HIH invest $2m in BTS (of which Mr Adler was a shareholder and director), to which Mr Williams agreed on 5 October 2000. The transaction was in breach of HIH’s investment guidelines which limited maximum exposure in respect of an individual investment to $500,000 unless approved by HIH’s Investment Committee. This transaction had not been approved by the Investment Committee (which comprised Mr Cohen (chair), Mr Cassidy, Mr Fodera and Mr Adler). Mr Gardener only became aware of the transaction at an HIH Board meeting on 29 November 2000 when Terence Cassidy (the Managing Director of the Australian operations of HIH and executive director of HIH) reported to the Board on the operations of the Investment Committee.
When Mr Gardener asked why the investment had been made, Mr Cassidy replied that it was a commitment that had been made some time before and that the company could not avoid. During the Board’s discussion of the transaction, both Mr Adler and Mr Williams were present. The Board resolved that the transaction be ratified but stressed that investment guidelines must be enforced so that similar breaches would not recur.
In evidence, Mr Gardener agreed that Mr Adler and Mr Williams were present during the meeting but said it seemed important that Mr Adler be present to give a response to the Board and for Mr Williams to explain the circumstances. Mr Gardener pointed out that he was not the Chairman of the Board, but acknowledged that the Board did not follow best practice and should probably have asked Mr Adler and Mr Williams to leave the room so that the Board could decide what to do about the transaction (transcript pp 193-194).
The expert witnesses agreed that the Board should have asked Mr Williams and Mr Adler to leave the room while the matter was discussed. Even though an investment of $2m would not normally have been a material investment for HIH, in view of HIH’s cash flow being critical at that time, it might have been possible for the Board to have sought to have the money refunded.
The Tribunal agrees that discussion of the matter should have taken place in the absence of Mr Williams and Mr Adler. We note that Mr Gardener queried the investment at the Board meeting. In our view, while best practice was not followed by the Board, any consequent criticism of Mr Gardener for this alone is insufficient to support a finding that he, as an individual Board member, did not act competently or diligently in the performance of his duties.
Pacific Eagle Equities (PEE)
APRA contends that Mr Gardener failed to competently and diligently perform his duties in relation to the PEE transaction in so far as he should have been aware that Andersen considered there to be a risk that the transaction was unlawful. APRA notes that although when Mr Gardener became aware of the transaction in September 2000, he was “horrified”, he did not consider the draft Minter Ellison report in detail when tabled at the Board meeting on 29 November 2000, and the issue was not considered in detail by the Audit Committee.
The parties agree that between 15 and 23 June 2000, Australian Equities Unit Trust purchased HIH shares valued at $10m. The trustee of Australian Equities Unit Trust was PEE, a company controlled by Mr Adler. HIH Casualty and General Insurance Ltd, a subsidiary of HIH, acting on the direction of Mr Williams, had lent PEE $10m shortly before the Trust was established.
On 12 September 2000, Mr Gardener attended a meeting of the Audit Committee at which the existence of the Trust was mentioned in relation to the preparation of the accounts for the financial year ending 30 June 2000. Mr Gardener states (affidavit 7 November 2008, at [268.5]) that to “the best of my recollection”, he raised the PEE transaction at the meeting as a result of an earlier discussion with Mr Buttle and Mr Pye of Andersen, HIH’s auditors, at which Mr Buttle expressed his concern that the transaction contravened the law.
Mr Gardener, who was supported by fellow Audit Committee members, said for a company to acquire its own shares was a serious matter and that this should have been brought to the attention of the Board before the transaction occurred. Mr Williams, supported by Mr Adler, said that legal advice had been received on setting up the Trust and he did not consider there were any contraventions of the law. Notwithstanding this, Mr Cohen, the Chairman of the Committee, directed that HIH’s lawyers should investigate the circumstances of the transaction and report on whether there had been any breaches of the law.
On 12 October 2000, Mr Gardener, who was in Italy at the time, attended meetings of the Board and Audit Committee by telephone. At the Audit Committee meeting, Mr Buttle again raised the PEE transaction, stating that it might be a ‘related party transaction’ that needed to be recorded in the accounts. There apparently was some further discussion of this at the meeting although it is not recorded in the Minutes (Respondent’s bundle, vol 3, tab 61.1).
The Minutes of a Board meeting held on 29 November 2000, which Mr Gardener attended, record that the Chairman informed the meeting that $10m had been invested in the Trust without Board approval, and he tabled a draft report from HIH’s lawyers, Minter Ellison, advising that there had been no breach of the law or regulations. The parties agree that Mr Gardener did not read the Minter Ellison report when tabled but accepted the Chairman’s summary as accurate. Mr Gardener said he assumed the draft report was the advice that had been requested by the Audit Committee. Because he does not have any legal training, he relied on that advice and drew comfort from the fact that the Board included those with legal training who did not raise any concerns in respect of the advice (affidavit 7 November 2008, at [268.14]).
At a Board meeting on 14 December 2000, the matter was discussed again and, in particular, whether there had been a breach of the Corporations Law. Mr Gardener said a letter from Andersen dated 13 December 2000 [ST 191.10] was tabled at the meeting referring to the advice of senior counsel obtained by Andersen in relation to the transaction and Andersen’s intention to report the transaction to the Australian Securities and Investments Commission (ASIC). Mr Gardener said it would be better if HIH reported the matter to ASIC itself, with which other non-executive directors agreed, and the Board resolved to report the matter to ASIC. On 22 December 2000, HIH reported the PEE matter to ASIC.
Mr Gardener said that at a meeting of the Human Resources Committee on 15 December 2000 and at a Board meeting on 19 January 2001, he stated that pending a full investigation into the PEE transaction, no money should be paid to Mr Williams by way of a termination payment other than that payable pursuant to HIH’s statutory obligations. No such additional termination payment was made to Mr Williams.
APRA appears to criticise Mr Gardener for not pressing for independent legal advice to be obtained on the PEE transaction. However, as APRA acknowledges (Opening Submissions at [84]), it appears that Mr Gardener was not aware that it was Minter Ellison who advised Mr Adler on the transaction. In the Tribunal’s view, it was therefore not unreasonable for Mr Gardener to rely on legal advice in relation to the transaction from HIH’s lawyers, Minter Ellison, and to the legal expertise of other non-executive members of the Board. Notwithstanding this, the evidence indicates that Mr Gardener asked appropriate questions and otherwise participated in discussing and commenting on the transaction in a way that, in the Tribunal’s view, was reasonable in the circumstances.
HIH Provisioning
APRA contends that Mr Gardener failed to competently and diligently perform his duties as a director and member of the Audit Committee, or act in the best interests of the company with respect to the adequacy of the provisioning. In particular, he failed to enquire or raise concerns about the adequacy or accuracy of the information presented to the Board on which he was relying, continued to approve the outstanding claims provisioning notwithstanding his awareness of the undesirable reserving situation, and failed to ensure the level of provisioning was adequate. Provisioning was critical to the business and to the solvency of HIH and given his extensive experience as an audit partner, he should have recognised the warnings about the level of provisioning and made further enquiries.
