The role of the INED: a regulatory perspective - Sylvia Cronin, Director of Insurance Supervision

Introduction

Good afternoon ladies and gentlemen.

It gives me great pleasure to join you here today and my thanks to Insurance Ireland for inviting me to talk about this important topic.

Today, I shall discuss

• Corporate Governance;
• key attributes of an independent perspective; and
• the importance of Culture

before drawing some conclusions on the role of the Independent Non-Executive Director (INED).

Let me begin by refreshing our memories, by starting with one of the lessons we learned from the financial crisis. The Nyberg report pointed out that on boards, there appeared to often have existed a collegiate and consensual style with little serious challenge or debate. The report also pointed out that INEDs were formally independent but, in practice, highly reliant on the knowledge, openness and ability of management. The lessons learned from the financial crisis have informed the letter and spirit of today’s corporate governance.

Governance continues to be an issue for all sectors of financial services and there is a large amount of work going on at both national and international level to improve the governance framework. A key issue is how to strengthen Board oversight of firms in a complex and rapidly changing environment. INED’s with an appropriate skill set who challenge a firms executive are an important step in this regard.

Since the financial crisis, and with the implementation of Solvency II, recent growth of shareholder activism, the ever-growing dominance of social media, crises of culture in firms and challenges presented by Brexit, the business environment has become more complex and risks and issues more difficult to navigate through. These are real and serious challenges. From both an INED’s as well as the Central Bank’s perspective, joining a board as an INED is a serious commitment and carries considerable responsibility. The INED must act in the best interests of the Company as a whole, not only for shareholders but considering all stakeholders. The INED needs to bring an independent viewpoint to the deliberations of the Board that is objective and independent of the activities of the management. If you have been offered a role as an INED, it is vital to do your research on the firm and consider if the role offered is a proper fit for your skill-set, and what will be expected of you in your role as INED. You should understand the composition of the board and how it operates, the firm’s strategy, its business model, corporate governance standards and the overall culture that drives its business.

This is wider than just the Insurance sector, as what is expected of non-executive directors – as the INEDs are often described in other industries - has increased significantly in nearly all industries. Ken Olisa said¹ “Ten years ago, it was more about ‘being in a select group – joining an exclusive club’ – whereas now, the importance to the markets of corporate governance means that it’s a serious job. In that way, the NED role has moved from being an honour to being a professional responsibility.” This demonstrates the increase in the demands and responsibilities for non-executive directors across the board, and not just in insurance.

An Independent perspective

One of the most important attributes of an independent board member is their ability to bring fresh, unencumbered and independent perspective to ensure that the interests of the firm as well as consumers are protected. The importance of a truly independent thought process cannot be overstated. I expect INEDs to be prepared to challenge ‘group think’ and also be prepared to challenge direction coming from the parent group. Effective INEDs can balance their viewpoints with a supportive style in asking difficult questions or challenging a view without creating conflict. At times, an INED’s decision making process relies heavily on the assurance received from executive management or group NEDs. However, independence is compromised if an INED takes an important decision because he or she has been assured by the CEO or a group NED that everything is fine. At the core of the role of an INED is the expectation that they understand the business, are able to commit time to understanding the issues that need their attention and are prepared to form an independent view. In the words of Cristina Stenbeck² of Kinnevik group “non-executive directors need to bring a truly independent perspective, champion their area of expertise but not hide behind it.”

An example of this would be INEDs understanding where in the Insurance Cycle the market is, and the resulting implications for the business model of the undertaking. Different products may be at different points in the cycle. INEDs should ensure that sufficient information is provided to them to understand the impact on the business model but to still be in a position to take a high-level view of the challenges coming down the line for the firm.

The boards have collective responsibility for their firms business and meeting the needs of the customers they serve. Nevertheless, this collective responsibility should not and cannot be used as an excuse to avoid individual accountability for the role INEDs play as individual directors on the boards and board committees. I am aware of the viewpoint that the nature of the Irish insurance industry is such that decisions are made at parent group level and implemented at Irish company level. This viewpoint does not absolve the local boards and INEDs of their responsibilities and the Central Bank has clearly outlined requirements for the effective, prudent and ethical oversight of the insurance undertaking. To this end, the chairperson of the board is required under the Central Bank’s corporate governance requirements to encourage critical discussion, challenge mind-sets and promote effective communication between executive and non-executive directors. We have seen many cases of challenge and oversight working well, where there is an independent chairperson in situ.

A deep understanding of the business and markets

The complexities of today’s commercial world require that an independent board member must be comfortable assessing the firm in the context of strategy, technology, social responsibility, reputation and ethics. Having a broad breadth of experience allows INEDs to advise on a range of commercial issues.

The Insurance directorate of the Central Bank supervises over 209 firms with different business models, business strategies and skillsets. Taking a broad focus first, in order to effectively address the many challenges faced, an independent board member working as part of a well functioning board, must ensure that the firm:

• has sufficient financial resources;
• is well governed, with effective risk management and control frameworks and appropriate culture;
• has business models which contribute to capital growth over the long-term; and
• can recover if it gets into difficulty.

