Livingstone Workshop March 2012 Final

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Commonwealth Workshop on Insurance RegulatorsBoard Responsibility and Oversight

Chrismar Hotel, Livingstone 14/15 March 2012

Principles for Sound Corporate GovernanceMarcus Killick

CEO Gibraltar Financial Services Commission

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Beginnings

The Good News A more detailed version

of the slides will be available on the FSC website (www.fsc.gi)

The Less Good News The is a participative

event. You will have tasks to do!

http://www.fsc.gi/

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Objective of the sessions

The four sessions are designed to provide an overview of the importance and implementation of effective corporate governance within a regulated insurance company.

They will cover:1. Principles for Sound Corporate Governance2. The Role and Function of Boards3. Board Training, Conflict Resolution and

Assessing Board Performance4. Risk Management

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Objective

To allow the boards of insurance companies to consider what they need to do to meet appropriate good corporate governance

processes within their own structure

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Content: Day 1 Session 2

The development of principle based modern corporate governance

International standard requirements for the governance of boards (examples Basel, and IAIS)

The problems with regulatory assessment of good corporate governance

Corporate Social Responsibility Self Assessment Exercise – “Shareholders

and Stakeholders”

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Why the regulatory focus on corporate governance?

Virtually every failure in the current crisis has stemmed from poor corporate governance/Board oversight. e.g.

Lehman Brothers Holdings IncNorthern RockRBSMF Global

Poor oversight can lead to poor compliance and reputational risk for the jurisdiction

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Why the regulatory focus on corporate governance?

“ But ultimate responsibility for poor decisions must lie with the firm, and the pattern of poor decisions which RBS made suggests there are likely to have been underlying deficiencies in RBS’s management, governance and culture”

“The failure of the Royal Bank of Scotland” (FSA Board Report)

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The development of principle based modern corporate governance

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Principle based V Rule based governance

A rules-based approach

makes it easy for a regulatory body to police corporate governance and penalise those who do not comply but, it is seen as presenting a rigid approach to governance that emphasises box-ticking and penalties for non-compliance. An example of this is Sarbane Oxley in the USA.

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Principle based V Rule based governance

A principles-based approachis seen as providing greater flexibility. Principles can be modified and improved over time and are less cumbersome.

principles are easier to create principles are easier for users to understand flexibility applies to all companies using the principles

regardless of the size or nature of the business companies are better placed to respond to market

conditions enabling them to improve their competitiveness and to be more enterprising

it encourages greater levels of co-operation between companies and regulators.

The main drawback of a principles-based approach is that it does not provide a clear set of 'dos and don'ts' for companies to follow. As a result, unscrupulous boards may interpret the principles in ways that distort the common-sense meanings underpinning the principles.

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The UK model : principle based with statutory backing

PrinciplesThe Hampel Committee formally established a principles-driven approach to corporate governance. The Hampel Report stated that:

“Good corporate governance is not just a matter of prescribing particular corporate structures and complying with a number of hard and fast rules. There is a need for broad principles. All concerned should then apply these flexibly and with common sense to the varying circumstances of individual companies.”

Comply or explain Since the Combined Code was first established in 1992, a comply-or-explain approach has been allowed. A company is required to either comply with the principles and provisions of the Code or explain and justify why not.

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Statutory – Companies Act 2006

Codifies the key directors duties with a view to reflecting in statute the position under the common law and equitable principles but with some significant changes.

Key elements: Duty is owed to the company and only the company is able to

enforce them (members can, in certain circumstance, bring action on the companies behalf);

A director has the following duties: Act within powers; Promote the success of the company; Exercise independent judgement; Exercise reasonable care, skill and diligence; Avoid unauthorised conflicts of interest; Not to accept benefits from third parties; Declare interests in proposed transactions or arrangements

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Other legislation affecting directors in the UK

Competition laws Health and safety Corporate manslaughter Bribery

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International standard requirements for the governance of boards (examples Basle, and

IAIS)

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International standard requirements 1) Basle “Core Principles for Effective banking

Supervision” (Principle 14) –

Corporate governance: “The supervisor determines that banks and banking groups have robust corporate governance policies and processes covering, for example, strategic direction, group and organisational structure, control environment, responsibilities of the banks’ Boards and senior management, and compensation. These policies and processes are commensurate with the risk profile and systemic importance of the bank.”

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International standard requirements 2) IAIS “Insurance Core Principles” (Principle 7) –

Corporate Governance“The supervisor requires insurers to establish and implement a corporate governance framework which provides for sound and prudent management and oversight of the insurer’s business and adequately recognises and protects the interests of policyholders.”