The parties have been unable to reach any agreement as to the relevant facts. In his affidavit dated 7 November 2008, Mr Gardener said HIH’s insurance business was operated and managed through three separate companies: HIH Casualty and General Insurance Ltd, FAI Insurances Ltd and CIC Insurance Ltd. Different classes of business were written by each company operating under its own licence issued under the Act. HIH was the holding company and did not itself hold such a licence (at [271ff]).
The actuary David Slee was retained by HIH to provide his assessment of the HIH Group’s Outstanding Claims Liability (OCL), which he did by way of six monthly reports. The reasonableness or adequacy of the provision proposed for HIH’s consolidated accounts could be tested against his assessment of the OCL. This occurred at regular six-monthly meetings, when both management’s and Mr Slee’s estimates for each division’s OCL were discussed. Following these meetings, a central estimate of the Group’s OCL was adopted, being an amount intended to have a 50 percent probability of being sufficient to meet outstanding claims. This central estimate was reviewed by Andersen as part of its audit function.
Based on his own experience of how Andersen undertook its audit function, Mr Gardener assumed that it arrived at its own OCL for the various portfolios of HIH’s business. Andersen prepared a table, comparing its own figures (including a high, low and likely estimate) with the actuarial estimate and the proposed booked figures, for each balance date and the relevant Audit Committee meetings. The object of this was to enable the directors to assess the adequacy or reasonableness of the proposed Outstanding Claims Provision (OCP). Based on the presentations made to the Audit Committee and Board meetings, Mr Gardener believed that a careful, professional and competent assessment had been made (at [281]).
Mr Gardener said HIH policy was to use reinsurance as an alternative to maintaining a prudential margin within its OCP, being a margin that would take the probability of sufficiency in meeting outstanding claims well above 50%, because maintaining a prudential margin tied up large amounts of capital and inhibited HIH’s plans for development. Further, the cost of reinsurance was an expense to the company which had taxation advantages. HIH’s reinsurance agreements required the reinsurer to honour the settlement of claims made by HIH unless effected dishonestly or carelessly. A Reinsurance Committee of the Board was responsible for ensuring that appropriate levels of reinsurance were in place to protect HIH’s OCL.
In oral evidence, Mr Gardener said the Board and management were aware of the risk attached to the fact that HIH did not have a prudential margin and that for the 2000 financial year “there was a need for a strengthening of the provisions or reducing the risk” (transcript p 167, lines 3 and 32-33). Mr Gardener said the problem with HIH was that it was writing too much business and was under-capitalised, and thus was running a high risk. This was something he pointed out on a number of occasions, including to Williams in May 1999 when he suggested that HIH’s UK and US businesses should be sold “to get the capital right” (transcript p 181, line 2ff). The Allianz joint venture was an example of HIH raising $200m capital and reducing its risk, with the risks and rewards of the joint venture being shared with Allianz.
In his affidavit dated 7 November 2008, Mr Gardener said estimating an insurer’s OCP is a difficult and complex task involving inputs from both management and a range of professionals (at [294]). The Board was necessarily dependent on such information in making its evaluation. At Audit Committee meetings, there was frequently a difference between the figures provided by management, auditors and actuaries. Mr Gardener said his custom was to rely heavily on the figures provided by the actuaries on the basis that they were skilled in such matters and independent (at [308]). Mr Gardener said he had no reason to believe that Mr Slee’s opinion was being compromised by management. He assumed from his past experience that any difficulties or qualification to the information provided would be brought to the attention of the Audit Committee by the auditors (at [321]).
At the hearing, part of the discussion between the experts in relation to this matter focused on whether any distinction should be drawn between Mr Gardener and Mr Stitt. In Stitt, under the heading ‘Claims Provisioning’, the Tribunal considered whether Mr Stitt was competent and diligent in relation to the quantification of HIH’s OCP and concluded that he was (Stitt, at [123]). In the present proceedings, Mr Kelly submitted, relying on Mr Bosch’s opinion (affidavit 27 October 2009, at [2.10.16]), that there is no material distinction, noting Mr Stitt’s long experience in the insurance industry. APRA submits that there is a material distinction by reason of Mr Gardener’s different background, as an accountant, and his experience as an auditor.
In our view, expressed above at [34], the Tribunal must make a subjective assessment of particular conduct. Thus, a person’s background and experience may amount to a material distinction. However, the facts surrounding each matter in which the competence and diligence of a director are in issue must be considered in order to determine whether differences in the directors’ background and experience are relevant considerations in relation to that particular matter. With regard to claims provisioning, we consider that Mr Gardener’s background and experience as an auditor should have given him a deeper understanding than a director without such experience of the material with which non-executive directors on the Audit Committee were presented. In particular, Mr Gardener’s background and experience as an auditor of HIH should have given him a deeper understanding of the issues involved in providing for outstanding claims.
The Tribunal in Stitt, at [116], noted that one of the fundamental disagreements between APRA and Mr Stitt was the approach that should be adopted to claims provisioning. APRA’s approach “insists that prudence dictates a ‘prudential margin’ in the outstanding claims provision, so as to cover those risks that cannot be catered for in the standard actuarial calculation”. In our view, given Mr Gardener’s background and experience, the relevant issue is whether Mr Gardener’s conduct in relation to claims provisioning, whether addressed by allowing a prudential margin or through reinsurance, indicates a lack of competence or diligence on his part.
Thus, in the present matter, the principal focus should be on Mr Gardener’s conduct in the Audit Committee in assessing the information presented to the Committee by HIH’s management, actuaries and auditors and taking appropriate follow‑up action having made that assessment. This, in turn, raises the question of whether it was reasonable for Mr Gardener to rely on the information presented to the Committee. In our view, the appropriate test is whether it was reasonable for a person of Mr Gardener’s background and experience, placed in that situation, to have relied on that information, or whether such a person should have taken other action.
Mr Hullah’s opinion on this aspect of the matter is that even by the standards of the time, a non-executive director of a general insurance company could not fulfil his duty unless he had some understanding of the work performed by the actuary and the assumptions and basis upon which the actuary came to his conclusions (transcript pp 280-281). Mr Hullah’s view is that Mr Gardener should have read Mr Slee’s report and required his presence at the Audit Committee meetings, and that Mr Gardener and other Committee members should have questioned Mr Slee about the assumptions, analyses and conclusions reached in his reports in order to enable the Committee to assess whether an adequate provision for outstanding claims had been made (affidavit 16 April 2009, at [5.103]; affidavit 8 October 2009, at, for example, [4.12]).
With regard to Mr Gardener’s reliance on the work done by Andersen, Mr Hullah expressed the view that while it was reasonable for directors to take some comfort from auditors, directors cannot rely on auditors to do the work they themselves need to do. He pointed out that in this case the reliance placed on the auditors had been misplaced, as the auditors had not met with Mr Slee, had not been in touch with him and, in the case of the 2000 accounts, had not received his signed opinion at the appropriate stage. Mr Hullah’s opinion is that relying on the auditors was not a substitute for directors themselves engaging with the actuary. If they had looked at Mr Slee’s reports they would have seen for themselves the concerns he had raised about prudential margins and declining operating results, and could have done more than was done (transcript p 293).
Mr Bosch’s view is that while with the benefit of hindsight Mr Gardener could certainly have done more, “his responses were reasonable” (affidavit 27 October 2009, at [2.10.20.3]).
