Corporate Governance in Insurance Sector

Anabil Bhattacharya, Chief Manager & CPIO, RTI Department, National Insurance Company
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Good corporate governance is key to efficiency in a competitive environment, as it provides a cutting edge. It is necessary, not just because it is good for the shareholders and other stakeholders, but because it is in the interest of the company itself in the present prevailing competitive environment in insurance industry, says Anabil Bhattacharya

Financial or Monetary Management is all about controlling our company’s finances so that we can make better decisions. We appoint accountants and officials in our internal audit department to keep proper track of the company's income and spending.

Even in our handling of personal finance, it is important to practice sound money management practice, which will invariably help us to :

  1. Control our spending, build up good credit record & avoid situations for debt/ taking loan.

  2. Prepare ourselves for unexpected emergencies to cope with.

  3. Save money & resorting to follow proper investment mechanism.

  4. Focus on future goals for better control of personal finances.

As an individual, we need to have a frequent look at our income, savings, debts, outgoings and work out a plan that suits us and will help us to keep control of our spending effectively. The budget planner may be a good starting point as this will give us a clear snapshot of our current money situation and what expenses we have on yearly basis.

Money management is an important skill that can help us meet our goals and give us peace of mind. We need to educate ourselves on our various options and think realistically about what we can afford now, and what we will be able to afford in future and obviously there are certain norms indeed we need to comply with. Similarly, we also need to maintain certain norms. Here comes the importance of corporate governance in a service oriented financial institutions like ours and for all other insurance firms.

The synonym of corporate governance is “good governance”. Governance indicates behaviour. The governance is the responsibility and accountability for the overall operation of an organisation. Governance is a shared process of top level leadership, policymaking and decision making. Corporate Governance is a relatively new issue for the Indian industry. It has assumed greater importance in the context of what has happened to companies like Enron, Xerox, WorldCom, etc. to cope with such situation is always very difficult proposition—then why not we take a vow for safeguarding our companies from being the mess of financial irregularities – since our own company is like my mother as it gives us our bead & butter – our livelihood.

The concept of corporate governance is defined in several ways because it potentially covers the entire gamut of activities having direct or indirect influence on the financial health of corporate entities. Corporate governance is a system by which business corporations are directed and controlled. It specifies the distribution of rights and responsibilities among different participants in the corporation.Corporate governance also spells out the rules and procedures for corporate decision-making.

But who are the participants here? The answer is – board members, managers, shareholders and other stakeholders.

Now obviously the question comes as – who are the stakeholders?

The stakeholders are those that have interests in the organisation i.e.:

  1. Shareholders

  2. Stakeholders

  3. Employees

  4. Suppliers

  5. Customers

Ensuring better corporate performance through involvement in strategy formulation and policy making, corporate conformance through top management’s supervision surveillance and accountability to the stakeholders come under the ambit of corporate governance.

First consideration is the strategy formulation. It is the plan that help identify agency goals, objectives, and performance measures. The plans are evaluated annually to determine their efficiency and success.

Corporate governance addresses three basic issues of any organisation:

  1. Ethical issues,

  2. Efficiency issues, and

  3. Accountability issues.

Ethical issues are concerned with the problem of fraud/fraudulent activities, which is becoming wide spread in capitalist economies. Corporations often employ fraudulent means to achieve their goals. At times corporations may resort to unethical means like bribes, giving gifts to potential customers and lobbying under the cover of public relations in order to achieve their goals of maximising long-term owner value.

Efficiency issues are concerned with the performance of management. Management is responsible for ensuring return on investment made by shareholders.In India, small shareholders are still an important source of capital for corporations as the mutual funds industry is still emerging.The issues relating to efficiency of a management is of concern to shareholders as there is no control mechanism through which they can control the activities of the management, whose efficiency is detrimental for returns on their (shareholders) investments.

The management of a corporation is accountable to its stakeholders. Accountability issues emerge out of the stakeholders’ need for transparency of management in the conduct of business. Since the activities of a corporation influence the workers, customers and society at large, some of the accountability issues are concerned with social responsibility that a corporation must shoulder.

Now the issues which corporate governance must address today in Indian insurance industry are:

  1. The growth of private companies in this liberalised market

  2. The magnitude and complexity of corporate groups

  3. Rise in hostile activities of predators (take over)

  4. Insider trading

  5. Litigations against directors

  6. Need for restructuring of boards

  7. Changes in auditing practices

A formal effort was initiated by the CII when it produced a document titled “Corporate Governance-A Desirable Code” in 1998, through a Task Force headed by Rahul Bajaj, probably for the first time formally recognised the obligation of listed corporations to create wealth and distribute it among all their shareholders.

A similar initiative was mounted by SEBI with the constitution of a committee under the chairmanship of Kumar Mangalam Birla and its report recommending guidelines on corporate governance published in February 2000. It is a well-balanced compendium of good practices that will stand corporate in good stead in their governance-improvement endeavors.

Some of these recommendations however have been categorised as mandatory and have since been incorporated in the Listing Agreement of the Stock Exchanges. To this extent, this initiative may be termed partly regulatory and partly voluntary. It may only be a matter of time before many of its other recommendations become mandatory regulations.

