THE ROLE OF DIRECTORS AND CEOs IN CORPORATE GOVERNANCE PRESENTED BY: DR. LAWRENCE S. SIKUTWA ARUSHA - 27 AUGUST 2018
Quote: Good corporate governance ensures that companies use their resources more efficiently, protects minority shareholders, leads to better decision making and improving relations with workers, creditors, and other stakeholders. World Bank, 2006 - Corporate Governance Country Assessment: Zambia. 2
I will briefly talk about governance in the LSA Group of Companies as it relates to Madison General Insurance Company (Z) LTD, (MGen Zambia), MGen Tanzania Insurance Company Limited and Madison Life Insurance Company (Z) Limited as a basis for discussing the role of directors and CEOs in corporate governance. Just a reminder, insurance is a promise and in the words of a certain respected insurer insurance is only but a promise dressed up in clever words, but a promise only has value if it can be delivered. We are discussing governance because it is a mechanism that can deliver that promise efficiently and effectively and hopefully without interruption. 3
As you are aware, the four pillars of corporate governance are: TRANSPARENCY FAIRNESS RESPONSIBILITY ACCOUNTABILITY 4
Definition Corporate governance is the mechanisms, processes and relations by which corporations are controlled and directed - Wikipedia. Corporate governance is the system of rules, practices and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company s many stakeholders such as shareholders, management, customers, suppliers, financiers, government and the community - Investopedia. 5
Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place - www.corpgov.net. The common words are obviously directed and controlled but we also see that the board of directors is responsible for the governance of their companies and that they are responsible for an appropriate governance structure to be put in place. 6
Like in any other organization, members of boards of directors in our group of companies are appointed by the shareholders. To attend to the detailed work of the boards, each board has sub-committees which assist to work through that detail and make recommendations to the main board. Note that sub-committees do not or should not decide but only recommend. Decisions are made by the board. The boards of directors and their sub-committees have charters which define their mandate, authority and responsibilities. The charters also provide for the composition and working procedures of the board and of the committees as well. 7
In appointing board members, we are concerned about diversity because a board made up of people with diverse backgrounds is more effective. This includes gender representation and different skills. Whether they are fit-and-proper persons is a cardinal consideration in appointing people to our boards of directors. 8
What is a fit-and-proper person? As an example, the Hong Kong Guidelines on Fit and Proper Criteria under the Insurance Ordinance (CAP 41) effected on 26 June 2017, determines a fit-and-proper person using criteria including the following: 1. Education or qualifications (knowledge), skills and experience of the person; 2. Person s ability to act competently, honestly and fairly; 3. Reputation, character, reliability and integrity of the person; 4. Person s (past and present) financial status or solvency; 5. Whether any disciplinary action has ever been taken against the person; and. 6. The state of affairs of any other business in which the person is involved in or proposes to be involved in, including group companies. 9
In terms of composition, we also ensure that non-executive directors are in the majority. Typically, we want non-executives to be about two thirds of the Board to ensure that decisions being made are at arm s length. Please also note that our non-executive directors cannot be re-nominated or appointed for more than three (3) terms of three (3) years each. 10
An interesting development is in the Nigerian Code of Corporate Governance for Insurance Companies which provides that no two members of the same extended family can occupy the positions of Chairman and Managing Director/Chief Executive Officer at the same time and all insurance companies are expected to operate independently and be responsible and accountable for the activities of the company irrespective of any relationship with other companies in a group. 11
Our insurance companies all have: An Audit Committee; An Investment Committee; A Technical Committee; and An HR and Remuneration/Succession Committee; Together, the board members deal with the nomination and recommendation for dismissal of board members. So, we do not have a Nominations Committee. In some organisations, there is a separate Nominations Committee. Others deal with nominations in the Executive Committee. We do not have executive committees. 12