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It is subjective involving both quantitative and qualitative information

Board policies and procedures can be assessed;

Board papers and board minutes can be reviewed;

Frequency of board meetings can be checked;

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BUT Board behaviour cannot be objectively

measured; Inappropriate shareholder influence cannot

be seen (The Board leads the company NOT the shareholders)

THEREFORE The role of the NED is vital to ensure the

board operates effectively Accordingly the regulator encourages the

appointment of NEDs and especially independent NEDs

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Corporate Social Responsibility

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Corporate Social Responsibility (CSR)

In “The Human Face of the New Capitalism” (2009), Howard* identified four different levels of CSR

Level 1 EconomicThis involves maximising returns for the company. However managers are responsible for operating within the rules of the game, i.e. competing fairly within the marketplace, forbidding monopolies and predatory market practices

Level 2: LegalHere, managers show a commitment to comply with the relevant laws. They comply with the letter of the law even when it is costlier to do so. An example is not hiring illegal labour at substandard wages

.

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Corporate Social Responsibility (CSR)

Level 3: EthicalHere, managers and directors show concern for what is right or good for stakeholders. Managers don't just comply with the letter of the law, but also with the spirit of the law. In addition, they take responsible actions where there are gaps in legal provision (eg by introducing anti pollution systems well above that legally required.

Level 4: DiscretionaryManagers and directors voluntarily take actions to improve society. Such actions may not be related directly to the company's normal operations. Directors and managers recognise that they control resources that can be used for the wider benefit of society. An example of this is the creation of the Ronald McDonald Houses in 25 countries. These provide free accommodation for parents of sick children who are in hospital, so that they can be near to their child. It has helped more than 10 million people worldwide.

Many believe that compliance with levels 1 and 2 should be taken as given as a basic requisite of social responsibility and is expected of any firm by the public

*”Does corporate social responsibility affect consumer behavior”.

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Self Assessment Exercise – “Shareholders and Stakeholders”

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Self Assessment Exercise 1 – “Shareholders and Stakeholders”

Each board has a range of groups to whom they are accountable or who are, in some way, stakeholders who have an interest in the good running of the firm.

Exercise: Who are your stakeholders? What interest do they have? Do some have priority, if so, which? Are those interests competing/conflicting? If so, how do you manage that conflict? To what extent do you engage in corporate social

responsibility?

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Livingstone March 2012

The Role and Function of BoardsMarcus Killick

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Content Day 2 Session 1

Role of the Board Board Committees Role of the Chairman Chairman and Chief Executive Executive and Non Executive Members Behaviour on the Board Self Assessment Exercise (behaviours and

attributes of the Chairman)

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Role of the Board

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Role of the Board

: Leads and controls the company; Increases shareholder value; Safeguards the interests of the

stakeholders; Makes policy; Approves the corporate objectives; Sets the strategy to achieve the corporate

objectives;

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Role of the Board

Critically monitors and assesses the achievement of those objectives and amends the strategy as appropriate;

Decides on the allocation of resources among competing interests;

Ensures that the organisation conducts its affairs in an ethical, legal and responsible manner;

Establishes formal and transparent arrangements for presenting the company's annual financial report with a balanced and understandable assessment of its position and prospects;

Reviews the effectiveness of the company's system of internal control; and

Has a role to monitor the standing of the organisation in the business and the wider community.

In essence these boil down to Strategy, Policy making, Decision taking and Oversight

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Strategy

Strategy is the direction or focus an organisation chooses to create the optimal balance between its internal strengths and weaknesses with the external threats and

opportunities presented by the environment in order to achieve the organisation’s

objectives.

It is an ongoing process

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Policy making

Policies define focus and differentiate responsibilities among the Board and the Executive. “Well-written policies lead to more efficient board functioning. Instead of having the same matter or very similar matters on the agenda repeatedly, the board can develop a policy that covers the issue and leave implementation of the policy to management.”

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Decision making

Decision making involves making choices about the organisation's vision, mission, and strategies. Boards make decisions about issues that are strategic and significant, such as whether to enter an agreement with another organisation. As decision makers, boards can also delegate non governance types of decisions to others.

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Oversight

Oversight is an important function, but boards must remember that the organisation is theirs to oversee, not to manage. Some boards cross the line and try to involve themselves in management. The NED’s role is to see that the company is properly run, not to run it themselves.

Nevertheless, in the oversight role, the board is legally responsible for everything that happens.

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Board Committees

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Board committees

Play an important role in the governance process. It is useful to periodically review the structure and functions of the committees and to ensure that everyone knows what to expect from them.Committees generally include:

Audit;Remuneration;Nomination;Risk.

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Board Committee roles Audit committee

Review accounting principles, policies and practices

Ensure all financial statements follow accounting practice and give an accurate representation of the companies situation

Scope, examine and follow up audits (especially on controls)

Develop and monitor internal audit Consider the appointment and

remuneration of auditors Should consist of non executive directors

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Board Committee roles Remuneration committee

Approve service contracts for executive directors (and senior management)

Recommend to the board the remuneration for executive directors and senior management

Review and recommend employee share schemes Review pensions Approve arrangements for retirement or

termination Chairman of the board (if independent) may be a

member but not chair

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Board Committee roles Nominations committee

Formal and transparent process for the appointment of new directors

Recommend appointments to the board Should consist of a majority of non

executive directors

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Frequency of meetings

All directors should be able to allocate sufficient time to the company to discharge their responsibilities effectively.

