Published by:  Bricker & Eckler LLP  

 

    

Oct 24, 2014

Board Diversity: Not Important to Most Corporate Boards?
 

Board diversity isn’t a priority for the majority of America’s corporate boards, or so suggests the survey results featured in a recent Businessweek article. Research suggests that companies with boards that include women tend to earn more, yet women only account for about a fifth of the board seats of the companies surveyed.
 
Posted by J. Beavers in   |  Permalink

 

Oct 02, 2014

Insurance Companies Will Soon Have to Disclose Corporate Governance Practices Annually
 

The National Association of Insurance Commissioners (NAIC) is moving forward with the Corporate Governance Disclosure Act (CGAD) and supporting Model Regulation. While the CGAD still needs to be approved by each state, it is anticipated that each state will adopt it without any changes. The one provision that some states may change is the confidentiality provision, which some states (e.g. Florida) have indicated is too broad. Click here for the version of the CGAD that was approved in Louisville.

As written, the CGAD act/regulation does not require companies to change or amend their governing practices, but it does require them to describe such specific practices/procedures on an annual basis. How the individual departments of insurance will use the information they receive and how the act/regulation will evolve to become more prescriptive after the state departments of insurance have analyzed the data from all of the companies is unknown. One area that we anticipate will become more prescriptive is board expertise/composition. For example, a requirement that certain expertise is present on a board (e.g. financial expert) in the near future would not be surprising. Similarly, we anticipate a requirement for annual board evaluations. 

The key provision of the CGAD regulation is Section 6, which describes what companies will have to describe in the new annual filing. It states:

A. The insurer or insurance group shall be as descriptive as possible in completing the CGAD, with inclusion of attachments or example documents that are used in the governance process, since these may provide a means to demonstrate the strengths of their governance framework and practices.

B. The CGAD shall describe the insurer’s or insurance group’s corporate governance framework and structure including consideration of the following.

(1) The Board, and various committees, ultimately responsible for overseeing the insurer or insurance group and the level(s) at which that oversight occurs (e.g., ultimate control level, intermediate holding company, legal entity, etc.). The insurer or insurance group shall describe and discuss the rationale for the current Board size and structure; and

(2) The duties of the Board and each of its significant committees and how they are governed (e.g., bylaws, charters, informal mandates, etc.), as well as how the Board’s leadership is structured, including a discussion of the roles of Chief Executive Officer (CEO) and Chairman of the Board within the organization.

C. The insurer or insurance group shall describe the policies and practices of the most senior governing entity and significant committees thereof, including a discussion of the following factors:

(1) How the qualifications, expertise and experience of each Board member meet the needs of the insurer or insurance group.

(2) How an appropriate amount of independence is maintained on the Board and its significant committees.

(3) The number of meetings held by the Board and its significant committees over the past year as well as information on director attendance.

(4) How the insurer or insurance group identifies, nominates and elects members to the Board and its committees. The discussion should include, for example:

a. Whether a nomination committee is in place to identify and select individuals or consideration.

b. Whether term limits are placed on directors.

c. How the election and re-election processes function.

d. Whether a Board diversity policy is in place and if so, how it functions.

(5) The processes in place for the Board to evaluate its performance and the performance of its committees, as well as any recent measures taken to improve performance (including any Board or committee training programs that have been put in place).

D. The insurer or insurance group shall describe the policies and practices for directing Senior Management, including a description of the following factors:

(1) Any processes or practices (i.e., suitability standards) to determine whether officers and key persons in control functions have the appropriate background, experience and integrity to fulfill their prospective roles, including:

a. Identification of the specific positions for which suitability standards have been developed and a description of the standards employed.

b. Any changes in an officer’s or key person’s suitability as outlined by the insurer’s or insurance group’s standards and procedures to monitor and evaluate such changes.

(2) The insurer’s or insurance group’s code of business conduct and ethics, the discussion of which considers, for example:

a. Compliance with laws, rules, and regulations; and

b. Proactive reporting of any illegal or unethical behavior.

