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Revitalizing Board of Directors for Better Corporate Governance… Part II and final

A board of directors is responsible for strategic leadership in establishing the company’s risk tolerance and in developing clear accountabilities for managing risk. Boards should ensure that companies regularly identify and assess the risks they face, including financial, operational, reputational, environmental, industry related, and legal risks. For an insurance company to minimize risks it has to develop a comprehensive risk management program designed in a constructive way. It should manage its risk appetite and tolerance settings. In the last week’s training program it was addressed that management can advise the board on top ten possible risks to achieve good governance.

 

The Board Risk and Audit Committee (BRAC), which was addresses in the training program, assists a board in fulfilling its responsibilities for corporate governance and in overseeing the company’s financial reporting, internal control structure, risk management systems and reporting, and internal and external audit functions. Terms of reference and requirements for an audit committee vary by country.

The training emphasized that a board has the power to lay off auditors only if there are sufficient reasons to disqualify them from work. Most of the time shareholders approve the decisions of the board in this case. Auditors, however, cannot afford to reach this far because they care about their reputation. They would have to go through certain regulations to keep their reputation. Otherwise, they can be sued or even be totally banned, and no one would want to hire them anymore.

A company should have in place a general culture of integrity in business dealings and respect of and compliance with laws and policies. Directors must declare conflicts of interest and refrain from voting on matters in which they have interest. To create and cultivate this culture of integrity and ethical dealing a board must adopt policies and procedures aimed at enhancing ethical dealings including a conflict of interest policy, a code of business conduct and a Whistleblower policy. Companies should appoint someone responsible for overseeing and managing of these policies and procedures. For instance, a conflict of interest happens when a board member puts his/her personal interests ahead of the interests of the organization. However, board members have a fiduciary obligation to act in the best interests of the organization that they serve in an ethical manner. They must act in good faith and put the interests of the organization ahead of their own, exercise their powers for the purpose of the organization and observe a duty of care in discharging their duties with regard to the law. Moreover, the board’s responsibilities with respect to ethics functions shall include supervising and monitoring matters reported using the insurer’s whistle blowing or other confidential mechanisms for employees and others to report ethical and compliance concerns or potential breaches or violations. It should also include approval of compliance programs, reviewing their effectiveness on a regular basis and signing off on any material compliance issues or matters.

An effective and competent board can be established to practice governance. What makes boards effective is their focus on big decisions (taking a stronger role on strong financial stakes), future impact (long-term vision), whether activities are in line with the mission and policy decisions, such as that of acquisitions, large investments, overseeing trends – positive or negative, and growth benchmarks.

A company can form effective boards through orientation and regular trainings. It can draft a charter that clearly defines areas of board oversight. Effective boards can be formed by establishing separate chairperson and CEO roles that are appropriate for the organization and by implementing a robust board self-evaluation program. Also, enriching the information flow between the board and management can result from effective board members. A company needs independent directors who give liberated perspectives on issues under consideration. It needs to develop an engaged board where directors ask questions and challenge management. Developing a competent board also requires educating and training them about business and governance matters. Undertaking meaningful evaluation to assess whether a board is fulfilling its mandates sums up the process, because performance evaluation is becoming increasingly important for boards and directors and has benefits for individual directors, boards and the companies for which they work.

On the first day of the training program, participants were introduced to the development of modern corporate governance law developed over years. Case studies and best board practices such as that of UK’s Commissions/ Law on Corporate Governance known as Combined Code (1998). This code outlines boards’ principles concerning values that of leadership, effectiveness, accountability, remuneration, and relation with shareholders.

By embracing corporate social responsibility (CSR) initiatives, boards are able to proactively identify and address legal, financial, operational and reputational risks in a way that can increase the company’s value to all stakeholders-investors, shareholders, employees and consumers. A company’s reputation is the most valuable asset for an organization. According to a 2012 study by World Economics, on average, approximately 25% of a company’s market value is directly attributed to its reputation. Companies opt to risk reputation only as a last resort. Boards should ask management to include reputation risk in the risk agenda for discussion at least on annual basis. One of the questions raised in the training was whether the issue of reputation can be affected in a noncompetitive environment. Mr. Jerry replied saying that even in noncompetitive markets’ reputation matters because shareholders’ complaints can ruin the image of the company and render it out of business. Therefore, boards should invest in CSR programming as an integral element of company risk assessment and compliance programs, and should advocate public reporting of CSR initiatives. Such initiatives can serve as both differentiating and value enhancing factors. According to recent studies, companies with strong CSR practices are less likely to suffer large price declines, and they tend to have better three- to five-year returns on equity, as well as a greater chance of long-term success.

Poor corporate governance practices led many multinational companies in the world such as the AIG, LEHMAN BROTHERS, IMPERIAL BANK, ENRON, WELLS FARGO, CHASE BANK  and others into a huge disaster.  The reasons for these companies’  black spot records include major  accounting misstatements, board  failing on appropriate supervision,  irregular accounting procedures and  reporting, lack of adequate board  and auditor supervision, selling  massive amounts of insurance  (credit default swaps) without  setting aside capital reserves,  inadequate risk-management  practices, lack of ethics at the top  (e.g. fraud) and others.

Participants of the training  program noted that insurance  operations are too technical and  not easy, and Mr. Jerry advised  NICE be conscious when deciding  to expand its business. With  utmost care national or global  risks may be controlled, but at  times things may go beyond the  capacity of companies to react  and in such situations they simply  watch themselves go down.  Yet, no international company  administrated by boards has given  up on itself but instead keeps  on looking for the best way out  through good corporate governance  for long term sustainability.

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