corporategoverancebestpractices

8/11/2019 Corporategoverancebestpractices

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2005 Sutherland Asbill & Brennan LLP

Corporate Governance Best Practices

For Insurance Companies:The Current Perspective

Thomas F. EnglishNew York Life Insurance Company

Donald R. StadingAmeritas Life Insurance Corp.

Stephen E. RothSutherland Asbill & Brennan LLP

Cynthia M. Krus

Sutherland Asbill & Brennan LLP


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Introduction

Despite the fact that there is no legal requirement to do so, there hasbeen some recent movement within the non-public company sectorof the insurance industry to adopt certain corporate governance bestpractices as set forth in the Sarbanes-Oxley Act of 2002 (SOX) andthe various securities exchanges.

The insurance industry is confronted with certain unique problems inapplying governance principles.

Any governance principles adopted by the insurance industry shouldbe flexible enough to take into account the variety of insurers withinits purview


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Introduction

Insurance companies should anticipate that the certain governanceand disclosure reforms will become increasingly expected of them,especially in light of the NAICs proposed revisions to the Model

Audit Rule incorporating certain aspects of SOX.

Our outline discusses best practices for officers and directors of

insurance companies to consider given the enhanced scrutinyinherent in todays environment.

Obviously, one size does not fit all and the board of each companyshould tailor procedures to its own circumstances.


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Tone at the Top

Having the right tone at the top is one of the most important factorsin ensuring that the board meets all its duties.

The right tone at the top will establish the ethical culture of thecorporation and permeate the corporations relationships withemployees, the business community and regulators.

The board of directors should participate in creating the right tone atthe top and oversee how it is being communicated to all employeesand constituents of the corporation.



Director Independence

Companies will increasingly be expected to have a board of directorswith at least a significant number, if not a majority, of independentdirectors.

In general, independent directors are individuals who have noemployment or other material business relationship with thecompany.

Several corporate governance guidelines suggest that directorsshould be independent in both fact and appearance.

Director independence is believed to enhance the objective exerciseof independent business judgment by boards for the benefit of the

companys shareholders and other constituencies.

The determination of what constitutes independence should take intoaccount the industry and regulatory structure that a companyoperates within.



Board Committees

It is best practice for a board to have the following committees:

an audit committee,

a compensation committee, and a nominating/corporate governance committee.

Each committee may formally establish a charter that specifies its

responsibilities and the manner and frequency of meeting andreporting to the board of directors.

There is no one size fits all template for board structures. Whenappropriate, smaller boards may opt to always meet as the full boardwith break-out sessions for independent directors to performcommittee-type functions.



Self Assessments

Boards and board committees of companies are increasinglyexpected to complete annual self assessments.

The self evaluation is intended to serve as a useful tool for the boardto assess its strengths and weaknesses.

The Business Roundtable recommends that the independentdirectors periodically review the performance of the CEO and,together with the CEO, the performance of the remaining uppermanagement.



Executive Sessions

Companies will increasingly be expected to require non-managementmembers of their board of directors to meet in executive sessions.

These executive sessions should be viewed primarily as a safetyvalve to deal with problems and not as a forum for revisiting mattersalready considered by the full board.


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Corporate Governance Guidelines

Companies will increasingly be expected to adopt a set of basicboard of directors governance policies to guide how their boardsshould govern themselves.

Corporate governance guidelines typically describe the board ofdirectors position on the following corporate governance guidelines:

Director qualification standards;

Director responsibilities; Director access to management and, as necessary and appropriate,

independent advisors;

Director compensation;

Director orientation and continuing education; Management succession; and

Annual performance evaluation of the board.


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Code of Ethics

Adoption and implementation of a code of ethics is one of the mostcommon practices in corporate governance.

It is increasingly expected that all companies will have a code ofethics in place to ensure that employees conduct themselves in a fairand ethical manner.

Topics commonly addressed in a code of ethics are as follows:

Conflict of interest; Corporate opportunities;

Confidentiality;

Fair dealing;

Protection and proper use of company assets;

Compliance with laws, rules and regulations; and

Encouraging the reporting of any illegal or unethical behavior


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Whistleblower Procedures

Whistleblower procedures ensure that employees are able to reportwrongdoing without the threat of retaliation.

