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Three tenets of corporate governance your captive board needs to practice – and why

 
April 24, 2019

Vermont Captive Insurance, April 16, 2019

In this article Derick White, Managing Director of Governance, Risk & Compliance explains that a captive insurer’s board of directors must fulfill its duty of care to policyholders, but going above and beyond compliance can help it achieve its key business objectives.

The board of directors for any corporation owes a duty of care to its shareholders.

While state laws dictate the exact threshold of that duty, in the most general terms fulfilling duty of care means “understanding the company and supports its goals,” said Derick White, Managing Director, Governance & Risk Compliance Practice Leader at Strategic Risk Solutions – and a former auditor, regulator and captive manager in Vermont.

“Board members have to ask questions, and if they rely on outside expertise, they must be able to justify that. Otherwise, directors can be held personally responsible if something goes wrong,” he said. And if recent trends in SEC filings are any evidence, shareholders are increasingly holding boards accountable for missteps.

Captive insurance companies are not immune to such actions. Whether a single-parent captive or member of a group captive or risk retention group, these companies likewise ensure the board adheres to state regulatory standards.

“After all, the board is responsible for running the company,” White said.

Practicing good corporate governance ensures that the board not only stays in compliance but actually exceeds expectations outlined by the duty of care. In addition to delivering good financial results, good corporate governance fosters better relationships with domicile regulators, underwriters, reinsurers, and other experts that make up a captive’s critical infrastructure.

White detailed three key tenets of strong corporate governance that captive boards should be addressing at every meeting:

  1. A Clear Framework Outlines How the Captive is Run

A framework establishes basic guidelines for the way the board is run, including how many directors should sit on the board, how often they should meet, what committees will report to the board, and what topics they’ll review at every meeting.

“Usually a framework is set by the bylaws when the company is first formed, but they’re often written by an outside attorney and the board members don’t always read them. Understanding your framework is an important foundation for everything else the board does.”

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