Board Composition Survey Report on Mutuals Board composition and operation as at 31 December 213
The Mutual sector is committed to demonstrating good practice in corporate governance. Introduction This is the first investigation has conducted into the composition and operation of Boards of directive firms that are full members of the Association of Financial Mutuals. The analysis is based almost exclusively on the financial reports and accounts as at 31 December 213, although some additional information was gathered from other sources, such as the Mutuals websites. A total of 26 Boards have been included in our analysis. The purpose of our investigation is threefold: to investigate the composition of the Boards of directive Mutuals to identify any trends in how Mutuals are run to stimulate debate as to the most effective way to run Mutuals It is difficult to actively compare the effectiveness of each Board. In this survey we will highlight how the Boards are run and their composition, alongside interesting trends. Every Mutual is different and their Boards will take different approaches to how they are run. However, we hope that this report will stimulate debate as to whether the approach of other Boards may be appropriate for their own. We hope that you find this report informative and please get in touch if you have any questions or comments. Regards Scott Eason Head of Insurance Consulting scott.eason@barnett-waddingham.co.uk 27 776 3884 Kim Durniat Partner, Head of Life Insurance kim.durniat@barnett-waddingham.co.uk 27 776 3885 www.barnett-waddingham.co.uk 2
Mutuals reported a high level of compliance with the Annotated Corporate Governance Code, however there are areas for development. Executive summary In 213, members of the Association of Financial Mutuals reported a high level of compliance with the Annotated Corporate Governance Code. Our survey backs this up, showing that during 213: The average Board was well diversified in terms of ages, length of service, qualifications and experience, Boards meet regularly and divide responsibility through the use of sub-committees, Many Boards ensure Board members receive targeted training sessions to expand their contribution to the Board and the membership as a whole. However, there are areas for development with many Boards struggling to consistently report relevant forms of external Board evaluation and demonstrate why the approaches they take are of benefit to members. www.barnett-waddingham.co.uk 3
1 Board governance The Board of a company is collectively responsible for its long-term success. To achieve this an effective Board must be established and maintained, which leads and directs the company in a manner consistent with its strategic aims and within an appropriate control framework. Recognition of the importance of the Board s role by regulators in the financial industry is demonstrated by the presence of rules and guidelines that govern Boards. Recognition of the importance of the Board s role by regulators in the financial industry is demonstrated by the presence of rules and guidelines that govern Boards. The overarching aim of these requirements is to ensure that: Boards are aware of the responsibilities attributed to them; minimum standards are met, which support effective Board operation; and consistency is achieved across the industry in terms of organisational systems and controls. There are several sources that set out requirements relevant to Mutuals, these include: 1. The PRA Handbook, Senior Management Arrangements, Systems and Controls (SYSC) 2. An annotated version of the UK Corporate Governance Code (the Code), published by the Association of Financial Mutuals (AFM). 3. Solvency II legislation: Articles 41-49 of the Directive set out the high-level standards and additional rules and guidelines expand on these. Full implementation of Solvency II is required from 1 January 216 but compliance with guidelines set out in EIOPA s consultation paper on the (proposal for guidelines on system of governance and own risks and solvency assessment) published in September 213 is necessary during the two-year preparatory period leading up to this date. There is much overlap in the requirements from the key sources listed above, giving standards against which Boards must comply in terms of their composition and operation: Membership of the Board ensuring a suitable breadth of experience and knowledge and the ability to challenge is maintained. The role of the Board ensuring that Boards are effective, responsible, focussed and well-led. Remuneration ensuring that remuneration is sufficient without being excessive, and commensurate to the work put in and performance. Review ensuring that Board members recognise their strengths and weaknesses in order to maintain the appropriate balance of skills. The data for this survey was taken from the annual reports of 26 directive Mutuals that are full members of the Association of Financial Mutuals, and supplemented by data from firms websites. All data is as at 31 December 213. The total sample size was 26 Boards consisting of 223 Board members: 158 of whom are non-executives and 65 of whom are executives. www.barnett-waddingham.co.uk 4
