Presentation at Insurance and Pension Authority/Commonwealth Secretariat Seminar on Corporate Governance of Insurance Companies March 2012 Livingstone Zambia

1. Commonwealth Workshop on Insurance Regulators
Board Responsibility and Oversight
Chrismar Hotel, Livingstone 14/15 March 2012
Principles for Sound Corporate Governance
Marcus Killick
CEO Gibraltar Financial Services
Commission
1

2. Beginnings
 The Good News  The Less Good News
 A more detailed version  The is a participative
of the slides will be event. You will have
available on the FSC tasks to do!
website (www.fsc.gi)
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3. Objective of the sessions
The four sessions are designed to provide an
overview of the importance and implementation
of effective corporate governance within a
regulated insurance company.
They will cover:
4. Principles for Sound Corporate Governance
5. The Role and Function of Boards
6. Board Training, Conflict Resolution and
Assessing Board Performance
7. Risk Management
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4. Objective
To allow the boards of insurance companies
to consider what they need to do to meet
appropriate good corporate governance
processes within their own structure
4

5. Content: Day 1 Session 2
 The development of principle based
modern corporate governance
 International standard requirements for the
governance of boards (examples Basel,
and IAIS)
 The problems with regulatory assessment
of good corporate governance
 Corporate Social Responsibility
 Self Assessment Exercise – “Shareholders
and Stakeholders”
5

6. Why the regulatory focus on corporate
governance?
 Virtually every failure in the current crisis
has stemmed from poor corporate
governance/Board oversight. e.g.
Lehman Brothers Holdings Inc
Northern Rock
RBS
MF Global
 Poor oversight can lead to poor compliance
and reputational risk for the jurisdiction
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7. Why the regulatory focus on corporate
governance?
“ But ultimate responsibility for poor
decisions must lie with the firm, and the
pattern of poor decisions which RBS made
suggests there are likely to have been
underlying deficiencies in RBS’s
management, governance and culture”
“The failure of the Royal Bank of Scotland” (FSA Board Report)
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8. The development of principle based modern
corporate governance
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9. Principle based V Rule based governance
A rules-based approach
makes it easy for a regulatory body to
police corporate governance and penalise
those who do not comply but, it is seen as
presenting a rigid approach to governance
that emphasises box-ticking and penalties
for non-compliance. An example of this is
Sarbane Oxley in the USA.
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10. Principle based V Rule based governance
A principles-based approach
is seen as providing greater flexibility. Principles can be
modified and improved over time and are less cumbersome.
 principles are easier to create
 principles are easier for users to understand
 flexibility applies to all companies using the principles
regardless of the size or nature of the business
 companies are better placed to respond to market
conditions enabling them to improve their
competitiveness and to be more enterprising
 it encourages greater levels of co-operation between
companies and regulators.
The main drawback of a principles-based approach is that it
does not provide a clear set of 'dos and don'ts' for
companies to follow. As a result, unscrupulous boards may
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interpret the principles in ways that distort the common-
sense meanings underpinning the principles.

11. The UK model : principle based with statutory
backing
Principles
The Hampel Committee formally established a principles-
driven approach to corporate governance. The Hampel
Report stated that:
“Good corporate governance is not just a matter of
prescribing particular corporate structures and complying
with a number of hard and fast rules. There is a need for
broad principles. All concerned should then apply these
flexibly and with common sense to the varying
circumstances of individual companies.”
Comply or explain
Since the Combined Code was first established in 1992, a
comply-or-explain approach has been allowed. A company is
required to either comply with the principles and provisions of
the Code or explain and justify why not.
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12. The UK model : principle based with
statutory backing
Statutory –
Companies Act 2006
 Codifies the key directors duties with a view to reflecting in
statute the position under the common law and equitable
principles but with some significant changes.
 Key elements:
 Duty is owed to the company and only the company is able to
enforce them (members can, in certain circumstance, bring
action on the companies behalf);
 A director has the following duties:
 Act within powers;
 Promote the success of the company;
 Exercise independent judgement;
 Exercise reasonable care, skill and diligence;
 Avoid unauthorised conflicts of interest;
 Not to accept benefits from third parties;
 Declare interests in proposed transactions or arrangements
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13. The UK model : principle based with
statutory backing
13