The functions and responsibilities of our boards are as follows: Providing strategic direction and leadership to the company and approving budgets, setting performance objectives, ensuring that there are good financial, administrative, marketing, underwriting, reinsurance, claims and investment policies and procedures and overseeing compliance, auditing and the actuarial function. Establishing a comprehensive and well-defined risk management framework or strategy. Selecting and placing fit and proper persons in the general management team, compensating them, monitoring their performance and engaging external service providers where necessary. 13
The functions and responsibilities continued Monitoring the application and effectiveness of the Code of Corporate Governance in their companies. Ensuring compliance with all relevant laws and in particular the Insurance Act and the Pensions Regulations Act as the case may be. Monitoring and managing potential conflicts of interest in the company. Establishing the fundamental values and objectives of the company and therefore the culture of the company. Establishing and overseeing the implementation of a Social, Environmental and Health and Safety Policy. Regular assessment of the company s financial condition, risk profile and solvency position. 14
The functions and responsibilities continued Approve the company s budgets, management accounts and audited financial statements. Approving the Company s organisation structure and changes from time to time Recommending the appointment of the company s external auditors for approval by the shareholders. Appointment of the external actuary. Reporting at least annually to the shareholders. Etc. In carrying out their duties, the board members are expected, individually and collectively to demonstrate independence and exercise objective and impartial judgement. 15
Regarding conflicts of interest and in order to ensure and maintain high ethical standards for the conduct of insurance business you may wish to note that in Nigeria, each director and employee of an insurance company is required to formally disclose to the Board of Directors his/her interest in any: 1. Insurance broking firm 2. Loss Adjusting firm 3. Acturial firm 4. Insurance and/or Reinsurance company 5. Accounting/Taxation/Audit firms 6. Legal firms I suppose that this will be extended to other suppliers of goods and services. 16
Meanwhile, I think that to avoid conflicts related to the control of insurance companies and to protect the interests of policyholders, no insurer should rely on more than a certain percentage of its business on one insurance broker. Vice versa an insurance broker should not place more than a certain percentage of its total portfolio with one insurer. I believe that this is the case in the UK. As you are aware, some brokers will place business with an insurer only because of the size of commission offered rather than the quality of the security. 17
Our boards are responsible for the proper running of the companies they lead and are accountable to the shareholders. In the case of Madison Life, they are also accountable to the participating policyholders. Below each board is senior management. The boards are responsible for appointing senior management comprising the CEO, CFO and Chief Underwriter. Those below this level are appointed by the CEO in accordance with the organization structure and budget, both of which are approved by the board. 18
The responsibilities of management include: Recommend and implement board strategies, policies and decisions and efficiently manage the day-to-day operations of the company. Identify and monitor the key risks facing the company and undertake actions to manage, control or mitigate them. Ensure that an effective risk management and internal control framework is implemented and ensure compliance with applicable laws, regulations and standards. Develop and manage a comprehensive and operationally oriented risk management and internal control system. Establish sound internal governance practices and effective internal organisational structures. 19
Management Responsibilities continued. Establish appropriate compensation systems and incentive structures to promote prudent behaviour consistent with the long-term interests of the company and fair conduct towards consumers and policyholders. Promote effective human resource management including establishing good recruitment and selection policies, training and succession planning. Establish an integrated, firm-wide information and reporting system and monitor the achievement of objectives, strategies, policies and plans approved by the board. We expect our CEOs and key executives to have the necessary competency, skills, expertise and professional experience to direct and manage their companies. We also expect them to be fit-and-proper persons just like the directors on the board. All our CEOs sit on the boards as executive directors. 20
Each Board is also responsible and accountable for instilling a culture of transparency and fairness regarding human behaviours and information flow in the company and dealings with outsiders e.g. suppliers. Important for each Board is that they have a responsibility to ensure that the Corporate Governance Framework is complemented by an effective and efficient solvency framework and that creditor rights are fully enforced in other words, they have a fiduciary responsibility 21