It is not always desirable to set fixed time commitments for board duties as the company believes that the time required by directors may change depending on business events

In 2010, PricewaterhouseCooper's 'Non-executive director survey' showed that during the year the typical time commitment for non-executive directors had risen by an average of four days per year (because of the uncertainty in the economy) and that it is estimated that non-executive directors in FTSE 100 companies spend 24 days per year performing their role.

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Frequency of meetings

Walker recommended that for the boards of major banks a letter of appointment should stipulate a minimum time commitment of 30-36 days per year.

The Board is also a social grouping therefore to build trust and confidence amongst its members consideration should be given to the use of board dinners etc and time allocated for these.

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Role of the Chairman

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Role of the Chairman

To lead the board in the determination of its strategy

Ensure the board has adequate information to perform its role

Ensure effective relationships are maintained with all major stakeholders

Runs the board to allow the Chief executive to run the company

Ensures right and common values

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Chairman and Chief Executive

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Chairman and Chief Executive

Should be seperate The chairman runs the board, the chief

executive runs the company The roles of the chairman and chief

executive should be separated The division of responsibilities between the

chairman and chief executive should be set out in writing and agree by the board

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Executive and Non Executive Members

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Executive and Non Executive Directors

There is no distinction between the position of executive and non executive directors. If a breach of duty is to be attributed to a board on the basis that all of its members were present at a meeting which had approved a wrongful act, then the liability of each director is joint and several and no allowance is made for the fact that some are part timers and may have acquiesced in a situation which they did not fully understand

Re Lands Allotment Co. (1894) 1 Ch 616 63 LJ Ch 291 CA.

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The role of the NED

“Essentially, the non-executive director's role is to provide a creative contribution to the board by providing objective criticism. Non-executive directors are expected to focus on board matters and not stray into 'executive direction' thus providing an independent view of the company that is removed from day-to-day running.

Non executive directors, are appointed to bring the following to the board:-

Independence;Impartiality;Wide experience;Special knowledge;Personal qualities.”

Institute of Directors

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The effective NED

“Non-executive directors should:Scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance. Satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible. Be responsible for determining appropriate levels of remuneration of executive directors and have a prime role in appointing and, where necessary, removing executive directors, and in succession planning.”

The UK Corporate Governance Code

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Personal Attributes of the Effective Non- Executive Director

The NED role is complex and demanding and requires skills, experience, integrity, and particular behaviours and personal attributes

Integrity and high ethical standards – these are a prerequisite for all directors

Sound judgement and an inquiring mind. NED’s should:question intelligently;debate constructively;challenge rigorously; anddecide dispassionately

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Independent Non-Executive Director

The following characteristics are indicative of an independent NED:

The individual is not an employee of the company or another company in the same group;

The individual is not a professional advisor to the company;

Individual is not a supplier or customer of the company; The individual does not have a family connection with

someone in the business; The individual’s directorship is for a fixed term and

accordingly he is less likely to be motivated by self-preservation when taking decisions;

The individual does not depend so heavily on his remuneration from the company as to make resignation difficult.

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Dealing with NEDs’

NEDs need to be well informed about the company, and the need to insist upon a comprehensive, formal and tailored induction to the company on appointment

NEDs should be adequately compensated for the time that they spent on the company’s business. Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully.

The term of an NED should generally be fixed, albeit subject to renewal for a further term. It is important to recognise that the nonexecutive directors' effectiveness is likely to improve with cumulative experience and knowledge of the company.

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Discussion 1Your firm and Corporate Governance

How does your firm apply corporate governance?

Are there non executive directors and, if so, are they independent?

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Board Behaviour

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Boardroom Behaviour

Historically given inadequate consideration in corporate governance now rising in profile. For example, the Walker report states:

“Boards and board behaviour cannot be regulated or managed through organisational structures and controls alone; rather behaviour is developed over time as a result of responding to existing and anticipated situations”.

(Annex 4 “Psychological behavioural elements in board performance”)

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Boardroom Behaviour

“Appropriate behaviours are an essential component of best practice corporate governance; and that the absence of guidance on appropriate boardroom behaviours represents a structural weakness in the current system.”

The Institute of Chartered Secretaries and Administrators (ICSA)

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Boardroom behaviour

Appropriate board behaviour can be defined as functioning in accord with the board's roles and responsibilities.

The first key characteristic is respect—for the organization, the management the employees, and other members of the board. Respect is basic, but it doesn't always exist.

Respect leads to two additional behavioural characteristics that are needed: openness in the board discussions and confidentiality.

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Boardroom behaviour

Conflicts of interest also fall in the category of behaviour. “There's no evil in conflict of interest; the evil lies in the hiding of it”. All boards need to have a policy about conflict of interest. Usually this policy requires all members to disclose potential conflicts and to abstain from voting on such matters.

