Making a Difference Trustee Training Corporate Governance and Fiduciary Responsibilities of Trustees On behalf of NAMAF Windhoek 18 and 19 August 2014

Making a Difference

Trustee TrainingCorporate Governance and Fiduciary Responsibilities of

Trustees

On behalf ofNAMAF

Windhoek18 and 19 August 2014

Presented by Esmé Prins-Van den Berg

AgendaDay 1: 18 August 2014

1. Corporate Governance2. Ethical Leadership3. Board of Trustees: Role and Responsibilities4. Trustees: Suitability, Role and Responsibilities5. Chairperson: Role and Responsibilities6. Principal Officer: Role and Responsibilities7. Board Committees8. Succession Planning9. Performance Management10. Remuneration of Trustees11. Conflicts of Interest12. Removal of Trustees

2© Healthcare Navigator CC 2014

Corporate Governance


Discussion:

What is corporate governance?

Why is it important?



• Corporate governance = Compliance?• Relationship with the law• “If all the boxes are ticked”, will the fund be successful?



1. King Report on Corporate Governance (King III)– Corporate governance mainly involves establishment of structures and processes

with appropriate checks and balances that enable directors to discharge their legal responsibilities and oversee compliance with legislation

– It is essentially about effective, responsible leadership– Corporate governance practices, codes and guidelines lift the bar of what is

regarded as appropriate standards of conduct

2. System by which business corporations are directed and controlled– Distribution of rights and responsibilities among different participants e.g.

board, managers, shareholders, other stakeholders– Rules and procedures for making decisions– Structure to set objectives, means to achieve them and performance monitoring


Corporate Governance3. Appropriate board structures, processes and values by which a company is

directed and controlled for company to achieve its purpose whilst keeping it under prudent control– It therefore enables directors to carry out their legal duties

4. ASX Corporate Governance Council– Corporate governance is system by which companies are directed and managed– It influences how the objectives of the company are set and achieved, how risk is

monitored and assessed and how performance is optimised– Good corporate governance structures encourage companies to create value…

and provide accountability and control systems…

5. If management is about running the business, governance is about seeing that it is run properly – Supervising/monitoring management performance– Ensuring accountability of management to shareholders and

other stakeholders7© Healthcare Navigator CC 2014

Balance between

Performance / Achievement / Strategy

and

Compliance / Accountability / Transparency / Honesty


Discussion:

1. Are there any benefits to Good Corporate Governance?

2. Is there a downside to Poor Corporate Governance?

3. Name companies with good and bad corporate governance. Why is it “good” or “bad”?


Benefits of Corporate Governance

1. Increases “value of entity”2. Gives confidence to market3. Enhances reputation of business4. Enhances empowerment of all stakeholders5. Improves efficiency6. Encourages innovation7. Enhances competitive advantages8. Meets financial, legal and statutory obligations9. Ensures accountability10. Encourages proper decision-making11. Eliminates conflicts of interest12. Creates sustainable business


Reasons for Benefits of Corporate Governance

1. Changes attitudes2. Guide to conduct business with honesty and integrity3. Sensitive to needs of affected persons4. Forces checks and balances5. Encourages open and transparent communication6. Basis for rewards based on performance and results7. Punishes those responsible for fraud8. Encourages business to establish high principles and ethics9. Not aimed at frustrating leadership, but encourages participative,

performance-based leadership10. Creates overarching goal for sustainable development11. Not guarantee for business success but produces better operating results


Why Corporate Governance?

Good governance = Good business sense


Discussion:

1. What are the Barriers and Challenges to Good Corporate Governance?

2. How do you overcome them?


Barriers to Corporate Governance

1. Conflicts of interest – own agendas2. Lack of focus, industry knowledge and experience3. Wrong remuneration / incentive strategies4. Not understanding roles5. Inadequate (business) skills and leadership6. Cost of compliance7. Might be disruptive to existing business model8. Communication between different levels in organisation9. Lack of understanding at Board level

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How Overcome?

• Avoid concentration of power• Buy-in• Policies and procedures → Clarity of principles → Consistency in

decision-making• Levels of authority → Accountability• Strong board commitment

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International Principles


Organisation for Economic Cooperation and Development (OECD)


5 Elements of Corporate Governance

18

Prot

ectio

n of

Min

ority

Sh

areh

olde

r Rig

hts

Strong Board Commitment to Corporate Governance Reforms

Goo

d Bo

ard

Prac

tices

Effec

tive

Cont

rols

Tran

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iscl

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© Healthcare Navigator CC 2014

International Corporate Governance Network (ICGN)

Global Corporate Governance Principles


ICGN: 9 Principles

1. Corporate objective: Sustainable value creation2. Corporate Boards

– Directors as fiduciaries– Effective board behaviour– Composition and structure of board– Role of chair– Lead independent director– Company secretary– Knowledge of company– Appointment of directors– Board and director development and evaluation– Related party transactions and conflicts– Board Responsibilities


