National Association of Mutual Insurance Companies

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Board Operations

Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers … and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.1

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Corporate Governance

Board Meetings

Setting the frequency and length of meetings is an important consideration for the board’s leadership. Meeting time will often depend on the complexity of the business and the volume of issues requiring the board’s attention.

There is a trade-off in the costs and benefits of setting meeting times. Longer meetings allow issues to be explored more deeply and viewpoints and perspectives to be given ample time and fewer meetings may be required if meetings are longer. Shorter meetings however, can often be more frequent and allow directors to stay more current and engaged on board issues over time. Sound meeting management practices consisting of a good agenda, starting on time, and focused/disciplined discussion can go a long way toward making board meetings more efficient.

Board Meeting Agenda

Developing an agenda is a critical element of a meeting’s effectiveness and efficiency. Generally the chairman is responsible for the board meeting agenda although many directors believe they should have a say in developing the agenda. For that reason, a process for handling suggestions from directors for agenda items can be a helpful organizational policy. The following subjects are important board matters requiring their attention and often show up on agendas of mutual insurance companies:

  • Corporate performance
  • Strategic Planning
  • CEO Succession
  • Corporate governance
  • Relations with policyholders
  • Change of control
  • Board/CEO relations
  • Compensation
  • Federal and state regulatory compliance 2

Board Qualifications

The specific tasks or competencies of directors help companies identify qualified candidates. In selecting any new director the question should be: How can this individual most contribute to the success of our farm mutual company through decision-making or counsel to our board and management? A variety of factors will influence the selection of a director, including:

Company situation

  • Company size: Is this person familiar with a company of this size and structure?
  • Stage of growth: Is this person familiar with a company with these growth expectations?
  • Financial condition: Would special financial knowledge or experience be helpful?
  • Competition: Would a specific industry background be helpful?

Personal Experience

  • Demonstrated track record in a specific area of needed expertise.
  • Knowledge of the insurance industry or a specific customer market.
  • Successful experience as a corporate director elsewhere.

Personal characteristics

  • Integrity: A high ethical standard in their personal and professional life.
  • Accountability: The willingness to commit the time required for the work of the board and to be responsible, both in taking warranted action and in being held accountable for it.
  • Engagement: The ability to honestly discuss and evaluate management and corporate performance.
  • Judgment: Informed and intelligent decision-making and the potential for good counsel on the range of likely business issues.
  • Financial literacy: Knowing how to read financial statements and how to use financial ratios in an insurance company context.
  • Maturity: A willingness to listen, to be open to the opinions of others, to communicate both persuasively and tactfully.
  • High performance standards: Personal or professional achievements.3

Director Independence

There are generally three categories of directors:

  • Inside – Any director who is a member of the management team running the organization.
  • Outside – Any director who is not currently a member of management.
  • Independent – Any director without a material, direct or indirect, personal financial relationship or interest in the company.

The argument in favor of independent directors is that they are more likely to evaluate matters free from any undue influence or bias in favor of current management. Independent directors can serve as a check on the ‘bias’ that insiders have towards their own internally generated proposals.

However, the presence of insiders on a board also has its advantages. Insiders bring a greater knowledge or awareness of company strengths and weaknesses to board discussions and decisions. Inside directors can also help counter any comparable ‘bias’ that may exist among independent directors who can’t rely on a more intimate knowledge of the company to help make critical business decisions

Financial Literacy

One specific attribute of directors that is increasingly recommended (or required of some companies) is “financial literacy.” The essential definition of financial literacy is the ability to read and understand fundamental financial statements, including a company’s balance sheet, income statement, and cash flow statement. Such literacy helps directors ask management the kinds of questions necessary for the board to perform its oversight role. Perhaps more importantly, financial literacy provides the director with the ability to evaluate management’s response to those questions. This attribute can be especially meaningful for insurance companies who operate in an environment of rather complex insurance accounting and financial regulatory requirements.

Board Selection

Companies often look for candidates with specific backgrounds, skills or experiences that can assist the board in its role and in the company’s development.4 Recruiting superior board candidates requires planning and execution. Generally, the committee or person responsible will want to review the ongoing role and function of the board, the current company situation, the size and present composition of the board, and the specific qualities and skills needed of the new director. A written position description that covers basic responsibilities and expectations is very helpful in recruiting candidate directors.

There is a growing perception that there is a limit to the number of boards on which one person can effectively serve. As time commitments increase for directors, candidates will not be as inclined to accept a board position as quickly as they might have in the past – especially if they are already serving on a board.

Board Orientation and Training

Director orientation can help new directors come to a quick understanding of the unique structure and function of the mutual insurance company. This understanding will assist new directors to more quickly participate in a meaningful way on board issues and give them helpful perspective for important decisions.

Topics for orientation of new board members can include such subjects as insurance industry overviews, mutual insurance principles, company history, company organization and operations, current company strategy, senior staff profiles, significant business risks facing the company, board governance practices (including board member expectations and appropriate policies), and recently discussed key issues or decisions by the board.

Of those companies who recognize the need for board member training, the most common needs cited were: general education or understanding regarding industry issues; better understanding of board duties and responsibilities; education on insurance company financial and accounting issues; corporate governance training; and strategic planning training.

Board Evaluation

Board evaluation is a relatively new idea in corporate governance practice and it is not widespread among companies. The recognized advantages of board evaluations include:

  • Strengthening overall board and individual member performance.
  • Its effectiveness as an audit of current performance and of possible areas of improvement (and a means for comparison/priority of improvement efforts).
  • Raising individual board member performance issues in an objective manner.
  • Regularly reviewing a critical process for peak performance in a business environment of rapid change.
  • Serving as a model/example to all in the company regarding performance evaluation and demonstrating the importance of organizational development based on feedback.
  • Reinforcing the corporate governance responsibilities and objectives of the board and each member.
  • Providing an opportunity for each member to reflect on both overall board and individual director contributions and providing explicit recognition of board success and important contributions from individuals.
  • Answering critics who are expecting or demanding more accountability from the board.
  • Minimizing errors or weaknesses in the governance process that might create public relations or legal issues later.

