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Does Your Captive Suffer from Bad Directors?

Unhappy Colleagues
September 26, 2018

We have written extensively about corporate governance and board members (see our Corporate Governance section), but it never crossed our mind to do an article on "bad" captive directors. That is, not until the National Association of Corporate Directors (NACD) sent us an email with an offer to download an article on this subject matter. The article, "A Field Guide to Bad Directors," by Michael Pocalyko, is a well-thought-out addition to the corporate governance body of work. Building off Mr. Pocalyko's piece, we thought we might examine whether your captive insurance company suffers from bad directors.

The NACD article defines "bad director" as follows.

They are our least welcome colleagues, thankfully scarce on the best boards. But there they are, all around us. They frustrate experienced, productive corporate directors. They are often the first shock for new corporate directors. They always take a heavy toll on executive management. They are more noticeable in the tough times, when a company undergoes financial stress, transition, or reorganization—or more generally, in economic recession. They divert us from best-practice corporate governance. They use up time, our most precious unrecoverable resource. They provoke us, raise personal conflict levels, and create unnecessary heat and light during boardroom and committee interactions. They disrupt communitarian decision making. They reactively disturb careful strategy and planning. They abound in bad companies.

If you were to take a close look at your captive's board of directors, does anyone fit this profile?

The NACD article identifies four key characteristics associated with bad directors, as follows.

  1. Inattention to detail 
  2. Narrow field of focus 
  3. Entitlement 
  4. Inadequacy

Inattention to Detail

We were frankly surprised by the definition of the first characteristic, which defined these directors as being "big picture" all the time. Readers will recognize that we have argued in the past that directors should not get mired in tactical issues, which are rightly the purview of management. However, reading further, we discovered the author really was concerned about directors who could not sit still for "deep data dives" in finance, risk management, or resource allocation. Said another way, they were unwilling to spend the time and effort to understand the significance of the information being presented and why management thought it was worthy of the board's attention.

While board members, from our perspective, should not be involved in developing tactical plans, we do agree it is imperative that they can understand the granular information being presented to them and why it is important. Glossing over this information because it requires too much thought means that board member is not fulfilling his or her fiduciary responsibility.

Narrow Field of Focus

The second characteristic, narrow field of focus, we would redefine as hidden agendas. These are directors who will voice all of the correct platitudes but, in reality, are working behind the scenes to accomplish their own ends. Our experience suggests you can quite often find these types of directors in group captives or risk retention groups. They are the individuals who always seem to be voicing an opinion or voting in a way that best serves the member they come from. Their loyalty resides only with the member and not with the captive insurer.

Entitlement

Entitlement is fairly straightforward; these are the directors who feel they deserve a seat at the table. For captive insurers, being member-driven organizations, this problem exists where they allow all of their members to serve on the board of directors. These are the directors who believe that they would be on the board regardless of the policy. In many instances, this is because they come from one of the largest members or because they contributed significant capital to the captive. The role of director is not based on competency but rather on the fact that they are somehow superior to their fellow members.

Inadequacy

The author uses the fourth attribute, inadequacy, to encompass myriad sins. These include incompetence, laziness, noncooperation, lack of integrity, stubbornness, and unwillingness to become better educated. In our experience, we have seen all of these shortcomings exhibited at one time or another by various board members. The problem is exacerbated when other directors, in the name of harmony, are unwilling or unable to point out these issues to the offender.

Self-Assessment

So how should your captive address the problem of a bad director? We are a big proponent of conducting annual board self-assessments. The ones we have participated in are composed of two parts: an individual self-assessment by each board member and a group self-assessment by the whole board. In addition, the board chair is tasked with interviewing each board member individually to determine how he or she sees himself or herself performing and how he or she views the contributions of his or her fellow board members.

When we discussed this concept in the past, we got pushback due to the time and effort involved, especially by the board chair. Our question has always been, well if you don't do it, who will? It goes hand in hand with the issue of bad directors. How can you remove a bad director unless you are willing to identify the individual and provide evidence of his or her inability to perform? In a future article, we will lay out a board self-assessment analysis for consideration.

In the interim, do you recognize any of these characteristics in any of the directors you work with?

Copyright © 2018 International Risk Management Institute, Inc.

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