2 Board composition The composition of Boards has been investigated in terms of its membership by age, gender, length of service and qualifications. In this section we show some interesting trends in Board composition. The average proportion of executives for the Mutuals which we investigated was 29%. Section B.1.2 of the Code states that at least half the Board, excluding the chairman, should comprise non-executive directors determined by the Board to be independent. Non-executive directors are important to constructively challenge and help develop proposals on strategy. Graph 3.1 shows the executive/non-executive split; an average across all the Mutuals is given at the bottom. 3.1 - Split between executive and non-executive members On average, Boards had 8 or 9 members, and the spread of membership numbers was quite narrow. It is essential to get the number of people sitting on the Board correct; too many could risk slowing down the decisionmaking process, but even riskier is having too few members to capture the wide range of skills that Boards require to operate succesfully and provide effective challenge. 1 British Friendly 2 Cirencester Friendly 3 Dentists Provident 4 DG Mutual 5 Druids Sheffield 6 Engage Mutual 7 Equitable Life 8 Exeter Family Friendly 9 Family Investments 1 Forester Life 11 Foresters Friendly 12 Healthy Investment 13 Holloway Friendly 14 Kingston Unity 15 LV= 16 Met Friendly 17 MGM 18 NFU Mutual 19 Police Mutual 2 Reliance Mutual 21 Royal London 22 Scottish Friendly 23 Sheffield Mutual 24 Shepherds Friendly 25 Teachers Assurance 26 Wesleyan - Average 1 2 3 4 5 6 7 8 9 1 11 12 Executive Non-executive members www.barnett-waddingham.co.uk 5
It is clear that males dominate the Mutuals Boards, occupying over three quarters of Board positions. Particularly striking is the small number of female executives; only 6 out of the 223 total Board members are female and held executive roles. We investigated whether there was a correlation between the size of Mutuals by assets held and the proportion of women on the Board, but found no evidence that Boards of a certain size are more or less prone to appoint women. Achieving the correct level of diversity in the Boardroom is a very topical subject. The high profile 3% club is campaigning for the FTSE1 to reach a split of 3% women across Boards. We investigated the gender composition in the Mutuals Boards and the split of male and females is shown in graph 3.2. 3.2 - Board members split by gender and executive roles 3% 16% Female executives Female non-executives Male executives Male non-executives 55% 26% www.barnett-waddingham.co.uk 6
The ages, where available, of Board members surveyed are shown in graph 3.3. We were unable to find information for 53 of the 223 Board members surveyed, and so these have been omitted from the analysis. The youngest and oldest Board members are 34 and 72 respectively with over 75% of the Board members aged over 5. 3.3 - Age of Board members 11% 1% 3% 6% Within most Boards, we found there to be a reasonable spread of age ranges, however on two of the Boards the members were all born within a decade of each other. There may be benefits of having a wide range of ages on the Board; younger members may bring new 21% 13% 18% 71+ 67-7 61-65 56-6 51-55 46-5 41-45 34-4 ideas to the table, especially in terms of marketing and new member engagement, whilst older members may have 27% more experience and a deeper knowledge of the market and the specific firm. www.barnett-waddingham.co.uk 7
We can see from the graph that on the whole, non-executives and executives have served on Boards for similar lengths of time. The majority can be seen to have served for 6 years or less (14 out of 158 non-executives; 42 out of 65 executive directors), with Non-executive Board members found to exhibit a slightly greater spread of length of service than other members. Section B.2.3 of the Code states that any non-executive director serving for more than six years should be subject to particularly rigorous review. Graph 3.4 shows the proportion of executive and non-executive Board members with different lengths of service. The length of service is calculated as complete years up to 31/12/213 of current Board members. A year of service means that those Board members are in their first year on the Board. 3.4 - Length of service of members on Boards Percentage of executives/non-executives 18% Executives 16% Non-executives 14% 12% 1% 8% 6% 4% 2% % 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18+ Years of service on Board (as at 31/12/213) www.barnett-waddingham.co.uk 8
Most Boards have an qualified actuary or accountant. 11 out of 26 Boards have both, whereas we only found 3 which had neither. We found 1 Mutuals had no actuary on their Board. Despite being a more subjective measure, the skillsets of Board members are still interesting to investigate. We analysed skills by category including: actuarial, accounting, legal, insurance, audit, compliance, general financial knowledge, sales and marketing expertise, Mutual specific (such as teachers, farmers or police officers), and others. Because of the subjective nature of this analysis we have not included our results, however we note that Board members were found to display a wide range of skills, and Boards themselves often have a diverse spread of expertise. The most common skills found included insurance, actuarial, and accountancy, highlighting the strong financial backgrounds of members. Section B.1 of the Code states that the Board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively. EIOPA s guideline 11 requires Boards to collectively possess appropriate qualification, experience and knowledge about: insurance and financial markets business strategy and business model system of governance financial and actuarial analysis regulatory framework and requirements Determining whether a Board member possesses a certain skill is a subjective exercise and is reliant on whether sufficient information is provided in the profiles included in firms annual reports. Instead we have focussed primarily on formal qualifications as an objective measure. Graph 3.5 shows how many Boards have at least one member holding various formal qualifications. 3.5 - Formal qualifications of Board members Number of Boards where at least one member has the qualification 2 18 16 14 12 1 8 6 4 2 Qualified actuary Chartered accountant Qualified solicitor Chartered director Chartered insurer Chartered marketer Qualification www.barnett-waddingham.co.uk 9