ICGN: 9 Principles

3. Corporate Culture– Culture and ethical behaviour– Integrity– Codes of ethics and conduct– Bribery and corruption– Employee share-dealing– Compliance with laws– Whistle-blowing

4. Risk Management– Effective and appropriate risk management– Dynamic management process– Board oversight– Comprehensive approach– Disclosure


ICGN: 9 Principles

5. Remuneration– Alignment with long term strategy– Link to value-creation– Pay for non-executives– Transparency– Share ownership– Shareholder approval and dialogue– Employee remuneration

6. Audit– Robust and independent audit– Ethical standards– Internal audit– Audit Committee role


ICGN: 9 Principles

7. Disclosure and Transparency– Transparent and open communication– Timely disclosure– Affirmation of financial statements– Accounting standards– Non-financial business reporting– Disclosure of ownership

8. Shareholder Rights– Accountability– Corporate Charter– Shareholder protection– Voting-related rights– Shareholder rights of action


ICGN: 9 Principles

9. Shareholder Responsibilities– Alignment– Integration into mandates– Integration into investment decision-making– Collaboration– Active and considered voting– Commitment to principles– Internal corporate governance


Liability


Failure to meet recognised standards of governance (even if not legislated) may render a board or individual trustee

legally liable


Who is responsible for governance in medical aid funds?

Board of Trustees

BoT = Focal point of corporate governance

Monitor compliance with good governance practices


King Report on Governance

(King III)


King Report on Governance (King III)

• Corporate Governance Principles• Implementation: 1 March 2010• Application in SA: To all entities regardless of manner and form of

incorporation or establishment – public, private and non-profit sectors…75 Corporate Governance Principles covered over 9 governance elements (chapters)

• “Each principle is of equal importance and together forms a holistic approach to governance. Consequently ‘substantial’ application of this Code and the Report does not achieve compliance”Customise according to applicable legislationReview has commenced…simplify

• Comply and explain


King III: Governance Principles

1. Ethical leadership and corporate citizenship2. Boards and directors3. Audit Committees4. Governance of risk5. Governance of information technology6. Compliance with laws, rules, codes and standards7. Internal audit8. Governing stakeholder relationships9. Integrated reporting and disclosure


King III Corporate Governance Principle 1

Ethical Leadership and Corporate Citizenship


Ethical Leadership

• “Good corporate governance is essentially about effective, responsible leadership”

• Responsible leadership characterised by ethical values:1. Responsibility2. Accountability3. Fairness and 4. Transparency

• All deliberations, decisions and actions of BoT and Executive Management must be based on these values


Principles of Governance (RAFT)

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• Corrective action / integrity / fiduciary dutiesResponsibility

• Responsibility for actions and decisionsAccountability

• Balance legitimate interests and expectationsFairness

• Meaningful analysis from outsideTransparency


Ethical Leadership

• Characteristics of responsible leaders

1. Build sustainable businesses: Consider fund’s economic, social and environmental impact on community in which it operates through effective strategy and operations

2. Reflect on role of business in society and consider short-term and long-term impact of their personal and institutional decisions on economy, society and environment

3. Do business ethically4. Do not compromise natural environment 5. Embrace a shared future with all fund’s stakeholders


Moral Duties of Trustees

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• Act with intellectual honesty and independence of mind in best interests of fund and all its stakeholders

• Rational decisions• Conflicts of interest to be avoided

Conscience

• Essential for sustainability• Consider legitimate interests and expectations of stakeholders in

decision-making and strategy

Inclusivity of Stakeholders

• Trustees must have knowledge and skills to govern fund effectively

• Develop continuallyCompetence

• Trustees must be diligent in performing duties• Devote sufficient time to fund affairsCommitment

• Trustees should have courage to:• Take risks associated with directing and controlling

successful, sustainable enterprise• Act with integrity in all board decisions and activities

Courage


Ethical Leadership

• Integrity should permeate all aspects and operations of fund e.g. vision, mission and objectives should be ethically sound

• Conduct of internal and external affairs should be beyond reproach• Driven from top• Ethical standards must be integrated into all the fund’s strategies

and operations (management policies)– Material term of employment and supplier contracts– Deal with suppliers that subscribe to similar standards of corporate

governance and ethics

• Code of Conduct supplemented by ethics-related policies e.g. Giving and receiving of gifts, supplier relations, etc. … powerful instrument for guiding fund’s ethics performance

• Board should ensure that fund’s ethics performance is assessed, monitored, reported and disclosed…improve ethical culture


Tran

spar

ency

Ethics / Integrity

Resp

onsi

bilit

y

Acco

unta

bilit

y

Fairn

ess

Discipline


Social ResponsibilityIndependence


Boards and Trustees


Medical Aid Funds Act

“Trustee” = Any person managing a registered fundMinor disqualified to “manage affairs” of fund