Another behavioural element is distinguishing between the important and the unimportant. The board has limited time. If it spends hours and hours on trivial matters, it won't be able to address significant and strategic matters.

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Boardroom behaviour

Effective working groups, including boards, require trust and respect. Mutual respect, equality, patience, tolerance of differences, listening with respect and without interrupting, are all required to create a culture of constructive challenge.

Failure to achieve this, however successful the board may be been historically, is an almost inevitable sign of problems ahead. Boards with an over dominant CEO and/or a weak Chairman have been a prime cause of the sudden collapse of seeming successful companies ( eg Maxwell, Goodwin, Ken Lay). Still evidence that boards seek to avoid conflict

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Boardroom behaviour - traps

Confirmation bias Framing Group think Halo-effect One-sided brain dominance Pattern-recognition bias

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Boardroom behaviour - traps

Ineffective situation analysis Premature solutions Saliency bias Stability bias Sunflower management Technical solutions to adaptive challenges Cognitive outsourcing

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Can you fall into a trap?

Imagine that a factory in Livingstone is about to shut which has 600 worker. Two alternative programs to deal with the situation have been proposed..

Program A: "200 people’s jobs will be saved"

Program B: "there is a one-third probability that 600 jobs will be saved, and a two-thirds probability that no jobs will be saved"

Which programme do you go for?

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Can you fall into a trap?

Two more alternativess have been developed:

Program C: "400 people will lose their jobs" Program D: "there is a one-third probability

that nobody will lose their job, and a two-third probability that 600 people will"

Which do you go for?

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Boardroom behaviour - Achieving productive disagreement

“So if we are all in agreement on this decision – then I propose we postpone further

discussion on this matter until our next meeting to give ourselves time to develop greater disagreement, and perhaps to gain some understanding of what the decision is

all about”

Alfred P SloanGeneral Motors

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Right brain

feelingbig picture orientedimagination rules

present and futurepresents

possibilitiesconceptualrisk taking

Left brain

logicdetail oriented

facts rulepresent and past

reality basedpractical

safe

Reference: I.McGilchrist, 2009

Board behaviour depends partially on understanding board member differences

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What can board behaviour help to do?

Help directors to understand cognitive styles, thinking preferences and decision speeds.

Teach boards to understand the thinking traps of working in groups and to recognise the typical situations in which they occur.

Use thinking process to help boards develop the conditions for a thinking board and a thinking organisation to evolve.

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Self Assessment Exercise (behaviours and attributes of the Chairman)

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Self Assessment Exercise 2 - Behaviours and attributes of the Chairman

What behaviours and attributes should a good Chairman possess?

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Behaviours and attributes of the Chairman*

Personal attributes Integrity and high ethical

standards Strong cognitive abilites Long term perspective and

a sense of purpose Personal authority and

presence No ego Emotional intelligence Change orientated Resiliant

Behaviours Enabling openness Listener, empathetic Builds trust Facilitating interaction Strong, clear

communicator Conceptually agile – opne

minded, encouraging of debates, able to challenge

*Non Executive Chairman Awards 2006

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Livingstone March 2012 February 2012

Board Training, Conflict Resolution and Assessing Board Performance

Marcus Killick

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Content : Day 2 Session 4

Board training and development Handling conflicts of interest Board conflict resolution Assessment

Assessing effectiveness of: the Board as a whole the ChairmanOther Board MembersBoard Committees

Methods of assessment Which style to chose?

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Board training and development

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Board training and development

The Combined Code requires that: “All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge.”

The chairman has a responsibility to ensure that directors continually update these skills and knowledge, as well as to develop familiarity with the company.

The company is required to provide ‘the necessary resources for developing and updating its directors’ knowledge and capabilities'.

The chair is required to regularly review with each director their training and development needs.

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Induction training

Areas to cover: General information relating to the organisation General health and safety (HR matters, fire exits,

toilets etc) Brief outline of their role and a summary of their

responsibilities Guidelines on delegated authority, policies and

procedures The firms history/strategy/mission statement The firms business plan/budgets/risk management

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Induction training

Organisation Chart Copy of the Annual Report (last 3 years) Board issues

Minutes of last Board meetings (last 3-6) Schedule of dates of future board meetings and sub committees Board policies and procedures Relevant legislation the Board member should be aware of Outline of the combined code and how the firm adheres to it Details of all board members (biographical and contact details) Details of sub committee together with their terms of reference

and copies of meeting minutes if they are joining a sub committee.

Conflicts of interest Consider mentoring

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Continuation training

Training is not a one off exercise. Boards must keep themselves up to date with: New products or services Changes in auditing and corporate governance Changes in the firms internal processes and

procedures

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Handling conflicts of interest

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Handling conflicts of interest

“There's no evil in conflict of interest; the evil lies in the hiding of it”.