Overall board performance evaluations generally include the following topics:

  • Board responsibilities.
  • Adequacy and timeliness of information.
  • Appropriateness of meeting agendas and time.
  • Team work of directors./li>
  • Trust, candor, mutual respect, cooperation.
  • Independence of thought.
  • Level of decision-making.
  • Independence of decisions. 5

Individual directors evaluations generally include the following topics:

  • Meeting attendance.
  • Degree of preparation.
  • Active participation in meetings.
  • Ability to communicate.
  • Willingness to listen, openness to ideas.
  • Understanding of company and industry.
  • Independence of thought.
  • Ability to work with directors.
  • Ability to work with management.
  • Independence of decisions. 6

To make such evaluations as effective as possible boards should plan to address some of the following process issues:

  • How to ensure board agreement on and commitment to evaluations.
  • How to establish goals for board and board member performance to use in the evaluation.
  • How to measure or evaluate progress or success.
  • How to address issues of candor, confidentiality, and objectivity.
  • How to formalize the process going forward.
  • How to address any issues or areas of improvement opportunities.
  • How to follow-up to ensure this is a helpful process.

Since board evaluation is a new area for most directors, it should be handled carefully and the process developed cautiously. This often means that boards will begin with just an overall board evaluation and/or individual board member self-evaluations. It may also be helpful for a board to assign responsibility for the board evaluation process to a single board member, or a group of board members, or a committee. This delegation and accountability helps ensure that the evaluation process actually takes place and that it receives the planning and follow-up that it deserves.

Board Compensation

Until recently, board compensation for many mutual insurance companies was not a significant issue. The increasing demands of service placed on directors has, however raised expectations for director compensation. Mutual company director compensation generally takes the form of either cash or non-cash benefits. The compensation provided to directors often consists of one or more of the following:

Cash retainers: Regular fees for board or committee service (separate from meeting fees).

Meeting fees: Fees paid only for attendance at board or committee meetings.

Leadership fees: Fees paid in addition to any of the above for assuming lead director, chairman or committee chairman responsibilities.

Benefits: Travel expenses, access to company benefit programs, event attendance.

A more expanded description of benefits afforded directors of mutual companies includes: health insurance, life insurance, accidental death insurance, disability insurance, retirement plans, spousal travel, matching charitable gift programs, expense reimbursements, and deferred compensation arrangements.

To maintain competitive and purposeful compensation practices, boards can establish specific factors to be used in setting director compensation. These compensable factors can include: attendance at meetings, leadership positions assumed, time spent on board matters outside of meetings, special qualities or skills, etc. If a board wishes to address possible changes in its director compensation it may wish to consider the following issues:

  • What is the right combination of cash and non-cash compensation?
  • How will company performance factor in board compensation, if at all?
  • What compensable factors apply?
  • How will the board transition from its current compensation program to the new one?
  • Who is responsible to review the compensation of directors and recommend changes?
  • What criteria and what input will we use regarding director compensation?
  • How often should director compensation be reviewed?

Board Terms and Retirement

Term limits, and mandatory retirement policies, are governance practices that can help ensure boards have the flexibility to evolve as time passes and new environments arise. These policies clearly communicate to existing and new directors that a board position is not a lifetime appointment. Term limits and mandatory retirement policies also allow the board to recruit and elect new board members with some regularity. These policies can be a way of handling the delicate issues of board rotation for directors who have not stayed current or who have failed to perform for the board as expected.

Conclusion

There is tremendous opportunity in the insurance industry. Perhaps more than ever before the critical capability of the insurance industry to manage risk and enable a robust economy is understood by a number of consumers and policymakers. Just as in the past, the mutual insurance industry is more than capable of meeting these challenges and exceeding all expectations, and improved corporate governance can be a significant enabler in that effort.

Footnotes

1 OECD, Principles of Corporate Governance, April 1999.

2 2001-2002 NACD Private Company Governance Survey, National Association of Corporate Directors (Washington, D.C. 2002) p. 3.

3 Report of the NACD Blue Ribbon Commission on Performance Evaluation of Chief Executive Officers, Boards and Directors, National Association of Corporate Directors (Washington, D.C. 1994, 1995), p. 20. The director experience categories listed are the top six categories according to 2001-2002 Public Company Governance Survey, National Association of Corporate Directors, (Washington, D.C. 2001) p. 34. This list of attributes of directors is compiled from several sources including the Report of the NACD Blue Ribbon Commission on Director Professionalism, 2001 Edition, National Association of Corporate Directors, (Washington, D.C. 2001) p. 11.

4 Michael D. Wagner, Bradford W. Rich and Dan A. Bailey, Corporate Governance of Mutual Insurers and Reciprocal Insurance Exchanges, National Association of Corporate Directors (Washington, D.C. 1998).

5 Richard M. Steinberg and Catherine L. Bromilow, Corporate Governance and the Board – What Works Best, The Institute of Internal Auditors Research Foundation, 2000, p. 74.

6 Richard M. Steinberg and Catherine L. Bromilow, Corporate Governance and the Board – What Works Best, The Institute of Internal Auditors Research Foundation, 2000, p. 74.

Posted: Monday, March 29, 2004 12:00:00 AM. Modified: Friday, September 23, 2005 4:12:24 PM.

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