Narrowing my focus, and taking our cross border sector as an example, I would like to share some statistics with you to give an indication of how varied the sector is. The Irish cross border sector writes business into more than 110 countries with more than 25 million customers. Over 60% of the cross border firms are planning growth in their current markets and 33% have plans to enter new markets. The top three challenges for the cross border firms are meeting varying host state requirements, establishing their reputation, and brand awareness in foreign markets. In order to effectively address these challenges, an independent board member must have a deep understanding of the business of the firm they are advising. Independent non-executive directors should seek to establish and continually ensure confidence in:

• Understanding of the markets, insurance products offered and business strategy of the firm;
• How conduct risk is managed and customers protected in multiple markets;
• Performance of senior management; and
• Adequacy of control functions.

INEDs must be able to understand and challenge strategic proposals and satisfy themselves that the proposals are based on proper research and that they make commercial sense for the firms and firms’ consumers.

Culture

This brings me to the last attribute I plan to touch on today: culture. ‘Effective’ culture is still rooted in old fashioned values of ‘doing the right thing’ and creating an environment where people can speak up and are comfortable in expressing their views.

A truly independent non-executive director helps foster a good culture within a firm and can help challenge aspects of culture which may not be best practice. INEDs, therefore, can be a positive influence, shaping the values, behaviours and standards the firm aspire to achieve.

While the Central Bank can articulate what an effective culture would look like, and we will aim to identify behaviours and cultures that are outside of our risk appetite, culture remains the responsibility of the organisation. The culture of an organisation is the responsibility of the leadership team and we will require boards and senior management to give culture the attention it deserves. To change a culture positively, INEDs can follow a three stage approach. Firstly, they can form a view on the prevailing attitudes and behaviours by using a combination of observation, examination and inference to analyse policies, practices and approaches to decision making. INEDs should look for a holistic view of the indicators that can feed into this, whilst being wary of apparently isolated instances that may be evidence of underlying problems that are individual in nature, but waiting to come together in the form of a perfect storm. In the second stage, they can establish a vision for the desired culture by asking themselves what is culture and what does an effective culture look like for them? And going further than this to consider what behaviours they wish promote which will drive a more effective culture. A firm’s culture is formed by the assumptions, values, expectations and beliefs, which drive behaviours and how staff act. As an article in the Harvard Business Review pointed out³: “Culture is not a ‘goal’ to be mandated, but the outcome of the collective set of behaviours.” In the third stage, INEDs can focus on translating their vision into meaningful actions that will influence the individuals’ perception of culture and attitudes and behaviours necessary to achieve their vision. Arguably, the last stage is the most difficult stage that requires continuous evolution rather than it being a task with an end date.

Over the years, the Central Bank has witnessed the difference that INEDs have made in encouraging a robust discussion on important issues or risks facing firms. On the contrary side, we have also witnessed attempts to rubber stamp significantly material transactions or proposals put forward by the parent group without proper risk management considerations. It is important that Boards regularly discuss their ‘culture’ and use a diverse set of indicators to monitor how it is evolving against the vision established by the Board. Having a diverse group of independent non-executive directors can help improve boardroom dynamics and culture, and help create a high performing board. In today’s environment and the freedom of services model across Europe, having board members from a diverse geographical background can be of great assistance to the board in terms of understanding different market environments and related challenges.

On foot of the corporate governance requirements, we certainly have taken steps in the right direction to improve control frameworks and processes and procedures. Regulated firms have also appointed independent directors to achieve a better balance between executives and non-executives. Nevertheless, it is evident from the continuation of scandals that changing the culture and realising the importance of attitudes and behaviours has only just begun. Culture begins in the boardroom and the board members are responsible for setting the tone. I encourage all insurance firms to have meaningful and purposeful conversations around culture and value the role INEDs can play in this process.

Closing Remarks

In today’s world, the political, regulatory, business and technology landscapes are continuously evolving. This evolution is broad based and not just restricted to the insurance industry. In summarising the key points from the attributes I briefly touched on, I would say that an independent perspective plays a central role in navigating the continuously evolving challenges that insurance firms are facing. The core strength of the independent perspective lies in the ability to maintain a high-level view whilst challenging the executive management and the wider governance framework in place. Culture is the personality of any firm that bring the values, attitudes and behaviour together, and independent directors should have a positive influence in shaping the values, behaviours and standards the firm aspire to achieve. Finally, I would like to say that INEDs should not hesitate to engage directly with the Central Bank. Thank you for your attention and I look forward to taking part in the panel question and answer session.

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Acknowledgements: Thanks to Faheem Mirza for his input into this speech.

¹ Ken Olisa, Chairman of Restoration Partners. Quote taken from page 10 of ‘What Makes an Exceptional Independent Non Executive Director?’ A report by KORN FERRY Institute: https://www.kornferry.com/institute/459-what-makes-an-exceptional-independent-non-executive-director

² Cristina Stenbeck, the present director and former chair of Kinnevik - a group investing in businesses with focus on technology. Quote taken from page 10 of ‘What Makes an Exceptional Independent Non Executive Director? A report by KORN FERRY Institute https://www.kornferry.com/institute/459-what-makes-an-exceptional-independent-non-executive-director

³ Harvard Business Review ‘You Can’t Dictate Culture — but You Can Influence It’: https://hbr.org/2011/06/you-cant-dictate-culture-but-y