(3) The insurer’s or insurance group’s processes for performance evaluation, compensation and corrective action to ensure effective senior management throughout the organization, including a description of the general objectives of significant compensation programs and what the programs are designed to reward. The description shall include sufficient detail to allow the commissioner to understand how the organization ensures that compensation programs do not encourage and/or reward excessive risk taking. Elements to be discussed may include, for example:


a. The Board’s role in overseeing management compensation programs and practices.

b. The various elements of compensation awarded in the insurer’s or insurance group’s compensation programs and how the insurer or insurance group determines and calculates the amount of each element of compensation paid;

c. How compensation programs are related to both company and individual performance over time;

d. Whether compensation programs include risk adjustments and how those adjustments are incorporated into the programs for employees at different levels;

e. Any clawback provisions built into the programs to recover awards or payments if the performance measures upon which they are based are restated or otherwise adjusted;

f. Any other factors relevant in understanding how the insurer or insurance group monitors its compensation policies to determine whether its risk management objectives are met by incentivizing its employees.

(4) The insurer’s or insurance group’s plans for CEO and Senior Management succession.

E. The insurer or insurance group shall describe the processes by which the Board, its committees and Senior Management ensure an appropriate amount of oversight to the critical risk areas impacting the insurer’s business activities, including a discussion of:

(1) How oversight and management responsibilities are delegated between the Board, its committees and Senior Management;

(2) How the Board is kept informed of the insurer’s strategic plans, the associated risks, and steps that Senior Management is taking to monitor and manage those risks;

(3) How reporting responsibilities are organized for each critical risk area. The description should allow the commissioner to understand the frequency at which information on each critical risk area is reported to and reviewed by Senior Management and the Board. This description may include, for example, the following critical risk areas of the insurer:

a. Risk management processes (An ORSA Summary Report filer may refer to its ORSA Summary Report);

b. Actuarial function;

c. Investment decision-making processes;

d. Reinsurance decision-making processes;

e. Business strategy/finance decision-making processes;

f. Compliance function;

g. Financial reporting/internal auditing; and

h. Market conduct decision-making processes.

It is anticipated that the CGAD will be in effect for 2016.


 
Posted by K. Kinross in   |  Permalink

 

Sep 23, 2014

Insurance Companies Will Soon Have to Disclose Corporate Governance Practices on an Annual Basis
 

The National Association of Insurance Commissioners (NAIC)  voted to adopt the model corporate governance annual disclosure act and regulation (CGAD) at its summer meeting in Louisville.  While the CGAD will still  need to be approved by each state,   it is anticipated that each state will adopt without any changes to the CGAD act/regulation.  The one provision that some states may change is the confidentiality provision-which some states (e.g. Florida) have indicated they believe is too broad.  Click here for the version of the CGAD that was approved in Louisville.

As it is written the CGAD act/regulation does not require companies to change or amend their governing practices but requires the companies on annual basis to describe such specific  practices/procedures.  The unknown is how the individual departments of insurance will use the information each receives and how the CGAD act/regulation will evolve to become more prescriptive after the state departments of insurance have analyzed the data from all of the companies.  One area that we anticipate will become more prescriptive is in the area of board expertise/composition (for example it will not be a surprise if in the near future there will be a requirement that certain expertise is present on a board (e.g. financial expert)). Similarly, we anticipate a requirement for annual board evaluations. 

The key provision of the CGAD regulation is Section 6, which describes what companies will need to describe in the new annual filing, it states:

A. The insurer or insurance group shall be as descriptive as possible in completing the CGAD, with inclusion of attachments or example documents that are used in the governance process, since these may provide a means to demonstrate the strengths of their governance framework and practices.

B. The CGAD shall describe the insurer’s or insurance group’s corporate governance framework and structure including consideration of the following.

