This document has been designed to provide some key principles of good governance that can aid decision making at board level at THE PREMIER INSURANCE & SURETY CORPORATION (TPISC). The guide builds on previous best practice while recognizing the major impact of the current changes to the non-life insurance industry. It is intended to be of interest to existing TPISC boards, and those responsible for managing governance systems and processes within non-life insurance business.
Governance is based on a set of principles that has developed over time to meet new challenges in areas such as: risk, finance, quality, probity, commerce and reputation. The current ‘rules’ and reactions to these challenges can usually be traced back to an initiating principle. Understanding these principles helps those tasked with developing appropriate governance to apply sensible solutions.
Governance initially started to develop as the management of organization’s separated from their ownership. As business grew more sophisticated and more stakeholders became involved in organizations, governance started to develop as a means of looking after their interests. Custom and practice, advisory codes, the law and the compliance requirements of Insurance Commission, other governing bodies, lenders and investors started to shape the governance structures and systems we know today.
The context for improved governance, TPISC is instituting significant system change in the business operation. Those on management board, developing new organizations and overseeing service changes have all been keen to understand how this will affect the way TPISC organizations will be governed in the future.
This makes it clear that accountability will rest on the committees themselves. It is clear that the management requires a high degree of accountability and maturity from those leading the committee
The role of committee services hold some responsibility as top management. However, top management also have a key role in assessing quality alongside the committee itself. Management is not in place simply to defend the reputation of the company but has accountability to its employees and wider stakeholders.
This builds on corporate practice in the business operations where directors and boards have clear, balanced responsibilities to various stakeholders and are not just there to assure the business success of the company concerned.
Addressing Risk Management increasingly needs to take an eclectic view of risk, seeking positive assurance that claims are valid. This is difficult in times of financial constraint and system upheaval. Studies should be made on the amount of risk that TPISC is prepared to accept, tolerate or be exposed to any point in time. Without proper guidance on the levels of risk that they are permitted to take, or not seizing important opportunities due to a perception that taking on additional risk is discouraged. The failures that gave rise to each crisis:
The challenge for governance today adds up to a new and very different challenge to TPISC in the coming years. We are moving away from a spoon-fed, prescribed model of leadership and governance to one where boards will need to craft their own arrangements, based on good governance principles and established better practice. Boards will need to ensure that they are in a state of continual preparedness for an ever-changing world, where significant demands are placed on their organizations and budgets.
In this document the following nine foundation principles of good governance are offered. Each of these reflect TPISC’s premise that principles should be of fundamental value; understood by users as the essential characteristics of the system and reflect the system's designed purpose.
These principles will help those boards and those developing governance systems to decide what is most appropriate for the specific needs of their organization.
Entity - An organization is a discrete entity and a legal personality. Thus the organization as a corporate body owes duties of care and needs to observe responsibilities and compliances that are separate from those of the organization’s owners or those controlling the organization. Often, the organization will have its own limited liability.
Often governance issues arise when one is uncertain about what the entity is one is dealing with such as in a network, across a service continuum or when services are delivered through a partnership or contract arrangement. It is important to understand what the entity is and who is accountable, and that the entity concerned should be legally constituted, aware of its responsibilities and easy to identify.
Accountability -The ‘controlling mind’ Organizations are run by people, and those who direct the organization and act as the organization’s ‘controlling mind’ need to be readily identifiable to any who might have dealings with that organization, in order that all can understand who is accountable for the control of the organization and who can enter into engagements on the organization’s behalf. Where the organization has been separated from its owners (that is, is not a sole trader or a partnership where the principals are singly and jointly liable for the control of the business entity) and is a body corporate then those who act as the controlling mind are usually termed ‘directors’. Directors have responsibilities in law for looking after the interests of the organization and of all stakeholders. The balance of how this is executed will change as the organization encounters opportunities and challenges. Directors act collectively as a board, this being the overall accountable group that comprises the ‘controlling mind’.
All legal entities should be controlled by identifiable individuals who can be brought to account for their actions. Within an organization, it is important to be able to distinguish between those who are accountable for the organization and those who are not. This is important for both internal control, and to ensure that external parties understand with whom they can make binding arrangements on behalf of the organization. Those controlling an organization need to be formally required to look after all stakeholder interests. They should have formal duties around their conduct and accountability.
Stakeholders Governance - needs to consider all stakeholders, even those who may not be immediately apparent. Stakeholders will classically include:
It is important to recognize that in a complex world the conduct of an organization can have significant effects on many, and as such those controlling organizations need to pay formal consideration to those who their actions might affect. In non-life insurance industry, it is important to be able to separate out responsibilities which in other industries would be congruent, such as to customers, clients and beneficiaries.