Mr Kelly contended that there was no material distinction between Mr Stitt and Mr Gardener. The non-executive director members of the Audit Committee had a considerable amount of information before them, took steps to understand it and did so reasonably. Mr Gardener had a reasonable expectation that Andersen would have discussed the actuaries’ reports with the actuaries and reviewed the assumptions and information relied on in those reports. Andersen never raised with the Audit Committee any particular limitation with the actuarial reports. The Committee was aware of the risk associated with the lack of a prudential margin and that there was a need for strengthening the provisioning or reducing the risk.
Mr Kelly contended that Mr Gardener was entitled to assume that Mr Slee’s work would be scrutinised by the auditors. Mr Kelly referred to a presentation by Andersen to the Audit Committee dated 9 September 1999 summarising Andersen’s approach in respect of the 2000 audit of HIH. With regard to provisioning, this includes “review actuarial reports including assumptions” (Applicant’s bundle, vol 2, p 519). It was not Mr Gardener’s role as a non-executive director to himself conduct an audit – he was entitled to rely on the outcome of the auditors’ review, including their assessment and review of the actuary’s report.
Mr Wheelhouse said one of Mr Gardener’s central failures was in not responding to the warnings, for example Mr Slee’s and those in the Ernst and Young (EY) Report, as to the deterioration of the business. These signs of deterioration should have “alerted a person with Mr Gardener’s skills and expertise to obtain all the information he could in relation to the outstanding claims liabilities” (transcript p 387, line 16ff). Mr Wheelhouse noted the provisioning was understated by an estimated $2.6b. Mr Gardener should have obtained and read Mr Slee’s reports, taken notice of Mr Slee’s warnings and acted. At Andersen’s presentation to the Audit Committee on 9 September 1999, Andersen noted in relation to provisioning, “the lack of prudential margins” (transcript p 90, line 1ff; Respondent’s bundle, vol 1, Tab 30.3, p 2357). The presentation highlighted the deterioration of the reserve position.
In the Tribunal’s view, Mr Gardener’s evidence establishes that he was aware of the risk associated with what appears essentially to have been the under‑capitalisation of the company relative to the business it was writing. The fact that the Board approved the use of reinsurance as an alternative to maintaining a prudential margin does not appear of itself to be a matter warranting criticism, provided that such reinsurance provided genuine and adequate risk relief. The Audit Committee and the Board had available to them information from management and its auditors. The evidence indicates that Andersen’s approach to its role could give the appearance that it had reviewed the actuarial reports. However, by assuming that the auditors were engaging with Mr Slee when in fact they were not, non-executive directors failed to hear his warnings or appreciate his concerns about prudential margins and declining operating results, and missed an opportunity to act earlier than otherwise in response to them.
In Mr Gardener’s case, he had dealt with Mr Slee when at Andersen, knew his shortcomings (transcript p 316), and had reason to need assurance about his work being reviewed. Despite this, Mr Gardener assumed that Andersen’s approach was the same as when he was the audit partner, without checking that this was still the case. Furthermore, being fully aware of the importance of adequate claims provisioning, Mr Gardener, in particular, was in a position by reason of his skills and experience to have made his own assessment of Mr Slee’s conclusions by asking for and examining his reports. Had he done so he may have been able to prompt earlier action than otherwise in response to Mr Slee’s concerns. In our view, Mr Gardener was too complacent and trusting of his former firm and failed to exercise appropriate professional scepticism. We note that his approach may also have been influenced by the involvement of his former Andersen colleagues, Mr Cohen and Mr Fodera, whose judgement he respected.
While it may not have been unreasonable for the non-executive directors to rely on the information presented to the Audit Committee and the Board without delving further, it is disappointing that Mr Gardener put so much misplaced trust in the auditors about something as important as outstanding claims provisioning without confirming that his understanding of their approach was correct. It is also disappointing that he did not take more of an interest, consistent with his skills and experience, by asking for, reading and considering Mr Slee’s reports himself.
The under‑capitalisation of HIH seems to have been clearly recognised by the Board, at least in the latter part of 2000, and the evidence establishes that the Board and management were taking steps to try and address this by selling some of HIH’s businesses and reducing the level of risk. Thus, they were responding to the deteriorating position of the company by taking action, albeit that this may have been much too late. It is easy with hindsight to criticise non-executive directors such as Mr Gardener by reason of the ultimate failure of the company. However, the question for the Tribunal is whether, in the circumstances existing at that time, the action taken by Mr Gardener was reasonable.
Specifically in relation to provisioning, assuming that it was not unreasonable by the standards of the time for Mr Gardener to rely on the information provided to the Audit Committee and the Board, did he act competently and diligently in relation to the adequacy of the provisioning? Should he have done more, especially in view of his background and experience? In our view, given the extent of the under-provisioning, it is easy to be critical and perhaps with some justification. Almost certainly there was other action Mr Gardener could have taken, and by today’s standards should have taken. However, we are not satisfied on the evidence before us that Mr Gardener’s conduct in relation to provisioning is sufficient to establish that he did not act competently and diligently according to the standards of the time. In terms of today’s standards, Mr Gardener’s evidence of his more recent conduct as a non-executive director of Austar and Hutchison (discussed below) suggests a much more proactive approach as, in both cases, the Chairman of their Audit Committees.
Ernst & Young Report
APRA contends that Mr Gardener failed to competently and diligently perform his duties as a director or act in the best interests of the company by failing to take such steps as were necessary or appropriate in the circumstances with respect to the EY report of 4 December 2000 and the matters raised therein which raised serious doubts about HIH’s solvency.
The parties agree that on 31 October 2000, the Board resolved to undertake an independent review of HIH’s financial position (required by Westpac as a condition of its continuing support). EY were engaged to undertake this review and the Board appointed Mr Gardener to liaise with them over this. A draft report was tabled at a Board meeting on 29 November 2000 and a final report at a Board meeting on 4 December 2000. In their Executive Summary to the report, EY stated that in their view, “the overall position of the [HIH] Group is delicately poised” (Respondent’s bundle, vol 4, tab 79.5, p 2). EY noted that the net assets position of HIH had deteriorated significantly since 30 June 2000 but that because of the complexity of the Group and the subjective nature of the valuation of some liabilities and assets, they had not been able to form a view on the current consolidated net assets position. Among the key uncertainties that might adversely affect HIH’s financial position, EY identified actuarial assumptions and the lack of a prudential margin (at p 3).
The parties agree that steps were taken by HIH management and the Recapitalisation Committee of the Board, monitored and directed by the Board, to address issues identified by EY. These included retaining EY to monitor HIH’s cash flows, and the sale of some of its insurance businesses, by reason of which HIH was able to commute a number of reinsurance treaties resulting in Hanover Re releasing $89m in cash and Swiss Re releasing between $205m and $210m in cash. Prior to the appointment of a provisional liquidator, efforts were also made to sell other assets and to attract outside investors.
In oral evidence, Mr Gardener agreed that he was asked by the Board to liaise with EY (transcript p 202ff). He and Mr Fodera had a meeting with representatives of EY on 3 November 2000 to determine the terms of engagement. Subsequently, he and Mr Fodera and “I think probably a couple of other people as well” (transcript p 204, line 7) met with EY on 23 November 2000 to discuss their draft report. They asked EY “to change the report slightly in a way that we felt would be more useful for us” (transcript p 204, line 19). The draft report then went to the Board meeting on 29 November 2000. In cross-examination, Mr Gardener was asked to comment on a statement at the bottom of the first page of the Report that “The directors of the group and its key entities are of the opinion the company has remained solvent”. He replied, “I had no knowledge that the company was other than solvent”.
