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Revitalizing Board of Directors for Better Corporate Governance… Part I

Corporate Governance is a system by which an organization is directed and controlled to sustain and enhance its corporate value and reputation for the interests of stakeholders. A company’s good governance practice fortifies its value in terms of profits, valuable brand and happy stakeholders.

Good governance is the result of implementing a set of regulations which guide the day to day activities a company directs. Good corporate governance should be transparent to stakeholders and be accountable for the company’s action in which shareholders can intervene if the company is managed poorly. In a holistic governance model there should be a company’s compliance to regulations and policies, governance of the three parties (shareholders, board and management), assurance of internal and external auditors as well as risk management. Most companies’ problems arise as a result of conflicts between board of directors and management due to poor governance. The board is ultimately responsible for good governance and failure to take on this responsibility risks the company’s operational continuity. A Board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Boards of a company are appointed by shareholders and they, in turn, appoint a management team that coordinates the daily activities of the company.

The National Insurance Corporation of Eritrea (NICE), in collaboration with ZEP RE (PTE Reinsurance Company in Kenya), organized a training program for its board, senior management and auditors at the Asmara Palace Hotel last Thursday. The one-day and a half training program was given by the ZEP RE company secretary, Mr. Jerry Segoli, and was attended by boards from other companies.

The training mainly focused on the principles and practice of corporate governance and also expectations of modern board members. Corporate governance is needed for efficient, effective and sustainable corporations that contribute to the welfare of society. It helps establish responsive and accountable corporations and builds legitimate corporations that are managed with integrity and transparency. Most of all, it protects stakeholders’ rights by legitimately representing their participation. Some of the principles of good corporate governance mentioned at the training include building strong, qualified board of directors, and evaluating performance, defining roles and responsibilities while establishing clear lines of accountability, emphasizing integrity and ethical dealing in company business, evaluating performance and making principled compensation decisions and finally engaging in effective risk management.

The objectives of the Eritrean corporate governance guidelines include setting of minimum standards of good governance for insurers, promoting corporate self discipline in the management of insurers, ensuring that insurers are managed by a competent board of directors in a sound and prudent manner and ensuring that the board makes reasonable and impartial business judgments in the best interests of the insurer by taking into account the impact on policyholders.

Board quality and composition is one of the global trends in governance of which directors should be aware in 2018. Institutional investors will continue to prioritize gender diversity, director skills and experiences, composition refreshment, and the appointment of directors who have enough time to dedicate to the company as key indicators of board quality. Activists and some institutional investors pay close attention to the number of directors with direct industry experience when assessing composition and quality. Under Eritrea Corporate Governance Guidelines the Board composition and skills sets that the board members of an Insurer shall have a minimum of seven directors. The majority of these directors shall be independent directors. Further, chairperson of the board shall be a non-executive director and shall not be a person who has served as chief executive officer of the insurer two years before his/her appointment as a chairperson of the board. The board has to consist of people with finance, economics, accounting, insurance, human resource management and other pertinent discipline skills and an experience to provide strategic direction to the insurer.

Mr. Jerry said that modern board is doing a little bit more than before. Now board understands risks and foresees danger horizon of five to ten years. The traditional role of the board was limited to governing an organization by establishing policies and setting strategic objectives, appointing, supporting and reviewing the performance of the chief executive, ensuring the availability of adequate financial resources, approving annual budgets, submitting annual reports on the organization’s performance and setting the salaries, compensation and benefits of senior management. But modern boards are expected to focus on strategy, risk management, regulation and compliance, technology, talent management and, more importantly, shareholder engagement. Boards of directors have an important role in strategy. While management is responsible for setting, refining, and executing the organization’s strategy, the board’s role is to provide oversight and guidance to the direction of the strategy and to weigh its inherent risks. Boards and management need to interact productively when defining and refining strategy. The Board Chair leads the Board and ensures it’s acting in the company’s long-term best interests. The CEO leads management, develops and implements business strategy and reports to the Board.

Boards have to define and periodically review the corporate business policy as mentioned in the Eritrea Corporate Governance Guidelines. They also have to define the underwriting policy of the insurer, the retention and reinsurance policy. Moreover, investment policy of the company’s assets must be defined. Boards are expected to define the role of and appoint the actuary. They have to oversee a sound and prudent management of their company including the implementation of effective internal control processes. Generally, a board of directors’ activities is determined by the powers, duties, and responsibilities delegated to it or conferred on by the organization’s constitution and by -laws.

Investors and/or the shareholders of a company have the right to know the investment moves their company is making as long as the company runs for them. Management reports to board and board to shareholders. Board checks on management to ensure company’s best interests are maintained. “If board members find something confusing, they should ask about it before approving it as a decision” says the ZEP RE company secretary Mr. Jerry. This is because the boards are the first to be asked, if things in the company go bad. Boards should know whether the right people are appointed in various committees in the company. Most boards organize themselves into standing or ad hoc committees. Standing Committees are those committees established on a permanent basis. These committees analyze issue within their areas of jurisdiction and make recommendations to the board. Standing committees can be like risk and audit committee and the investments committee. But the Ad hoc Committees are specially constituted forums for specific purposes and for limited duration. Strategic planning oversight committee can be labeled as ad hoc committee.

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