Financial Institutions and Markets Bill, 2013 (FIM Bill)

Board of Trustees (BoT)– Charged with managing affairs of medical aid fund, elected / appointed under

fund’s rules– Trustees must be “fit and proper” to manage business of fund…to be defined in

standards by NAMFISA– At least 50% elected by members– 1/3 to be independent? (standards)– Disqualifications

• Director, officer, employee of administrator / its holding company, subsidiary, JV or associate

• Consultant, contractor of administrator• Financial institution / financial intermediary rendering financial services to

fund / BoT– Chairperson may not be the PO, general manager or other senior officer of fund


Size of BoT

King:– Collective knowledge, skills, experience and resources required to be considered– Evolving circumstances, needs of fund, nature of business– Sufficient trustees to structure board committees– Difficulties with quorums if board is too small– Regulatory requirements– Skills and knowledge needed to make business judgment calls– Size, diversity and demographics – must be effective


What is a Trustee?

• King III advises that when considering the skills and suitability of a proposed trustee, the following dimensions require consideration:

1. Knowledge and experience required to fill gap on Board2. Apparent integrity of individual3. Skills and capacity of individual to discharge his/her duties to Board

• “Fit and proper”– What constitutes a “fit and proper” person?...standards– Whose responsibility to determine who are fit and proper persons?– Guidance by CMS in SA


Proposed Fit and Proper Criteria (CMS)

• Fit – competence and ability to do job• Proper – person’s character and integrity• Fit and proper person: Person who is financially sound, honest, reputable,

reliable and competent to perform specific role• Criteria for assessment

– Honesty, integrity and reputation– Competence and capability– Financial soundness

• Standard: Overall standard to be met• Disqualification and evaluation criteria: Not definitive list

– Disqualification criteria: Could be automatically disqualified or disqualified taking account of range of criteria

– Evaluation criteria: Non-compliance with single criterion does not necessarily result in person not being fit and proper…look at other factors


Term of Office of Trustees

• Medical Aid Funds Act and FIM Bill: No limit on terms specified• King III

– Staggered rotation– Terms > 9 years should be subject to particular rigorous review by Board to

ensure independence


What are the duties of the BoT and Individual Trustees?


All trustees have fiduciary duties


Specific Duties

MAF Act1. Advise Registrar of contact details of PO / appointment of PO

FIM Bill2. Take all reasonable steps to ensure interests of beneficiaries under Rules of

fund and Chapter in Act protected at all times3. Act with due care, diligence, prudence and good faith4. Take all reasonable steps to avoid conflicts of interest5. Act with impartiality in respect of all beneficiaries6. Prepare annual report and submit to NAMFISA… prescribed requirements7. Disclose all payments / considerations to NAMFISA annually …offence8. File copy of administration contract with NAMFISA9. Monitor delegation to administrator according to contract and take remedial

action, if applicable10. Appoint auditor


Specific Duties

11. Appoint a valuator13. Manage or supervise management of business and affairs of fund with

objective to maximise returns for members14. Ensure financial resources are sufficient to discharge obligations15. Ensure consumers (members) are fairly treated in accordance with

contractual arrangements16. Establish Audit Committee…requirements17. Establish procedures to identify and deal with conflicts of interest…

committee18. Establish investment policies19. Establish procedures with regard to fair treatment of members, including

disclosure of information to them, protection of their personal information, prompt assessment and payment of legitimate claims and handling of complaints

20. As to be further prescribed in standards (NAMFISA)


FIM Bill: Standard of Conduct for Trustees

• Director and officer (trustee) of financial institution (fund) in exercising any of powers and discharging any of duties of director or officer must(a) Act with honesty and in good faith with a view to the best interests of

fund and its members and(b) Exercise care, diligence and skill that reasonably prudent person would

exercise in comparable circumstancesDirector, officer (trustee) and employee of financial institution (fund) must comply with Act and Rules


King III: Standard of Conduct

Each trustee has

1. Duty to exercise degree of care, skill and diligence that would be exercised by

reasonably diligent individual with

• General knowledge, skill and experience expected from person carrying out same functions and

• General knowledge, skill and experience of trustee

2. Fiduciary duty to act in good faith and in manner trustee reasonably believes

to be in best interests of fund


Boards and Trustees

• BoT must direct, govern and be in effective control of fund

Board’s 2 main functions:– Strategic direction– Responsible for control of fund

• Ultimate responsibility: Positive performance of fund in creating value…consider legitimate interests and expectations of all stakeholders

• Exercise leadership, enterprise, integrity and judgment in directing business of fund so that it can survive and thrive