Mr Gardener said at least $400m was realised through these sales and attempts were made to sell other businesses. For example, in addition to the joint venture agreement with Allianz, 51 percent of HIH’s corporate and commercial lines of business were sold to a joint venture with QBE, HIH’s workers compensation business was sold to the NRMA, HIH’s New Zealand insurance business was sold to QBE, and its travel business was sold to Graham Hannan. Attempts were also made to sell HIH’s Asian and Argentinean insurance businesses, HIH’s commercial property portfolio and its interest in a Lloyd’s syndicate and UK insurance business.
Further, in late 2000, management commenced work on a proposal to restructure HIH overseen by the newly appointed CEO, Randolph Wein. Work was also undertaken to identify costs savings. External consultants were engaged to assist in this work.
Mr Gardener stated that prior to receiving EY’s report, HIH management had already been pursuing strategies to address HIH’s financial position, albeit without reference to the non-executive members of the Board, as they learned at the meeting on 5 September 2000. Board papers for the meetings held between 4 December 2000 and 15 March 2001 illustrate the extensive work undertaken by HIH’s management and external advisers. On 12 October 2000, the Board resolved to establish a Recapitalisation Committee to investigate recapitalisation alternatives available to HIH. Mr Gardener was not a member of this Committee but is aware that the Committee met regularly in the period from October 2000 to March 2001.
Mr Wein and his management group and external consultants were also engaged in developing a new business plan for HIH involving restructuring HIH and “a solvent run off of non-viable or unsaleable insurance lines” (affidavit 7 November 2008, at [335]). Mr Wein’s developing plan was presented to the Board on 26 February 2001.
Thus, Mr Gardener states it is simply not correct to assert that HIH was not taking steps to address its financial difficulties in the period from December 2000 to March 2001. Indeed, it was a period of heightened activity:
In fact, notwithstanding KPMG’s opinion as expressed at the meeting on 15 March 2001, to the effect that the solvency of the Group was marginal and that the risk to the directors in trading without the protection of external administration was too great, KPMG’s view was that the purpose of entering external administration was to provide a safe haven from which Wein’s business plan could most effectively be implemented.
Mr Gardener said it was Mr Wein who persuaded him not to resign from the Board in the latter part of 2000 when he was again considering this. Mr Gardener felt that having been re-appointed to the Board in September 1999, he owed it to the shareholders to see out his three‑year term and assist in restructuring the company: “It seemed to be the honourable thing to do”. He said he reinvested all his director’s fees in the company and the dividends generated, as an indication of his commitment to HIH, and consequently, as a shareholder, “lost something like about $260,000 or thereabouts” when HIH was wound up (transcript p 215).
Mr Bosch was asked to comment in relation to the EY Report. He states, “Having read the material made available to me, in my opinion both management and the board acted energetically to deal with the many complex issues confronting them in the EY Report” (affidavit 27 October 2009, at [3.9.3]). Mr Bosch concluded that Mr Gardener “acted reasonably in this period” (affidavit 27 October 2009, at [3.9.4]).
APRA contended at the hearing that Mr Gardener failed to respond sufficiently to the EY Report and, more particularly, should have taken steps to investigate the solvency of HIH (transcript p 387). However, in our view, the evidence referred to above indicates Mr Gardener acted reasonably and there is nothing to suggest that he did not act appropriately in relation to the matters raised in the EY Report.
HIH Audit Committee
APRA contends that Mr Gardener failed to competently and diligently perform his duties as a director and member of the Audit Committee by failing to take appropriate and reasonable measures to enhance the independence and appearance of independence of the Audit Committee. In particular, APRA contends, first, that he did not take any or reasonable steps to ensure the Audit Committee had sufficient time to consider the financial statements or to make further enquiries into matters revealed by the statements prior to their approval; second, that he allowed directors and management to attend meetings of the Audit Committee, knowing that this did not constitute best practice; and, third, he did not take steps to create an environment in which the auditors could meet with and make presentations to the Audit Committee in the absence of management.
Mr Gardener was appointed a member of the Audit Committee on 2 December 1998, and Chairman on 26 February 2001. During this period, the Committee comprised Neville Head, Geoffrey Cohen, Charles Abbott and Robert Stitt. The Chairman of the Committee was Mr Head until his resignation on 5 August 1999. He was replaced by Mr Cohen as Chairman on 25 August 1999. The Committee met immediately before HIH Board meetings and members of the Board were invited to attend its meetings.
The parties agree that Mr Gardener and Mr Head attended a meeting with the auditors (Mr Davies and Mr Gooley of Andersen) on 12 March 1999. Mr Davies (who was replaced as audit partner by Mr Buttle for the 1999/2000 audit) prepared a file note of this meeting dated 15 March 1999 that Mr Gardener accepts is an accurate record. Communication and meetings between the auditors and the Audit Committee were discussed, as was the need for increased corporate governance.
It was agreed at the meeting that more regular financial information needed to be provided to the Board and that earlier meetings should “be scheduled between the auditors and the audit committee (including management) to discuss issues arising in the presentation of the financial results”. Mr Davies concluded that as a result of the agreement reached at the meeting, “I believe we have a significant acknowledgement from the audit committee to satisfy ourselves that they will be more involved in the process for determination of the financial results that they have been in the past”.
The parties agree that at the Audit Committee meetings attended by Mr Gardener, financial statements and reports were discussed, with the auditors giving a presentation about the financial results. At meetings following the end of a particular financial period, statements would be recommended for approval by the Board subject to any amendments. The Allianz transaction was discussed at a meeting on 12 September 2000.
Mr Gardener deals at some length with the Audit Committee in his affidavit dated 7 November 2008, including setting out his understanding of its role and function. He observed (at [72]) that having senior management attend Committee meetings allowed the Committee and the auditors (who attended by invitation) “to ask questions of and receive prompt answers and information from them”. The internal auditor, Greg Waters, also attended (again, by invitation), and Mr Gardener’s perception of him was that he “was exceedingly competent in his role”, from which Mr Gardener drew comfort (at [73]). Mr Gardener also relied upon the expertise of the Andersen partners and staff assigned for the HIH audit, believing Andersen to be a “highly reputable firm” (at [84]).
Mr Gardener said that based on the manner in which audits were carried out during the time he was the senior audit partner and later concurring partner on the HIH audit, it was his understanding that the auditors reviewed the work of the external actuaries, including David Slee. While he was the senior HIH audit partner, he had visited Mr Slee twice yearly to get a better understanding of his work, his relationship with management and to satisfy himself as to the integrity of his function (at [90]). Mr Gardener said that during his time at Andersen, they performed an audit of the actuaries’ work by comparing the actuaries’ calculations with their own findings. From this, they were able to give an opinion to the Audit Committee about the reasonableness of management’s and the actuaries’ calculations of Outstanding Claims Liability (OCL) (at [93]).
