«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
– To delegate specific aspects of decision-making to board committees; and – To ensure the continuity of management.
Source: Adapted from Co-operators Group, 2005.
For example, not all board members may be aware that their position entails legal responsibilities and obligations to govern, that they may be held liable for misusing or neglecting their legal duties, and that they have to declare a conflict of interest if they (or relatives, business associates or friends) stand to benefit financially directly or indirectly from any decisions or actions. Decisions regarding the awarding of contracts to third parties must be taken objectively and at arm’s length – and be perceived as such.
Besides being mindful of their own conflicts of interest, board members need to attend to relationships with external agencies, including supervisory, government and industry bodies and associations. They need to take into account the effects of decisions or proposals on customers, suppliers, advisers and members of the public, because corporate governance must also be concerned with impacts outside the company.
Recent scandals involving boards of directors of some major corporations have spotlighted the role of auditors. Where external auditors are engaged, they may need to meet the board of directors in the absence of management.
In many jurisdictions, auditors now have a legal duty to directly inform relevant authorities of malpractice or failure to respect good corporate governance principles.
Board members are expected to attend meetings regularly and review and question the reports and correspondence provided. The chair should ensure that management distributes agendas and operational reports in good time to directors to help make their meetings productive. Formal minutes of items discussed and decisions taken should also be distributed.
3 The foundation stone For those instances where the vehicle for the microinsurance operation is a joint stock company, the Memorandum and Articles of Association of the company are the critically important foundation stone of good governance.
They are sometimes referred to as the company’s “Initiating Documents”.
With some modification, they should be mirrored in other governance structures such as cooperatives, mutual societies and NGOs. They are often accompanied by, and refer to, a Shareholder’s Agreement, which may have to be revised when a significant shareholder either disposes of or acquires capital in the company.
294 Microinsurance operations These documents establish the intent of the initial providers of capital to a company and cover a number of important points with regard to how the company operates. In particular, the documents differentiate between, and prescribe the limits on, the powers of management and the powers of the directors – with the ultimate power lying with the shareholders and owners of the company. They thus establish three tiers of operational control: management, directors and shareholders (principal stakeholders).
They very clearly prescribe the following:
1. The areas of business in which the company is expected to operate.
2. The uses to which the capital of the company may be put.
3. The procedures for appointing (and dismissing) management (usually just the managing director or chief executive, but possibly also the chief financial officer and others) and the decisions that management is allowed to take without reference to the board of directors. The annual budget is usually an important tool by which directors control management’s use of the company’s money.
4. The procedures for the appointment of members of the board of directors (as well as dismissal procedures). Generally, these days a number of directors are appointed who do not represent the shareholders, and these directors are expected to represent the interests of non-represented stakeholders at board meetings as well as the interests of the public and the economy in general. The appointment of a director usually requires approval by a majority of the shareholders at a formal shareholders’ meeting. The maximum and minimum numbers of directors allowed are also specified.
5. The powers the board of directors is allowed to exercise without reference to a meeting of the shareholders. Usually, the board exercises almost total control over the company’s use of existing funds and assets, as well as the use of revenues coming in from operations. However, it has to refer to the shareholders with regard to new money coming into the company, in particular if it relates to any change in the percentage shareholdings and/or if it exceeds the prudential norms (described in point 7) for borrowing or otherwise putting the shareholders’ capital at risk.
6. The way the directors’ votes are used to make a decision (e.g. on some decisions unanimity is required but for others just a majority vote).
7. The financial prudential norms (i.e. financial limits) within which the company must operate, including borrowing limits, solvency ratios, exposure to certain coverage risks, reinsurance, and capital adequacy.
These may also be prescribed by the government’s appointed regulator (e.g. superintendent of insurance), but there is nothing to prevent the company from having norms that are more conservative.
8. The procedures for shareholders entering and leaving the company.
9. The procedures for shareholders exercising their votes to make a decision entrusted to them. Often a 75 per cent majority is required.
10. The decisions over which the shareholders have control are:
– any change to the nine points above covered by the Memorandum and Articles of Association of a company, – the sale, liquidation or disposal of the company and – the appointment of auditors.
The Initiating Documents are, therefore, the reference by which the company is governed. It is particularly important in empowering both directors and shareholders if management (which may have little financial stake in the company) deviates from what the owners originally wished. The owners (shareholders) may, however, amend anything prescribed in these initiating documents, as mentioned in point 10, if they are persuaded to do so by either management or the directors. In this way the Initiating Documents are a foundation stone for company governance, but can still be modified with time as the company and its environment evolve.