BoT and trustees should act in best interests of fund– Best interests of fund = Best interest of collective membership– Board has collective authority and decision-making, but trustees carry individual

responsibility

Board Charter: Board responsibilities


King III: Role and Functions of BoardBoard should1. Appreciate that strategy, risk, performance and sustainability are inseparable2. Provide effective leadership based on ethical foundation (Values: RAFT;

moral duties of trustees)3. Ensure that fund is and is seen as responsible citizen4. Ensure that fund’s ethics are managed effectively5. Ensure that fund has effective and independent Audit Committee6. Be responsible for governance of risk7. Be responsible for IT governance8. Ensure compliance with legislation and consider adherence to non-binding

rules, codes and standards

9. Ensure effective risk-based internal audit

10.Appreciate that stakeholder perceptions affect fund’s reputation


King III: Role and Functions of Board

Board should

9. Ensure integrity of Board’s integrated report

10.Report on effectiveness of fund’s system of internal controls

11.Consider business rescue proceedings/turnaround mechanisms when fund

financially distressed

12.Appoint PO and establish framework of delegation of authority

13.Comprise a balance of power with majority of non-executive trustees

14.Appoint trustees through formal process

15.Ensure that induction, ongoing training and development of trustees

conducted through formal processes (Training policy)

16.Delegate functions to well-structured committees without abdication of its

own responsibilities


King III: Role and Functions of Board

Failure to perform these duties could render trustee personally liable

FIM Bill: – Fund could indemnify trustee against any liability, including legal defence costs,

that might be incurred as a trustee, but only if trustee acted honestly and in good faith with a view to the best interests of the fund and its members

– Fund may purchase and maintain insurance for benefit of trustee against such liability


Discuss decision-making by the BoT with specific reference to the following matters:

1. Requirements for proper decision-making.2. How to deal with disagreement of trustees.3. Voting.4. Effect of decisions on dissenting trustees.

55

Discussion (Decision-Making):


Board Agendas and Material

Foundation of each decision: Intellectual honesty based on all relevant facts• Independent from management• Objective judgment based on sufficient management information,

independently from management– Trustees should have unrestricted access to all fund’s info, records, documents,

management, staff, etc. subject to processes established by Board– FIM Bill: Fund must make information, including accounting records, about

fund, available to trustees to enable them to perform responsibilities and exercise their duties under Act

BoT or trustees should be able to at expense of fund take independent advice in connection with duties, if necessary and after following due process established by BoT


Regular Board Agenda Items

1. Management accounts2. Strategy3. Risk Register4. IT Governance5. Compliance6. Stakeholder relationships7. Fund’s reputation

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Board Oversight: Documents

1. Code of Conduct2. Board Charter3. Ethics-related policies4. Risk Register5. Risk management policy and plan6. Internal Audit Charter7. IT Governance Charter and Policies8. Compliance Policy9. Stakeholder strategy and policies10. Conflict of Interest Policy11. Integrated report


Frequency of Board Meetings

Sufficient scheduled meetings to discharge dutiesMinimum of 4 advisableCircumstances of fund to influence


Empowered Board

• Small, cohesive Board• Independent• Open and free communication• Experience and expertise• Access to intelligible financial and operational performance information• Power rests in Board

– Take decisions jointly– Independent discretion– Regular meetings


What are the functions and duties of the Chairperson?


Board of Trustees: Chairperson

• Leadership = main role• Presiding officer at meetings• Ensure smooth functioning of board in interest of good governance• Represents board• Not domineering…seek to achieve maximum participation to function as

effectively as possible• Carries responsibility if anything goes amiss….. failure….. position at risk• No conflict of interest• Independent• Number of outside chairmanships


King - Chairperson: Specific Functions

1. Set ethical tone for BoT and fund

2. Provide overall leadership without limiting principle of collective responsibility

3. Identify and participate in selecting board members (through Nomination

Committee)

4. Oversee succession plan for board and PO

5. Formulate annual work plan for board with PO

6. Preside over board meetings, ensure use of time productively and encourage

collegiality among board members

7. Manage conflicts of interest

8. Monitor collective functioning of board, performance of individual trustees

and interaction at meetings

9. Ensure trustees play full and constructive role in affairs of fund

10. Be collegial with board members and management

11. Act as link between board and management63© Healthcare Navigator CC 2014

King - Chairperson: Specific Functions

12. Play lead role in removal of non-performing/unsuitable trustees

13. Ensure complete, timely, relevant, accurate, honest and accessible

information placed before board

14. Meet individual trustees annually about evaluating their performance

15. Know trustees’ strengths and weaknesses

16. Mentoring to develop skill and enhance trustees’ confidence and encourage

their contributions at meetings

17. Ensure trustees aware of responsibilities - induction programmes and

continuing professional education

18. Ensure good relations maintained with fund’s strategic stakeholders (and

members)

19. Building and maintaining stakeholders’ trust and confidence in fund

20. Upholding rigorous standards of preparation for meetings

21. Ensure execution of board decisions64© Healthcare Navigator CC 2014

Delegation of Responsibilities

Principal OfficerBoard Committees


Principal Officer


FIM Bill

Principal Officer (PO)– CEO– Fund appoints PO– PO member of BoT– “Fit and proper”…standards– Namibian citizen and resident in Namibia…exceptional circumstances foreigners– Minor disqualified to be a Principal Officer – Authorised to act on behalf of fund


Which responsibilities should be delegated to the PO?


