Corporate governance post-Penrose
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Corporate governance post-Penrose Michael Culligan Presented at a seminar of the Society of Actuaries in Ireland “Life Assurance – A brave new world”. 20 May 2004. Penrose Report. Penrose Report into Equitable Life Commissioned in August 2001

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20 May 2004

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20 may 2004

Corporate governance post-PenroseMichael CulliganPresented at a seminar of the Society of Actuaries in Ireland“Life Assurance – A brave new world”

20 May 2004


Penrose report

Penrose Report

  • Penrose Report into Equitable Life

  • Commissioned in August 2001

  • To investigate and report into Equitable Life and identify any wider lessons for conduct/regulation of life assurance

  • Report delivered in March 2004

  • Quite a wait…but well-received when eventually published

  • Critical of

    • management & directors

    • regulators

    • actuarial profession

  • 800 pages long!


Corporate governance 1

Corporate governance (1)

  • System by which companies are directed and controlled

  • Boards of directors are responsible for the governance of their companies.

  • Shareholders’ role is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place

  • Responsibilities of the Board include

    • setting the company’s strategic aims

    • providing the leadership to put them into effect

    • supervising the management of the business; and,

    • reporting to shareholders on their stewardship.

  • The Board’s actions are subject to laws, regulations and the shareholders in general meeting.


20 may 2004

Corporate governance (2)

  • So, it’s about how corporations are governed

    • “Does exactly what it say on the tin”!

  • Clear that the Board is placed squarely at the centre of things

  • This applies to all companies

  • But, life assurance companies are “special”

    • bring their own issues

    • can prove tricky to accommodate within generic framework

  • True of mutuals in particular

    • don’t intend to consider mutuals

    • Penrose absolutely scathing on their structures

    • UK Treasury has launched independent review

  • Will focus on shareholder-owned companies


Agenda

Agenda

  • Current corporate governance structures

  • Issues raised by Penrose

  • Recent UK regulatory changes

  • Possible implications for the Irish regulatory regime

  • Conclusions


Irish corporate governance 1

Irish corporate governance (1)

  • Every company has a Board of Directors

    • No rules re size (other than min. 2 people)

    • No rules re qualifications

    • No single statement of directors’ responsibilities

  • Normally, a mix of execs and non-execs

    • No distinction in law

    • No law governing the mix (but code for listed companies)

  • Clear rationale for appointing non-execs

    • Can make a valuable contribution to decision making process

    • Can help to formulate strategy

    • Most importantly, bring an element of independence and objectivity


Irish corporate governance 2

Irish corporate governance (2)

  • For life offices, IFSRA have power of veto over Board appointments

    • Board nominations subject to IFSRA approval

    • “Fit and proper” test

  • For new companies, approval of initial Board is part of overall approval process

    • Subsequent nominations subject to approval as above

  • Allows IFSRA to influence:

    • make-up of Board

    • skills, knowledge and experience of Board as a whole

    • balance between execs and non-execs

  • Influence may be more theoretical than practical


Irish corporate governance 3

Irish corporate governance (3)

  • Generally held that Board is responsible for all aspects of the company’s business

  • IAIS core principle on corporate governance:

    • “…the board is the focal point…”

    • ”…it is ultimately accountable and responsible…”

  • IFSRA also clear about role of the Board:

    • “…ultimate responsibility lies with the Board and senior management”


Irish corporate governance 4

Irish corporate governance (4)

  • Position complicated by the statutory Appointed Actuary role

  • Appointed Actuary has Board as his/her principal

    • but also has a duty to IFSRA and to policyholders

  • Appointed Actuary’s annual investigation not subject to Board sign-off

  • Also, not subject to audit

  • Means that almost all of the liabilities side of the balance sheet (in IFSRA Returns) is dictated by one individual


Agenda1

Agenda

  • Current corporate governance structures

  • Issues raised by Penrose

  • Recent UK regulatory changes

  • Possible implications for the Irish regulatory regime

  • Conclusions


Penrose introduction

Penrose – introduction

  • UK arrangements were broadly similar to those outlined for Ireland

    • formed backdrop to Penrose’s report

  • Will examine his conclusions in relation to corporate governance

  • His report dealt with one company, but many findings have more general application

  • Report covered a range of governance issues

    • role of directors

    • role of audit committee

    • role of actuaries etc

  • Will concentrate on role of directors


Penrose on directors 1

Penrose – on directors (1)

  • Composition of Equitable Board

    • gradual shift from non-execs to execs

  • Penrose clearly viewed strongnon-exec presence as desirable

  • Also clearly viewed Board’s as having ultimate responsibility for all matters

  • However, problems with this in practice

    • skills and experience of actuarial matters?

    • able to make independent judgements on actuarial issues?