4.1 Step ahead – if groundwork points the way Delta Life, founded in 1986 to provide endowment insurance to Bangladesh’s middle and upper classes, launched Grameen Bima (village insurance) two years later to enter the low-income market in collaboration with a microcredit NGO. Delta underwrote a scaled-down endowment product and the NGO delivered it to the poor along with its loans. The partnership soon dissolved because NGO staff members were more interested in selling their own loans than Delta’s insurance.
Delta then developed its own delivery network and did well selling insurance directly. In 1991, it added microenterprise or project loans to its product menu, with its agents offering credit as well as insurance, and collecting repayment instalments as well as premiums.
In 1993, Delta launched Gono (urban) Bima for the poor in cities.
Together, the two microinsurance schemes grew by leaps and bounds – a 1,025 per cent increase in new policies from 40,000 in 1994 to 450,000 in
1998. In insurance, growth of this magnitude, unsupported by a proportionate growth in equity capital and retained earnings, always spells trouble. And it did for Delta, revealing major problems – in information systems, internal controls and administration. In addition, bad debts had mounted with the exponential growth, as agents had been using loans as a marketing tool: buy a policy, get a loan.
In 2002-2003, Delta took decisive corrective action, including consolidating microinsurance under a single Gono-Grameen Bima division and eliminating the project loans. These and a number of other adjustments resulted in clear benefits for the company and its roughly one million poor customers.
If Delta Life’s milestone decisions and actions were ascribed to appropriate structural components, this recap would say that Delta’s board of directors decided to launch Grameen Bima and the partnership with the NGO.
Later, too, the decision to end the partnership and choices of subsequent courses of action were made by the board of directors.
Management had a role to play as well, but mostly in researching available options and preparing briefs to help the board analyse and assess them, and then carrying out and following up on the strategic decisions. Indeed, since management was part of the problem, the 2002-2003 restructuring was led by a consultant who was hired by and reported to the board.
The board of directors was ultimately responsible and accountable for the direction Delta Life took and its consequences, as it had been in favour of launching the venture and starting and ending the partnership with the NGO.
Governance 297 The board’s role, in a word, is stewardship – and that is the case in all jurisdictions.
How did Delta’s board fare in its stewardship of the company? The case study concludes: “Over the years, Delta Life’s social motivation has evolved into a commercial motivation, benefiting the company as well as its…customers. Along the way, Delta Life has learnt a number of valuable lessons,
many of them the hard way.” The study then lists several institutional lessons, including:
– Cross-subsidize start-up of microinsurance – Manage microinsurance with the same business approach as traditional insurance – Focus on core competencies – Develop a good management information system for large volumes of small policies – Establish internal controls, for where money is involved fraud will not be too far behind (see Box 58) One underpinning lesson the case study, not to mention Delta Life itself, could have drawn is that the board of directors could have done its homework better – including the competence to understand that growth must not to be out of proportion to the increase in the company’s financial strength.
Perhaps, if it had not had 36 members, the board might have been more effective. Indeed, Delta Life could have avoided chalking up lessons the hard way.
For starters, solid research and careful analysis of the buying behaviour of the client base, and of the marketing approach of the microcredit NGO as the intended delivery channel, could have averted the first error – a partnership destined for dissolution.
Trust is good, but control is betterBox 58
After Enron, WorldCom and Parmalat, it was not the role of external auditors alone that came under the spotlight. Internal auditors were also mobilized. The global Institute of Internal Auditors based in Florida, United States, for example, has been focusing on how its members can better support compliance with corporate governance standards. Insurers in their formative years may not be able to afford an internal audit unit, but it would serve their boards well to direct management to assign that responsibility to a suitable staff member who can then work closely with the board’s audit committee.
Credit unions have a time-honoured structure ensuring not only democratic participation but also control through their boards and committees, and other popularly based financial service providers would do well to adapt it.
298 Microinsurance operations The point to keep in mind, however, is that there have been a number of instances where credit unions have encountered serious financial difficulties, which, almost invariably, have been due to the failure of good supervision and undue trust placed in key senior (and sometimes junior) staff and management.
4.2 Counterbalance “too much good heart” The mission of CARD’s Mutual Benefit Association in the Philippines is to promote “the welfare of marginalized women, to extend financial assistance to its members in the form of death benefits, medical subsidy and pension and loan redemption packages, and to actively involve the members in the direct management of the association including the formulation and implementation of policies and procedures geared towards sustainability and improved services”.