King: Delegation of Responsibilities Principal Officer (CEO)

1. Appointment of executive team, succession planning and performance appraisals

2. Develop fund strategy for consideration and approval by BoT3. Develop annual business plans and budgets4. Monitor and report to BoT on performance of fund and compliance5. Establish organisational structure6. Setting tone in providing ethical leadership7. Compliance with legislation and corporate governance principles8. Application by fund of best practices


Board Committees


Delegation of Responsibilities: Board Committees

Important element of governance process– Effective way of managing Board workload– BoT retains fiduciary responsibilities and accountability (FIM Bill: No limit on

responsibilities)

Clearly agreed reporting procedures and written scope of authority– Committees must have sufficient authority to perform duties and fulfil

purpose

Terms of Reference1. Composition2. Objectives, purpose and functions3. Delegated authorities4. Tenure5. Reporting mechanism to Board

Performance evaluation


Board Committees

• Frequency of meetings– As appropriate and necessary– Standing Committees: Quarterly– Audit Committee: Audit cycle– Disputes Committee: As and when necessary– Others: As and when necessary

• Examples of Committees– Risk– Remuneration– Nomination– Audit (Statutory)– Governance– Disputes


King III: Committees

1. Audit Committee2. Nomination Committee3. Remuneration Committee4. Risk Committee


1. Discuss whether succession planning should be considered in a medical aid fund.

2. How could succession planning be achieved in practice?

3. Consider the Board and Executive Management.


Discussion (Succession Planning):

1. Discuss the value of performance management of trustees.

2. Are there any benefits to the fund?

3. How should performance management be conducted?

4. What should be done with the outcome of the process?


Discussion (Performance Management):

1. Discuss whether trustees should be remunerated.

2. How and by whom should an appropriate level of remuneration be determined?

3. Is there any preferred model for remuneration?


Discussion (Remuneration):

Conflicts of Interest

What is a “conflict of interest”?

Provide examples of such conflicts in the medical aid fund environment.


Conflict of Interests1. Trustee in position to influence business of fund / other decisions

that could result in financial / other gain for trustee / family / business associates or provide improper advantage to others to detriment of fund

2. Interests of third parties become more important than fund interests3. Competing professional, personal and financial obligations/interests

that would make fair fulfilment of duties difficult4. King III:

– Personal interests of trustee or persons closely associated with him/her should not take precedence over interests of fund

– Certain conflicts of interest are fundamental and should be avoided– Others should be disclosed

• Avoid • Declare interests at every Board and Committee meeting• Disqualification vs Recusal


Removal of Trustees


Removal of Trustees

Should there be a process to remove trustees from the Board?When and how should trustees be removed from the Board?Section 46 Medical Schemes Act (SA)

“(1) The Council may, by notice in writing, remove from office a member of the board of trustees of a medical scheme if it has sufficient reason to believe that the person concerned is not a fit and proper person to hold the office concerned.”

King IIIFund Rules


End of Day 1


AgendaDay 2: 19 August 2014

1. Audit Committees2. Governance of risk3. Governance of Information Technology4. Compliance 5. Internal audit6. Governing stakeholder relationships7. Integrated reporting and disclosure8. Applying the Principles9. Case Studies10. Closure



Audit Committee


Audit Committee

• BoT must appoint auditor • Duties of auditors• Fund must establish Audit Committee

– At least 2 trustees– At least 1 must be independent within meaning of standards


Audit Committee: King III

• Fulfils vital role in corporate governance• Identify and manage financial risks• Board and management should be committed to supporting and

maintaining an effective Audit Committee• Board approve written ToR• Board appoints chairperson• Meet at least twice per year


Audit Committee

1. Ensure integrity of integrated reporting and internal financial controls2. Comment on financial statements, accounting practices and internal financial

controls…keep BoT apprised3. Consider factors that may predispose management to present incomplete /

misleading picture of fund’s position, performance or sustainability4. Evaluate significant judgments and reporting decisions affecting integrated

report made by management5. Monitor enforcement actions against fund…involved in response to

monitoring actions6. Consider evidence that might indicate previous information published was

incorrect…public correction7. Carefully consider forward-looking statements of financial or sustainability

information…proper appreciation of key drivers8. Address following in respect of risk management:

– Financial reporting risk– Fraud risk as it relates to financial reporting– IT risks as it relates to financial reporting


Audit Committee: King• Audit Committee should have understanding of:

