So what’s all the fuss about corporate governance?
October 6, 2015I’ve delivered presentations on the future of the fraternal business model to more than a few member society conventions and State Fraternal Alliance annual meetings over the past several months. And I devote a significant segment of each address to the topic of corporate governance – one of the most important yet misunderstood functions of any healthy organization. To me, corporate governance is the process by which societies make decisions and the process by which they select the individuals – convention delegates, board members, officers, etc. – who are responsible for making those decisions. Unqualified decision makers make poor decisions more frequently than qualified ones. Organizations can recover from the poor decisions of an unqualified leader by replacing him or her. But if the process of selecting an organization’s leaders is fatally flawed, it makes it even more difficult – if not impossible – for a society to remain sustainable because the system has a much greater chance of yielding one poor leader after another. It’s no secret that the governance structure I prefer – and the one that has proven to be the most effective for both not-for-profit and for-profit corporations – is one in which a society’s members or delegates elect qualified board members; where the board is responsible for hiring a qualified president and CEO, developing the organization’s strategic plan, and protecting the organization’s assets; and where the president and CEO is charged with hiring a management team to assist him or her in managing the operations of the organization. This structure enhances the accountability of the CEO to the board, and the board to the members; enhances the ability of the organization to identify and retain the most highly qualified leaders; and results in the organization’s leaders making sound decisions for the benefit of its members – current and future. It’s also no secret that while many fraternals have implemented such a governance structure or are making progress toward doing so in the near future, many society leaders bristle at the notion of making such significant changes to their corporate governance. The typical response I get from those most resistant to a more modern governance structure is: “Our governance structure has served us well for more than 100 years. We are financially strong and don’t need anyone telling us how to run our organization.” That may be true, but there is a direct correlation between good decision-making (i.e. governance) and organizational sustainability. And it’s a link that regulators clearly understand and are determined to address. Each state will soon be enacting its own corporate governance disclosure law based on the Corporate Governance Annual Disclosure Model Act (GCAD) enacted by the National Association of Insurance Commissioners (NAIC). These laws don’t require insurers to meet specific governance standards, but they do compel insurers – fraternal and commercial – to disclose the details about their organization’s corporate governance structure. Bottom line, regulators want to know if insurance company executives and board members are qualified to direct and manage complex financial services organizations, and if the process for identifying those leaders results in the selection of the most capable individuals to run the company. Why all the fuss about fraternal corporate governance from the NAIC and individual state regulators? Try these reasons on for size:
- We’re not selling widgets, we’re selling promises – and some pretty important promises at that. We’re promising to secure our members’ financial futures. We may not have to deliver on those promises for years, decades even. But when the time comes, regulators want to know we’ll be able to make the sound decisions to fulfill those promises.
- Some fraternals are confused about what their financial services mission is. There are societies out there that behave more like cultural organizations or charities than the financial organizations on which the fraternal model was built. Regulators are rightly concerned about societies that operate their life insurance and annuity operations like a hobby.
- While the financial condition of many fraternals has improved in the past few years, there are still some societies on shaky ground, with steady reductions in membership, surplus, and assets.
- Regulators take their consumer protection mission seriously. They are bound and determined to not have a single consumer hurt as a result of an insurer insolvency on their watch.
- Unlike commercial insurers, fraternals do not have a guaranty fund to pay the claims of insolvent societies. I know as well as anyone that guaranty funds are no guarantee that every claim will be paid in full, but many regulators perceive the lack of fraternal participation in the guaranty fund system as a weakness, which makes them even more concerned about potential poor decision-making (i.e. governance).