14. The development of principles based
modern corporate governance (1)
Modern corporate governance has developed over the last twenty five years.
 In 1992 the 'Report of the Committee on the Financial Aspects of Corporate Governance' (the
Cadbury Report) produced a number of recommendations that were to substantially alter
corporate governance practice in this country. These included: the clear division of the role of
the chairman and chief executive in a company, selection processes for non-executive directors
and a balanced composition of the board of directors.
 In the early 1990s there was considerable concern about directors' pay and share options. This
led to the Greenbury Report in 1995 (produced by a committee chaired by Sir Richard
Greenbury). The recommendations from this report were for the establishment of a
remuneration committee made up of non-executive directors to set the remuneration packages
for directors detailed disclosure of directors remuneration in company annual reports.
 In 1996, the Hampel Committee was set up to review the findings of the previous reports. The
findings of the committee, chaired by Sir Stephen Hampel, led to a new line of thought about
how corporate governance could be incorporated effectively into thinking and practice. Hampel
emphasised that good corporate governance procedures should not focus on a tick-box
approach. Such an approach would be over-prescriptive. Hampel criticised box ticking in that it
would then be easy for lazy or unscrupulous directors to arrange matters, 'so that the letter of
every governance rule was complied with but not the substance.' His principles-based approach
is now an essential part of UK corporate governance,
 In 1998, the Turnbull Committee was set up by the Institute of Chartered Accountants resulting
in the Turnbull Report. The guidance in the report provided a framework for managers to help
with implementing internal control structures and financial reporting procedures required by the
Code.
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15. The development of principles based
modern corporate governance (2)
 In 2002, the government set up the Higgs Committee to review the role and effectiveness of
non-executive directors. The committee made recommendations about the proportion of non-
executive directors that should be on boards and committees and the expansion of the role of
the senior independent director.
 In 2003 (updated 2010), the UK government commissioned an additional report into the role of
audit committees in corporate governance. This resulted in the Smith Guidance. The Smith
Guidance examined situations where external auditors provided other (non-audit) services to
companies to determine whether this compromised the independence of the auditor.
 In 2009, the Financial Reporting Council (FRC) undertook a review of the Combined Code. The
FRC is the UK's independent regulator responsible for promoting confidence in corporate
reporting and governance. In 2010, the FRC published the latest revision to the Combined
Code - The UK Corporate Governance Code.
 In response to the financial crisis of 2008-9, the government set up the Walker Review (2009) to
examine corporate finance in the banking sector. The review specifically looked at key issues
associated with executive remuneration and the role of the board. Walker emphasises the
importance of risk management.
 In July 2010, the UK Stewardship Code was introduced. It superseded Section E of the UK
Corporate Governance Code that dealt with relationships with shareholders and that had
stressed that communication between a company and its shareholders was not just a case of
communication to shareholders but dialogue with shareholders. In issuing the Stewardship
Code, the FRC emphasised the importance of engagement with stakeholders in creating
effective governance practices. The aim of the Stewardship Code is to encourage institutional
investors, and the companies in which they invest, to engage in high-quality dialogue to
promote good governance.
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16. The development of principles based
modern corporate governance (3)
 In March 2011, The FRC issued a document entitled 'Guidance on board
effectiveness'. This guidance was designed to help companies apply the UK
Corporate Governance Code and it shows considerable progression in
thinking over the last 20 years about the nature and behaviour of the board
and its members. Review. The guidance relates specifically to sections A
and B of the UK Corporate Governance Code on leadership and
effectiveness of the board. The FRC’s guidance sets out that ‘an effective
board develops and promotes its collective vision of the company’s purpose,
its culture, its values and the behaviours it wishes to promote in conducting
its business’. The emphasis is therefore very much on the board to develop
a collective consciousness and shared sense of responsibility.
The guidance also sees the effective board as one in which respectful
challenge is an important behavioural characteristic and one in which
diversity in the board’s composition is essential.
“An effective board should not necessarily be a comfortable place.
Challenge, as well as teamwork, is an essential feature. Diversity in board
composition is an important driver of a board’s effectiveness, creating a
breadth of perspective among directors, and breaking down a tendency to
‘group think’.”
(FRC, Guidance on board effectiveness, 2011: 2)
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17. Opposition to modern corporate
governance requirements
Many of the reports were met with scepticism and hostility
For example, following the publication of Higgs in 2003 the
CBI surveyed 61 FTSE 100 chairmen and found that:
 82% of them felt the new role of senior independent director
suggested by Higgs would undermine the role of chairman
 87% thought that non-executive directors chairing the
nomination committee would not strengthen independence
 56% thought that non-executive directors meeting together in
the absence of the chairman would not be useful for corporate
governance
 50% felt that disallowing the chief executive officer from also
being the chairman would not improve corporate efficiency.
Nine years later all the above are in place and fully accepted.
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18. Other legislation affecting directors in the
UK
 Competition laws
 Health and safety
 Corporate manslaughter
 Bribery
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19. International standard requirements for the
governance of boards (examples Basle, and
IAIS)
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20. International standard requirements
1) Basle “Core Principles for Effective banking
Supervision” (Principle 14) –
Corporate governance:
“The supervisor determines that banks and
banking groups have robust corporate
governance policies and processes covering,
for example, strategic direction, group and
organisational structure, control environment,
responsibilities of the banks’ Boards and
senior management, and compensation. These
policies and processes are commensurate with the
risk profile and systemic importance of the bank.”
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21. Basle Corporate Governance –Essential
Criteria (1)
Principle 14: Corporate governance is supported by a number of essential criteria that are
necessary for a jurisdiction to be in full compliance with the principle
Essential criteria
4. Laws, regulations or the supervisor establish the responsibilities of the bank’s Board and senior
management with respect to corporate governance to ensure there is effective control over the bank’s
entire business. The supervisor provides guidance to banks and banking groups on expectations for
sound corporate governance.
2. The supervisor regularly assesses a bank’s corporate governance policies and practices, and their
implementation, and determines that the bank has robust corporate governance policies and
processes commensurate with its risk profile and systemic importance. The supervisor requires banks
and banking groups to correct deficiencies in a timely manner.
3. The supervisor determines that governance structures and processes for nominating and appointing a
Board member are appropriate for the bank and across the banking group. Board membership
includes experienced non-executive members, where appropriate. Commensurate with the risk profile
and systemic importance, Board structures include audit, risk oversight and remuneration committees
with experienced non-executive members.
4. Board members are suitably qualified, effective and exercise their “duty of care” and “duty of loyalty”.
5. The supervisor determines that the bank’s Board approves and oversees implementation of the
bank’s strategic direction, risk appetite and strategy, and related policies, establishes and
communicates corporate culture and values (eg through a code of conduct), and establishes conflicts
of interest policies and a strong control environment.
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22. Basle Corporate Governance –Essential
Criteria (2)
6. The supervisor determines that the bank’s Board, except where required otherwise by laws or
regulations, has established fit and proper standards in selecting senior management, plans for
succession, and actively and critically oversees senior management’s execution of Board strategies,
including monitoring senior management’s performance against standards established for them.
7. The supervisor determines that the bank’s Board actively oversees the design and operation of the
bank’s and banking group’s compensation system, and that it has appropriate incentives, which are
aligned with prudent risk taking. The compensation system, and related performance standards, are
consistent with long term objectives and financial soundness of the bank and is rectified if there are
deficiencies.
8. The supervisor determines that the bank’s Board and senior management know and understand the
bank’s and banking group’s operational structure and its risks, including those arising from the use of
structures that impede transparency (eg special-purpose or related structures). The supervisor
determines that risks are effectively managed and mitigated, where appropriate.
9. The supervisor has the power to require changes in the composition of the bank’s Board if it believes
that any individuals are not fulfilling their duties related to the satisfaction of these criteria.
Additional criterion
1. Laws, regulations or the supervisor require banks to notify the supervisor as soon as they become
aware of any material and bona fide information which may negatively affect the fitness and propriety
of a bank’s Board member or a member of the senior management.
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23. What is duty of care and duty of loyalty?
The OECD defines “duty of care” as:
“ The duty of a board member to act on an informed and
prudent basis in decisions with respect to the company.
Often interpreted as requiring the board member to approach
the affairs of the company in the same way that a ’prudent
man’ would approach their own affairs. Liability under the
duty of care is frequently mitigated by the business
judgement rule.”
The OECD defines “duty of loyalty” as
“ The duty of the board member to act in the interest of the
company and shareholders. The duty of loyalty should
prevent individual board members from acting in their own
interest, or the interest of another individual or group, at the
expense of the company and all shareholders.”
OECD glossary of corporate governance-related terms in “Experiences from the Regional Corporate
Governance Roundtables”, 2003, www.oecd.org/dataoecd/19/26/23742340.pdf.)
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24. International standard requirements
2) IAIS “Insurance Core Principles” (Principle 7) –
Corporate Governance
“The supervisor requires insurers to establish and
implement a corporate governance framework
which provides for sound and prudent
management and oversight of the insurer’s
business and adequately recognises and
protects the interests of policyholders.”
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25. Principle 7 Criteria (1)
 The supervisor requires the insurer’s Board to set
and oversee the implementation of the insurer’s
business objectives and strategies for achieving
those objectives, including its risk strategy and risk
appetite, in line with the insurer’s long term
interests and viability.
 The supervisor requires the insurer’s Board to:
ensure that the roles and responsibilities allocated
to the Board, Senior Management and Key
Persons in Control Functions are clearly defined so
as to promote an appropriate separation of the
oversight function from the management
responsibilities; and provide adequate oversight of
the Senior Management.
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26.  The supervisor requires the insurer’s Board to have, on an on-going
basis: an appropriate number and mix of individuals to ensure that
there is an overall adequate level of knowledge, skills and expertise
at the Board level commensurate with the governance structure and
the nature, scale and complexity of the insurer’s business;
appropriate internal governance practices and procedures to
support the work of the Board in a manner that promotes the
efficient, objective and independent judgment and decision making
by the Board; and adequate powers and resources to be able to
discharge its duties fully and effectively.
 The supervisor requires the insurer’s Board to provide oversight in
respect of the design and implementation of sound risk
management and internal control systems and functions.
 The supervisor requires the insurer’s Board to: adopt and oversee
the effective implementation of a remuneration policy, which does
not induce excessive or inappropriate risk taking, is in line with the
identified risk appetite and long term interests of the insurer, and
has proper regard to the interests of its stakeholders; and ensure
that such a remuneration policy, at a minimum, covers those
individuals who are members of the Board, Senior Management,
Key Persons in Control Functions and other employees whose
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actions may have a material impact on the risk exposure of the
insurer (major risk–taking staff).