3 Board activity Section B.3 of the Code states that all directors should be able to allocate sufficient time to the company to discharge their responsibilities effectively. Part of this time requirement means attending meetings of the Board and its sub-committees. Graph 4.1 shows the number of Board meetings held by the Mutuals in 213. 4.1 - Number of Board meetings held in 213 The average number of Board meetings held by the Mutuals in 213 is 9, although some met quarterly and two met a staggering 14 times! All Boards had good attendance at their Board and committee meetings; with only two falling below 9% attendance during 213. Number of Boards 5 4 3 2 1 4 5 6 7 8 9 1 11 12 13 14 Number of Board meetings www.barnett-waddingham.co.uk 1
The majority of Mutuals had risk, audit, remuneration, nominations and with-profits committees (if applicable), although some Mutuals incorporated several of these together, encompassing the role of the individual committees involved. Where Mutuals have combined sub-committees we have shown them in graph 4.2 as having both (e.g. many Mutuals combine their risk and their audit committees). Incorporating many committees in to one is efficient, yet may risk dominance from a strong personality on the Board or a lack of focus. On average, Mutuals have 5 different committees. Less than two thirds of Mutuals have an investment committee. To some degree the presence of an investment committee depends on the size of the Mutual: on average those with an investment committee were more than three times larger (by measure of assets held by the Mutual) than those which lacked an investment committee. Principle A.2 of the Code states There should be a clear division of responsibilities no one individual should have unfettered powers of decision. SYSC 2.1.1 of the PRA Handbook states A firm must take reasonable care to maintain a clear and appropriate apportionment of significant responsibilities among its directors and senior managers in such a way that: it is clear who has which of those responsibilities; and the business and affairs of the firm can be adequately monitored and controlled by the directors, relevant senior managers and governing body of the firm. Sub-committees are an important part of the way most Boards are run, allowing for the clear division of responsibility suggested by the Code, and enabling members with the relevant expertise to focus their attentions without taking up the time of the entire Board. Boards delegate the responsibility to investigate matters to committees, but retain overall responsibility for any decisions made. Graph 4.2 shows the committees of the 26 Mutuals. 4.2 - Types of committee Percentage of Mutuals with the committee 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Risk Audit Investment Remuneration Nominations With-profits* Other** Committee * Shown as a % of those Mutuals with with-profits funds ** Other committees include Compliance, Membership, Marketing, Finance, Corporate Governance and Treating Customers Fairly. www.barnett-waddingham.co.uk 11
There appears to be a tendency that as the number of committee meetings increase so does the number of Board meetings. One might think that the more the committees meet the less need there is for the Board as a whole to meet, however it seems more likely from this graph that the more time the committees meet the more there is for the Board to discuss. Also, more committee meetings could indicate that a lot is currently going on with that firm for the Board to consider. The majority of Board members attend between 1 and 2 meetings per year, but there is a very wide range. The Board members that attend 3+ meetings per year sit on most, if not all of the committees of a particular Mutual and are dominated by non-executive members. There is a risk that in sitting on all of the committees a Board member could find themself with too broad a focus, however the PRA Handbook does recognise in SYSC2.1.2 that the role of a non-executive director in a Mutual may be extensive. Graph 4.3 shows the number of Board meetings against the number of committee meetings for each Mutual, and graph 4.4 shows the total number of meetings attended by the Board members of Mutuals. 4.3 - Number of Board meetings vs number of committee meetings Number of committee meetings 5 45 4 35 3 25 2 15 1 5 2 4 6 8 1 12 14 16 Number of Board meetings 4.4 - Number of meetings attended by all Mutuals Board members Number of Board members 14 Executives 12 Non-executives 1 8 6 4 2-1 1-2 2-3 3-4 45-5 5-6 Total number of meetings attended www.barnett-waddingham.co.uk 12
4 Remuneration In this section we look at two of the trends which appear to drive remuneration; the size of the Mutual and the number of meetings attended by Board members. There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. Principle D.2 of the Code states there should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. EIOPA s guideline 9 is set to ensure that remuneration arrangements do not encourage risk taking or threaten the ability to maintain an adequate capital base. Additionally, guideline 1 states that companies should ensure the composition of the remuneration committee enables it to exercise a competent and independent judgement on the remuneration policy and its oversight. Graph 5.1 shows the relationship between the average remuneration of a nonexecutive Board member and the size of a company, measured by its assets. 5.1 - Relationship between average non-executive remuneration and assets held 1 6 Average remuneration s 9 8 7 6 5 4 3 Assets Remuneration 5 4 3 2 Assets of company m 2 1 1 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 19 2 21 22 23 24 25 26 Company index www.barnett-waddingham.co.uk 13