In oral evidence, Mr Gardener said if he were a member of an Audit Committee now, he would make further use of the auditors to obtain information. He said in his experience Mr Slee was informative but inconsistent. When Mr Gardener was the auditor of CE Heath, he never felt sufficiently informed by reading Mr Slee’s reports (transcript p 316). Mr Gardener indicated that he would be disappointed if he had known that Andersen had not discussed Mr Slee’s report and opinion with him. This was not consistent with his practice as an auditor.
Mr Gardener said the Audit Committee, with the assistance of the auditors, “independently reviewed HIH’s financial affairs and financial reporting functions” (affidavit 7 November 2009, at [109]). At every Audit Committee when the issue of reserving or making provision for OCL was discussed, he considered that a careful, professional and competent assessment was made by management, the external actuary and the external auditor (at [116]). During the course of Committee meetings, Mr Gardener regularly tested, questioned and attempted to critically examine and analyse the advice given in relation to the financial reports (at [118]). He was satisfied by the responses. There was no information provided to the Committee to suggest that reliance on the material prepared by management, Andersen and the internal auditor was unreasonable (at [120]).
With regard to the presence of management during Audit Committee meetings, Mr Gardener said in his experience this is not uncommon and is an effective way for such meetings to be conducted in a complex business such as HIH. During the time he was a member of the HIH Audit Committee, the presence of management did not inhibit debate. It is only in circumstances where this might occur that management should be required to excuse themselves from a meeting (at [122]). However, he said auditors should have an opportunity to convey any concerns they have about the flow of information from management to the directors, and the usual way for this to happen is for there to be a time in the meeting for management to be excused from attendance. Nevertheless, while he said (in oral evidence – transcript p 147, line 14) that this was preferable, this is a matter for the Chairman.
In the case of HIH, Mr Gardener was confident that, given his relation with Andersen, they would be quick to tell him of their concerns, and no such concerns were ever imparted to him (at [123]). In his role as a member of the Audit Committee of both Austar and Hutchison, he regularly meets separately with the auditors. This also happened on a number of occasions while he was a member of the HIH Audit Committee (at [124]).
In relation to the time spent considering the accounts, Mr Gardener said in his opinion there was sufficient time for him to form a view of HIH’s financial situation.
The expert witnesses were asked to comment on this matter. There was general agreement that the HIH Audit Committee did not operate according to ‘best practice standards’ in 1998-2001: for example, the Committee was chaired by Mr Cohen who also chaired the Board, there were an inadequate number of meetings each year, there was insufficient time for meetings, members of management were present during the whole of the meetings, and there is no evidence that the Committee reviewed its terms of reference or its responsibilities or assessed its own performance. Mr Bosch noted that many companies would not have complied with these corporate governance guidelines at that time and there was no legal requirement for them to do so.
Both Mr Hullah and Mr Bosch thought the amount of time taken in the HIH Audit Committee seems slight, but Mr Bosch said given that some documents were handed out prior to the hearing, it did not appear to him that the time spent was unreasonable. Mr Hullah considered that the Committee process did not allow sufficient time to consider the financial statements and make appropriate enquiries.
Both Mr Hullah and Professor Ramsay thought the separate meetings Mr Gardener had with auditors were not an acceptable substitute for the Committee meeting with auditors without management being present.
Mr Bosch said it was primarily the responsibility of the Chairman to ensure that the Audit Committee complied with best practice. While Mr Gardener had a responsibility to do what he could to improve the workings of the Board and its committees, Mr Bosch noted that Mr Gardener focused on the Board and Mr Bosch considered this appropriate. Mr Hullah and Professor Ramsay, while acknowledging the responsibility of the Chairman, thought it was still incumbent on Mr Gardener to influence the Committee’s practices.
In oral evidence, Mr Bosch noted that (after June 1999) Mr Gardener was isolated as a Board member and without support, and what he could have done to improve the processes of the Audit Committee was “very limited” (transcript p 237, line 14). Mr Bosch said it appeared that Mr Gardener “asked a great many incisive questions and that he acted responsibly as a member of that committee” (transcript p 237, line 14). Professor Ramsay said that while Mr Gardener was a new member of the Committee, he came with significant audit and financial experience and other Committee members might well have deferred to him (transcript p 247, line 13).
Mr Kelly submitted while the HIH Audit Committee, like those of many other listed companies at the time, did not comply with best practice, any finding as to the conduct of the Committee or as to a matter that is systemic in nature, cannot automatically translate into a finding about each individual member of that Committee without assessing the individual’s conduct. Mr Kelly said APRA has failed to articulate how the governance of the Committee reflected on Mr Gardener’s conduct, and there is no proper basis to allege that he was anything other than a diligent and conscientious member of the Committee.
The Tribunal accepts the view of the experts that the Audit Committee did not act in accordance with best practice at the time. In our view, Mr Gardener could possibly have done more to influence the operation of the Committee, given his background and experience as an auditor. However, we also accept that, as a new member of the Committee and one who by June 1999 felt isolated as a result of the rejection of his concerns by Mr Williams (who was supported by at least the majority of directors), this would not have been easy. Ultimately, the responsibility for the successful operation of the Committee lay with the Chairman. We conclude that Mr Gardener is open to criticism with regard to the operation of the Audit Committee, but the view we have formed of Mr Gardener is that notwithstanding this, he was a conscientious member of the Committee who acted in what he considered to be an appropriate way given the particular circumstances at the time.
HIH as a Maximum Audit Risk
APRA contends that Mr Gardener failed to competently and diligently perform his duties as a director and member of the Audit Committee by reason of his failure to disclose to the Board that HIH’s auditors, Andersen, assessed HIH for its internal Risk Assessment Rating (RAR) as a ‘maximum audit risk’.
The parties agree that from 1973 to 1989, Mr Gardener was the audit partner on the audit of HIH and its predecessors and, from 1990 to 1993 and 1996 to 1997, he was the concurring partner on the audit of HIH. Mr Gardener accepts that for those years he would have been aware of HIH’s RAR, but before becoming a Board member, he did not enquire as part of his ‘due diligence’ of Andersen’s RAR in relation to the HIH audit. He did not disclose to his fellow Board members of HIH any information about Andersen’s RAR.
In his affidavit dated 7 November 2008, Mr Gardener said he cannot now recall whether for the HIH audits for which he was the concurring partner, HIH was identified as being a maximum audit risk client (at [136]), although he would have been aware of this at the time. Such an assessment is specific to each year of a company’s audited accounts (at [135]) and has the consequence that the audit client will be subjected to a greater degree of scrutiny (at [138]). Mr Gardener said following his retirement from Andersen (on 30 June 1998), he was not privy to Andersen’s internal RAR for HIH.
Mr Gardener said that during the time he was a member of the HIH Audit Committee, Andersen made him and other Committee members aware of the issues of particular interest to them in auditing HIH, including presenting their risk analysis to the Committee (at [140]).
This matter was discussed by Mr Bosch and Mr Hullah in their affidavits in relation to the due diligence that Mr Gardener should have performed prior to accepting a position on the HIH Board. Mr Hullah’s opinion was that such due diligence should include meeting with management, internal auditors, external auditors and other external advisers (affidavit 16 April 2009, at [5.10]). In Mr Bosch’s view, such extensive due diligence as that suggested by Mr Hullah is not required and would not be common. Moreover, the extent of due diligence is usually related to the knowledge the person already has about the company (affidavit 27 October 2009, at [2.10.4]). Mr Bosch said that in 1998, “it would have been rare for a prospective director to have undertaken such a comprehensive programme” (affidavit 27 October 2009, at [2.10.3]). Mr Bosch did not agree with APRA’s contention that Mr Gardener’s failure to disclose Andersen’s RAR to the Board reflects a lack of diligence (affidavit 27 October 2009, at [2.10.6]).
