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NACD Publishes "2018 Governance Outlook"

corporate governance-SF
January 17, 2018

Knowing our interest in good corporate governance, a Captive Wire reader passed along a copy of the 2018 Governance Outlook article published by the National Association of Corporate Directors (NACD). While the publication is primarily aimed at directors of large publicly traded corporations, it contains several monographs that are germane to the governance of captive insurers as well. In fact, we would encourage all captive boards to consider paying dues for at least one board member to belong to the NACD. The association produces a wealth of material on corporate governance, and much of it is beneficial to any board wishing to practice good governance.

The white paper 2018 Governance Outlook: Projections on Emerging Board Matters is 44 pages long and divided into 7 articles.

  • Public Board Priorities for 2018
  • The Future of Risk Management
  • Board Evolution: The Forces Driving Board Composition and Succession
  • Sometimes It's What You Don't Say That Gets You in Trouble
  • Trends in D&O Exposures and Insurance Solutions
  • Workforce Disrupted: Radically Rethinking the Workforce and Digital To Become Future Ready
  • How Can Board Members Help Turn Cyber-Risk Reduction from a Goal into a Reality

It includes an Executive Summary up front for those who want a quick synopsis of the material. For purposes of our story, we thought we'd highlight some of the key takeaways from several of the essays. For those looking for additional material on corporate governance, you can check some of our prior papers.

Public Board Priorities for 2018

The NACD polled its more than 600 members to create a list of the top trends likely to impact their corporations in 2018. Among all responses, the top five concerns are listed below.

  • Significant industry changes—58 percent
  • Business model disruptions—46 percent
  • Changing global conditions—46 percent
  • Cyber-security threats—38 percent
  • Competition for talent—36 percent

Within the financial services arena where captives would operate, the top three concerns were as follows.

  • Fintech disruption
  • Industry consolidation
  • Regulatory change

So we pose the following question to our readers: How many of your captive boards within the last year have spent time at a board meeting discussing potential long-term opportunities and threats to your organization? As noted before, we assert that many captive boards spend too much time looking in the rearview mirror and not enough quality time thinking about issues likely to shape their captive insurer in the future. Last week we published "4 Captive Insurer Resolutions for 2018," and to this list we'd add one more—devote at least one board meeting a year to generative thinking.

The Future of Risk Management

Since captive insurers are in the business of managing and mitigating risk, if you choose to read no other section of the report, you should read this one. The opening paragraph is illuminating, and if you recognize that your captive falls into this category, perhaps you need to rethink your approach to risk management.

Since passage of the Sarbanes-Oxley Act of 2002, many organizations have taken a procedural approach to risk management, settling for risk management processes that emphasize form over substance. Organizational risks are listed, charted, graphed, and circulated. Signatures are obtained, trainings are logged, and boxes are checked for the necessary purpose of documenting compliance with regulatory requirements.

While this approach may allow board members to leave meetings feeling satisfied that the captive's risks are being well managed, it certainly falls short of a more proactive approach to monitoring the organization's risks. The article goes on to enumerate the top four risks identified for 2018.

  • Cyber-security Risk
  • Business Interruption Risk
  • Financial Risk Due to Fraud and Errors
  • Reputational Risk

These may not be the top four risks for your captive, but if you were to ask each board member to list their top four risks, would there be consensus or divergence? If the answer is the latter, what are you going to do to correct the problem?

Workforce Disrupted: Radically Rethinking the Workforce and Digital To Become Future Ready

It will come as no surprise to regular readers that we continue to focus on the need to attract and retain talent. Therefore, this monograph is near and dear to our heart in urging directors to take a much more active role in preparing their companies for the future, especially in terms of human capital needs.

The essence of the story can be captured by the following paragraph.

Every business in every industry today faces unprecedented disruption in terms of technology and the rapid evolution of business models. As a consequence, the composition, demands, and expectations of the workforce are shifting dramatically. Given the board's critical roles in overseeing risk and strategy, directors in 2018 should seek to understand the impending disruptions and opportunities that stem from future human capital trends.

Now many captive directors may say, "Wait a minute—we don't have any true human capital since we outsource the management of our captive to outside professionals." However, has your board ever sat down with each of your professional service providers and asked what their human capital strategy is? If not, why not? In your role as a director, a prime responsibility is ensuring the fiscal and operational soundness of your insurer. If your service providers start to encounter employment problems, the regulators are going to be looking to you, not them, for how the problem is being corrected. Wouldn't it be better to have an understanding of how these vendors plan on addressing such a problem before it occurs rather than after the fact?

In closing, we hope this story leads to discussions at your captive concerning not only some of the issues identified here but also other governance matters where you can strengthen your company.

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