Gibraltar FSC approach:

Board has a conflict policyDay to day licensing and enforcement decisions are delegated to the Executive so removing potential conflict issues for board members in the local industry.Board papers are redacted where appropriate to remove firm/individual namesAll enforcement cases are reviewed by the Chairman with redacted information going to the BoardAll entertainment and hospitality by/to Executive recorded. CEO reviews Executive, Chairman reviews CEOPrior approval required for certain entertainment/hospitality (eg from applicants)Procedures in place for other conflicts (eg where there are personal relationships with a licensee)Political involvement/public statements also subject to policy

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Board conflict resolution

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“ Politics in organisations is ever present, no matter who you are, or what you do, it is impossible to escape the power/political

interactions that take place between people at work.”

Professor Lyman PorterUniversity of California

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Five conflict resolution behaviours*:

Competing Collaborating Compromising Accomodating Avoiding

Each have strengths and weaknesses in dealing with conflict. It is important to understand your and others style to achieve resolution

*Thomas Kilman Conflict Mode

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Competing

Characteristics Individual pursues own concerns at others expense Uses power to win

Uses Quick decisive action Implementing unpopular actions To avoid being manipulated

Sample statements Do as you are told I’m sure mine is the best way I am not prepared to change my position

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Collaborating

Characteristics Individuals attempt to work with other person to find a solution

that satisfies both their concerns Working with others to solve problems

Uses To merge insights from people with different perspectives To find solution where both sets of concerns are too important

to compromise

Sample statements Let’s work this out together Let’s find some common ground Where do we differ?

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Compromising

Characteristics Mutually acceptable solutions under pressure A back up style when collaboration is unsuccessful

Uses When goals are only moderately important When opponents with equal power are committed to mutually

exclusive goals

Sample statements Let’s be satisfied with I suggest we meet half way Let’s both come away from this with something

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Accommodating

Characteristics Individuals neglect own concerns to satisfy the concerns of the

other person Obeying others when you prefer not to

Uses When you find you are wrong, to allow a better position to be

heard To maintain cooperation To build “credit” for later use

Sample statements I concede that point I don’t want to offend you What is you preferred outcome?

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Avoiding

Characteristics Does not address the conflict Postpones Withdraws

Uses When situation trivial or more important issues pressing When potential damage of confrontation outweighs benefit of

resolving issue Lets people cool down and regain perspective

Sample statements Let’s talk about this later I’m not in a position to discuss

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Differences in the boardroom

Task DifferencesTask Differences

Relationship Relationship differencesdifferencesProcess DifferencesProcess Differences

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Differences in the boardroom

Task differencesDifferences in views and opinions in what is to

be done by the organisationPositive (to a point)

Process differencesDifferences in views and opinions in how

the work of the board gets done Can be negative

Relationship differencesDifferences between board members of a

personal and emotional natureNegative

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Constructively handling task differences

Do not be internally conflicted. Challenge is a board members role

Be prepared. Make sure you have the information you need to challenge effectively

Maximise you distinctive contribution. Use your expertise, knowlledge, perspective and experience

Focus on date and logic. Not on positions and personalities

Speak sparingly but powerfully

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Handling relationship differences

Check your contribution first. Am I causing or exacerbating the problem? Could I be misunderstanding the other person?

Use the Chairman. Managing conflict is their role

Check with other board members. Do others share your concerns?

Talk to the other person Seek external mediation

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Board assessment

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Board Assessment

“It is best practise that the performance of the board as a whole, of its committees and of its members, is evaluated at least once a year... Companies should disclose in their annual report whether such performance evaluation is taking place.”

The Review of the role and effectiveness of non-executive directors 2003 ( the Higgs Review)

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Assessing the effectiveness of the Board as a whole

Has the board set itself clear performance objectives and how well has it performed against them?

What has been the whole board’s contribution to the testing and development of strategy?

What has been the board’s contribution to ensuring robust and effective risk management?

Is the composition of the board and its committees appropriate with the right mix of knowledge and skills sufficient to maximise performance in the light of future strategy?

Are inside and outside board relationships working effectively? There may, for example, be problems getting the optimum level of interaction between non-executive and executive directors. Lack of contract between meetings and sometimes lack of understanding of the role of the non-executives (particularly in smaller companies) are both contributors to this. Occasionally, where a small caucus of key directors gets on particularly well, the non-executive directors can feel cut out- this requires particular attention to be paid to the provision of appropriate and timely information.

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Assessing the effectiveness of the Board as a whole

How has the board responded to any problems or crises that have emerged and could or should they have been foreseen?

Are the matters reserved for the board the right ones?

What is the relationship between the board and its main committees and between the committees themselves?

How well does the board communicate with the management team, company employees and others? How effectively does it use mechanisms such as the AGM, the business review and the annual report?

Is the board as a whole up to date with latest developments in the regulatory environment and the market?

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Assessing the effectiveness of the Chairman

Is the chairman demonstrating effective leadership of the board?

