corporate governance post-penrose michael culligan presented at a seminar of the society of...

Corporate governance post-Penrose

Michael Culligan

Presented at a seminar of the Society of Actuaries in Ireland“Life Assurance – A brave new world”

20 May 2004

Penrose Report

Penrose Report into Equitable Life Commissioned in August 2001 To investigate and report into Equitable Life and identify any

wider lessons for conduct/regulation of life assurance Report delivered in March 2004 Quite a wait…but well-received when eventually published Critical of

– management & directors– regulators– actuarial profession

800 pages long!

Corporate governance (1)

System by which companies are directed and controlled Boards of directors are responsible for the governance of their

companies. Shareholders’ role is to appoint the directors and the auditors

and to satisfy themselves that an appropriate governance structure is in place

Responsibilities of the Board include– setting the company’s strategic aims– providing the leadership to put them into effect– supervising the management of the business; and,– reporting to shareholders on their stewardship.

The Board’s actions are subject to laws, regulations and the shareholders in general meeting.

So, it’s about how corporations are governed– “Does exactly what it say on the tin”!

Clear that the Board is placed squarely at the centre of things This applies to all companies But, life assurance companies are “special”

– bring their own issues– can prove tricky to accommodate within generic framework

True of mutuals in particular– don’t intend to consider mutuals – Penrose absolutely scathing on their structures– UK Treasury has launched independent review

Will focus on shareholder-owned companies

Corporate governance (2)

Agenda

Current corporate governance structures

Issues raised by Penrose

Recent UK regulatory changes

Possible implications for the Irish regulatory regime

Conclusions

Irish corporate governance (1)

Every company has a Board of Directors– No rules re size (other than min. 2 people)– No rules re qualifications– No single statement of directors’ responsibilities

Normally, a mix of execs and non-execs– No distinction in law– No law governing the mix (but code for listed companies)

Clear rationale for appointing non-execs– Can make a valuable contribution to decision making process– Can help to formulate strategy– Most importantly, bring an element of independence and objectivity

For life offices, IFSRA have power of veto over Board appointments– Board nominations subject to IFSRA approval– “Fit and proper” test

For new companies, approval of initial Board is part of overall approval process– Subsequent nominations subject to approval as above

Allows IFSRA to influence:– make-up of Board– skills, knowledge and experience of Board as a whole– balance between execs and non-execs

Influence may be more theoretical than practical


Generally held that Board is responsible for all aspects of the company’s business

IAIS core principle on corporate governance:– “…the board is the focal point…”– ”…it is ultimately accountable and responsible…”

IFSRA also clear about role of the Board:– “…ultimate responsibility lies with the Board and senior

management”


Position complicated by the statutory Appointed Actuary role

Appointed Actuary has Board as his/her principal– but also has a duty to IFSRA and to policyholders

Appointed Actuary’s annual investigation not subject to Board sign-off

Also, not subject to audit

Means that almost all of the liabilities side of the balance sheet (in IFSRA Returns) is dictated by one individual


Agenda





Conclusions

Penrose – introduction

UK arrangements were broadly similar to those outlined for Ireland– formed backdrop to Penrose’s report

Will examine his conclusions in relation to corporate governance

His report dealt with one company, but many findings have more general application

Report covered a range of governance issues– role of directors– role of audit committee – role of actuaries etc

Will concentrate on role of directors

Penrose – on directors (1)

Composition of Equitable Board– gradual shift from non-execs to execs

Penrose clearly viewed strongnon-exec presence as desirable

Also clearly viewed Board’s as having ultimate responsibility for all matters

However, problems with this in practice– skills and experience of actuarial matters?– able to make independent judgements on actuarial issues?


Penrose saw four main problems: non-execs “ill-equipped to manage a life office by training or

expertise” directors “totally dependent on actuarial advice” directors unable to “assess the advice…and challenge the

actuaries” actuaries on the Board inhibited by professional guidance

Criticisms cover Board’s oversight of all actuarial work

Not everyone agreed with his conclusions– representations from some non-execs– felt that his criticisms set unrealistic standards for non-execs

But, Penrose did not accept this– difference between ability to do technical actuarial calculations and

ability to understand the results of actuarial work

Also, further representations from some non-execs – “absurd” to expect non-execs to challenge actuaries when auditors

and regulators had not Penrose’s response:

– to accept this line of argument would have profound significance for the governance of life offices


Summary of current position

In summary:

Regulators want to emphasise primacy of Board

But, practical problems with ability of Boards to oversee the actuarial function independently

And, non-executives may feel it unreasonablefor them to understand and take responsibilityfor actuarial matters

How do we square this circle?

