Tuesday, 3 July 2012
Saturday, 3 March 2012
Tuesday, 19 April 2011
As a New Zealand taxpayer – and therefore collectively on the hook for a possible $0.5 – $1.0 billion support package (read ‘bailout’) – I was delighted to see that the Government has appointed an experienced insurance professional, John Pritchard, to the board of AMI Insurance.
It may come as a surprise – as it did to me when I read AMI’s latest annual report – to find that not one of the existing board members appears to have a background in either insurance or risk … unless you count the ownership of racehorses in the latter category. I know, and have considerable respect for, some of the directors: an outstanding retired banker, a leading former retailer, a successful market gardener, and so on. But nobody about whom I could find any experience in the industry in which AMI operates.
Going one step deeper, the Chief Executive’s own earlier career was mainly in banking, not insurance. When you look at the executive management team, you see Heads of Customer Division, Customer Experience, Marketing and Products, all of which helps us to understand how the company has been so successful in growing market share over the last decade, from a relatively small Christchurch-based insurer to one of the leaders nationwide.
However, nobody in the top team has a title that suggests deep involvement in risk management. You have to delve to what appears to be at least third tier to find someone described as Actuarial Team Leader.
I doubt whether anybody could have foreseen the destruction caused by the seismic bombs that hit Christchurch last September and more tragically on 22 February. But a part of risk management is about assessing events of low probability but high impact.
Much of AMI’s business was, not surprisingly, centred on Christchurch, where it had acquired a large share of the House and Contents insurance market, and a disproportionate concentration of its portfolio. And I have read that its reinsurance rates were among the industry’s lowest. Not being from the industry, I wouldn’t have a clue about appropriate reinsurance levels, but I do understand a little about concentration of risk.
What bothers me is that I’m not convinced that anybody else on the board would have had much more knowledge, so would not have been in a strong position to ask whether the reinsurance rates were too low for the high concentration of the company’s exposure.
My daytime business is ‘Building boards into leading teams’, and I’m the last person to suggest that everyone at the board table should come from the same industry background. To the contrary, I believe that having a range of backgrounds and perspectives is vital in achieving effective board oversight. However, having nobody at the board table with a background in the industry seems to defy common sense – because directors must be sure they are receiving the information they need in order to make good decisions. If you don’t have somebody with experience, you won’t know what you don’t know.
Without knowing the background, I can only make some assumptions about AMI’s board practices and (lack of) evolution. The Chairman has been on the board for about twenty years and several of the other directors have been there for a long time, while the CEO was appointed more than 15 years ago.
I’d imagine that some of those relationships had grown quite comfortable during the good times of rapid growth. One of the dangers when this happens is that a director who wants to ask hard questions, challenging the strategy and management’s assumptions, can feel increasingly uncomfortable and isolated if he (at AMI they’re all ‘he’) starts to ‘rock the boat.’ This is why it’s so important that a healthy board culture doesn’t just accept, but insists on dissenting views being aired.
I’d also guess that, as the business grew rapidly, the board’s priorities reflected its experience in growing businesses and satisfying customers, and didn’t focus adequately on changes to its risk exposures or concentration of its portfolio.
The lack of board turnover, combined with the directors' industry backgrounds, seems to have resulted in a failure to grasp the increasing significance of such agenda items, in line with AMI's changing position in a rapidly changing world. As Charles Darwin observed (see my earlier post on his anniversary a couple of years ago):
- It is not the strongest of the species that survive, nor the most intelligent, but the ones most responsive to change.
A failure to recognize this at AMI’s board table over many years may well cost you and me up to a billion dollars. Let’s hope Mr Pritchard can make enough of a difference to prevent this from happening.
Thursday, 20 January 2011
One of the first things that struck me was the calibre and influence of the 23 participants. Most were senior Indonesian bankers, with some from the Philippines and two from the Institute of Directors in Thailand. One introduced himself by telling us his family owned the bank where he was chief executive, another was a respected company director from the Philippines and a third a former director of the Central Bank of Indonesia. The overall awareness of global banking regulation and understanding of corporate governance principles and practice were also impressive.
While we were preparing, one of my fellow faculty members posed a question that made me stop and think: "Are the principles of corporate governance for banking any different from those in other industries?" This raised the further question of whether banks are fundamentally different from other types of business. I think that two aspects do make banks different:
- The first is that every business is connected in some way to at least one bank, and
- Second, unlike most industries, banks conduct a huge amount of business with each other as well as with the rest of the economy, so the failure of any major bank will likely weaken its competitors too.
With this as a start point, I believe that our GCGF faculty was well motivated to make the ToT week a success. We were well supported with the new 'Governing Banks' Supplement to the usual GCGF corporate governance training manuals. This was the Supplement's first outing, so one of my tasks was to adapt some of the generic presentations to incorporate the banking-related material. While it required long hours and very early mornings of intensive preparation for each day (think ‘Just in Time’ delivery - in a services context!), it all came together. I greatly appreciated the quality of the background information in the Supplement, which meant I did not have to do much of my own research or sourcing of information.
Our teaching faculty consisted of a specialist in adult learning, Mary Jo Larson, who teaches at Columbia University; Sidharta Utama, an experienced director and respected expert in corporate governance in Indonesia, who teaches at Universitas Indonesia and who chairs the Board of Management for the Indonesian Institute of Company Directors; and me.
We were in good company; the participants were largely complimentary at the end of the week; and I for one learned a great deal from the faculty and the attendees!
The key task now is to build on the success and energy for this first programme - supporting the local efforts to spread the training in Indonesia, increasing the reach of the Indonesian Institute, and running further courses while the memories remain fresh. I look forward to all of that.
Saturday, 5 June 2010
Saturday, 29 May 2010
- A “reasonable director” is one who turns up at board meetings - anyone who’s been around for a while will know that this is not a universal attribute of all directors. It’s no defence that you missed the meeting where the board took a bad decision. The logic here seems to be that the company has a right to the wisdom of its directors, so they in turn have a responsibility to show up. We can all applaud that one.
- A “reasonable director” is one who takes an active interest in the affairs of the company, and asks for the information he or she needs, to understand the company’s business and financial position. They have a duty of diligence and care to make sure - within reason - that the information they receive is complete and accurate. The longer I sit at board tables, the more I realise that one of the most important skills of a good director is the ability to ask good, thoughtful, questions, and to understand the issues well enough to ask the follow-up, “So, if that’s the case...”
Monday, 22 March 2010
- The target (the bloggee?) is tarred by one person’s allegations, which are now stored on hundreds of servers, and there’s no realistic right of reply (call me outdated, but has the idea of “natural justice” totally disappeared?). As a result of this blog, is there any realistic hope that this accusation can ever really be buried? Surely the better approach - if the writer had been genuinely well-intentioned - would have been to raise it with the individual in person, or if that didn’t work, confidentially with the person’s boss, the CEO?
- For the blogger, on the other hand, I’d recommend that any potential employer or client should read his blog post and think carefully of what might happen if they too were to fall out later. As a result, the new employer or client might well ask themselves, “Why take the risk?”