(1) The Board, and various committees, ultimately responsible for overseeing the insurer or insurance group and the level(s) at which that oversight occurs (e.g., ultimate control level, intermediate holding company, legal entity, etc.). The insurer or insurance group shall describe and discuss the rationale for the current Board size and structure; and

(2) The duties of the Board and each of its significant committees and how they are governed (e.g., bylaws, charters, informal mandates, etc.), as well as how the Board’s leadership is structured, including a discussion of the roles of Chief Executive Officer (CEO) and Chairman of the Board within the organization.

C. The insurer or insurance group shall describe the policies and practices of the most senior governing entity and significant committees thereof, including a discussion of the following factors:

(1) How the qualifications, expertise and experience of each Board member meet the needs of the insurer or insurance group.

(2) How an appropriate amount of independence is maintained on the Board and its significant committees.

(3) The number of meetings held by the Board and its significant committees over the past year as well as information on director attendance.

(4) How the insurer or insurance group identifies, nominates and elects members to the Board and its committees. The discussion should include, for example:

a. Whether a nomination committee is in place to identify and select individuals or consideration.

b. Whether term limits are placed on directors.

c. How the election and re-election processes function.

d. Whether a Board diversity policy is in place and if so, how it functions.

(5) The processes in place for the Board to evaluate its performance and the performance of its committees, as well as any recent measures taken to improve performance (including any Board or committee training programs that have been put in place).

D. The insurer or insurance group shall describe the policies and practices for directing Senior Management, including a description of the following factors:

(1) Any processes or practices (i.e., suitability standards) to determine whether officers and key persons in control functions have the appropriate background, experience and integrity to fulfill their prospective roles, including:

a. Identification of the specific positions for which suitability standards have been developed and a description of the standards employed.

b. Any changes in an officer’s or key person’s suitability as outlined by the insurer’s or insurance group’s standards and procedures to monitor and evaluate such changes.

(2) The insurer’s or insurance group’s code of business conduct and ethics, the discussion of which considers, for example:

a. compliance with laws, rules, and regulations; and

b. proactive reporting of any illegal or unethical behavior.

(3) The insurer’s or insurance group’s processes for performance evaluation, compensation and corrective action to ensure effective senior management throughout the organization, including a description of the general objectives of significant compensation programs and what the programs are designed to reward. The description shall include sufficient detail to allow the commissioner to understand how the organization ensures that compensation programs do not encourage and/or reward excessive risk taking. Elements to be discussed may include, for example:


a. The Board’s role in overseeing management compensation programs and practices.

b. The various elements of compensation awarded in the insurer’s or insurance group’s compensation programs and how the insurer or insurance group determines and calculates the amount of each element of compensation paid;

c. How compensation programs are related to both company and individual performance over time;

d.Whether compensation programs include risk adjustments and how those adjustments are incorporated into the programs for employees at different levels;

e. Any clawback provisions built into the programs to recover awards or payments if the performance measures upon which they are based are restated or otherwise adjusted;

f. Any other factors relevant in understanding how the insurer or insurance group monitors its compensation policies to determine whether its risk management objectives are met by incentivizing its employees.

(4) The insurer’s or insurance group’s plans for CEO and Senior Management succession.

E.The insurer or insurance group shall describe the processes by which the Board, its committees and Senior Management ensure an appropriate amount of oversight to the critical risk areas impacting the insurer’s business activities, including a discussion of:

(1) How oversight and management responsibilities are delegated between the Board, its committees and Senior Management;

(2) How the Board is kept informed of the insurer’s strategic plans, the associated risks, and steps that Senior Management is taking to monitor and manage those risks;

(3) How reporting responsibilities are organized for each critical risk area. The description should allow the commissioner to understand the frequency at which information on each critical risk area is reported to and reviewed by Senior Management and the Board. This description may include, for example, the following critical risk areas of the insurer:

a. Risk management processes (An ORSA Summary Report filer may refer to its ORSA Summary Report);

b. Actuarial function;

c. Investment decision-making processes;

d. Reinsurance decision-making processes;

e. Business strategy/finance decision-making processes;

f. Compliance function;

g. Financial reporting/internal auditing; and

h. Market conduct decision-making processes.