There appears to be a relationship between the average non-executive remuneration and the assets that a Mutuals holds: the 5 largest Mutuals pay the 5 highest averages to their non-executives, and 12 of the 13 smallest Mutuals pay the smallest average amounts. This scale is dominated by a few larger Mutuals so to analyse what is happening at the smaller end we have capped the scale in graph 5.2: 5.2 - Relationship between average non-executive remuneration and assets held Average remuneration s 1 6 Assets 9 Remuneration 5 8 7 4 6 5 3 4 2 3 2 1 Assets of company m 1 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 19 2 21 22 23 24 25 26 Company index Based on this graph we can see that the size of a company still has some impact on the average remuneration per meeting, although the relationship is less clear. 7 of the 13 largest Mutuals pay above the average remuneration of about 1,9 per meeting, compared to 5 of the 13 smallest Mutuals. However, we thought it might be the case that the largest Mutuals are also the busiest, and hence the apparent higher remuneration could be caused by Boards at these Mutuals meeting more frequently. To look at this in more details, graph 5.3 shows the relationship between the average non-executive remuneration per meeting against asset size, with the asset scale capped as before. 5.3 - Relationships between average non-executive remuneration per meeting and assets held 6 6 Assets Average remuneration per meeting s Remuneration 5 5 4 4 3 3 2 2 1 1 Assets of company m 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 19 2 21 22 23 24 25 26 Company index www.barnett-waddingham.co.uk 14
It can be seen in graph 5.3 that there is a very slight general trend that the more meetings attended leads to a higher remuneration, rewarding Board members for the time and effort put in. There are a few nonexecutives who are remunerated significantly more than the average of 1,9 per meeting, with the highest remunerated non-executives earning more than 1, per meeting attended. The Code recognises that levels of remuneration should be sufficient to attract and motivate directors of the required quality. Graph 5.4 shows how non-executive remuneration varies with the number of meetings that they attended. 5.4 - Relationships between non-executive remuneration and meetings attended Meetings attended 6 5 4 3 2 1 2 4 6 8 1 12 14 16 18 Total remuneration s www.barnett-waddingham.co.uk 15
5 Board Evaluation Some Boards appear to be far more thorough with their self-evaluation. In this section we take a look at how Boards report the evaluation of their own performance. For 4 of the Mutuals we looked at we could find no evidence of how the Board, committees or directors had been reviewed; Some companies are far more thorough with the documentation of their reviewing processes not given in some cases, despite individual review of Board members being important to customers. Boards should state in the annual report how performance evaluation of the Board, its committees and its individual directors has been conducted (Code reference B.6.1). Graph 6.1 shows the percentage of Board members in each position who were individually reviewed in 213. 6.1 - Who was individually reviewed in 213 Number of Boards 5 1 15 2 25 Chief executive officer 81% Other executive directors 77% 5 of the 26 Boards did not report a performance evaluation of the chairman by the nonexecutive directors. Chairman Non-executive directors 81% 85% 16 of the 26 Boards reported having had an independent review in the last 3 years. Independent Board evaluations are a way to assure the customer that their Board is performing to the best of its ability. This is especially important in Mutuals, where the customer is the sole purpose of the company. Non-executive directors, led by the senior independent director, should be responsible for performance evaluation of the chairman, taking into account the views of the executive directors (Code reference B.6.3). www.barnett-waddingham.co.uk 16
However there are 4 Mutuals which satisfy the size criteria but failed to report an external Board evaluation. 12 Boards took the extra step of carrying out a skills assessment and subsequently giving targeted training sessions. This helps to ensure that Board members have the required skills to succeed in the roles, and to expand their contribution to the Board. Only 12 of the 26 companies performed in depth interviews of their members with the chairman or Senior Independent Director. Focused development is a large part of the message that the corporate governance code is trying to get across, and so either the reporting of the process or the process itself should move towards thorough interviews of each and every Board member. An aid to this process would be to use questionnaires, which may be worth adopting in order to get the opinion of all members of the Board about the performance of all other members of the Board. This could help ensure that every Board member has the opportunity to give feedback on all aspects of their governance annually. There are various requirements relating to reviewing Board performance which we have extracted from the Code. Performance evaluations are an important part of the ability of a Board to effectively govern; Code reference B.4.2 states that the chairman should regularly review and agree with each director their training and development needs. Graph 6.2 shows how different Mutuals went about reviewing the members of their Boards. 