CORPORATE GOVERNANCE FRAMEWORK

by
Prof. YRK Reddy
www.yagaconsulting.com
www.academyofcg.org

©2005 YRK Reddy

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 The Globalisation of Standards
• The rationale & the broad strategy
• IMF,World Bank,OECD,Commonwealth,
BCBS,IAIS
• The moves fro generic to specific – the
early arguments of ACG
• All assume market economy benefits and
mostly the “outsider model”

©2005 YRK Reddy

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 A Good Situation

Research
Shareholder Meetings & Vote
Analysis/ Activisim/
Media/ Board, supervision, meetings & Vote Transparency/
Ratings/ Accountability/
markets for equitable rights
control
Management Reportings

©2005 YRK Reddy

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 Modern corporations are disciplined by
internal and external factors
(Source: Corporate Governance Framework, Nadereh Chamlou, Magdi Iskande, World Bank)
Internal External

Shareholders Private Regulatory

Stakeholders Standards
(for example, accounting
Board of Directors and auditing)
Laws and
Appoints Reputational agents1 regulations
and
Reports to
monitors
•Accounts
•Lawyers Financial Sector
•Credit Rating •Debt
Management •Investment Bankers •Equity
•Financial media
Operates •Investment advisors Markets
•Research •Competitive factor and
•Corporate Governance product markets
Core functions Analysis •Foreign direct investment
•Corporate control
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Reputational agents refer to private sector agents, self-regulating bodies, the media, and civic society that
reduce information asymmetry, improve the monitoring of firms, and shed light on opportunistic behaviour

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 “The Irresistible Case for CG”

• Korea-US Research: 160% premuim

• ABN/AMRO: Best CG Rated companies had P/E
ratios 20% higher
• Russian study: 70,000% increase in firm value of
21 companies
• Deutsche Bank: S&P 500: 19% out-performance.
• Harvard / Wharton: abnormal returns of 8.5%
• Cheaper debt: Romania`s BCR
• Operations too: better ROE; EVA
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 The Country Analysis in Scorecard –
Four Critical Factors

• Legal Infrastructure
• Regulation
• Information Infrastructure
• Market Infrastructure

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 The Special Case of Insurance
Industry
• Opacity of financial institutions due to nature of
some contracts; deferred exchange; swift changes in
risk profiles
• Illiquidity & risk of Asset liability mismatch
• Informational asymmetries between policy holders &
insurers
• Complex structure of principle-agent issues and
coordination problems

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• The need for strong regulation and active
supervision. ( fixes the informational asymmetries,
market failures, systemic risks).
• Supplemented by self-regulatory initiatives by
Boards and shareholders; market discipline, legal
infrastructure etc.
• A complex construct of listing agreements;
company laws; insurance laws; regulatory norms;
supervisory expectations – the great need for
alignment / harmonisation.
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 The IAIS Guidance
• ICP 9 is mainly the role, responsibility of Boards
and senior management.
• Integrates with other Core Principles that relate to
CG:
– Suitability of Persons
– Changes in control & Portfolio Transfers.
– Internal Controls
– On-site inspections
– Risk Assessment & Risk Management
– Information, disclosure and Transparency towards the
market
©2005 YRK Reddy
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 Insurance Core Principles on
Corporate Governance
Essential criteria
A) The supervisory authority requires and verifies that the
insurer complies with applicable corporate governance
principles
B) Board of Directors:
1. Sets out its responsibilities in accepting and committing to
the specific corporate governance principles for its
undertaking. Regulations on corporate governance should be
covered in general company law and/or insurance law. These
regulations should take account of the size, nature and
complexity of the insurer.

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2. Establishes policies and strategies, the means of attaining
them, and procedures for monitoring and evaluating the
progress toward them. Adherence to the policies and
strategies are reviewed regularly, and at least annually.

3. Satisfies itself
that the insurer is organised in a way that
promotes the effective and prudent management of the
institution and the board’s oversight of that management.
The board of directors has in place and monitors independent
risk management functions that monitor the risks related to
the type of business undertaken. The board of directors
establishes audit functions, actuarial functions, strong
internal controls and applicable checks and balances.

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4. Distinguishes between the responsibilities, decision-making,
interaction and cooperation of the board of directors,
chairman, chief executive and senior management. The board
of directors delegates its responsibilities and establishes
decision-making processes. The insurer establishes a division
of responsibilities that will ensure a balance of power and
authority, so that no one individual has unfettered powers of
decision.

5. Establishesstandards of business conduct and ethical

behaviour for directors, senior management and other
personnel. These include policies on private transactions, self-
dealing, preferential treatment of favoured internal and
external entities, covering trading losses and other inordinate
trade practices of a non-arm’s length nature. The insurer has
an on-going, appropriate and effective process of ensuring
adherence to those standards.

