A Primer on Governance Models for Captives
John M. Foehl | February 25, 2020
I've written extensively on governance for captive insurers, but a recent question from a reader caused me to relook at what I'd written. The reader inquired about whether there were different forms of governance and, if so, which form was best suited to a captive. In looking back over what I'd authored on captive governance, it became clear that I'd never once addressed this topic. Therefore, in an effort to correct this oversight, I've created this primer on governance models for captives.
The purpose of a governance model is to create a framework for how the captive insurer's policies, systems, structures, and procedures are melded together to create a cohesive whole. In addition, a governance model will also determine how the board and the CEO will operate together to achieve the organization's overall mission.
A fundamental question that should be considered early on is whether the captive operates more from a nonprofit or for-profit perspective. While there is some overlap between the models for these two systems, their primary directive differs substantially. For-profit captives will be focused on generating income beneficial to the company, its shareholders, and its employees. Nonprofits concentrate on meeting certain needs of their members or constituents with less attention on the bottom line. For purposes of this article, we are going to look at governance models more applicable to for-profit entities. We'll come back at a later date with some additional material on models for nonprofits.
One other comment before delving into various corporate governance models―readers might find the following white paper from the Business Roundtable of interest. The "Principles of Corporate Governance―2016" provides a list of guiding principles of corporate governance. In the preface of the Roundtable notes, it reads, "No one approach to corporate governance may be right for all companies, and Business Roundtable does not prescribe or endorse any particular option, leaving that to the considered judgment of boards, management, and shareholders. Accordingly, each company should look to these principles as a guide in developing the structures, practices, and processes that are appropriate in light of its needs and circumstances."
Models for Consideration
There is any number of papers on corporate governance models, and while this one is somewhat dated, I believe it provides a good starting point for consideration by a captive board. It posits there are five models for consideration.
1. Traditional Model
This is considered to be the oldest corporate model in use today, dating back to the 1700s. The traditional model assigns legal responsibility for the corporation to the collective board, and the board must speak with one voice on all matters pertaining to the company. Under this model, the board chair is normally assumed to be the "voice" of the board, but the chair can only speak in a way authorized by the board as a whole.
The model defines how the board seeks to delegate responsibilities from itself to the committees of the board and to the CEO. One negative attribute of the traditional model is that it does not describe how accountability and reporting should occur when the board determines to delegate responsibility.
2. Carver (Policy) Model
Full disclosure: this is the governance model the author is very familiar with, having worked under it in several captive insurers. The Carver model is premised on two fundamental ideas.
- Boards should define the "ends" of the captive―i.e., what the captive wants to accomplish.
- The board should then create policies that will be used by the captive in the pursuit of its ends.
Under Carver, the board's policies create a series of limitations concerning what the CEO is not permitted to or entitled to do. This then permits the CEO wide latitude in deciding the means for achieving the ends. A potential downside to this model is that the board spends all of its time on policies and doesn't work on strategic issues.
3. Outcome Model
This model, as the name implies, looks at defining the value and outcomes the captive seeks to deliver to its members and policyholders. The board sets the standards, expectations, and performance results according to the vision for the captive. Not surprisingly, clarifying and setting outcomes to achieve success become the primary duty for the board. This model is particularly useful in assessing performance both of the CEO and the board since there are clearly defined outcomes and accountability. A downside occurs when the board does not understand the business well enough to clearly define the outcomes.
4. Consensus Model
This model can be used by both for-profit and nonprofit captives. As the name implies, it assumes all board members are equal and therefore equitably share responsibility, accountability, and liability. The model is primarily focused on how decision-making is achieved by the board. The model works well for small captives with limited members or a sole member. It may rely on Robert's Rules of Orders for determining a path forward when complete consensus is not achievable. A negative associated with this model is that it can take considerable time to reach consensus and therefore can delay decisions, especially in times of rapid change.
5. Competency Model
This model is best suited to boards interested in developing the knowledge and skills of the directors. The model seeks to foster communication, trust, and relationships to improve the overall performance of the board. It helps to define the behavior and frequency of engagement for board members. This model may suffer since the model does not determine how to set policies, strategy, or monitor all important functions of the board.
No matter what model your board chooses to operate under, it is important to have one. In fact, many boards today don't select a single model but decide to cherry-pick pieces from each of these models or others that are in use. The intent, as stated at the beginning of this article, is for the board to have a framework for its governance structure. There is no right or wrong model.
John M. Foehl | February 25, 2020