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What’s all the fuss about corporate governance? – Part 2

October 13, 2015
Last week’s post about the primary reasons for increased scrutiny of corporate governance practices by insurance regulators generated quite a few emails from member society executives, most of which fell into the “Thanks, this needed to be said” category. This week, we’ll explore the potential for regulators to move beyond the parameters of the NAIC’s new Corporate Governance Model Act – regulations that require all insurers (not just fraternals) to disclose the details about their organization’s corporate governance structure – and actually require companies to meet specific governance standards. While there are no such proposals on the horizon, it’s not a stretch to think that regulators won’t attempt such an expansion of their authority sometime in the foreseeable future – especially if we provide them an excuse to do so. Leadership-icon In fact, two states (Illinois and Ohio) have considered enacting rules that would impose stricter corporate governance standards on fraternals than on commercial insurers. These governance issues were included in broader legislative proposals that addressed fraternal solvency regulation. Both states enacted similar solvency laws and the Illinois legislation included a section that authorizes the Department of Insurance to establish the qualifications for fraternal CEOs that are elected by the organization’s delegates or members.  This specific provision of the new Illinois law becomes effective on January 1, 2019. Regulators’ primary concern when it comes to fraternal governance is the election of officers rather than the hiring of a CEO by an elected board of directors. Most regulators believe that the election of a CEO (and other officers) can more frequently result in the selection of a very popular, but not always qualified, individual to manage the operations of a complex financial services organization. Moreover, regulators point out that the election of other officers – vice presidents, etc. – makes those individuals more accountable to the people that elected them and less accountable to the CEO who is charged with leading the organization.  I’ll be honest, in this case I agree with the regulators. Surprisingly (or maybe not so surprisingly), so do many leaders of Alliance member societies who still maintain the “elected CEO” corporate governance model. During the debates over the governance provisions of both the Ohio and Illinois fraternal solvency measures, member society executives suggested the Alliance may want to support stricter governance standards, including a requirement that CEOs and other executives be hired rather than elected. When asked why they would endorse a proposal that would overhaul the governance of their own societies, they said candidly that a regulatory mandate was the only way such changes could be made. They felt that the leadership of their societies would never support such a drastic modernization of their organization’s decision-making process. I admire these executives’ awareness of the need to improve their societies’ governance and their willingness to consider a regulatory mandate to accomplish that goal. But at this stage of the game – given that so many Alliance members have made such significant progress on their own to upgrade their governance – I think reliance on regulatory intervention falls into the “be careful what you wish for” category. Once you defer to regulatory authority on the basic principle of how your society organizes itself and makes decisions, you no longer have a regulator-regulated relationship, you have a business partner. That said, there’s no excuse for fraternals to reject the mountain of evidence that demonstrates the value – to the society and its current and future members – of a modernized governance structure and to make progress (even if its incremental) toward implementing such changes on their own. If we fail to do so, any future fraternal financial instability will provide regulators the reason they need to intervene more drastically and establish specific governance standards that all societies must meet. OK, enough from me. This is a major issue for individual societies and for the Alliance as a whole.  Let’s hear your thoughts on the topic. Post them here or send them to me in an email at jannotti@fraternalalliance.org.