Are relationships and communications with shareholders well managed?

Are relationships and communications within the board constructive?

Are the processes for setting the agenda working? Do they enable board members to raise issues and concerns?

Are all directors allowed or encouraged to participate fully in board discussions?

Is the company secretary being used appropriately and to maximum value?

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Assessing the effectiveness of other board members

The Institute of Chartered Secretaries and Administrators (ICSA) suggests that key questions that need to be answered through an individual evaluation process, include:

How well prepared and informed are they for board meetings and is their meeting attendance satisfactory?

Do they demonstrate a willingness to devote time and effort to understand the company and its business and a readiness to participate in events outside the boardroom, such as site visits?

What has been the quality and value of their contributions at board meetings?

What has been their contribution to development of strategy and to risk management?

How successfully have they brought their knowledge and experience to bear in the consideration of strategy?

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How effectively have they probed to test information and assumptions? Where necessary, how resolute are they in maintaining their own views and resisting pressure from others?

How effectively and proactively have they followed up their areas of concern?

How effective and successful are their relationships with fellow board members, the company secretary and senior management?

Does their performance and behaviour engender mutual trust and respect within the board?

How actively and successfully do they refresh their knowledge and skills and are they up to date with: the latest developments in areas such as corporate governance framework and financial reporting the industry and market conditions?

How well do they communicate with fellow board members, senior management and others, for example shareholders. Are they able to present their views convincingly yet diplomatically and do they listen and take on board the views of others?

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The benefits of individual evaluation

evaluation makes it possible to identify directors who are underperforming using a clear set of criteria that are appropriate to a particular company

establishing evaluation criteria helps individual directors to focus on areas that are regarded to be important in organising their work

providing feedback to directors on their performance enables them to identify what they are doing well, and also areas where they can make improvement

as with any form of appraisal, individual director evaluation makes it possible for the director working with the chair to identify training and development targets

a number of surveys have shown that in the USA, Europe and elsewhere, that in companies in which evaluation of individual directors takes place:

the directors rate the effectiveness of the board more highly than is the case in companies without such an evaluation process

the investors rate the effectiveness of the board more highly.

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The main criticisms of individual evaluation are that: it can be seen as a threat to the collegiality among directors,

when the performance spotlight is directed at individuals it works against the notion of consensus and working together directors are chosen because of their proven track record,

skills and ability. Therefore, to assess their performance is to question these abilities

some talented directors may be discouraged from putting themselves forward if they have to be continually evaluated

concerns about who should do the evaluation. Directors actually spend a relatively limited time together – so are they equipped to judge each others performance given the evidence available?

individual evaluations may encourage board members to compete against each other rather than work as a team.

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Assessing the effectiveness of Board Committees

Does each board committee have adequate and appropriate written terms of reference?

Is the volume of business now handled by the committee (particularly the audit committee set at the right level?

Does the committee work in an ‘inclusive’ manner or has it, for example, resulted in executive directors not involved in the respective committee feeling distanced from those matters covered by the committee’s area of activity?

How effective are the board’s committees? (Specific questions on the performance of each committee should be included such as, for example, their role, their composition and their interaction with the board.)

Are board committees used to the best advantage? A more effective use of the nomination committee might be to widen its remit to embrace management development.

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Methods of assessment

Self evaluation provides a means for each director to reflect on their own performance. Individuals can be supplied with evaluation questionnaires that enable them to identify the sorts of questions to consider.. The weakness of self evaluation is that it is based on self-reporting and biases associated with self-image.

Peer evaluation involves directors assessing each other’s performance. This requires a high level of trust. The reliability of such an assessment is curtailed by lack of experience about how to conduct such an evaluation, and issues associated with personal feelings and interpretations of the value of others’ actions.

Evaluation by the chair may be more effective if the chair has had appropriate training and has suitable interpersonal skills. The main disadvantage of evaluation by the chair includes problems associated with personalities and personal relationships developed over time.

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Methods of assessment

360 degree feedback This may involve three forms of feedback: feedback from seniors (e.g. by the chair on a new non-executive director), feedback from peers (e.g. from fellow non-executives) and feedback from subordinates (where this applies).. The advantage of 360 degree feedback is that where an individual receives negative feedback from one source, then this may be counteracted by positive feedback from several other directions. 360 degree feedback also provides a wider collection of evidence, although it may take time to analyse.

Feedback from external facilitators. External facilitators may be brought in to evaluate the effectiveness of individual directors (the Combined Code requires this every three years for FTSE 350 companies anyway).

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When to choose external assistance?

For new chairmen: Incoming chairmen, especially if they have only been members of a board for a short time prior to their appointment, may find it useful to commission their party facilitation of an evaluation in order to accelerate, and render more objective, their own assessments of the board’s capabilities and to plan future changes of the membership where this is envisaged.

For “old” boards: Conversely, chairmen of boards which have operated with the same membership over a long period may consider an element of third-party facilitation as a safeguard against inertia or complacency.