27. Principle 7 Criteria (2)
 The supervisor requires the insurer’s Board to ensure there is a
reliable financial reporting process for both public and supervisory
purposes which is supported by clearly defined roles and
responsibilities of the Board, Senior Management and the external
auditor.
 The supervisor requires the insurer’s Board to have systems and
controls to ensure the promotion of appropriate, timely and effective
communications with the supervisor and relevant stakeholders on
the governance of the insurer.
 The supervisor requires the insurer’s Board to have appropriate
policies and procedures to ensure that Senior Management:
 carries out the day-to-day operations of the insurer effectively and in
accordance with the insurer’s strategies, policies and procedures;
 promotes a culture of sound risk management, compliance and fair
treatment of customers;
 provides the Board adequate and timely information to enable the Board
to carry out its duties and functions including the monitoring and review
of the performance and risk exposures of the insurer, and the
performance of Senior Management; and
 provides to the relevant stakeholders and the supervisor the information
required to satisfy the legal and other obligations applicable to the
insurer or Senior Management.
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28. Principle 7 Criteria (3)
 The supervisor has the power to require the insurer to demonstrate
the adequacy and effectiveness of its corporate governance
framework.
 The supervisor requires the individual members of the Board to:
 act in good faith, honestly and reasonably;
 exercise due care and diligence, act in the best interests of the
insurer and policyholders, putting those interests of the insurer
and policyholders ahead of his/her own interests;
 exercise independent judgment and objectivity in his/her
decision making, taking due account of the interests of the
insurer and policyholders; and not use his/her position to gain
undue personal advantage or cause any detriment to the
insurer.
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29. The problems with regulatory assessment of
good corporate governance
29

30. The problems with regulatory assessment of good
corporate governance
It is subjective involving both quantitative
and qualitative information
Board policies and procedures can be
assessed;
Board papers and board minutes can
be reviewed;
Frequency of board meetings can be
checked;
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31. The problems with regulatory assessment of
good corporate governance
BUT
 Board behaviour cannot be objectively
measured;
 Inappropriate shareholder influence cannot
be seen (The Board leads the company NOT
the shareholders)
THEREFORE
 The role of the NED is vital to ensure the
board operates effectively
 Accordingly the regulator encourages the
appointment of NEDs and especially
independent NEDs
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32. Corporate Social Responsibility
32

33. Stewardship
 Stewardship deals with relationships with shareholders and that communication
between a company and its shareholders was not just a case of communication to
shareholders but dialogue with shareholders.
 The aim is to encourage institutional investors, and the companies in which they invest,
to engage in high-quality dialogue to promote good governance. In the UK The
Stewardship Code* was introduced in the wake of criticism that institutional investors
were taking a short-term view of investment and were therefore failing to take
appropriate levels of responsibility for companies that they invested in.
 The Stewardship Code sets out seven principles that apply to institutional investors.
They should:
 publicly disclose their policy on how they will discharge their stewardship responsibilities
 have a robust policy on managing conflicts of interest in relation to stewardship and this policy
should be publicly disclosed
 monitor their investee companies
 establish clear guidelines on when and how they will increase their activities as a method of
protecting and enhancing shareholder value
 be willing to act collectively with other investors where appropriate
 have a clear policy on voting and disclosure of voting activity
 report periodically on their stewardship and voting activities.
(Financial Reporting Council, The Stewardship Code, 2010)
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34. Corporate Social Responsibility (CSR)
In “The Human Face of the New Capitalism” (2009), Howard*
identified four different levels of CSR
Level 1 Economic
This involves maximising returns for the company. However
managers are responsible for operating within the rules of
the game, i.e. competing fairly within the marketplace,
forbidding monopolies and predatory market practices
Level 2: Legal
Here, managers show a commitment to comply with the
relevant laws. They comply with the letter of the law even
when it is costlier to do so. An example is not hiring illegal
labour at substandard wages
.
34

35. Corporate Social Responsibility (CSR)
Level 3: Ethical
Here, managers and directors show concern for what is right or
good for stakeholders. Managers don't just comply with the letter of
the law, but also with the spirit of the law. In addition, they take
responsible actions where there are gaps in legal provision (eg by
introducing anti pollution systems well above that legally required.
Level 4: Discretionary
Managers and directors voluntarily take actions to improve society.
Such actions may not be related directly to the company's normal
operations. Directors and managers recognise that they control
resources that can be used for the wider benefit of society. An
example of this is the creation of the Ronald McDonald Houses in
25 countries. These provide free accommodation for parents of sick
children who are in hospital, so that they can be near to their child. It
has helped more than 10 million people worldwide.
Many believe that compliance with levels 1 and 2 should be taken
as given as a basic requisite of social responsibility and is expected
of any firm by the public
*”Does corporate social responsibility affect consumer behavior”.
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36. Self Assessment Exercise – “Shareholders
and Stakeholders”
36

37. Self Assessment Exercise 1 –
“Shareholders and Stakeholders”
Each board has a range of groups to whom they
are accountable or who are, in some way,
stakeholders who have an interest in the good
running of the firm.
Exercise:
 Who are your stakeholders?
 What interest do they have?
 Do some have priority, if so, which?
 Are those interests competing/conflicting?
 If so, how do you manage that conflict?
 To what extent do you engage in corporate social
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responsibility?

38. Commonwealth Workshop on Insurance Regulators
Board Responsibility and Oversight
Livingstone March 2012
The Role and Function of Boards
Marcus Killick
38

39. Content Day 2 Session 1
 Role of the Board
 Board Committees
 Role of the Chairman
 Chairman and Chief Executive
 Executive and Non Executive Members
 Behaviour on the Board
 Self Assessment Exercise (behaviours and
attributes of the Chairman)
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40. Role of the Board
40

41. Role of the Board
:
 Leads and controls the company;
 Increases shareholder value;
 Safeguards the interests of the
stakeholders;
 Makes policy;
 Approves the corporate objectives;
 Sets the strategy to achieve the corporate
objectives;
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42. Role of the Board
 Critically monitors and assesses the achievement of those
objectives and amends the strategy as appropriate;
 Decides on the allocation of resources among competing
interests;
 Ensures that the organisation conducts its affairs in an
ethical, legal and responsible manner;
 Establishes formal and transparent arrangements for
presenting the company's annual financial report with a
balanced and understandable assessment of its position and
prospects;
 Reviews the effectiveness of the company's system of
internal control; and
 Has a role to monitor the standing of the organisation in the
business and the wider community.
In essence these boil down to Strategy, Policy making,
Decision taking and Oversight
42

43. Strategy
Strategy is the direction or focus an
organisation chooses to create the optimal
balance between its internal strengths and
weaknesses with the external threats and
opportunities presented by the environment
in order to achieve the organisation’s
objectives.
It is an ongoing process
43