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6. Appoints and dismisses senior management. It establishes a
remuneration policy that is reviewed periodically. This policy
is made available to the supervisory authority.

7. Collectively ensures that the insurer complies with all relevant

laws, regulations and any established codes of conduct (refer
to EC f)

8. Has thorough knowledge, skills, experience and commitment

to oversee the insurer effectively (refer to ICP 7).

9. Is not subject to undue influence from management or other

parties. The board of directors has access to information about
the insurer, and asks and receives additional information and
analyses that the board sees fit.

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10. Communicates with the supervisory authority as required and
meets with the supervisory authority when requested.

11. Sets out policies that address conflicts of interest, fair

treatment of customers and information sharing with
stakeholders, and reviews these policies regularly (refer to ICP
25).

C) Senior Management is responsible for:

1. Overseeing the operations of the insurer and providing

direction to it on a day-to-day basis, subject to the objectives
and policies set out by the board of directors, as well as to
legislation.

2. Providing the board of directors with recommendations, for its

review and approval, on objectives, strategy, business plans
and major policies that govern the operation of the insurer.
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 3.Providing the board with comprehensive, relevant and timely
information that will enable it to review business objectives,
business strategy and policies, and to hold senior management
accountable for its performance.

Advanced criteria

1. The board of directors may establish committees with specific

responsibilities like a compensation committee, audit
committee or risk management committee.

2. The remuneration policy for directors and senior management has

regard to the performance of the person as well as that of the
insurer. The remuneration policy should not include incentives
that would encourage imprudent behaviour.
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3. The board of directors identifies an officer or officers with
responsibility for ensuring compliance with relevant
legislation and required standards of business conduct and
who reports to the board of directors at regular intervals (refer
to EC b).

4. When a “responsible actuary” is part of the supervisory

process, the actuary has direct access to the board of directors
or a committee of the board. The actuary reports relevant
matters to the board of directors on a timely basis.

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 OECD Guidelines for Insurers
Governance
• Recommendations for Insurance and
Private Pensions Committee, adopted by
OECD Council on April 2005.
• Note the absence of “corporate” – and the
overall emphasis on the stakeholder system.

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“Regulation alone cannot achieve the good
practice necessary for integrity and
effectiveness. Companies themselves must
develop internal rules and systems in
order to reach these goals, but
governments and international bodies can
provide guidance on these rules and
systems.”

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 Main Objectives
“To provide complementary guidance that would help the sector to
enhance the protection of policyholders and/or shareholders beyond
the protection already by existing regulation and supervision; and
“To develop complementary guidance specifically directed to the
insurance sector that would supplement corporate governance rules
generally applicable to corporations”
Covers:
Governance structure,
Internal governance mechanisms and
Stakeholders protection

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Guidelines for Insurer’s Governance

1. Governance Structure: The governance

structure must establish an appropriate
division of administrative and oversight
responsibilities, stipulate and delineate the
qualifications and duties of persons
bearing responsibilities, and protect the
right of policyholders and shareholders or
“participating policyholders”

Guidelines I. Identification of responsibilities

Guidelines II. Board's structure
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Guideline III. Functions and responsibilities
Reviewing and guiding the strategy of the insurance
entity, including insurance strategies,; approving the
pricing strategy, setting performance objectives,
overseeing auditing and actuarial functions, and other
oversight structures and monitoring the administration
of the insurance entity in order to ensure that the
objectives set out in the fund by-laws, statutes or
contracts, or in documents associated with any of
these, are attained (e.g. diversified asset allocation,
cost effectiveness of administration et.);

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Guideline IV. Composition and suitability

Guideline V. Accountability

Guideline VI. Actuary

Guidelines VII. External Auditors

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2. Internal Governance Mechanisms: Insurance entities should
have appropriate control, communication and incentive
mechanisms that encourage good decision – making power and
timely execution, transparency, disclosure and ensure regular
review and assessment, having regard to the branches of
business operated. These mechanisms should be tailored to the
protection of policyholders, beneficiaries and shareholders (or
participating policyholders).

Guideline VIII. Internal controls

Guideline IX. Reporting

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3. Stakeholders’ protection: The governance framework of
insurance entities should ensure an appropriate protection of the
rights of stakeholders through disclosure and redress mechanisms
and the compliance with the basic rights of shareholders or
participating policyholders in the case of mutual insurers.

Guideline X. Protection of participating policyholders in the

case of mutual insurers.

Guideline XI. Disclosure

Guideline XII. Redress

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