Why Captives Need To Focus on Culture When Considering Governance

Boardroom table with empty chairs

August 27, 2019 |

Boardroom table with empty chairs

Over the span of some 20-plus years with Captive.com, I've written rather extensively on corporate governance for captive insurers. But in looking back on these stories, it struck me that I'd never once written about the role of culture in fostering good corporate governance. Maybe, because many assume intuitively, the lack of a strong corporate culture precludes the necessary architecture for good governance to thrive. However, a recent discussion with a former associate about why culture is so important got me thinking it is time to correct this oversight.

Before diving into the actual topic, I'd like to make several observations. First, at least to my mind, corporate culture comes easier to single parent captives than to association, cell, or group captives. Most corporations have some sort of culture, which spans the gamut from inherently healthy to incredibly toxic. Whatever the environment, it will almost certainly encompass the captive insurer since, by default, it is a subsidiary of the parent organization.

Group captives though do not start with a coherent culture in place since the participants all come from different backgrounds. This means they start with a clean slate in terms of developing a culture for the captive. The issue I see, however, is that culture must be nurtured, which takes both time and effort. For captive insurers where the board of directors only meets several times per year, a true corporate culture may never fully germinate. And as noted above, lacking a foundation, good governance may also founder.

This problem is compounded with group captives where all of the owners also sit on the board of directors. I've written previously about how difficult it is with large boards of directors to arrive at a consensus and provide directives to management. This complication becomes more serious when there is no agreed-upon organizational culture in place. An interesting exercise for any group captive is to ask the board of directors to individually describe and enumerate what the culture is within their captive insurance company.

So why should captive insurers invest resources into developing a good corporate culture? If nothing else, this need is likely to be driven by regulators and legislators. While not strictly subject to it, on January 1, 2020, the National Association of Insurance Commissioners Corporate Governance Annual Disclosure Model Act becomes an accreditation standard for all state insurance departments. (Note: risk retention groups are already subject to corporate governance standards.) The Model Act requires all insurers to provide a confidential corporate governance annual disclosure to their domiciliary state regulator.

As regulators begin to take a more critical look at how seriously insurers approach governance, insurers will need to respond. While not insurer-specific, the United Kingdom modified its Corporate Governance Code in 2017 to suggest the following provision: "Directors should embody and promote the desired culture of the company. The board should monitor and assess the culture to satisfy itself that behavior throughout the business is aligned with the company's values."

"Culture" is one of those nebulous concepts that cause many people to struggle. While it sounds good in theory, an abstract philosophy like culture can be hard to define, let alone figure out how to monitor and implement it within your captive insurance company. But while researching this topic, I came across a white paper from the Program on Corporate Compliance and Enforcement from the New York University School of Law titled Governance and Culture—The Conversation Boards Are Having Now.

Authors Ben Morgan and Holly Insley make the argument that to define a company’s culture requires the use of a risk management framework component. Obviously, for those involved in insurance and more specifically captive insurance, the notion of a risk management framework is intuitively something understood. Their framework has four key attributes, summarized as follows.

  • A strong "speak up" or "see and say" culture, empowering employees to feel free to raise concerns without fear of retaliation
  • Consideration of conflicts, where decision-making power is given to the right people and it is clear when an individual should abstain from the decision-making process
  • Appropriate accountability for someone within the organization who has final responsibility for a process and for everyone who reports to that person to understand what is expected of them and their contribution to the outcome
  • Clear lines of communication, where the company leadership sets the tone and communicates it effectively to the rest of the company

While I think these are a good starting point, I would add others to the list, as follows.

  • Expectations of outside vendors. Does the organization expect its outside consultants and vendors to espouse the same ideals and ethics as the captive? If a captive claims to have one culture but that culture deviates significantly from the culture practiced by its service providers, in my opinion, some employees, especially younger employees, will quickly see the hypocrisy.
  • A continuous evolution. Creating a lasting corporate culture is a work in progress. Like a strategic plan, it is not something that gets written up and placed in a binder and then checked off the "to-do" list. The board and management should periodically revisit how the culture of the organization is functioning and whether changes are warranted as a result of economic or technological forces.

Culture, like good governance, is something that should survive any trial by fire. While it's easy to say you have a strong corporate culture and sound governance, you only really know if this is true when it has been tested.

August 27, 2019