44. What isn’t strategy
http://www.youtube.com/watch?v=R4q6uixp2UY
44

45. Policy making
Policies define focus and differentiate responsibilities
among the Board and the Executive.
“Well-written policies lead to more efficient board
functioning. Instead of having the same matter or
very similar matters on the agenda repeatedly, the
board can develop a policy that covers the issue and
leave implementation of the policy to management.”
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46. Decision making
Decision making involves making choices about the
organisation's vision, mission, and strategies. Boards
make decisions about issues that are strategic and
significant, such as whether to enter an agreement
with another organisation. As decision makers,
boards can also delegate non governance types of
decisions to others.
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47. Oversight
Oversight is an important function, but
boards must remember that the
organisation is theirs to oversee, not to
manage. Some boards cross the line and
try to involve themselves in management.
The NED’s role is to see that the company
is properly run, not to run it themselves.
Nevertheless, in the oversight role, the
board is legally responsible for everything
that happens.
47

48. Board Committees
48

49. Board committees
Play an important role in the governance
process.
It is useful to periodically review the structure
and functions of the committees and to
ensure that everyone knows what to expect
from them.
Committees generally include:
 Audit;
 Remuneration;
 Nomination;
 Risk.
49

50. Board Committee roles
Audit committee
 Review accounting principles, policies and
practices
 Ensure all financial statements follow
accounting practice and give an accurate
representation of the companies situation
 Scope, examine and follow up audits
(especially on controls)
 Develop and monitor internal audit
 Consider the appointment and
remuneration of auditors
 Should consist of non executive directors
50

51. Board Committee roles
Remuneration committee
 Approve service contracts for executive directors
(and senior management)
 Recommend to the board the remuneration for
executive directors and senior management
 Review and recommend employee share schemes
 Review pensions
 Approve arrangements for retirement or
termination
 Chairman of the board (if independent) may be a
member but not chair
51

52. Board Committee roles
Nominations committee
 Formal and transparent process for the
appointment of new directors
 Recommend appointments to the board
 Should consist of a majority of non
executive directors
52

53. Frequency of meetings
All directors should be able to allocate sufficient time to the
company to discharge their responsibilities effectively.
 It is not always desirable to set fixed time commitments
for board duties as the company believes that the time
required by directors may change depending on business
events
 In 2010, PricewaterhouseCooper's 'Non-executive
director survey' showed that during the year the typical
time commitment for non-executive directors had risen by
an average of four days per year (because of the
uncertainty in the economy) and that it is estimated that
non-executive directors in FTSE 100 companies spend
24 days per year performing their role.
53

54. Frequency of meetings
 Walker recommended that for the boards of
major banks a letter of appointment should
stipulate a minimum time commitment of 30-36
days per year.
 The Board is also a social grouping therefore to
build trust and confidence amongst its members
consideration should be given to the use of
board dinners etc and time allocated for these.
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55. Role of the Chairman
55

56. Role of the Chairman
 To lead the board in the determination of its
strategy
 Ensure the board has adequate information
to perform its role
 Ensure effective relationships are
maintained with all major stakeholders
 Runs the board to allow the Chief executive
to run the company
 Ensures right and common values
56

57. Chairman and Chief Executive
57

58. Chairman and Chief Executive
 Should be seperate
 The chairman runs the board, the chief
executive runs the company
 The roles of the chairman and chief
executive should be separated
 The division of responsibilities between the
chairman and chief executive should be
set out in writing and agree by the board
58

59. Executive and Non Executive Members
59

60. Executive and Non Executive Directors
There is no distinction between the position of executive and
non executive directors. If a breach of duty is to be attributed to
a board on the basis that all of its members were present at a
meeting which had approved a wrongful act, then the liability of
each director is joint and several and no allowance is made for
the fact that some are part timers and may have acquiesced in
a situation which they did not fully understand
Re Lands Allotment Co. (1894) 1 Ch 616 63 LJ Ch 291 CA.
60

61. The role of the NED
“Essentially, the non-executive director's role is to provide a
creative contribution to the board by providing objective
criticism. Non-executive directors are expected to focus on
board matters and not stray into 'executive direction' thus
providing an independent view of the company that is removed
from day-to-day running.
Non executive directors, are appointed to bring the following to
the board:-
Independence;
Impartiality;
Wide experience;
Special knowledge;
Personal qualities.”
Institute of Directors
61

62. The effective NED
“Non-executive directors should:
Scrutinise the performance of management in
meeting agreed goals and objectives and monitor the
reporting of performance.
Satisfy themselves on the integrity of financial
information and that financial controls and systems of
risk management are robust and defensible.
Be responsible for determining appropriate levels of
remuneration of executive directors and have a prime
role in appointing and, where necessary, removing
executive directors, and in succession planning.”
The UK Corporate Governance Code
62

63. Personal Attributes of the Effective
Non- Executive Director
The NED role is complex and demanding and
requires skills, experience, integrity, and particular
behaviours and personal attributes
 Integrity and high ethical standards – these are
a prerequisite for all directors
 Sound judgement and an inquiring mind. NED’s
should:
question intelligently;
debate constructively;
challenge rigorously; and
decide dispassionately
63

64. Independent Non-Executive Director
The following characteristics are indicative of an
independent NED:
 The individual is not an employee of the company or
another company in the same group;
 The individual is not a professional advisor to the
company;
 Individual is not a supplier or customer of the company;
 The individual does not have a family connection with
someone in the business;
 The individual’s directorship is for a fixed term and
accordingly he is less likely to be motivated by self-
preservation when taking decisions;
 The individual does not depend so heavily on his
remuneration from the company as to make resignation
difficult.
64

65. Dealing with NEDs’
 NEDs need to be well informed about the company, and the need to
insist upon a comprehensive, formal and tailored induction to the
company on appointment
 NEDs should be adequately compensated for the time that they
spent on the company’s business. Levels of remuneration should be
sufficient to attract, retain and motivate directors of the quality
required to run the company successfully.
 The term of an NED should generally be fixed, albeit subject to
renewal for a further term. It is important to recognise that the
nonexecutive directors' effectiveness is likely to improve with
cumulative experience and knowledge of the company.
65

66. Discussion 1
Your firm and Corporate Governance
 How does your firm apply corporate
governance?
 Are there non executive directors and, if so,
are they independent?
66

67. Board Behaviour
67

68. Boardroom Behaviour
Historically given inadequate consideration in
corporate governance now rising in profile. For
example, the Walker report states:
“Boards and board behaviour cannot be
regulated or managed through organisational
structures and controls alone; rather behaviour
is developed over time as a result of responding
to existing and anticipated situations”.
(Annex 4 “Psychological behavioural elements in board performance”)
68

69. Boardroom Behaviour
“Appropriate behaviours are an essential component
of best practice corporate governance; and that the
absence of guidance on appropriate boardroom
behaviours represents a structural weakness in the
current system.”
The Institute of Chartered Secretaries and Administrators (ICSA)
69

70. Boardroom behaviour
 Appropriate board behaviour can be defined as
functioning in accord with the board's roles and
responsibilities.
 The first key characteristic is respect—for the
organization, the management the employees, and
other members of the board. Respect is basic, but
it doesn't always exist.
 Respect leads to two additional behavioural
characteristics that are needed: openness in the
board discussions and confidentiality.
70

71. Boardroom behaviour
 Conflicts of interest also fall in the category of
behaviour. “There's no evil in conflict of interest;
the evil lies in the hiding of it”. All boards need to
have a policy about conflict of interest. Usually this
policy requires all members to disclose potential
conflicts and to abstain from voting on such
matters.
 Another behavioural element is distinguishing
between the important and the unimportant. The
board has limited time. If it spends hours and
hours on trivial matters, it won't be able to address
71
significant and strategic matters.