6.2 - How they were reviewed Review method Independent review in last 3 years Questionnaire Interview Skills evaluation/ training sessions Discussion at the end of each meeting No information provided 5 1 15 2 25 4% 19% Number of Boards Board evaluations of FTSE35 companies should be externally facilitated at least every 3 years, and any other connections between external consultants and the company disclosed (Code reference B.6.2). In the case of Mutuals, this has been amended in the Annotated version for Mutual Insurers to mean Mutual insurers with gross premium income of more than 2 million per annum on average over the preceding three financial years or assets of more than 1 million on average at the end of the last three financial years. 42% 46% 46% 62% www.barnett-waddingham.co.uk 17
Every Mutual is different and their Boards will take different approaches to how they are run. However, we hope that this report will stimulate debate as to whether the approach of other Boards may be appropriate for their own. Corporate Governance Report 214 In September 214 the AFM published an overview of compliance with the Annotated Corporate Governance Code; the Code on which we have based much of our analysis. This report showed that the level of compliance with the 27 main principles was 96.8% in 213, up from 91.2% in 212. However the report notes that no AFM member fully complied with all 53 Code Provisions. Nearly two thirds of mutual were able to comply fully with 51 or more of the 53 Code Provisions despite the complications of translating provisions written for a plc to the mutual sector. This high level of compliance should give comfort that the mutual sector is committeed to demonstrating good practice in corporate governance. The report identifies a number of areas for further development: The mutual sector has been relatively slow to adopt annual elections. Some mutuals are slow to adopt a diversity policy and implement measurable benchmarks. There is a need for cost-effective and relevant forms of external Board evaluation for mutuals, as the current process of evaluation is very inconsistent. This is supported by our research in this area where it is often unclear how a Board has been evaluated. There is plenty of scope for more readable commentary on how the company works in the interest of members and how the Board adds value. The clarity and relevance of some explanations relating to Code provisions are limited, and do not always demonstrate how the preferred approach is of benefit to members. www.barnett-waddingham.co.uk 18
We help clients to navigate these complex issues, delivering clear advice and real-world solutions based on our extensive experience of the UK and European insurance sector. Services for insurers These are challenging times for the life and general insurance industries. Volatile economic conditions, low interest rates and the demands of Solvency II and the regulator are placing a strain on existing business models and resources, and emphasising the need for robust risk and capital management and insightful investment strategies. We help clients to navigate these complex issues, delivering clear advice and real-world solutions based on our extensive experience of the UK and European insurance sector. s services for insurers are built around three specialisms: Actuarial services - including core tasks such as reserving, capital management, M&A and pricing. Risk management - implementing risk frameworks, improving governance and delivering clear management information. Investment consulting driving performance improvement through enhancing mandates and governance frameworks We also provide a range of insights on mortality, morbidity and longevity risk for insurers through our specialist longevity consulting practice. We build a bespoke team based on your exact requirements. Our partner-led approach means you will have access to senior knowledgeable consultants who will remain personally involved at all levels of the work. Our growing client base covers a broad range of life and general insurance companies, from niche insurers to FTSE1 firms and global insurers. Keep up to date with the insurance world and our commentary by following our blog: www.barnett-waddingham.co.uk/blog/insurance www.barnett-waddingham.co.uk 19
LLP is the UK s largest independent firm of actuaries, administrators and consultants with seven offices throughout the UK. We were founded in 1989 and offer a full range of services to trustees, employers, insurance companies and individuals. www.barnett-waddingham.co.uk Glasgow Liverpool Leeds LLP is a body corporate with members to whom we refer as partners. A list of members can be inspected at the registered office. LLP (OC37678), BW SIPP LLP (OC322417)), and Barnett Waddingham Actuaries and Consultants Limited (6498431) are registered in England and Wales with their registered office at Cheapside House, 138 Cheapside, London EC2V 6BW. LLP is authorised and regulated by the Financial Conduct Authority and is licensed by the Institute and Faculty of Actuaries for a range of investment business activities. BBW SIPP LLP is authorised and regulated by the Financial Conduct Authority. Bromsgrove Cheltenham Amersham London Actuaries and Consultants Limited is licensed by the Institute and Faculty of Actuaries in respect of a range of investment business activities. October 214 337771