There is no evidence before the Tribunal as to whether HIH was assessed by Andersen as a maximum audit risk for the 1998 audit. Indeed, it only appears to be assumed that HIH was a maximum audit risk for the immediately preceding years. Mr Gardener’s evidence is that for the years in which he was the concurring partner, he does not recall whether HIH was identified as being a maximum audit risk client in the years 1990 to 1993 and 1996, but recollects that this was the case in 1997 (affidavit 7 November 2008, at [136]). Even if Mr Gardener had been aware of this information, another issue is whether a conflict of interest would arise if he had revealed to the HIH Board information obtained in his prior role as a partner at Andersen.
As to the due diligence that Mr Gardener should have undertaken prior to his accepting a position on the HIH Board, the Tribunal accepts that discussion with the auditors of a company may be appropriate as part of the required due diligence in a particular case. However, in our view, what is appropriate in a particular case will depend on the particular circumstances. In this instance, the Tribunal is not satisfied that the evidence in this matter – noting, in particular, the history of Mr Gardener’s prior involvement with HIH and his knowledge of the business and its management - indicates a lack of due diligence on his part.
Human Resources Committee
APRA contends that Mr Gardener failed to competently and diligently perform his duties as a member of the Human Resources Committee (HRC) for the following reasons: by approving increases to the remuneration of executives and directors without conducting proper internal reviews of the remuneration and performance of directors and senior management, and without considering the need for a general review of salary levels and remuneration practices; by failing to ensure the HRC and Board retained adequate control over the allocation of bonuses by approving the delegation of complete discretion to Mr Williams; by failing to ensure the remuneration process was a sound one; and by acting inconsistently with the terms of reference of the HRC.
Mr Gardener was appointed to the HRC on 2 December 1998. He attended meetings on 12 March 1999, 29 September 2000, 4 October 2000, 31 October 2000 (by telephone), 15 December 2000 and 26 February 2001. The reason for the HRC not meeting between 12 March 1999 and 29 September 2000 was because the HRC usually met once a year shortly after the balance date and in 1999/2000, HIH’s reporting cycle changed from the end of the calendar year to the end of the financial year (30 June).
At its meeting on 12 March 1999 (Respondent’s bundle, tab 18), the HRC determined the salaries of Mr Williams and four other executives and resolved that the allocation of bonuses to senior staff would be at Mr Williams’ discretion. The HRC had before it reports from Hart Consulting Group dated 1 March 1999 as to Board Fees and Managing Directors’ pay levels, and Mr Williams reported orally on specific executive performance. The parties agree that the HRC discussed perceptions of the performance of management in the previous year.
At its four meetings in late 2000, the issue of Mr Williams’ succession was discussed. On 4 October 2000, the HRC discussed the retaining of Korn/Ferry to advise the Committee and, on 9 October 2000, discussed a report from Hart Consulting Group. On 26 February 2001, the HRC resolved to recommend to the Board revisions to director compensation, having received advice on this from John Egan and a memorandum from the Chairman of the Board, Mr Wein.
Mr Gardener said that during the time he was a member of the HRC the Chairman was Mr Cohen and the other members were Mr Stitt and, initially, in particular for the meeting on 12 March 1999, Mr Head and Mr Gorrie. Mr Gardener said he trusted their commercial judgement knowing them to be experienced in such matters. Moreover, at the time of the 12 March 1999 meeting, his first HRC meeting, he still held Mr Williams in high regard and considered him, as CEO, to be an appropriate source of information in respect of the performance of senior staff (affidavit 7 November 2008, at [159ff]).
Mr Gardener said that in making his decision to approve the remuneration levels recorded in the minutes, he based his decision on the salary under review, the advice of Mr Williams, the advice of the independent consultants and his assessment of the previous year’s financial results. He said he was necessarily heavily reliant on Mr Williams’ advice about the performance of senior management and on the views of his fellow directors who had been members of the HRC for the full year. In considering Mr Williams’ remuneration, he applied the advice received from Hart Consulting and listened to his fellow directors. The consensus of the meeting was that Mr Williams and his senior executives had done excellent work in relation to the takeover of FAI. Since Mr Gardener had not been involved in this, he did not feel in any position to contradict the consensus of the Committee.
Mr Gardener states that at the HRC meetings in late 2000, the Committee discussed the making of an ex gratia payment to Mr Williams on his retirement, and also the remuneration to be paid to senior management. In both cases, the Committee resolved to obtain independent advice. At the meeting on 15 December 2000, the HRC, in the absence of Mr Williams, agreed to an ex gratia payment to Mr Williams of three times his annual salary, in line with Mr Cohen’s advice as to Mr Williams’ expectation, but resolved not to pay him anything (after Mr Gardener raised the PEE transaction) except his statutory entitlements until it was determined that he had no outstanding debts to the company. Mr Gardener said he reiterated this at a Board meeting on 15 January 2001.
The minutes of a further Board meeting on 19 January 2001 record that the Board agreed that that it was desirable to obtain legal advice in relation to the payment to be made to Mr Williams in addition to his statutory entitlements. There was also discussion of making an ex gratia payment to an executive director, George Sturesteps, which was revised at a later Board meeting on 26 February 2001. APRA contends that Mr Gardener’s participation in these decisions demonstrates a failure to appreciate proper corporate governance. It contends that Mr Gardener failed to give consideration to whether a termination payment to Mr Williams was justified, especially given his recent conduct in the BTS and PEE transactions, and in the light of HIH’s deteriorating cash position.
It was Mr Bosch’s opinion that Mr Gardener acted reasonably in all the circumstances. In relation to the HRC meeting on 12 March 1999, Mr Bosch noted that, at the time, Mr Gardener had been a member of the Board for just over three months, and had attended three Board meetings and one Audit Committee meeting: “He had very little experience of the performance of the executives whose remuneration the committee was reviewing”. In Mr Bosch’s opinion, Mr Gardener’s respect for the experience and judgement of his fellow committee members “was well-founded and it would have been presumptuous of him to contest their evaluation without very good reasons. There appear to have been no such reasons" (Affidavit 27 October 2009, at [3.10.2]). Mr Bosch noted that Mr Gardener had read the advice of independent consultants (Hart Consulting Group). Mr Bosch said it was normal in his experience for an HRC to take the advice of a person such as Mr Williams in relation to the performance of those reporting to him. Mr Bosch said in his opinion there was no sound basis for APRA’s allegations.
The Tribunal is not satisfied on the evidence before it that Mr Gardener failed to act competently or diligently in performing his duties as a member of the HRC. In our view, his conduct in relation to the matters discussed at the meeting on 12 March 1999 was reasonable given his situation at that time and noting that the Committee had the benefit of external reports from Hart Consulting Group dated 1 March 1999 as to Board Fees and Managing Directors’ pay levels. With regard to later HRC meetings, the evidence suggests, once again, that Mr Gardener acted reasonably in the particular circumstances.