Following KM Birla committee report, listing agreements now mandate appointment of an Audit Committee comprising a minimum of three members, all non-executive but the majority and the committee chair is being independent as well. The proposed company law amendment also envisages an Audit Committee comprising three or more directors, at least two-third of them being non-executive.

Good corporate governance is the key to efficiency in a competitive environment, as it provides a cutting edge. It is necessary not just because it is good for the shareholders and other stakeholders, it is essential because it is in the interest of the company itself in the present competitive environment existing in Insurance.

It is good for the shareholders because it is good for the company on which their future depends. If the quality of corporate governance is good, decision-making process should be transparent, consistent with the need to protect the competitive interests of the company as otherwise shareholders and other stakeholders in the enterprise would lose out.

Corporate governance is the acceptance by the management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment of values, about ethical business conduct and about making a distinction between personal and corporate funds in management of the company.

Investment is an act of faith in the ability of corporate management. Investors expect management to act as trustees and ensure safety of capital and also to earn rate of return higher than cost of capital. Management is expected to protect the investors’ interest and adopt good corporate governance practices.

Despite various attempts, neither a globally accepted definition nor a universally agreed model of corporate governance could be established so far. Though there is agreement as to general and basic principles of corporate governance but applications are made according to the needs of an individual organisation and existing business environment.

Good corporate governance is not ‘one size fits all” proposition, and a wide diversity of approaches to corporate governance should be expected and entirely appropriate. Moreover, a corporation’s practices will evolve as it adapts to changing situations.

Requirement of corporate governance mainly arises because various stringent measures have been taken around the world, like:

  1. High profile business failures in USA that gave calls for makers and checkers.

  2. Foreign Corrupt Practices Act, 1977 imposed in USA – has its impact in India.

  3. Sarbanes-Oxley Act came in place in USA revolutionising the practice of Audit, financial disclosure, and at the same time imposing severe penalties for willful default by managers and auditors.

  4. Similar types of symptoms lead London Stock Exchange to set up Cadbury Committee for measures to prevent recurrence of such phenomena.

In India, company legislation has until recently been the main instrument for improving corporate governance. Subsequently incorporating the recommendations of the Bhabha Committee, this Act legislated, among other things, the abolition of the system of managing agencies, an institution that had served the country well during the early days of corporatisation, but has fallen into disrepute through abuse and malpractice in its application by its latter day exponents. SEBI has an ongoing programme of reforming the primary and secondary capital markets. Among the professions, The Institute of Chartered Accountants of India (ICAI) has emerged as a mature body regulating the profession of public auditors and counts among its achievement the issue of a number of accounting and auditing standards.

Regulatory bodies for financial sector in India are:

  1. Department of Company Affairs

  2. Securities and Exchange Board of India

  3. Reserve Bank of India

  4. BSE & NSE

  5. IRDA for insurance industry

Insurance Industry Scenerio

So far none of the Indian insurance companies share is listed in Indian stock exchanges hence not covered by Clause-49 of listing agreement. However, Section 292A of Companies Act is applicable, where paid up capital is not less than ` 50 million. Further as part of commercial and administrative prudence both public and private sector insurance companies have adopted corporate governance norms in general but not as elaborate as required by Clause – 49 (till the time as not beinglisted in Indian stock exchange).

In Insurance Sector IRDA has introduced corporate governance norms to formulate comprehensive regulation on the role and function of board of Indian life and non-life insurance companies and also to frame other relevant norms to usher in the corporate governance in the sector. However, IRDA Regulation on preparation of Financial Statement and Auditor’s Report requires inclusion of Management’s Responsibility statement in annual report. They have amended Investment Regulation, which covers the area of Risk Management.

Audit

Audit is a pivotal feature in the architect of the Corporate Governance. Audit Committee is the central feature, concerned with working of internal control. An ICAI guidance note refers to the important areas of compliance in this regard. Clause-49 requires corporate governance compliance certificate by a participating chartered accountant or company secretary.

Earlier we knew of the management in private sector administration in public sector. With liberalisation and globalisation, public sector functioning in India has undergone a paradigm shift and now it is striving to be as efficient as private sector in spite of their inherent constraints like CVC, CAG etc. There are two Audit Committees for the Public Sector and Central Government namely:

  1. Public Accounts Committee; and

  2. Committee on public undertaking (COPU).

Corporate Governance is also linked with Human Governance made of three components political, economic and civil governance. India is started to have low humane governance index of 0.42 while East Asia’s is 0.65 and the average for the developed world is around 0.85. This suggests fighting corruption to be essential component of good governance. Corporate prosperity is direct outcome of good governance. Role of chartered accountant whether in service or in practice need not be over emphasised in this regard.

Finally we must remember the IRDA‘s specific directive to Indian Insurers – “The sole Insurance Authority advises that a Chartered Accountants firm, who is not the Statutory or Internal or Concurrent Auditor of the concerned Insurer and having a minimum of three to four of experience of IT systems, risk management and process controls of banks, Mutual Funds or insurance companies, shall certifythat the Investment Risk Management System and Processes envisaged by these guidelines are in place and working effectively all through the operation of the company.”

(The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of INCLUSION. Comments are welcome at info@skoch.in)

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