1. Integrated reporting, which includes financial reporting2. Internal financial controls3. External audit process4. Internal audit process5. Corporate law6. Risk management and have adequate level of comfort regarding fund’s

process for identifying, managing and reporting risk7. Sustainability issues8. IT governance as it relates to integrated reporting9. Governance processes within fund10. IFRIS, GAAP, Guidelines of Global Reporting Initiative (GRI), other financial /

sustainability reporting standards, regulations, guidelines• Statutory duties: Audit Committee’s decision prevails• Duties assigned by the BoT: Board retains ultimate decision-making

ability



Governance of Risk


Governance of Risk

• Systematic, documented, formal risk assessment• Documented risk management policy and plan support fund’s strategy …

to be developed by management• Effective ongoing risk assessment process• Risk Committee… could be assigned to Audit Committee

– Review risk management progress and maturity of fund– Effectiveness of risk management activities– Key risks facing fund– Responses to address key risks

• PO accountable to Board• Board should ensure that management monitors risk management plan

effectively and continually• BoT should regularly receive and review Register of fund’s key risks


Governance of Risk

• BoT should annually set risk tolerance levels• BoT responses to risks:

– Avoid– Treat, reduce or mitigate– Transfer risk exposure– Tolerate or accept risk– Exploit risk– Terminate– Integrated approach

• Integrated report: Risk disclosure– Undue, unexpected or unusual risks– Current, imminent or envisaged risk that may threaten long-term

sustainability– Views on effectiveness of fund’s risk management processes



Governance of Information Technology


Governance of IT• IT essential to manage transactions, information and knowledge necessary

to sustain fund• IT Governance = Framework that supports effective and efficient

management of IT resources to facilitate achievement of fund’s strategic objectives… must deliver value to fund and mitigate IT risk

• Governance of information and technology• BoT’s responsibility• BoT should

– Understand strategic importance of IT– Assume responsibility for governance of IT– Place IT governance on board agenda

• IT Governance Charter and policies– Decision-making rights– Accountability framework


Governance of IT

• IT strategy should be integrated with fund’s strategic and business processes… improve fund’s performance and sustainability

• Require IT internal control framework… independent assurance to BoT of effectiveness

• Disaster recovery arrangements and business continuity plan• Negative impact of IT on environment should be considered• Good governance principles should apply to all parties in supply chain

for acquisition and disposal of IT goods and services• Compliance with IT laws, rules, codes, standards, guidelines and

leading practices• Responsibility for provision of IT goods and services delegated to

another party, all parties, including BoT, remain accountable for enforcing and monitoring effective IT governance


Governance of IT

• Information records = most important information assets… evidence of business activities

• Information management– Protection of information– Management of information– Protection of personal information

• Board should ensure processes in place to ensure complete, timely, relevant, accurate and accessible IT reporting



Compliance


Compliance

• Board’s responsibility to monitor compliance…Regular Board agenda item

• Fund must comply with applicable laws and consider adherence to non-binding rules, codes and standards

• Identification of laws, rules, codes and standards• Shortcomings in laws and proposed expected changes…handle in ethical

and responsible manner• Extent of reliance placed by BoT on Committee / function if delegated

depends on BoT’s assessment of knowledge, effectiveness and experience of Committee / function

• Trustees should sufficiently familiarise themselves with general content of applicable laws, rules, codes and standards to adequately discharge their fiduciary duties in interests of fund and their duty of care, skill and diligence… Induction and ongoing training


Compliance• Compliance risk = Risk of damage arising from non-adherence to law and

regulations to fund’s business model, objectives, reputation, going concern, stakeholder relationships or sustainability

• Non-compliance: Identify, assess and respond to through risk management processes

• Compliance policy– Management develops– BoT approves

• Disclosure in integrated report– How compliance function discharged– Material and immaterial, but often repeated regulatory penalties, sanctions

and fines imposed on fund / officers– Consider impact on fund, breaches of confidentiality and agreements with

other parties• PO accountable to BoT• Include in Code of Conduct… Compliance culture


Compliance

How could a BoT discharge its responsibility in respect of compliance?– Regular item on Board agenda– Define reporting requirements– Board reports– Risk register– Compliance audits– Compliance officer– Agreements with outsource parties



Internal Audit


Internal Audit• Required as result of complexity of business, organisational dynamics

and regulatory environment• Required by funds …must be independent and objective• Board must ensure effective risk-based audit

– Risk-based approach (vs Compliance approach)– Allows assessment of whether process intended to serve as control is an

appropriate risk measure – Risk-based internal audit plan to be agreed with Audit Committee

• Report functionally to Audit Committee to ensure respect and cooperation of BoT and management

• Internal Audit Charter…approved by BoT… generally through Audit Committee …informed by strategy of fund

• Internal controls needed for:– Financial matters– Operational issues– Compliance issues– Sustainability issues