Governance and Management Directors - may in addition to their governance responsibilities also have a portfolio of management responsibilities, these being the duties to manage and operate the enterprise from day-to-day. Directors need to separate themselves from their management role when they are acting as the controlling mind of the organization and are acting as overall guardian to stakeholder interests. The origin of the word ‘director’ is from the word ‘steer’, while that of the word management is ‘to hold in the hand’. Governance concerns:
The purpose of governance is to ensure better decisions. We separate governance from management by the role each has in decisions. Management makes (or crafts) decisions. By this we mean management identifies an issue, gathers and analyses the data, identifies and weights options consults and comes up with recommendations. Directors in their governance role then take decisions, and move at that point from being responsible to accountable.
Governance works on the separation of powers, so that those running the organization day-to-day are internally accountable to themselves and others who have a focused governing role. This ensures that the broader interests of the organization, investors, owner and other stakeholders are balanced and that the organization is not run in the interests of those staffing it. Those governing an organization are additionally charged with ensuring that they recruit in a team most able to run the organization successfully, to meet strategic aims and in the interests of stakeholders. The board has privy knowledge of the organization that is unique and so is the best system for ensuring that the performance of management meets the requirements of all stakeholders. It is now generally recognized that a corporate governance structure with separate representatives in the roles of chair and chief executive "resolves inherent conflicts of interest and clarifies accountability -- the chair to the shareholders and the chief executive to the board".
The board and constructive challenge - Directors come together as a board to shape policy and take decisions. They need to consider the interests of the organization and of all stakeholders. In order to take the best decisions the board will need to be informed, and have to hand all relevant information and advice pertinent to a decision. The board will need to consider options and consequences. In order to do this efficiently and effectively the board will go through a process of constructive challenge, where ideas, beliefs, facts and recommendations will be tested in order to verify, confirm or overturn as appropriate.
Larger organizations with more complex accountabilities to multiple stakeholders will do this by having some directors who do not hold management positions as part of the board. These are termed ‘non-executive’ or ‘independent’ directors. Independent directors may be drawn from significant investors or recruited as holding particular skills and experience in order that they can usefully challenge and help the board arrived at sound decisions. Drawing independent directors into holding a portfolio of responsibilities confounds their ability to apply constructive challenge. In trustee boards all members of the board are usually without benefit or pay, and so will usually be non-executive. In smaller commercial organizations all directors will usually hold a paid position within the organization and have a portfolio of responsibilities. In larger commercial and most public corporations the board is comprised of both executive and non-executive directors and this is termed a unitary board. Whether executive or non-executive, the responsibility of all directors for the organization’s and stakeholder interests remain the same. The need to participate in constructive challenge likewise remains the same.
A successful enterprise needs to continually make informed decisions about direction, markets, resource allocation and capacity. Decisions need a form of internal testing to provide a transparent explanation as to why one course of action was agreed over others. Testing such decisions is best done through a form of constructive challenge whereby assumptions are not allowed to stand without being tested, and partial views are tempered by considering alternatives.
Delegation and reservation - Boards will set out how they govern through a system of delegation and reservation. The board will overtly decide what decisions it reserves (or holds) to itself as a governance responsibility, and those it will delegate elsewhere. The most significant delegation is usually to management, but boards may also delegate to sub-groups of the board itself, to advisors, to partners or through other controlled means. Boards will describe the limits and substance of all delegations and reservations. Typical forms of delegation within an organization, aside that to management, will include formally agreed delegation to board sub committees. These should be few in number and not confused with management groups often misleadingly called ‘committees’. The only required committees are audit and remuneration & appointments, although many organizations will have other committees.
Governing boards need to formally agree in and transparent way what role they will take in the detailed direction of an organization. This will be different for each organization and dependent on the level of risk, market forces, the detailed knowledge required to undertake particular tasks and the maturity of management. The controlling mind of the organization needs to plan and be explicit about the level of direction it will need to exert itself, and that which it is comfortable to discharge to others both within and outside the organization. This will help other stakeholder assess risk and control for themselves. The board must be clear in the role and delegated authority of committees, and indeed the use of the term ‘committee’ which we suggest is overused
Openness and transparency TPISC - should have the confidence that their business and decision-making processes would stand exposure to the public eye. This ensures that TPISC meet important legal and compliance requirements, as well as fosters good business practice through building reputational and brand value. Decisions and conduct should be auditable and explainable. A new duty of conduct is to be imposed on all committed, which will include a requirement for boards to meet in public and for any service failings to be dealt with in an open and transparent manner.
Board supports - To enable the board to work well, the board will need to work through the various roles and support systems it needs in place. These include:
A board model of governance requires different individuals to take different roles in order to deliver on the preceding principles of governance. Different actors need to be charged with different parts of the accountability continuum, and there need to be managed systems to ensure that information, advice and challenge are brought together to arrive at the best decisions for all stakeholders. It is important that the different individuals concerned understand their individual roles in making sure the board governance system works and can respond to future needs.