(c)Conclusion in relation to HIH conduct
The Tribunal has found that the Board and Audit Committee of HIH did not always act in accordance with best practice at the time – for example, by not asking management or directors to withdraw from meetings where the meeting was to discuss matters in which those persons had a personal interest. However, we are satisfied that Mr Gardener was conscientious and diligent in undertaking his duties as a non-executive director. Certainly, in hindsight, his actions are in some instances open to criticism, but we are satisfied that in all the circumstances he acted reasonably at the time. In our view, Mr Gardener’s reliance on information provided to him by the management and auditors was by the standards of the time and in all the circumstances not unreasonable. However, his misplaced reliance on the auditors and his lack of enquiry into the important area of the work of the actuaries, the adequacy of provisioning and the lack of a prudential margin are disappointing. On the other hand, we note that at various times, he did ask appropriate questions, seek further information, and support action being taken to try and rectify a deteriorating financial situation.
The Tribunal notes, in particular, that Mr Gardener raised his concerns about the governance and direction of HIH at a meeting with Mr Williams in May 1999, at which he addressed speaking notes that he had prepared and which he provided to Mr Williams. Mr Gardener described Mr Williams’ response as “being dismissive of me and what I was saying to the point of his being hostile” (affidavit 27 October 2009, at [19]). Mr Gardener felt “rebuffed”. Mr Williams subsequently called an ad hoc Board meeting on 1 June 2009 at which he said he was aware “of some unhappiness amongst the non-executive directors”, at which Mr Williams referred to a number of matters raised in a letter from Mr Head, and Mr Gardener said he also had some concerns that he had discussed with Mr Williams (at [21]). Mr Gardener was asked about his concerns and then Mr Williams asked the other directors if they agreed with his comments. “Those present gave unqualified support to Mr Williams”.
Following this meeting, Mr Gardener considered whether he should resign. However, he decided against this because he had only recently joined the Board and considered that HIH and Mr Williams, who was highly regarded and had a proven track record, should be given the benefit of doubt. Mr Gardener also thought it likely that because of Mr Williams’ age (62), it was likely that there would soon be a change in the leadership of the company (at [22]). Shortly after the meeting, Mr Head phoned to say that he was going to resign because of growing conflict between him and Mr Williams.
Mr Gardener stated that at a subsequent Board meeting, most likely held in September or October 1999, he “pressed with the full Board” his view that the financial information being provided to the Board was insufficient. Other members of the Board disagreed. Mr Gardener said he also questioned Mr Fodera about the profitability of various lines of insurance business. Feeling increasingly isolated, Mr Gardener again considered whether he should resign. In February 2000, he discussed his concerns about Mr Williams’ management style with Mr Cohen, who told him that Mr Williams was likely to retire early in the next financial year. On this basis, Mr Gardener decided not to resign.
In the latter part of 2000, Mr Gardener participated in the process of selecting Mr Williams’ successor and, while in Hong Kong on other business, met with Randolph Wein to discuss his candidacy. Mr Williams resigned as CEO in December 2000 and Mr Wein was appointed to replace him. In January 2001, Mr Gardener again met with Mr Wein in Hong Kong and raised his concerns about HIH’s strategic direction and governance, referring to the speaking notes he had prepared for his meeting with Mr Williams in May 1999, of which he later sent a copy to Mr Wein. Mr Gardener said he raised with Mr Wein whether he should remain on the Board and Mr Wein urged him to do so. They discussed at some length the changes Mr Wein intended to implement. Mr Gardener felt confident in Mr Wein’s leadership and that his concerns about the governance of HIH would be appropriately addressed (at [34]).
In oral evidence, Mr Gardener said throughout the period until his discussion with Mr Wein in January 2001, he constantly thought of resigning. However, resigning was the easy way out and he felt having committed to HIH, he “owed it to the shareholders” to, if at all possible, see out his three‑year term (from the time of his reappointment in September 1999). He said (transcript p 215, line 26): “It seemed to be the honourable thing to do”.
The Tribunal also notes the comments of Justice Owen concerning Mr Gardener in the Royal Commission Report quoted above at [5] and [6], and that Justice Owen made no adverse finding as to Mr Gardener’s fitness and propriety.
As stated above, our conclusion, based on the evidence before us and the broad picture of Mr Gardener’s conduct as a director of HIH, is that, despite the significance of HIH’s collapse and its deleterious effects, and despite Mr Gardener’s conduct at the time falling short of today’s standards in some important respects, we are not satisfied that his conduct establishes that he is not a fit and proper person to be a director or senior manager of a general insurance company or that he would not properly conduct himself today by today’s standards.
Other Conduct
Before coming to a final view on Mr Gardener’s fitness and propriety, the Tribunal must also consider other relevant conduct to complete the picture. As stated above at [33], the Tribunal must take into account all relevant evidence at the time of making its decision. In Mr Gardener’s case, this includes his work as a non-executive director of a number of public and private companies and not-for-profit organisations.
(a)Directorships
Mr Gardener has been a director of the following public companies:
§Ashton Mining Company (Ashton). Ashton owned half the Argyle Diamond mine in Western Australia. Mr Gardener was appointed Chairman of the Board in September 2000 but only served until December 2000 when Ashton’s shares were purchased by Rio Tinto. Mr Gardener states that as a result of his actions, shareholders achieved a much improved price for the purchase of their shares.
§Hillgrove Gold NL from 1999 to 4 January 2002, including as Chairman from 1999 to 2001.
§Combined Communication Network Ltd (the principal taxi operating company in Sydney) from 2000 to February 2002.
§Austar United Communication Ltd (Austar) (provider of subscription television to eastern regional Australia). Mr Gardener was elected a non-executive director on 16 June 1999 and served until 29 May 2008, during which time he was Chairman of Austar’s Audit Committee. He said that during this time, Austar underwent restructuring, faced difficult economic conditions, re-arrangement of corporate borrowings, and a shareholders’ equity rights issue, posing governance, accounting and regulatory challenges. Mr Gardener said that as Chairman of the Audit Committee, he and his fellow independent directors had at least one meeting each year with the auditors at their offices. This facilitated a free ranging discussion which he found very useful (affidavit 27 October 2009, at [44]).
§Hutchison Telecommunications (Australia) Ltd (Hutchison). Mr Gardener was appointed a non-executive director in 1999, a position he still holds. During this period, he has also served as a member (and Chairman since 2000) of Hutchison’s Audit Committee and as a member of its Governance Nomination and Compensation Committee. On two occasions when Hutchison has issued securities, Mr Gardener has served as Chairman of its ad hoc Due Diligence Committee for the purpose of issuing the required prospectus.
Mr Gardener said he has made sure he has at least one detailed offsite meeting with the auditors each year. Further, his “main concern has always been to ensure that, in the interests of all shareholders, all matters and relevant information were brought to the Board on a timely basis” (affidavit 27 October 2009, at [54]). He said he has been deeply involved in reviewing the proposed joint venture agreement between Hutchison and Vodafone for the merger of their mobile wireless businesses and in overseeing the merger and necessary governance processes. He was re-elected as a director for a further three years in May 2009.
Mr Gardener said he has also been a director of a number of private companies (for example, Alpha Investment Management from 1999 to 2001) and not-for-profit organisations (for example, the Garvan Institute of Medical Research from 1984 to 2001, and the Australian Chamber Orchestra from 1992 to 1994).