Possible options

Two possible options: regulator ensures that Boards have requisite actuarial skills regulator makes clear to Boards that they are ultimately

responsible and should take necessary actuarial advice

Potentially a third option– regulator bypasses the Board and takes direct responsibility for

overseeing actuarial function– not realistic

Regulator unlikely to go for first option Second option provides potential way forward

Agenda





Conclusions

Developments in the UK (1)

Fundamental overhaul of regulation by FSA CP167 on governance issues

– final proposals published in June 2003 (after consultation) Driven/influenced by with-profits issues

– not going to focus on with-profits issues– focus on issues affecting all insurers

First main change is the removal of the Appointed Actuary role New role – “Actuarial Function Holder” (AFH) – created instead

– AFH’s role is to advise directors on actuarial issues– can be either employee or external consultant– may a director, but not be CEO or Chairman

Directors are responsible for the methods and assumptions– AFH’s role is an advisory one

Returns to FSA will include a cert. from the Board re value of long-term liabilities

Other major change is extension of audit– long-term liabilities now to be subject to review by actuary advising

the auditors (“Reviewing Actuary”) Peer review of AFH?

In summary, new regime brings fundamental change– Appointed Actuary’s sole responsibility removed

Developments in the UK (2)

UK developments vs. Penrose

How well do these measures address Penrose’s criticisms?

Penrose less concerned with detail of new proposals than with overall result

Key question for him was how to ensure “independent and effective actuarial audit”

New UK system achieves this (through auditors’ Reviewing Actuary)

But, is change from AA to AFH really necessary?

Would peer review of the AFH really addmuch value?

Agenda





Conclusions

Implications for Ireland?

Historically close ties with UK– industry– actuarial profession

Given scale and high-profile nature of UK changes, likely to put it on the agenda in Ireland

Society of Actuaries in Ireland (SAI) conscious of this

Society has developed a set of proposals for discussion with IFSRA

Proposals intended to address criticisms of existing regime

Echo broad thrust of UK changes, but differ in certain key respects

SAI’s proposals (1)

1. Position of Appointed Actuary to be retained AA to retain responsibility for deciding on methodology and

assumptions AA to continue to sign off as at present

2. Scope of directors’ certificate to IFSRA to be extended to include certifying the value of long-term liabilities

3. Wording of auditors’ certificate to IFSRA to be changed remove reliance on AA’s certificate matter for auditors to decide amount and source of actuarial

advice they need

Proposals have much to recommend them Clearly extend responsibility for signing off on long-term

liabilities to Board and to auditors But, are not unnecessarily prescriptive about nature or amount

of actuarial advice each should take– Directors free to engage independent actuarial advice if desired– Auditors would almost certainly take some advice, but this is left to

them to decide Less prescription is important practical point

– UK approach would bring significant extra cost for little extra benefit?

– Take example of purely unit-linked office Proposals form solid base for dialogue with

IFSRA

SAI’s proposals (2)

Agenda





Conclusions

Summary and conclusions

Current corporate governance structures increasingly seen as problematic

But, considerable practical difficulties with reconciling primacy of Board with actuarial expertise of directors

Question is how to square this circle

Conclusion is that Boards must be expected to take advice on actuarial matters (whether internally or externally)

UK proposals address this issue

SAI’s proposals also address this issue, but in a slightly different (and less prescriptive) way

Current regime seems destined to change – let’s see what happens!

Corporate governance post-Penrose

Michael Culligan

Presented at a seminar of the Society of Actuaries in Ireland“Life Assurance – A brave new world”

20 May 2004

corporate governance post-penrose michael culligan presented at a seminar of the society of...

Documents

board of directors

experience of board

approval of initial

life assurance companies

objectivity slide

makeup of board skills

penrose report penrose

new companies