Knowing the organization and the market - Those acting as the controlling mind of an organization have a duty to know and understand the organization they are responsible for, and the market in which the organization operates. Within the organization the board needs to understand and be assured that relevant compliances are being met, and that the organization remains fit for purpose. Externally boards need to understand opportunities and risks. In order to do this, boards should have in place systematic processes so that they remain informed and assured at all times. The most significant of these will be the organized delegation to management, described above, and the setting of tolerances around when and how management should bring matters to the attention of the board. Other systems boards will have in place to remain aware of internal and external issues will be specific governance and information systems, such as performance reports, the board assurance framework, the risk register, decision tracker, audit plans and professional advice. To ensure that these systems are robust and are functioning properly TPISC will have an audit committee, which is a committee of non-executives (without the Chair) who will have an on-going assurance role to the board that all relevant governance systems are working and delivering added value. Boards need to check continually that their knowledge of their own organization and of the market is sufficient for purpose, but do so without delving into the management of the organization itself. Finally, Boards and their members have a responsibility to anticipate and respond to their external environment. This is always dynamic and a good board will spend time future proofing the organization by paying attention to new (or newly appreciated) risks and opportunities. This can be done by directors rehearsing locally what has gone wrong (and right) elsewhere, boundary issues and evaluating their own instincts.
Skills alone are not enough to discharge accountabilities to stakeholders. Those running an organization must have an intimate knowledge of the organization for themselves before they can assure and act on behalf of other stakeholders. Additionally, those governing an organization need to understand the external environment in order that they know the consequences of their decisions can manage risk and are able to anticipate the outcome of different options. To provide constructive challenge directors need to understand more than generic business practice. In healthcare, when strategic decisions need to be taken the various options themselves will require a degree of professional insight and confidence in order to challenge and add to informed debate. Directors who do not familiarize themselves with the market they operate in are being derelict in regard to their overall responsibilities to stakeholders.
Mechanics of Governance The main principle of the code is that every institution should be headed by an effective board, which is collectively responsible for the success of the organization. The board’s role is to provide leadership of the organization within a framework of prudent and effective controls which enables risk to be assessed and managed. The board should operate in the round focusing on the business of the organization by
Quality Governance Everyone expects to receive the highest standard of “Quality Governance: The duty of each body/committee to put and keep in place management for the purpose of monitoring and improving the quality of good governance provided by and for that body and in part in response to the concept of Governance
The programmes of governance will change but this allows the board to ensure that:
The cycle of business should include assigned and protected time for boards to consider emerging issues and help to shape strategies. The impact of an annual cycle of business is likely to raise more issues than can be accommodated in monthly meetings but this will drive a thoughtful approach to delegated authority to officers and sub committees and encourage more analysis to be put into routine finance, performance and risk reports
The Framework is underpinned by 10 questions:
Integrated Governance Integrated governance was introduced as a response to a number of issues including the devolution of accountability to local services and commissioners and the view that boards are important but must be focused and add value. Also, although it encompasses audit its effectiveness and research risk management; education and training; and public involvement. The separation of corporate governance led to a silo approach in many organizations, where issues were separated from finance, staffing and estates. Integrated governance was described not as a form of governance but rather a movement from uninterrupted to integrated. Integrated Governance provides the umbrella for all TPISC governance approaches. It combines the principles of corporate/financial accountability and it moves towards a single risk sensitivity process which covers all the trust’s objectives, supported by a coordinated source of collecting information and subject to coordinated inspection which set out a process for integration and alignment. It set out ten key elements which were developed as maturity matrices and gave support to the use of such tools as the board assurance framework, annual cycle of business, effective use of dashboard information, annual board review and an overhaul of sub-committees of the board.
Information Governance Information Governance is the way by which management handles all organizational information - in particular the personal and sensitive information of the company. It allows organizations and individuals to ensure that corporate information is dealt with legally, securely, efficiently and effectively. It provides a framework to bringing together the requirements, standards and best practice that apply to the handling of information. It has four fundamental aims:
Research Governance Research Governance can be defined as the broad range of regulations, principles and standards of good practice that exist to achieve, and continuously improve, research quality across all aspects of non-life insurance. By non-life insurance research it is taken to mean any material goods/belongings/possesions research.
Staff Governance Staff governance focuses on how staffs are managed and feel they are managed by one of Non-Life Insurance company’s largest employers. Staff governance is the third pillar of the governance framework within which TPISC Boards, must operate.