Internal Audit

• Internal audit’s key functions:– Evaluate fund’s governance processes, including ethics– Perform objective assessment of effectiveness of risk management and

internal control framework– Systematically analyse and evaluate business processes and associated

controls– Provide information regarding instances of fraud, corruption, unethical

behaviour and irregularities• Total outsourcing of function… PO responsible to oversee, manage,

inform and take accountability for effective functioning• Report on effectiveness of system of internal controls to BoT• Integrated report

– BoT must report on effectiveness of system of internal controls – Disclose if no internal audit function established and explain how adequate

assurance of effective governance, risk management and internal control environment maintained



Governing Stakeholder Relationships



• Stakeholders = Any group that can affect achievement of fund’s strategy and long-term sustained growth or be affected by fund’s operations– Members– Suppliers– Customers– Regulators– Employees– Unions– Media– Analysts– Consumers– Society in general– Auditors– Communities



• Board is ultimate custodian of corporate reputation and stakeholder relationships …regular board agenda item

• Stakeholder-inclusive approach stimulate appropriate dialogue between fund and its stakeholders… build and maintain trust and confidence

• Stakeholders that could materially affect operations of fund should be identified, assessed and dealt with as part of risk management process

• Stakeholders’ assessments of fund result in formation of corporate reputation– Reputation based on how well fund performs compared with legitimate

interests and expectations of stakeholders (Generally contributes to economic value of companies)

– Must deal with stakeholder perceptions… cannot ignore



• Respond to legitimate interests and expectations of stakeholders– Interest / expectation of stakeholder is legitimate, if a reasonable and

informed outsider would conclude it to be valid and justifiable on legal, moral or ethical basis in circumstances

• Management to define strategy and policies for management of relations with all stakeholder groupings… adoption by Board

• Complete, timely, relevant, accurate, honest and accessible information• BoT to adopt responsible communication programme• Board should guard against using legal or other processes to frustrate /

block constructive engagement by stakeholders… might be appropriate• BoT should encourage stakeholders to attend AGMs• Disclose in Integrated Report nature and outcomes of dealings with

stakeholders



Integrated Reporting and Disclosure


Integrated Reporting and Disclosure

• Holistic and integrated representation of fund’s performance iro finances and sustainability

• Report effectively about– Goals and strategies of fund– Performance regarding economic, social and environmental issues

• Serve to align fund with legitimate interests and expectations of its stakeholders

• Audit Committee: General oversight• Prepare annually


Integrated Report


Disclose information that is complete, timely, relevant, accurate, honest and accessible and comparable with past performance of fund and include

forward-looking informationAnnual Financial Statements and commentary of BoT on financial results

Stakeholder dealings

Ethics performance Committees

Assessment of trustee independence Risk disclosure and process of risk management

Remuneration report Sustainability (‘non-financial’) information (Must allow stakeholders to understand key issues affecting fund and effect of fund’s operation on economic, social and environmental well-being of community)

Compliance: How function discharged Review of finance function

Effectiveness of internal controls IT Governance

Applying the Principles

Discussion 1


ABC Medical Aid Fund entered into a termination and restraint agreement with a trustee, Mr. X, in terms of which:

(a) Mr. X resigned from the Board on an agreed date;(b) Mr. X would not stand for nomination as a trustee again;(c) ABC Medical Aid Fund paid Mr. X R962 500 as consideration for his resignation; and(d) ABC Medical Aid Fund paid Mr. X R700 000 as consideration for a restraint of trade

covenant.

Discuss the following:

Certain of the trustees of ABC are unhappy with the agreement and wish the Board to pursue a legal process to declare the agreement invalid and recover the payments from Mr. X. The Board is divided on this matter and approach you for advice. Consider this agreement against the principles of good corporate governance and advise the Board of any action to be taken, if indicated. Motivate your answer. Give particular attention to the following aspects:

1. Appropriateness and lawfulness of the agreement.2. Trustee duties.3. Decision-making process followed by the Board when reaching the initial agreement.4. Process that dissenting trustees in respect of the initial agreement should have followed.110© Healthcare Navigator CC 2014

Liberty Medical Scheme (2013)

Former trustee of Liberty Medical Scheme ordered by High Court to pay back R1.7m received as settlement to resign from BoT and as a “restraint of trade” paymentHigh Court found that BoT – Did not have power to enter into settlement agreement– Acted outside law – Breached their fiduciary responsibilities, which included

• Duty to avoid conflict of interest and • Always act in best interests of beneficiaries of fund

Court stated that it was highly undesirable in terms of policy that trustees were induced by attractive restraint payments to be loyal and honest


Applying the Principles

Discussion 2


ABC Medical Aid Fund has a Board of Trustees consisting of 8 members of which 50% is elected by the membership and the balance appointed by the Board. It is administered by a third-party administrator and has a fulltime Principal Officer.

Discuss the following:

1. The Principal Officer has resigned and the Board has not filled the vacancy yet. Could the chairperson act as Principal Officer until an appointment has been made? Motivate.

