Building success for captive boards
The selection of independent non-executive directors for captives often comes down to the appointment of people who have proved their worth conducting the same role for other captives or financial institutions. This process has made the industry male, pale and stale, and has led to group-think, but there is a better way, say Malcolm Cutts-Watson of Cutts-Watson Consulting and Nick Graham of OSA Recruitment | November 2019
What does the future look like?
This blind spot has been recognised by Airmic (in association with Aon). Its publication “Captive governance: A practical guide for independent NEDs on captive boards” is essential reading for captives directors, managers and advisers. In this paper we explore best practice and recommend a process to follow, providing some insights to success.
We use Guernsey as an example domicile, but our comments are equally applicable to other captive insurance domiciles. It is assumed readers are familiar with the value NEDs bring to any board.
Guernsey’s captives industry has historically recruited board appointments through the “old boys’ network”. Personal recommendation has been largely effective: the population of independent NEDs (INEDs) has essentially been self-policing, with the captives community recognising who the effective and competent individuals in Guernsey are, and recruiting accordingly.
Those who have demonstrated professional reliability and competence have prospered, while the less experienced and lower calibre candidates have struggled to find appointments.
The downside of this is that it has led to a concentration of captives directorships within an aging cohort, and accusations of “male, pale and stale” appointments.
However, the landscape has been evolving in Guernsey, particularly over the past two to three years, driven by enhanced corporate governance within all financial services sectors, with listed funds in the vanguard. In tandem, there has been scrutiny of economic substance requirements and gender diversity. As ever, where listed funds lead, other sectors inevitably follow.
When fund boards need to appoint an INED, they need to demonstrate that there is an independent, robust and documented process that stands up to scrutiny from a range of stakeholders. Guernsey-based OSA Recruitment can provide this service at an affordable price, and feedback has recognised the value it adds.
The process requires objectivity, rigour and clarity, introducing fresh candidates who are not necessarily plugged into the existing INED network, or known to the board or captive manager in question.
A successful outcome can be achieved through:
To assess the suitability of a NED candidate, it is worth conducting a mapping exercise against the matrix shown in Table 1.
While corporate governance standards from the funds industry have been the driver, it is clear that banks, family wealth offices, trust companies, commercial trading businesses and investors/shareholders have recognised the growing importance of an engaged INED. An increasing number of financial institutions want to attract the most suitably qualified, experienced and talented candidates.
At a time when boards are changing their outlook to be more open-minded and innovative in their recruitment approach, the ultimate goal is always to source and appoint the most suitable person to the role.
Boards genuinely value the benefits that diversity brings, including the avoidance of “group-think” and the addition of a variety of different perspectives.
The dynamics and culture of the board is being given more thought, and is being more carefully planned for. Personality fit is high on any recruitment process, to facilitate an INED adding value by engaging with the rest of the board and the management team.
This trend will become more prevalent and will continue to be driven by shareholder pressure, regulatory scrutiny, and meeting substance requirements. We predict a younger, more diverse, demographic of candidates in the INED space giving boards greater choice.
Effectively the appointment of an INED to a board will become as professional a process as appointing a senior executive.
Will the captive insurance industry look itself in the mirror and question how board appointments should be made? Should captive and other insurance companies have a structured and a robust process in how they appoint INEDs? Undoubtedly, but there is a long way to go.
A recent study by Coutts found networking (89 percent) and business referrals (88 percent) remain the selection routes of choice for companies when appointing NEDs. Executive search and advisory firm Opus Executive Partners advises that only 4 percent of NEDs are interviewed formally.
The increasing use of professional, well-connected and independent INED recruitment outsourcing services is a strong trend which insurance company boards will surely embrace as they seek to ollow best practice.
Malcolm Cutts-Watson, is managing director of Cutts-Watson Consulting and Nick Graham is chairman of OSA Recruitment and a dedicated specialist of NED recruitment. They can be contacted at: email@example.com
Cutts-Watson Consulting, Non-executive directors, Captive governance: A practical guide for independent NEDs on captive boards, Captives, North America