72. Boardroom behaviour
 Effective working groups, including boards, require
trust and respect. Mutual respect, equality, patience,
tolerance of differences, listening with respect and
without interrupting, are all required to create a culture
of constructive challenge.
 Failure to achieve this, however successful the board
may be been historically, is an almost inevitable sign
of problems ahead. Boards with an over dominant
CEO and/or a weak Chairman have been a prime
cause of the sudden collapse of seeming successful
companies ( eg Maxwell, Goodwin, Ken Lay). Still
evidence that boards seek to avoid conflict
72

73. Boardroom behaviour - traps
 Confirmation bias
 Framing
 Group think
 Halo-effect
 One-sided brain dominance
 Pattern-recognition bias
73

74. Boardroom behaviour - traps
 Ineffective situation analysis
 Premature solutions
 Saliency bias
 Stability bias
 Sunflower management
 Technical solutions to adaptive challenges
 Cognitive outsourcing
74

75. Can you fall into a trap?
Imagine that a factory in Livingstone is
about to shut which has 600 worker. Two
alternative programs to deal with the
situation have been proposed..
 Program A: "200 people’s jobs will be
saved"
 Program B: "there is a one-third probability
that 600 jobs will be saved, and a two-
thirds probability that no jobs will be saved"
Which programme do you go for?
75

76. Can you fall into a trap?
Two more alternativess have been
developed:
 Program C: "400 people will lose their jobs"
 Program D: "there is a one-third probability
that nobody will lose their job, and a two-
third probability that 600 people will"
Which do you go for?
76

77. Boardroom behaviour -
Achieving productive disagreement
“So if we are all in agreement on this decision
– then I propose we postpone further
discussion on this matter until our next
meeting to give ourselves time to develop
greater disagreement, and perhaps to gain
some understanding of what the decision is
all about”
Alfred P Sloan
General Motors
77

78. Board behaviour depends partially on
understanding board member differences
Left brain Right brain
logic feeling
detail oriented big picture oriented
facts rule imagination rules
present and past present and future
reality based presents
practical possibilities
safe conceptual
risk taking
78
Reference: I.McGilchrist, 2009

79. What can board behaviour help to do?
 Help directors to understand cognitive
styles, thinking preferences and decision
speeds.
 Teach boards to understand the thinking
traps of working in groups and to recognise
the typical situations in which they occur.
 Use thinking process to help boards
develop the conditions for a thinking board
and a thinking organisation to evolve.
79

80. Self Assessment Exercise (behaviours and
attributes of the Chairman)
80

81. Self Assessment Exercise 2 - Behaviours and
attributes of the Chairman
What behaviours and attributes should a
good Chairman possess?
81

82. Behaviours and attributes of the
Chairman*
Personal attributes Behaviours
 Integrity and high ethical  Enabling openness
standards  Listener, empathetic
 Strong cognitive abilites  Builds trust
 Long term perspective and  Facilitating interaction
a sense of purpose  Strong, clear
 Personal authority and communicator
presence  Conceptually agile – opne
 No ego minded, encouraging of
 Emotional intelligence debates, able to challenge
 Change orientated
 Resiliant
*Non Executive Chairman Awards
82
2006

83. Commonwealth Workshop on Insurance Regulators
Board Responsibility and Oversight
Livingstone March 2012 February 2012
Board Training, Conflict Resolution and
Assessing Board Performance
Marcus Killick
83

84. Content : Day 2 Session 4
 Board training and development
 Handling conflicts of interest
 Board conflict resolution
 Assessment
 Assessing effectiveness of:
 the Board as a whole
 the Chairman
 Other Board Members
 Board Committees
 Methods of assessment
 Which style to chose?
84

85. Board training and development
85

86. Board training and development
The Combined Code requires that:
“All directors should receive induction on joining the board
and should regularly update and refresh their skills and
knowledge.”
 The chairman has a responsibility to ensure that directors
continually update these skills and knowledge, as well as to
develop familiarity with the company.
 The company is required to provide ‘the necessary
resources for developing and updating its directors’
knowledge and capabilities'.
 The chair is required to regularly review with each director
their training and development needs.
86

87. Induction training
Areas to cover:
 General information relating to the organisation
 General health and safety (HR matters, fire exits,
toilets etc)
 Brief outline of their role and a summary of their
responsibilities
 Guidelines on delegated authority, policies and
procedures
 The firms history/strategy/mission statement
 The firms business plan/budgets/risk management
87

88. Induction training
 Organisation Chart
 Copy of the Annual Report (last 3 years)
 Board issues
 Minutes of last Board meetings (last 3-6)
 Schedule of dates of future board meetings and sub committees
 Board policies and procedures
 Relevant legislation the Board member should be aware of
 Outline of the combined code and how the firm adheres to it
 Details of all board members (biographical and contact details)
 Details of sub committee together with their terms of reference
and copies of meeting minutes if they are joining a sub
committee.
 Conflicts of interest
 Consider mentoring
88

89. Continuation training
 Training is not a one off exercise. Boards
must keep themselves up to date with:
 New products or services
 Changes in auditing and corporate governance
 Changes in the firms internal processes and
procedures
89

90. Handling conflicts of interest
90

91. Handling conflicts of interest
“There's no evil in conflict of interest; the evil lies in the hiding of it”.
Gibraltar FSC approach:
Board has a conflict policy
Day to day licensing and enforcement decisions are delegated to the
Executive so removing potential conflict issues for board members in
the local industry.
Board papers are redacted where appropriate to remove
firm/individual names
All enforcement cases are reviewed by the Chairman with redacted
information going to the Board
All entertainment and hospitality by/to Executive recorded. CEO
reviews Executive, Chairman reviews CEO
Prior approval required for certain entertainment/hospitality (eg from
applicants)
Procedures in place for other conflicts (eg where there are personal
relationships with a licensee)
Political involvement/public statements also subject to policy
91

92. Board conflict resolution
92

93. Board conflict resolution
“ Politics in organisations is ever present, no
matter who you are, or what you do, it is
impossible to escape the power/political
interactions that take place between people
at work.”
Professor Lyman Porter
University of California
93

94. Board conflict resolution
Five conflict resolution behaviours*:
 Competing
 Collaborating
 Compromising
 Accomodating
 Avoiding
Each have strengths and weaknesses in dealing
with conflict. It is important to understand your and
others style to achieve resolution
*Thomas Kilman Conflict Mode
94

95. Competing
 Characteristics
 Individual pursues own concerns at others expense
 Uses power to win
 Uses
 Quick decisive action
 Implementing unpopular actions
 To avoid being manipulated
 Sample statements
 Do as you are told
 I’m sure mine is the best way
 I am not prepared to change my position
95