The staff governance the employers legally accountable for staff governance, in the same way that they are already responsible for the quality of management and for appropriate financial management. The Staff Governance Standard is the key policy document which defines the five elements that make up staff governance specifying that staff are entitled to be
TPISC employers must be able to show that they have systems which not only identify areas for improvement around staff governance, but also develop and monitor action plans. The Staff Governance Standard is monitored in each Board through the staff survey.
Behaviours Good board governance cannot be legislated for but can be built over time. The best bets for success are:
Behaviours determine the actions of the organization and are a vital element of good governance. Some behaviours are expected and prescribed, others reflect experience, styles and etiquettes adopted or learnt.
Good Governance Standard Good Governance Standard consists of the following:
The only way to be sure that Corporate Officers do the right thing is to keep an eye on them, to challenge them, to hold them to accountable and, above all, to take part in them. Top Management should draw Codes of Conduct or Professional Ethics incorporating the following principles, and that internal systems for maintaining standards should be supported by independent scrutiny.
Selflessness: Corporate Officers should take decisions solely in terms of the company’s interest. They should not do so in order to gain financial or other material benefits for themselves, their family or their friends.
Integrity: Corporate Officers should not place themselves under any financial or other obligation to outside individuals or organizations that might influence them in the performance of their official duties.
Objectivity: In carrying out business, including making appointments, awarding contracts, or recommending individuals for rewards and benefits, Corporate Officers should make choices on merit.
Accountability: Corporate Officers accountable for their decisions and actions to the stakeholders and must submit themselves to whatever scrutiny is appropriate to their office.
Openness: Corporate Officers should be as open as possible about all the decisions and actions that they take. They should give reasons for their decisions and restrict information only when the wider interest clearly demands.
Honesty: Corporate Officers have a duty to declare any private interests relating to their duties and to take steps to resolve any conflicts arising in a way that protects the interest.
Leadership: Corporate Officers should promote and support these principles by leadership and example.
Systems integration and alignment
The board’s job is to be strategic, to look forward and up. But it must have confidence that strategies are being delivered, decisions are being acted upon and that all staff understand their roles and responsibilities.
Board members will have a number of systems and supports to build assurance that these are happening but they must be prepared to ask the right questions and support each other in securing an acceptable response.
Key things to look for are:
There are ten key elements that need to be considered to ensure effective overall and connected governance:
Whole system: governance between organizations
Problems often occur at the borders between one organization or team and another. Learning from Investigations In the absence of formal governance arrangements, responsibility for supporting the governance of partnerships falls to partners’ own corporate governance mechanisms.
The NHS works across organizational boundaries and in partnership with other organizations in the interest of patients, local communities and the wider population. The NHS is an integrated system of organizations and services bound together by the principles and values now reflected in the Constitution. The NHS is committed to working jointly with local authorities and a wide range of other private, public and third sector organizations at national and local level to provide and deliver improvements in health and well-being.
Ten simple rules for governance between organizations:
Continuity of Business
Annual cycle of business
An effective board will set out a programme for the year ensuring its board meetings cover the key annual events and anticipate critical decision taking. The programme will of course change but this allows the board to ensure that:
The cycle of business should include assigned and protected time for boards to consider emerging issues and help to shape national and local strategies. The impact of an annual cycle of business is likely to raise more issues than can be accommodated in monthly meetings but this will drive a thoughtful approach to delegated authority to officers and sub committees and encourage more analysis to be put into routine finance, performance and risk reports.
Annual board review
The Corporate Governance Code expect the board to undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors. Individual evaluation should aim to show whether each director continues to contribute effectively and to demonstrate commitment to the role (including commitment of time for board and committee meetings and any other duties).
The organization will undertake a formal annual board review covering the whole range of the board’s activities including strategy and operational performance to ensure it has mature processes in place covering:
Clinical audit Clinical audit was originally a process by which clinicians reviewed their own practice, but is now recognized as capable of giving information and assurance about clinical quality as a whole.
Ten simple questions for boards
What are the lessons for leading and managing during difficult times? Boards will need to be explicit in their decision making if they are to avoid reputational risk and judicial review. TPISC Board considered the following Principles for Disinvestment:
Straightforward method of checking whether an organization is being proactive:
Good governance needs to be at the heart of the current reforms of the NHS. It is vital for the development of a vibrant healthcare market that will continue to provide high quality healthcare. Those who are working to further improve existing healthcare organizations or developing the new CCGs and HWBs need to understand and apply the principles of good governance. It is important to think through how these principles should best be applied to their own local situation. The opportunities that come with getting the right governance system in place is that a useful balance will be struck between flexibility and proper risk management, and between control and freedom to innovate. Patients and local communities will be confident in the system, and governance will become proportionate, and an asset to an organization rather than an irksome series of tasks. These principles, allied to carefully considering how your organization can be of good governance knowledge, will ensure higher quality healthcare and proper governance.