When you have a problem: For example, a situation which will require tactful, impartial handling.

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When to choose external assistance?

When challenged: Some shareholders lobby groups routinely criticise or challenge the tenure of certain directors on the basis of judgments which may be regarded as mechanistic (as per the ICGN reference to “box tickers”). Such challenges are often ignored, often with good reason. The occurrence of criticism, however, may encourage periodic third- party evaluation which may, in turn, provide clear legitimisation of the decision to ignore it.

Every so often:. Periodic external facilitation may make it easier to solicit the views of the company secretary, HR director or other senior executives immediately below board level whose inputs would be compromised should they be involved in conducting the process. Senior executives may be (understandably) reluctant directly to criticise directors who are their employers and may be more likely to be candid in speaking with an external facilitator on a confidential basis.

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Team ExerciseMarcus Killick

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Team Exercise (preparing for the first Board meeting) Day 2 Session 5

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Team Exercise - Preparing for the first Board meeting

Day 2 Session 5

You are a new non executive member of the board of an insurance company. You have been asked to attend your first Board meeting. To date you have had nothing but notification of your appointment and the following agenda

which has not been accompanied by any papers

1. Minutes of the previous meeting2. Action points arising for executive from the previous meeting3. Annual business plan4. Annual paper concerning authority to be delegated to the Executive

Report from the Executive5. Proposed budget for following year6. Nomination committee recommendation7. Any other business

You are aware that the budget contains some new extraordinary items and that the nomination committee recommendation is likely to be contentious.

How should you prepare for the meeting

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Preparing for the Board meeting

Initial work prior to receipt of the board pack Have I reappraised myself of the Combined Code

and my obligations under it? Have I reviewed the firm’s assessment of it

compliance with the Code? Is there an induction process? If so it would be

helpful to attend it prior to the board meeting to obtain a better understanding of the working of the firm

If there is no induction process, what research do I need to perform to maximise my ability to contribute to board discussions (eg previous annual reports, news etc)?

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Have I considered any potential conflicts of interest between my role on the board and any other roles I have? If so have I fully disclosed them to the company secretary?

When is the meeting and how far in advance will I receive the board pack?

Remember to allow time to review the papers and ask any questions necessary to ensure I am prepared for the meeting.

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On first review of the board pack Are any papers missing? If so is there a date given

when they will be received? Do the papers give me the information necessary

to fulfil my fiduciary and statutory duties? Are their papers on which I need to conduct further

research? In the case of the current agenda item 5 contains some new financial information and I need to do background reading on the treatment of exceptional items

Do I have any initial questions? If so are they such that they are impeding my ability to understand the importance of matter at hand?

Is the information/data given up to date? If not, will more current figures be provided at the meeting?

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Do I consider the time allocated to each issue adequate? If not this should be raised with the Chairman.

Is the agenda laid out correctly in my view with the most important issues to be considered first? In the case of the exceptional item this appears suitably placed in the agenda

Is there any procedure for any other business? For example to prevent sudden material issues to be raised without giving the board due time to consider them.

Are there any areas which I would expect to have been on the agenda but are not (eg issues relating to corporate social responsibility etc)..

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On sub committees Are any sub committees due to meet? If so, will I be appointed to any of them? If this is the case,

consider meeting the Chairman of the sub committee to discuss its role and structure

Are there any contentious issues likely from one of the sub committees at the first meeting? In this case the Nominations Committee recommendation does appear contentious. If so obtain details of the issue and the different views so that I can give consideration of the matter (including what questions I should raise) prior to the meeting

Are there papers for the sub committees or are they dealt with verbally? In this case it is a verbal report and, given the contentious nature of the proposed appointment I should request for it to be in writing in advance to give me time to consider the issues

If a matter is contentious consider whether it is high enough up the agenda for appropriate consideration. In this case it is item 7 so the Chairman should be asked to consider moving it up the agenda.

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On the previous minutes. Do they contain action points? If so do the

board papers show they have or are being addressed adequately?

Pre meeting Will I meet other directors/senior executives

before the meeting (eg at a pre board dinner)? If not should I ask to meet with senior executives to better understand their roles?

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Risk Management and Corporate Governance

Marcus Killick

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Content: Day 2 Session 6

Identification and Mitigation of Risks Corporate Governance - example

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Identification and Mitigation of Risks

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Identification and mitigation of risks

A key role of the board is to identify the risks to which the firm is exposed and determine how they should be mitigated.