(b)Character Witnesses
Mr Gardener provided affidavits as to his character from six business associates, five of whom were called for cross-examination at the hearing, one being uncontactable overseas at the time of the hearing.
Deanne Weir, Group Director, Corporate Development and Legal Affairs for Austar, and Company Secretary (affidavit dated 4 September 2008), said she had worked extensively with Mr Gardener on Austar’s committees. During Board and Audit Committee meetings, she observed that Mr Gardener often asked questions of auditors and management, directed the attention of the Board and Audit Committee to ensuring that all compliance standards were met, and displayed a high level of competence in dealing with these and other complex accounting and taxation issues facing the Board and Audit Committee. She said she had no knowledge of his involvement with HIH.
Marie Sexton, General Counsel and Company Secretary of Hutchison (affidavits dated 29 September 2008 and 28 October 2009), who has known Mr Gardener since July 1999, stated (29 September 2008, at [11]):
In carrying out his role and responsibilities as a member of the HTAL [Hutchison Telecommunications Australia Ltd] board, I have observed Mr Gardener to be a diligent and interested director. During meetings of the Board and the Audit Committee, Mr Gardener asks questions of management, other directors and others attending such as the independent auditors about accounting issues. It is clear that Mr Gardener has read and reflected upon board papers prior to meetings of the HTAL board and board committees.
She said that during Audit Committee meetings, management will occasionally leave the meeting in order that independent directors can discuss issues with the auditors privately.
In her later affidavit, Ms Sexton spoke of the part played by Mr Gardener in the joint venture agreement for the merger of Hutchison’s and Vodafone’s telecommunications businesses. She said he demonstrated “strong commercial acumen in the judgement he brought to approving the transaction and sensitivities to the governance issues arising” (affidavit 28 October 2009, at [9]). His involvement was collaborative and informed. While Ms Sexton acknowledged she has no knowledge of Mr Gardener’s involvement with HIH, she said he had shown “diligence, technical skills and commercial acumen and commitment to his role of a director” (at 23]).
Michael Coleman, chartered accountant and partner of KPMG in Australia since 1981 (affidavit dated 28 November 2008), said he had known Mr Gardener for 10 to 15 years and spoke of Mr Gardener’s involvement in KPMG’s Audit Committee Institute of which Mr Coleman is the Chair. Mr Coleman said Mr Gardener had been an active participant in Institute activities since its establishment in 2002. He described Mr Gardener as a person who appears to take “his responsibilities as a director generally, and as an Audit Committee member in particular, very seriously” and who has “a firm understanding and appreciation of the principles of good corporate governance” (at [9]). Mr Coleman said he has no knowledge of Mr Gardener’s involvement with HIH.
William Ferris AC, company director (affidavit dated 22 September 2008), said he has known Mr Gardener since 1972. He was a director and Chairman of Austar from 23 April 2003 until 15 December 2005. Mr Ferris spoke highly of Mr Gardener’s work as the Chairman of Austar’s Audit Committee and as a Board member, including noting that on some occasions matters were discussed by independent directors in the absence of management. He said Mr Gardener “demonstrated leadership and professionalism in ensuring that the Company’s regulatory, audit and governance obligations were fully acquitted” (at [15]). Mr Ferris said he has no knowledge of Mr Gardener’s involvement with HIH.
Ken Reid, partner of KPMG in Australia since 2002 (affidavit dated 27 October 2008), said he first met Mr Gardener when KPMG was appointed auditor of Austar in 2002. Mr Reid had numerous dealings with Mr Gardener as Chairman of Austar’s Audit Committee, including informal meetings with Mr Gardener and other Board members to discuss the conduct of the audit and the issues to be presented to the Audit Committee. Mr Reid said Mr Gardener demonstrated a good understanding of accounting, audit and governance issues relating to Austar and carried out his role as Chairman of the Audit Committee with diligence (at [4]). Mr Reid said he has no knowledge of Mr Gardener’s involvement with HIH.
John Burrows, Chartered Accountant and Company Director (affidavit dated 21 October 2008), was in North Africa at the time of the hearing and uncontactable. Mr Burrows stated that he has known Mr Gardener for nearly 40 years, including as a fellow partner in Andersen with whom he worked closely as a colleague. They remain close friends. Mr Burrows described Mr Gardener as a person of “integrity and selflessness (to a fault)”, and as “an outstanding auditor and professional accountant” whose professional approach was always “thorough and displayed a deep knowledge of the business and technical issues involved” (at [11]).
(c)Conclusion in relation to other conduct
The evidence as to Mr Gardener’s conduct as a director of other companies attests to his competence and diligence. The Tribunal notes in particular his conduct as a director and Chairman of the Audit Committee of both Austar and Hutchison. His character witnesses speak highly of Mr Gardener’s work including, where appropriate, ensuring that non-executive directors discuss relevant issues in the absence of management and with the auditors. His witnesses also speak of his willingness to ask searching questions and of his attention to issues of corporate governance. Indeed, the witnesses speak highly of his conduct in relation to many similar matters to those where APRA has found him wanting.
Overall Conclusion
Mr Gardener has made it clear that he does not wish to serve as a director or senior manager of a general insurance company in the future. His objective in pursuing this application before the Tribunal is to clear his name.
As the Tribunal commented in Stitt at [125], it is to be reasonably expected that where a person’s conduct is subjected to detailed scrutiny over a number of years, this will serve to focus the person’s attention on the performance of their duties as the director of a company for the future. This is not to suggest that in Mr Gardener’s case, he would not have done so in any event, but it may have provided an additional focus on those aspects of his work where he was criticised by APRA in relation to his conduct as a director of HIH. This in turn is likely to lessen the possibility of any contravention of his obligations in the future.
In terms of whether Mr Gardener is a fit and proper person to be a director or senior manager of a general insurance company at the time of our making a decision in this matter, as stated above, the Tribunal must consider both whether he exercised sufficient diligence in performing his work as a non-executive director of HIH as could be expected of a person of his background and experience at the time, and his conduct in the period since. Thus, we must make an overall assessment of his fitness and propriety.
The Tribunal has stated above that despite the significance of HIH’s collapse and its deleterious effects, we are not satisfied that Mr Gardener’s conduct while a director of HIH establishes that he is not a fit and proper person. Moreover, in terms of his other conduct, the evidence attests to his competence and diligence. Thus, our overall assessment is that we are not satisfied that it has been established that Mr Gardener is not a fit and proper person to be a director or senior manager of a general insurance company.
Decision
The two decisions under review must therefore be set aside and in substitution for those decisions the Tribunal determines that Mr Gardener is not disqualified from acting as a director or senior manager of a general insurance company.
I certify that the 169 preceding paragraphs are a true copy of the reasons for the decision herein of Mr RP Handley, Deputy President, Mr SE Frost, Senior Member, and Mr TC Jenkins, Member.
Signed: .............[sgd]...............................................................
A Veness, Associate
Dates of Hearing: 23, 25, 26, 27 and 30 November 2009
Date of Decision: 24 December 2009
Applicant representative: Piper Alderman
Applicant counsel: Mr J Kelly SC with Mr A Coleman
Respondent representative: Sparke Helmore
Respondent counsel: Mr S Wheelhouse SC with Ms S Phillips
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