The question of solvency leads us to discuss why an insurance company could fail. In a poor corporate governance environment, insurance companies and any other companies for that matter are bound to fail. Therefore, every board of directors has a duty to prevent this from happening. Remember that the board has a fiduciary responsibility. In their 2010 report, the American Academy of Actuaries noted that 58% of insolvencies in general insurance companies in America were due to underreserving. 22
A comprehensive list of insolvencies is attributed to the following: Inadequate loss reserves (as already stated above). Rapid growth. Fraud. Reinsurance with weak reinsurers. Greedy, cavalier and incompetent management. Catastrophe losses. We can add to the above: Weak regulatory environments (tolerance of weak boards of directors, poor quality management and staff, uneconomic rating including deliberate underpricing, broad unsupported scope of cover, failure to apply a fit-and-proper test, etc, etc). 23
Regarding insolvencies related to management behaviours, a number of questions arise: Is management too concerned with personal comforts? What does market gossip say about the competence and behaviour of management? Is the board independent and does it have good quality directors? What is management s underwriting philosophy? Slash and run? Is the internal structure well designed and managed well? What do the reinsurers and insurance brokers say about management? What do the financial ratios and other quantitatives say about how the company is managed? Are the employees happy? What do they say about management? How does the company s internal and external physical environment look like? Etc, etc, etc. When just one company fails the entire industry will suffer. 24
Good governance can make a difference. Governance supported by management tools such as the Balanced Score-card can make an even bigger difference. Remember that the board and management provide strategic direction. The Balanced Scorecard (BSC) is a strategic planning and management system that organizations can use to: Communicate what they are trying to accomplish e.g. Performance Management. Align everyone s day-to-day work to strategy. Prioritize profits, products and services. Measure and monitor progress towards strategic targets. 25
The BSC aligns Mission, Vision and Strategy by aligning actions with strategic objectives as shown in the slide below: Source: www.balancedscorecard.org 26
Strategic objectives are the continuous improvement activities that must be done to implement strategy. They break-down abstract concepts like mission and strategy into action lists with start dates and completion dates and identify the responsible people who will implement them. Examples: Increase Revenue, Improve Customer Experience, Reduce costs, Eliminate waste, etc, etc. 27
The key perspectives of the BSC are given below: Source: www.balancedscorecard.org 28
Financial Perspective: This perspective takes a view of the organisation s financial performance and the use of financial resources. Customer/Stakeholder Perspective: This perspective views the organisation s performance from the point of view of the customer and other key stakeholders. Internal Processes Perspective: This perspective views organisational performance through the eyes of the quality and efficiency related to the company s products and/or services and other key business processes. Organisational Capacity Perspective (originally called Learning and Growth): This perspective views the organisation s performance through the lenses of Human Capital, Infrastructure, Technology, Culture and other capacities that are key to competitive performance. 29
The BSC allows for strategy mapping to visualize and communicate how value is created by the organization. A strategy map is a simple graphic showing a logical cause-and-effect connection between strategic objectives as shown below: 30
Source: www.balancedscorecard.org 31
If we link Corporate Governance to the Balanced Score-card as shown below, we can create durable, highly competitive insurance organisations which will use their resources more efficiently and will make better decisions as well as achieve improved relations with workers and the outside world including creditors and suppliers. This can only happen if the boards and CEOs are ready and willing to adopt good corporate governance and put the governance into practice effectively. 32
THE SPIDER WEB: PILLARS OF GOVERNANCE IN THE EYES OF THE BALANCED SCORE-CARD FINANCIAL OR STEWARDSHIP FAIRNESS CUSTOMER AND STAKEHOLDER TRANSPARENCY INTERNAL PROCESSES RESPONSIBILITY ORGANISATIONAL CAPACITY OR LEARNING AND GROWTH ACCOUNTABILITY Developed by: L S Sikutwa (Dr) 33
In the LSA Group of Companies, we try to implement the Code of Corporate Governance effectively and we use the BSC for planning, measuring and monitoring progress, effecting the performance management system and as a framework for strategy making. Above all we regard the role of board of directors as providing leadership and monitoring management on behalf of the shareholders and the role of the CEOs as providing managership. Together they provide strategic direction. 34
THANK YOU. 35