It is anticipated that the CGAD will be in effect for 2016.

 


 
Posted by K. Kinross in   |  Permalink

 

Dec 09, 2013

Bricker & Eckler Launches New Business Litigation Blog
 

Members of Bricker & Eckler's Litigation group recently launched a new blog, BusinessLitigationBlog.com, featuring the latest on issues pertaining to a wide array of business disputes. Follow the blog to learn more about issues that your business has likely faced or may face in the future, including alternative dispute resolution, business contracts, business insurance, business torts, complex commercial litigation, general business litigation and intellectual property.


 
Posted by J. Beavers in  Uncategorized   |  Permalink

 

Nov 21, 2013

Directors May Take Greater Risk in Relying upon Committees that Do Not Consist Solely of Directors
 

The Securities and Exchange Commission (SEC) rarely takes judicial or even administrative action against boards of directors.  However, on December 10, 2012, the SEC instituted public administrative and cease-and-desist proceedings under the Investment Company Act of 1940 (1940 Act) against eight outside directors of mutual funds sponsored by Morgan Keegan & Company, Inc. (Morgan Keegan).  On June 13, 2013, the eight directors settled the proceedings by consenting to the cease-and-desist order.

 

The SEC’s allegations were that the eight directors delegated to a committee composed of the funds’ officers and accounting employees, the directors’ responsibility for assuring that the funds’ investments were valued at fair value as required by the 1940 Act without:

  • providing any meaningful substantive guidance on how those determinations should be made;
  • learning how fair values were actually being determined;
  • receiving more than limited information on the factors considered in making fair value determinations and almost no information explaining why fair values were assigned to specific portfolio securities;
  • providing any other guidance – either written or oral – on how to determine fair value; and
  • knowing or inquiring what methodology was used by the committee. 

Under most states’ corporation laws, including Ohio’s, a director may rely and may be protected when relying upon committees, but the standard of care required of a director is greater if the committee is not composed solely of directors.  For example, under both Ohio’s for-profit and non-profit corporation laws, a director may rely upon a committee composed solely of directors as to matters within the committee’s designated authority as long as the director reasonably believes the committee merits confidence.  This is not a difficult standard to meet because it requires the director (i) to know the committee’s authority, which the director can know by reviewing the committee’s charter, and (ii) to reasonably believe the committee merits confidence, about which the director can have some confidence because each member of the committee has the director’s fiduciary duties of care and loyalty when serving on the committee.  Those duties are to act in good faith, in a manner the director reasonably believes to be in or not opposed to the best interests of the corporation, and with the care that an ordinarily prudent person in a like position would use under similar circumstances.

 

On the other hand, if the committee is composed of non-directors, a director may only rely upon the committee for matters about which the director reasonably believes the committee members are reliable and competent.  Because non-directors do not have the same fiduciary duties of care and loyalty as a director, courts have held that a director must ask questions of a non-director committee in order to have such a reasonable belief.  Reliability requires inquiring about the truth and veracity, and freedom from conflicts of interest, of each committee member.  Competence requires inquiring about the care the members of the committee have taken in discharging their responsibilities, including the key question, “What happens if things don’t go as planned?”

 

Even though the SEC allowed the eight outside directors of the Morgan Keegan funds to consent to the cease-and-desist order without admitting or denying the SEC’s findings, they have suffered both economic loss in terms of legal fees and expenses, and reputational loss because of publicity.  Although the cease-and-desist order does not by itself result in a Morgan Keegan director being subject to the new “bad actor” disqualification of section 506(d) of SEC Regulation D, it is a disclosure item in the “management” section of registration statements, prospectuses and proxies subject to Regulation S-K.


 
Posted by J. Beavers in  Director & Officer Insurance, Indemnification, and Other Protections   |  Permalink

 

 

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