Corporate governance forms the foundation on which a captive is built, as said Sean O’Donnell, director of financial examination at the DC Department of Insurance, Securities and Banking (DISB), in a session at this year’s Captive Insurance Companies Association (CICA) International Conference. O’Donnell added that, from a regulatory perspective, “everything flows from corporate governance. If there is good corporate governance in place, then the captive is likely to be successful in the long run”. Although it was noted that corporate governance helps a captive through difficult times, rather than prevent them entirely, O’Donnell outlined the two main components of corporate governance frameworks. The first is literal, which refers to adherence to the corporate documents, bylaws and statutes of a domicile. The second component, he continued, is the all-encompassing involvement and awareness of a captive’s management team in the operation of the captive to ensure it properly follows its business plan, as well as laws and regulations, in its processes. Conversely, Joe Holahan, partner at Morris, Manning & Martin, highlighted that, from an attorney’s perspective, the two fundamental components of corporate governance are substantive and procedural. Substantive refers to the directors’ and officers’ (D&O) fiduciary duties to the company, such as due care and loyalty, while procedural is designed to ensure a captive’s chain of authority is properly followed as ascribed by statutes and internal processes, and that decisions made on behalf of the captive ultimately derive from the owner. Robert Donohoe, president and CEO of Lone Star Alliance Risk Retention Group (RRG), added that from the corporate side of running an RRG, implementation is a significant aspect of corporate governance. Establishing a culture of accountability, transparency and discipline is crucial to ensure that processes in place allow the captive to follow its original guidelines and laws as a company, he noted. “Corporate governance does not work with just a chief compliance officer or CEO. It is a common understanding of the mission and goals of the company, and a commitment to carrying it out. The procedures, protocols and principles in place must allow staff to instinctively follow those rules,” Donohoe added. Discussing the consequences of bad governance, O’Donnell warned that captives may have difficulty obtaining D&O coverage as a result of reputational risk to the captive’s owners and management. Such a reputational crisis could also lead to loss of service providers, reinsurers and other business partners. Donohoe agreed that poor governance can create a loss of credibility and trust, whether internally within an organisation or among regulators or outside investors, as well as causing a significant loss of time. In extreme cases, O’Donnell noted that fines may be imposed following repeated egregious displays of poor corporate governance. Echoing the potential for severe practical consequences, Holahan noted that, in some cases, serious corporate governance problems can arise in otherwise well-managed captives — programmes that are financially successful and have high member satisfaction. He pointed out that this can sometimes mask other problems that may look inconsequential compared to ensuring the captive remains solvent and members remain happy — “that is the trap”, he warned. It is worthwhile, therefore, to invest time now in sound corporate governance practices to avoid serious evolved problems down the line which can cause a detrimental economic impact. Donohoe added that the most effective way for a captive to prepare for such a crisis is to “establish and executive a game plan. Keep on the right path, and you will avert crises down the road”. Concluding the session, O’Donnell recommended that applications submitted to regulators should demonstrate that a captive is working with good service providers to develop a robust corporate governance programme. Ensuring this is an important consideration when forming a captive goes a long way in setting up the structure for success (whether in financial, regulatory or governance terms) in the long run.
