The criticism of regulators by HIH Royal Commissioner Neville Owen for failing to detect the problems within both FAI and HIH means “heightened regulation and closer scrutiny of insurers will follow”, says law firm Freehills. In a bulletin examining the implications of the report for insurance, Freehills says the report will lead to higher compliance costs for insurers “which, in turn, are likely to increase the cost of insurance”.

“The existence of, and adherence to, satisfactory risk management programs, including satisfactory corporate governance structures and processes, may become an essential requirement for insurance cover.”

The royal commission’s findings and observations on corporate governance are likely to have the most practical relevance to companies and their directors and executives, says Freehills. It will “almost certainly etch in investors’ minds the perception that ‘undesirable corporate governance’ equals ‘investment risk’”.

The practical consequence for those charged with maximising shareholder value is that suggestions of financial impropriety or otherwise undesirable corporate governance practices can have a profound impact on market value.

Broad areas the royal commission thinks need attention are the need for truly independent judgement at board level; periodic testing of the practical effectiveness of governance models; and greater disclosure in relation to the way a company is run.

But Commissioner Owen avoided defining best practice, noting: “Any attempt to impose governance systems or structures that are overly prescriptive or specific is fraught with danger. By its very nature corporate governance is not something where ‘one size fits all’.”

Cautioning against being seduced by the corporate governance “mantra”, he said the key to good corporate governance “lies in substance, not form”.