2. The Board has issued a tender for marketing services to be supplied to the fund. Three trustees have established a marketing company in which all of them have shares. This company has also tendered for the business of the fund. Advise the Board on how they should deal with this matter.

3. Three trustees’ terms’ of office will expire at the next Annual General Meeting. One of them is a Board appointed member. He has already served five 3-year terms as a trustee. The Board is divided as to whether this person should be appointed for another term. You are requested to advise the chairperson of the Board on how to deal with this matter.


Case Studies


Pro Sano (2003)

1. Trustees used funds of medical aid fund to settle personal tax liabilities of R4 million

2. Trustees ordered the fund to pay for a tax consultant for personal tax advice

If you were the Regulator, how would you react?What is the applicable governance principle(s)?Conclusion: CMS served notices for the removal the trustees on the basis that they were not fit and proper


Omnihealth Medical Scheme (2003)

1. Agreement with administrator not properly recorded, resulting in Omnihealth paying R25m more than what administrator entitled to

2. No written contract for provision of managed health care services, resulting in fund paying R6.5m that it had not contracted to pay

3. Loyalty scheme allowed, which did not comply with legislation and which cost members R9.5 million

4. Reinsurance contracts implemented without authorisation of BoT, which lost almost R16 million of members’ money in reinsurance premiums

5. Bad debts accrued to about R30 million due to failure to stop payments for “members” in arrears with their contributions

If you were the Regulator, how would you react?What is the applicable governance principle(s)?Conclusion: CMS served notices for the removal of trustees on the basis that they were not fit and proper



LHH is the holding company of the administrator2 trustees (including chairperson) of Liberty Medical Scheme (LMS) made following proposal to LHH:– Marketing company to be established in which 2 trustees and LHH to

have shares – Company to provide marketing services to LMS – If proposal not accepted

• Administration agreement would be terminated by LMS and • Amalgamation between LMS and another scheme being pursued at

the time to be frustrated



If you were the Regulator, how would you react?What is the applicable governance principle(s)?Conclusion: – CMS invoked process to determine whether chair was fit and proper to

hold office as trustee (other trustee resigned)– Chair applied for interdict against CMS to abandon process– Appeal dismissed with costs…Chair resigned– Personal benefit of trustees…serious conflict of interest


Medshield (2013)

1. Trustees failed to recover illegal payments to brokers (R28m) … Paid brokers for “research” (not used by fund) in addition to statutory fees only iro new members < 42 years

2. Obstructed inspection of fund3. Chairperson not member of fund when elected to BoT contrary to Rules4. Chairperson also acted as CEO of fund contrary to Rules5. Chairperson earned excessive remuneration: Salary as CEO and trustee6. BoT irregularly elected: Service Provider apparently “orchestrated”

proxies ensuring election of certain trustees who incidentally became members of fund just before AGM


Medshield

If you were the Regulator, how would you react?What is the applicable governance principle(s)?Conclusion: – Court placed scheme under curatorship

• Trustees demonstrated flagrant disregard of provisions of Medical Schemes Act and Rules of fund

• Trustees failed to comply with relevant regulatory demands to address non-compliance

• Conflicted relationship– Trustees held personally liable…Punitive cost order against trustees for

behaviour (attorney-client scale)– Relationship with service provider resulted in trustees becoming conflicted


Sizwe Medical Scheme (2013)

1. BoT not properly constituted ito fund Rules and legislation2. Allegations of irregularities and election fraud3. Principal Officer appointed by BoT whilst no quorum present4. Principal Officer refused to cooperate with provisional curator and

was constantly absent from office

If you were the Regulator, how would you react?What is the applicable governance principle(s)?Conclusion: – Court placed scheme under curatorship– Punitive cost order against fund (attorney-client scale)– Failure to comply with Rules and legislation– Appointment of Principal Officer unlawful– Principal Officer not acting in interest of fund


Hosmed (2013 / 2014)

1. Trustees selectively wrote off debt owed to Hosmed by their employer - benefited employer and themselves, but prejudiced fund, its beneficiaries and other employer groups…Failed to disclose this conflict of interest and did not recuse themselves from meetings

2. Trustees lied under oath iro signature of procurement agreement (irregular procurement)

3. Trustees procured marketing material in irregular manner4. Trustees conducted investigation in unfair and aggressive way resulting in

employer groups leaving the fund - fund lost almost 3 000 members5. Trustees failed to manage their personal finances responsibly (2 trustees

had numerous judgments against them related to debt) - this meant that they were unlikely to run a fund properly

If you were the Regulator, how would you react?What is the applicable governance principle(s)?Conclusion: – CMS removed trustees…not fit and proper– Court placed scheme under provisional curatorship 122© Healthcare Navigator CC 2014

Discussion:

What are the lessons to be learned from these case studies?

Was proper governance applied in these funds?


Conclusion


When you don’t give up, you cannot fail!

..\Barcelona.mp4


Discussion / Questions?

Thank You

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