Penrose on directors 2

Penrose – on directors (2)

Penrose saw four main problems:

  • non-execs “ill-equipped to manage a life office by training or expertise”

  • directors “totally dependent on actuarial advice”

  • directors unable to “assess the advice…and challenge the actuaries”

  • actuaries on the Board inhibited by professional guidance

  • Criticisms cover Board’s oversight of all actuarial work


Penrose on directors 3

Penrose – on directors (3)

  • Not everyone agreed with his conclusions

    • representations from some non-execs

    • felt that his criticisms set unrealistic standards for non-execs

  • But, Penrose did not accept this

    • difference between ability to do technical actuarial calculations and ability to understand the results of actuarial work

  • Also, further representations from some non-execs

    • “absurd” to expect non-execs to challenge actuaries when auditors and regulators had not

  • Penrose’s response:

    • to accept this line of argument would have profound significance for the governance of life offices


Summary of current position

Summary of current position

In summary:

  • Regulators want to emphasise primacy of Board

  • But, practical problems with ability of Boards to oversee the actuarial function independently

  • And, non-executives may feel it unreasonablefor them to understand and take responsibilityfor actuarial matters

  • How do we square this circle?


Possible options

Possible options

Two possible options:

  • regulator ensures that Boards have requisite actuarial skills

  • regulator makes clear to Boards that they are ultimately responsible and should take necessary actuarial advice

  • Potentially a third option

    • regulator bypasses the Board and takes direct responsibility for overseeing actuarial function

    • not realistic

  • Regulator unlikely to go for first option

  • Second option provides potential way forward


Agenda2

Agenda

  • Current corporate governance structures

  • Issues raised by Penrose

  • Recent UK regulatory changes

  • Possible implications for the Irish regulatory regime

  • Conclusions


Developments in the uk 1

Developments in the UK (1)

  • Fundamental overhaul of regulation by FSA

  • CP167 on governance issues

    • final proposals published in June 2003 (after consultation)

  • Driven/influenced by with-profits issues

    • not going to focus on with-profits issues

    • focus on issues affecting all insurers

  • First main change is the removal of the Appointed Actuary role

  • New role – “Actuarial Function Holder” (AFH) – created instead

    • AFH’s role is to advise directors on actuarial issues

    • can be either employee or external consultant

    • may a director, but not be CEO or Chairman


Developments in the uk 2

Developments in the UK (2)

  • Directors are responsible for the methods and assumptions

    • AFH’s role is an advisory one

  • Returns to FSA will include a cert. from the Board re value of long-term liabilities

  • Other major change is extension of audit

    • long-term liabilities now to be subject to review by actuary advising the auditors (“Reviewing Actuary”)

  • Peer review of AFH?

  • In summary, new regime brings fundamental change

    • Appointed Actuary’s sole responsibility removed


Uk developments vs penrose

UK developments vs. Penrose

  • How well do these measures address Penrose’s criticisms?

  • Penrose less concerned with detail of new proposals than with overall result

  • Key question for him was how to ensure “independent and effective actuarial audit”

  • New UK system achieves this (through auditors’ Reviewing Actuary)

  • But, is change from AA to AFH really necessary?

  • Would peer review of the AFH really addmuch value?


Agenda3

Agenda

  • Current corporate governance structures

  • Issues raised by Penrose

  • Recent UK regulatory changes

  • Possible implications for the Irish regulatory regime

  • Conclusions


Implications for ireland

Implications for Ireland?

  • Historically close ties with UK

    • industry

    • actuarial profession

  • Given scale and high-profile nature of UK changes, likely to put it on the agenda in Ireland

  • Society of Actuaries in Ireland (SAI) conscious of this

  • Society has developed a set of proposals for discussion with IFSRA

  • Proposals intended to address criticisms of existing regime

  • Echo broad thrust of UK changes, but differ in certain key respects


Sai s proposals 1

SAI’s proposals (1)

  • Position of Appointed Actuary to be retained

    • AA to retain responsibility for deciding on methodology and assumptions

    • AA to continue to sign off as at present

  • Scope of directors’ certificate to IFSRA to be extended

    • to include certifying the value of long-term liabilities

  • Wording of auditors’ certificate to IFSRA to be changed

    • remove reliance on AA’s certificate

    • matter for auditors to decide amount and source of actuarial advice they need


Sai s proposals 2

SAI’s proposals (2)

  • Proposals have much to recommend them

  • Clearly extend responsibility for signing off on long-term liabilities to Board and to auditors

  • But, are not unnecessarily prescriptive about nature or amount of actuarial advice each should take

    • Directors free to engage independent actuarial advice if desired

    • Auditors would almost certainly take some advice, but this is left to them to decide

  • Less prescription is important practical point

    • UK approach would bring significant extra cost for little extra benefit?

    • Take example of purely unit-linked office

  • Proposals form solid base for dialogue withIFSRA


Agenda4

Agenda

  • Current corporate governance structures

  • Issues raised by Penrose

  • Recent UK regulatory changes

  • Possible implications for the Irish regulatory regime

  • Conclusions


Summary and conclusions

Summary and conclusions

  • Current corporate governance structures increasingly seen as problematic

  • But, considerable practical difficulties with reconciling primacy of Board with actuarial expertise of directors

  • Question is how to square this circle

  • Conclusion is that Boards must be expected to take advice on actuarial matters (whether internally or externally)

  • UK proposals address this issue

  • SAI’s proposals also address this issue, but in a slightly different (and less prescriptive) way

  • Current regime seems destined to change – let’s see what happens!


20 may 2004

Corporate governance post-PenroseMichael CulliganPresented at a seminar of the Society of Actuaries in Ireland“Life Assurance – A brave new world”

20 May 2004


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