To do this the Board should consider the following factors: The nature and extent of the risks to the company; The likelihood of the risks concerned materialising; The firms ability to reduce the incidence and impact on

the business of the risks that do materialise, and The costs of operating particular controls relative to the

benefit thereby obtained in managing the related risk Once the risks have been identified the board

should determine what its appetite for risk is

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Types of risk

Strategic, for example a competitor coming on to the market

Compliance, for example responding to the introduction of new insurance legislation

Financial, for example non-payment by a customer or insolvency of an intermediary

Operational, for example the breakdown of key computer equipment

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Risk mitigation

Choices: Tolerate

The risk is tolerated without any further action being taken Transfer

For some risks the best response may be to transfer them (eg taking out insurance)

TreatWhilst continuing with the action that gives rise to the risk action is taken to bring the risk to an acceptable level

TerminateWhere the only way to bring the risk to an acceptabel level is to terminate the activity

Useful link: Institute of Risk Management http://www.theirm.org/publications/documents/ARMS_2002_IRM.pdf

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How do we assess or quantify the Risk?

It’s quite easy! We look at two elements;

Consequence “Impact” Probability “Likelihood”

Which are categorised as High, Medium or Low.

Put together in a Risk Matrix allows the Firm to turn this into a “score” to identify the seriousness of the risk and the type of action we take.

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Risk Matrix

TreatTerminate,Transfer or

Treat

Treat

Treat

Low Medium High

Low

Medium

High

IMPACT

LIKEL

IHOO

D

Tolerate

TolerateTolerate

Transfer orTreat

Transfer orTreat

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How do we use this Matrix?

Example: What impact will a failure to have a proper

fraud detection in insurance claims? Failure to identify fraud could affect

Number of successful claimsSize of claimsProfitability

In this case we mark the Impact as Medium! What is the likely hood that this risk will

materialise? Based on experience with the industry let us

consider this to be Medium

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TreatTerminate,Transfer or

Treat

Treat

Treat

Low Medium High

Low

Medium

High

IMPACT

LIKEL

IHOO

D

Tolerate

TolerateTolerate

Transfer orTreat

Transfer orTreat

So where does it fall in the Risk Register?

Here!

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Mitigate

Mitigate, central meaning is “to lessen” or “make less severe,”

In this case the mitigant is Upgrade the fraud detection processes

If the firm carries out this action, it is treating the risk and lessening its effect and impact.

Thus reducing its exposure to the Risk.

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Ongoing Mitigation

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Board Reporting

Effective risk management requires a Report and review structure To ensure risks are identified and assessed Appropriate control and responses in place

This is effected by the Board Reporting Board receive report on a regular basis Collated matrix Shows all the risks faced by the Organisation

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Corporate Governance - example

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Regulatory board – an example. Gibraltar Financial Services Commission

8 members, 7 effectively NED Statute requires at least 2 NEDs have “significant

experience of regulation and supervision of finance in another jurisdiction”

Currently 4 Gibraltar and 3 UK based NEDs Meets four times each financial year (financial year

runs from April to March) Separate Chairman and CEO Senior Independent Member Follows Corporate Governance Code (in so far as

a Statutory Board is able to) and publishes on the FSC website how we adhere to it

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FSC Board meetings - preparation

No later than three weeks before a Board meeting each Division must submit an executive report detailing their activities over the previous quarter and their level of adherence to the annual business plan. This is reviewed by the CEO

Two weeks before the meeting the Chairman meets with the Executive, reviews the draft board papers (including the executive report) and determines the agenda

At the same time he meets with the local NEDs separately from the Executive to discuss Executive performance and any other issues

Board papers are sent out at least 10 days before the meeting to give Members time to consider them

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Annual Board Cycle

May/June Approval of annual report and audited financial

statements “Blue skies” assessment of high level risks likely to affect

the FSC and jurisdiction in the year ahead to guide Executive on preparation of annual risk assessment

September Review of analysis by Executive of detailed risks and

threats (risk register) facing the Commission in the year ahead

Direction to Executive on specific measures to be included in following years business plan to mitigate risks and threats

Consideration of whether any changes needed to Commission's strategy is required as a result of risks identified

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Annual Board Cycle (2)

December Review of adequacy of draft business plan for next

financial year prepared by the Executive and resources required to deliver it

Review and approval of budget for next financial year January/February

Sign off of finalised Business plan Annual review of authority delegated to Executive Annual review of stakeholder relations

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Additional Board oversight of the Executive

Control of agenda with Chairman not CEO Board regularly meets with Supervisory Divisions Board meets with finance sector representative bodies to get

industry views Specific areas (eg budget and senior executive performance)

subject to detailed scrutiny by specific Board committees All Board action points recorded and brought to next meeting

to assess whether Executive has dealt with them properly. Action points cannot be removed without board approval

Achievement against business plan brought to and discussed at each board meeting

Performance against budget brought to and discussed at each board meeting

Industry statistics and trends are brought ot each Board so the Board can assess whether changes to the Business Plan are required

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Board Committees

AuditPerformance & Remuneration (For Senior

Executives)Budget Review Nomination

Terms of reference for all these can be found on the FSC website

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Oversight of the board

There is an annual appraisal of the Chairman by the senior independent director

The Board conducts an annual self appraisal The FSC is subject to external reviews

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Thank youMarcus [email protected]

The End

Documents

Livingstone Workshop March 2012 Final