Section 301 of SOX requires audit committees of public companiesto establish procedures for:

The receipt, retention, and treatment of complaints received by the

company regarding accounting, internal accounting controls, or auditingmatters; and

The confidential, anonymous submission by employees of the companyof concerns regarding questionable accounting or auditing matters.

Section 806 of SOX provides substantial protection to employeewhistleblowers who report certain company misconduct.


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The Model Audit Rule

The NAICs proposed revisions to the Model Audit Rule wouldsubject insurance companies to corporate governance rules similarto those mandated by SOX.

The proposed revisions include:

Creation of an independent audit committee;

Designation of an audit committee financial expert; Prohibition of non-audit services;

Pre-approval of audit and non-audit services;

Rotation of lead audit partner; and

Managements report on internal control over financial reporting.


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The Model Audit Rule AuditCommittee Independence

Under the proposed revisions, each member of the audit committee wouldbe required to be a member of the board of directors and independent of theinsurer.

In order to be considered independent under the proposed revisions, anaudit committee member may not: Accept any consulting, advisory or other compensatory fee from the insurer other

than in his/her capacity as a member of the audit committee, the board or anyother board committee; or

Be an affiliated person of the insurer or any subsidiary thereof. The number of independent audit committee members is based on direct

and assumed premium volume: $0 - $25 million = no minimum, but encouraged

$25 - $100 million = 50% or more >$100 million = 75% or more

NOTE: The proposed revisions allow for an exception where domiciliary law requires

participation by an otherwise non-independent member.

The proposed revisions would permit the audit committee of the holding companyto act on behalf of the subsidiaries.


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The Model Audit Rule AuditCommittee Financial Expert

Pursuant to the proposed revisions, all members of the audit committeeshould be financially literate and at least one individual should qualify as anaudit committee financial expert.

An audit committee financial expert should have the following attributes: An understanding of generally accepted accounting principles or statutory

accounting principles;

The ability to assess the general application of such principles in connection with

the accounting for estimates, accruals and reserves; Experience preparing, auditing, analyzing or evaluating financial statements that

present a breadth and level of complexity of accounting issues that are generallycomparable to the breadth and complexity of issues that can reasonably beexpected to be raised by the companys financial statements, or experience

actively supervising one or more persons engaged in such activities; An understanding of internal controls and procedures for financial reporting; and

An understanding of audit committee functions.


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The Model Audit Rule AuditCommittee Financial Expert

An audit committee financial expert should have acquired suchattributes through:

Education and experience as a principal financial officer, principalaccounting officer, controller, public accountant or auditor or experiencein one or more positions that involve the performance of similarfunctions;

Experience actively supervising a principal financial officer, principal

accounting officer, controller, public accountant, auditor or personperforming similar functions;

Experience overseeing or assessing the performance of companies orpublic accountants with respect to the preparation, auditing or evaluation

of financial statements; or Other relevant experience.


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The Model Audit Rule InternalControl Over Financial Reporting

The proposed revisions to the Model Audit Rule would incorporatethe substantive requirements of the Section 404 of SOX.

Internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting

principles or statutory accounting principles. Under the proposed revisions, an insurer would be required to file a

report prepared by management regarding managementsassessment of the insurers internal control over financial reporting.


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The Model Audit Rule InternalControl Over Financial Reporting

Managements report on internal control over financial reportingwould contain:

A statement of managements responsibility for establishing andmaintaining adequate internal control over financial reporting;

A statement identifying the framework used by management to evaluatethe effectiveness of internal control over financial reporting;

Managements assessment of the effectiveness of internal control overfinancial reporting;

A statement indicating that the independent certified public accountantthat audited financial statements has issued an attestation report onmanagements assessment of internal control over financial reporting;

Disclosure of any material change in internal control over financialreporting that occurred in the fourth quarter; and

Disclosure of any material weaknesses.

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