96. Collaborating
 Characteristics
 Individuals attempt to work with other person to find a solution
that satisfies both their concerns
 Working with others to solve problems
 Uses
 To merge insights from people with different perspectives
 To find solution where both sets of concerns are too important
to compromise
 Sample statements
 Let’s work this out together
 Let’s find some common ground
 Where do we differ?
96

97. Compromising
 Characteristics
 Mutually acceptable solutions under pressure
 A back up style when collaboration is unsuccessful
 Uses
 When goals are only moderately important
 When opponents with equal power are committed to mutually
exclusive goals
 Sample statements
 Let’s be satisfied with
 I suggest we meet half way
 Let’s both come away from this with something
97

98. Accommodating
 Characteristics
 Individuals neglect own concerns to satisfy the concerns of the
other person
 Obeying others when you prefer not to
 Uses
 When you find you are wrong, to allow a better position to be
heard
 To maintain cooperation
 To build “credit” for later use
 Sample statements
 I concede that point
 I don’t want to offend you
 What is you preferred outcome?
98

99. Avoiding
 Characteristics
 Does not address the conflict
 Postpones
 Withdraws
 Uses
 When situation trivial or more important issues pressing
 When potential damage of confrontation outweighs benefit of
resolving issue
 Lets people cool down and regain perspective
 Sample statements
 Let’s talk about this later
 I’m not in a position to discuss
99

100. Differences in the boardroom
Task Differences
Process Differences Relationship differences
100

101. Differences in the boardroom
 Task differences
Differences in views and opinions in what is to
be done by the organisation
Positive (to a point)
 Process differences
Differences in views and opinions in how the
work of the board gets done
Can be negative
 Relationship differences
Differences between board members of a
personal and emotional nature
Negative
101

102. Constructively handling task differences
 Do not be internally conflicted. Challenge is
a board members role
 Be prepared. Make sure you have the
information you need to challenge
effectively
 Maximise you distinctive contribution. Use
your expertise, knowlledge, perspective
and experience
 Focus on date and logic. Not on positions
and personalities
 Speak sparingly but powerfully
102

103. Handling relationship differences
 Check your contribution first. Am I causing
or exacerbating the problem? Could I be
misunderstanding the other person?
 Use the Chairman. Managing conflict is
their role
 Check with other board members. Do
others share your concerns?
 Talk to the other person
 Seek external mediation
103

104. Board assessment
104

105. Board Assessment
“It is best practise that the performance of
the board as a whole, of its committees and
of its members, is evaluated at least once a
year... Companies should disclose in their
annual report whether such performance
evaluation is taking place.”
The Review of the role and effectiveness of non-executive directors
2003 ( the Higgs Review)
105

106. Assessing the effectiveness of the Board
as a whole
 Has the board set itself clear performance objectives and how well has it
performed against them?
 What has been the whole board’s contribution to the testing and
development of strategy?
 What has been the board’s contribution to ensuring robust and effective risk
management?
 Is the composition of the board and its committees appropriate with the right
mix of knowledge and skills sufficient to maximise performance in the light of
future strategy?
 Are inside and outside board relationships working effectively? There may,
for example, be problems getting the optimum level of interaction between
non-executive and executive directors. Lack of contract between meetings
and sometimes lack of understanding of the role of the non-executives
(particularly in smaller companies) are both contributors to this.
Occasionally, where a small caucus of key directors gets on particularly well,
the non-executive directors can feel cut out- this requires particular attention
to be paid to the provision of appropriate and timely information.
106

107. Assessing the effectiveness of the Board
as a whole
 How has the board responded to any problems or crises that have emerged
and could or should they have been foreseen?
 Are the matters reserved for the board the right ones?
 What is the relationship between the board and its main committees and
between the committees themselves?
 How well does the board communicate with the management team,
company employees and others? How effectively does it use mechanisms
such as the AGM, the business review and the annual report?
 Is the board as a whole up to date with latest developments in the regulatory
environment and the market?
107

108. Assessing the effectiveness of the
Chairman
 Is the chairman demonstrating effective leadership of the board?
 Are relationships and communications with shareholders well managed?
 Are relationships and communications within the board constructive?
 Are the processes for setting the agenda working? Do they enable board
members to raise issues and concerns?
 Are all directors allowed or encouraged to participate fully in board
discussions?
 Is the company secretary being used appropriately and to maximum value?
108

109. Assessing the effectiveness of other
board members
The Institute of Chartered Secretaries and Administrators (ICSA) suggests
that key questions that need to be answered through an individual
evaluation process, include:
 How well prepared and informed are they for board meetings and is their
meeting attendance satisfactory?
 Do they demonstrate a willingness to devote time and effort to understand
the company and its business and a readiness to participate in events
outside the boardroom, such as site visits?
 What has been the quality and value of their contributions at board
meetings?
 What has been their contribution to development of strategy and to risk
management?
 How successfully have they brought their knowledge and experience to bear
in the consideration of strategy?
109

110. Assessing the effectiveness of other
board members
 How effectively have they probed to test information and assumptions?
Where necessary, how resolute are they in maintaining their own views and
resisting pressure from others?
 How effectively and proactively have they followed up their areas of
concern?
 How effective and successful are their relationships with fellow board
members, the company secretary and senior management?
 Does their performance and behaviour engender mutual trust and respect
within the board?
 How actively and successfully do they refresh their knowledge and skills and
are they up to date with: the latest developments in areas such as corporate
governance framework and financial reporting the industry and market
conditions?
 How well do they communicate with fellow board members, senior
management and others, for example shareholders. Are they able to present
their views convincingly yet diplomatically and do they listen and take on
board the views of others?
110

111. Assessing the effectiveness of other
board members
The benefits of individual evaluation
 evaluation makes it possible to identify directors who are
underperforming using a clear set of criteria that are appropriate to
a particular company
 establishing evaluation criteria helps individual directors to focus on
areas that are regarded to be important in organising their work
 providing feedback to directors on their performance enables them
to identify what they are doing well, and also areas where they can
make improvement
 as with any form of appraisal, individual director evaluation makes it
possible for the director working with the chair to identify training
and development targets
 a number of surveys have shown that in the USA, Europe and
elsewhere, that in companies in which evaluation of individual
directors takes place:
 the directors rate the effectiveness of the board more highly than is
the case in companies without such an evaluation process
 the investors rate the effectiveness of the board more highly.
111

112. Assessing the effectiveness of other
board members
The main criticisms of individual evaluation are that:
 it can be seen as a threat to the collegiality among directors,
when the performance spotlight is directed at individuals
 it works against the notion of consensus and working
together
 directors are chosen because of their proven track record,
skills and ability. Therefore, to assess their performance is to
question these abilities
 some talented directors may be discouraged from putting
themselves forward if they have to be continually evaluated
 concerns about who should do the evaluation. Directors
actually spend a relatively limited time together – so are they
equipped to judge each others performance given the
evidence available?
112
 individual evaluations may encourage board members to
compete against each other rather than work as a team.

113. Assessing the effectiveness of Board
Committees
 Does each board committee have adequate and appropriate
written terms of reference?
 Is the volume of business now handled by the committee
(particularly the audit committee set at the right level?
 Does the committee work in an ‘inclusive’ manner or has it,
for example, resulted in executive directors not involved in
the respective committee feeling distanced from those
matters covered by the committee’s area of activity?
 How effective are the board’s committees? (Specific
questions on the performance of each committee should be
included such as, for example, their role, their composition
and their interaction with the board.)
 Are board committees used to the best advantage? A more
effective use of the nomination committee might be to widen
its remit to embrace management development.
113

114. Methods of assessment
 Self evaluation provides a means for each director to reflect
on their own performance. Individuals can be supplied with
evaluation questionnaires that enable them to identify the
sorts of questions to consider.. The weakness of self
evaluation is that it is based on self-reporting and biases
associated with self-image.
 Peer evaluation involves directors assessing each other’s
performance. This requires a high level of trust. The reliability
of such an assessment is curtailed by lack of experience
about how to conduct such an evaluation, and issues
associated with personal feelings and interpretations of the
value of others’ actions.
 Evaluation by the chair may be more effective if the chair
has had appropriate training and has suitable interpersonal
skills. The main disadvantage of evaluation by the chair
includes problems associated with personalities and
personal relationships developed over time.
114

115. Methods of assessment
 360 degree feedback This may involve three forms of
feedback: feedback from seniors (e.g. by the chair on a new
non-executive director), feedback from peers (e.g. from
fellow non-executives) and feedback from subordinates
(where this applies).. The advantage of 360 degree feedback
is that where an individual receives negative feedback from
one source, then this may be counteracted by positive
feedback from several other directions. 360 degree feedback
also provides a wider collection of evidence, although it may
take time to analyse.
 Feedback from external facilitators. External facilitators
may be brought in to evaluate the effectiveness of individual
directors (the Combined Code requires this every three
years for FTSE 350 companies anyway).
115

116. When to choose external assistance?
 For new chairmen: Incoming chairmen, especially
if they have only been members of a board for a
short time prior to their appointment, may find it
useful to commission their party facilitation of an
evaluation in order to accelerate, and render more
objective, their own assessments of the board’s
capabilities and to plan future changes of the
membership where this is envisaged.
 For “old” boards: Conversely, chairmen of
boards which have operated with the same
membership over a long period may consider an
element of third-party facilitation as a safeguard
against inertia or complacency.
 When you have a problem: For example, a
situation which will require tactful, impartial
handling.
116

117. When to choose external assistance?
 When challenged: Some shareholders lobby groups
routinely criticise or challenge the tenure of certain directors
on the basis of judgments which may be regarded as
mechanistic (as per the ICGN reference to “box tickers”).
Such challenges are often ignored, often with good reason.
The occurrence of criticism, however, may encourage
periodic third- party evaluation which may, in turn, provide
clear legitimisation of the decision to ignore it.
 Every so often:. Periodic external facilitation may make it
easier to solicit the views of the company secretary, HR
director or other senior executives immediately below board
level whose inputs would be compromised should they be
involved in conducting the process. Senior executives may
be (understandably) reluctant directly to criticise directors
who are their employers and may be more likely to be candid
in speaking with an external facilitator on a confidential basis.
117

118. Commonwealth Workshop on Insurance Regulators
Board Responsibility and Oversight
Livingstone March 2012
Team Exercise
Marcus Killick
118

119. Team Exercise (preparing for the first Board
meeting) Day 2 Session 5
119

120. Team Exercise - Preparing for the first Board
meeting
Day 2 Session 5
You are a new non executive member of the board of an insurance company.
You have been asked to attend your first Board meeting. To date you have
had nothing but notification of your appointment and the following agenda
which has not been accompanied by any papers
3. Minutes of the previous meeting
4. Action points arising for executive from the previous meeting
5. Annual business plan
6. Annual paper concerning authority to be delegated to the Executive
Report from the Executive
7. Proposed budget for following year
8. Nomination committee recommendation
9. Any other business
You are aware that the budget contains some new extraordinary items and
that the nomination committee recommendation is likely to be contentious.
How should you prepare for the meeting
120

121. Preparing for the Board meeting
Initial work prior to receipt of the board pack
 Have I reappraised myself of the Combined Code
and my obligations under it?
 Have I reviewed the firm’s assessment of it
compliance with the Code?
 Is there an induction process? If so it would be
helpful to attend it prior to the board meeting to
obtain a better understanding of the working of the
firm
 If there is no induction process, what research do I
need to perform to maximise my ability to
contribute to board discussions (eg previous
annual reports, news etc)?
121

122. Preparing for the Board meeting
 Have I considered any potential conflicts of
interest between my role on the board and
any other roles I have? If so have I fully
disclosed them to the company secretary?
 When is the meeting and how far in
advance will I receive the board pack?
 Remember to allow time to review the
papers and ask any questions necessary to
ensure I am prepared for the meeting.
122

123. Preparing for the Board meeting
On first review of the board pack
 Are any papers missing? If so is there a date given
when they will be received?
 Do the papers give me the information necessary
to fulfil my fiduciary and statutory duties?
 Are their papers on which I need to conduct further
research? In the case of the current agenda item 5
contains some new financial information and I
need to do background reading on the treatment of
exceptional items
 Do I have any initial questions? If so are they such
that they are impeding my ability to understand the
importance of matter at hand?
 Is the information/data given up to date? If not, will
more current figures be provided at the meeting?
123

124. Preparing for the Board meeting
 Do I consider the time allocated to each issue
adequate? If not this should be raised with the
Chairman.
 Is the agenda laid out correctly in my view with the
most important issues to be considered first? In
the case of the exceptional item this appears
suitably placed in the agenda
 Is there any procedure for any other business? For
example to prevent sudden material issues to be
raised without giving the board due time to
consider them.
 Are there any areas which I would expect to have
been on the agenda but are not (eg issues relating
to corporate social responsibility etc)..
124

125. Preparing for the Board meeting
On sub committees
 Are any sub committees due to meet?
 If so, will I be appointed to any of them? If this is the case,
consider meeting the Chairman of the sub committee to
discuss its role and structure
 Are there any contentious issues likely from one of the sub
committees at the first meeting? In this case the Nominations
Committee recommendation does appear contentious. If so
obtain details of the issue and the different views so that I
can give consideration of the matter (including what
questions I should raise) prior to the meeting
 Are there papers for the sub committees or are they dealt
with verbally? In this case it is a verbal report and, given the
contentious nature of the proposed appointment I should
request for it to be in writing in advance to give me time to
consider the issues
 If a matter is contentious consider whether it is high enough
up the agenda for appropriate consideration. In this case it is
125
item 7 so the Chairman should be asked to consider moving
it up the agenda.

126. Preparing for the Board meeting
On the previous minutes.
 Do they contain action points? If so do the
board papers show they have or are being
addressed adequately?
Pre meeting
 Will I meet other directors/senior executives
before the meeting (eg at a pre board
dinner)? If not should I ask to meet with
senior executives to better understand their
roles?
126

127. Commonwealth Workshop on Insurance Regulators
Board Responsibility and Oversight
Livingstone March 2012
Risk Management and Corporate
Governance
Marcus Killick
127

128. Content: Day 2 Session 6
 Identification and Mitigation of Risks
 Corporate Governance - example
128

129. Identification and Mitigation of Risks
129

130. Identification and mitigation of risks
 A key role of the board is to identify the risks to
which the firm is exposed and determine how they
should be mitigated.
 To do this the Board should consider the following
factors:
 The nature and extent of the risks to the company;
 The likelihood of the risks concerned materialising;
 The firms ability to reduce the incidence and impact on
the business of the risks that do materialise, and
 The costs of operating particular controls relative to the
benefit thereby obtained in managing the related risk
 Once the risks have been identified the board
should determine what its appetite for risk is
130

131. Types of risk
 Strategic, for example a competitor coming
on to the market
 Compliance, for example responding to
the introduction of new insurance
legislation
 Financial, for example non-payment by a
customer or insolvency of an intermediary
 Operational, for example the breakdown of
key computer equipment
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132. Risk mitigation
Choices:
 Tolerate
The risk is tolerated without any further action
being taken
 Transfer
For some risks the best response may be to
transfer them (eg taking out insurance)
 Treat
Whilst continuing with the action that gives rise
to the risk action is taken to bring the risk to an
acceptable level
 Terminate
Where the only way to bring the risk to an
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acceptabel level is to terminate the activity

133. How do we assess or quantify the Risk?
 It’s quite easy!
 We look at two elements;
 Consequence “Impact”
 Probability “Likelihood”
 Which are categorised as High, Medium or
Low.
 Put together in a Risk Matrix allows the
Firm to turn this into a “score” to identify the
seriousness of the risk and the type of
action we take.
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134. Risk Matrix
Terminate,
Transfer or
High
Treat Transfer or
Treat
Treat
LIKELIHOOD
M edium
Transfer or
Tolerate Treat
Treat
Tolerate
Low
Tolerate Treat
Low M edium High
134 IMPA CT

135. How do we use this Matrix?
Example:
 What impact will a failure to have a proper
fraud detection in insurance claims?
 Failure to identify fraud could affect
Number of successful claims
Size of claims
Profitability
 In this case we mark the Impact as Medium!
 What is the likely hood that this risk will
materialise?
 Based on experience with the industry let us
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consider this to be Medium

136. So where does it fall in the Risk Register?
Transfer or
Terminate,
Here!
High
Treat Transfer or
Treat
Treat
LIKELIHOOD
M edium
Transfer or
Tolerate Treat
Treat
Tolerate
Low
Tolerate Treat
Low M edium High
IMPA CT
136

137. Mitigate
 Mitigate, central meaning is “to lessen” or
“make less severe,”
 In this case the mitigant is
 Upgrade the fraud detection processes
 If the firm carries out this action, it is
treating the risk and lessening its effect and
impact.
 Thus reducing its exposure to the Risk.
137

138. Ongoing Mitigation
138

139. Board Reporting
 Effective risk management requires a
 Report and review structure
 To ensure risks are identified and assessed
 Appropriate control and responses in place
 This is effected by the Board Reporting
 Board receive report on a regular basis
 Collated matrix
 Shows all the risks faced by the Organisation
139

140. Internal Control
140

141. Internal control
"The board should, at least annually, conduct a review of the
effectiveness of the company’s risk management and internal
control systems and should report to shareholders that they have
done so. The review should cover all material controls, including
financial, operational and compliance controls”*
“A sound system of internal control... Depends on a thorough and
regular evaluation of the nature and extent of the risks to which the
company is exposed”**
*Combined code (C.2.1)
** ICAEW Internal Control: Guidance for Directors on the Combined Code
141

142. Elements of a sound system of internal
control
Is one where the policies, procedures etc when taken
together:
 Facilitate the firm’s operation by enabling it to
respond appropraitely to significant risks in
achieving its objectives
 Help ensure the quality of internal and external
reporting (eg proper records etc)
 Help ensure compliance with appropriate laws and
regulations
However
It can only provide reasonable but not absolute
assurance.
142

143. Discussion 2
Your firm and Internal control
 Does your board have clear strategies for
dealing with the significant risks that are
identified? Is there a policy on how to
manage those risks?
 Do the board receive timely, relevant and
reliable reports on progress against
business objectives and the related risks?
 Are there embedded ongoing processes
within your firm which monitor the effective
application of the policies processes and
activities related to internal control and risk
management?
143

144. Corporate Governance - example
144

145. Regulatory board – an example. Gibraltar
Financial Services Commission
 8 members, 7 effectively NED
 Statute requires at least 2 NEDs have “significant
experience of regulation and supervision of finance
in another jurisdiction”
 Currently 4 Gibraltar and 3 UK based NEDs
 Meets four times each financial year (financial year
runs from April to March)
 Separate Chairman and CEO
 Senior Independent Member
 Follows Corporate Governance Code (in so far as
a Statutory Board is able to) and publishes on the
FSC website how we adhere to it
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146. FSC Board meetings - preparation
 No later than three weeks before a Board meeting
each Division must submit an executive report
detailing their activities over the previous quarter
and their level of adherence to the annual business
plan. This is reviewed by the CEO
 Two weeks before the meeting the Chairman
meets with the Executive, reviews the draft board
papers (including the executive report) and
determines the agenda
 At the same time he meets with the local NEDs
separately from the Executive to discuss Executive
performance and any other issues
 Board papers are sent out at least 10 days before
the meeting to give Members time to consider
them
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147. Annual Board Cycle
 May/June
 Approval of annual report and audited financial
statements
 “Blue skies” assessment of high level risks likely to affect
the FSC and jurisdiction in the year ahead to guide
Executive on preparation of annual risk assessment
 September
 Review of analysis by Executive of detailed risks and
threats (risk register) facing the Commission in the year
ahead
 Direction to Executive on specific measures to be
included in following years business plan to mitigate risks
and threats
 Consideration of whether any changes needed to
Commission's strategy is required as a result of risks
identified
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148. Annual Board Cycle (2)
 December
 Review of adequacy of draft business plan for next
financial year prepared by the Executive and resources
required to deliver it
 Review and approval of budget for next financial year
 January/February
 Sign off of finalised Business plan
 Annual review of authority delegated to Executive
 Annual review of stakeholder relations
148

149. Additional Board oversight of the Executive
 Control of agenda with Chairman not CEO
 Board regularly meets with Supervisory Divisions
 Board meets with finance sector representative bodies to get
industry views
 Specific areas (eg budget and senior executive performance)
subject to detailed scrutiny by specific Board committees
 All Board action points recorded and brought to next meeting
to assess whether Executive has dealt with them properly.
Action points cannot be removed without board approval
 Achievement against business plan brought to and
discussed at each board meeting
 Performance against budget brought to and discussed at
each board meeting
 Industry statistics and trends are brought ot each Board so
the Board can assess whether changes to the Business Plan
are required
149

150. Board Committees
 Audit
 Performance & Remuneration (For Senior
Executives)
 Budget Review
 Nomination
Terms of reference for all these can be found on the
FSC website
150

151. Oversight of the board
 There is an annual appraisal of the Chairman by
the senior independent director
 The Board conducts an annual self appraisal
 The FSC is subject to external reviews
151

152. The End
Thank you
Marcus Killick
mkillick@fsc.gi
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