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NAIC Makes Model Corporate Governance Regulation Applicable to Fraternals

Earlier this week, at the  National Association of Insurance Commissioners (NAIC) Spring National  Meeting, the Corporate Governance (E) Working Group amended a proposed corporate governance model act to ensure that it applied to fraternal life insurers.  The model act is expected to be adopted at the NAIC’s August 2014 meeting.  From there, it will be up to each state to enact the model.

The Alliance strongly supported this amendment.  The fact that regulators made a specific revision to the proposal to include fraternals is a clear sign that they understand the important link between corporate governance and organizational sustainability.

Over the past three years, the Alliance has focused a considerable amount of energy compiling research and conducting educational programs for member societies on “best practices” for corporate governance.  We are proud of the results of this effort.  Thanks to the information and instruction provided by the Alliance, many member societies have taken significant steps to enhance their corporate governance structures – and, in turn, improve their organizations’ financial and fraternal performance. board14

But as we all know, some fraternal boards and executives have a way of clinging to the past despite all the evidence that changes must be made.  Steadily declining surplus?  Not a problem.  Downward trend in RBC?  We’ll assess the members.  Fewer and fewer members participating in community service events?  Just an anomaly.  Local chapters becoming irrelevant to younger members?  This too shall pass.

It is for these organizations that the NAIC Corporate Governance Model Act is needed.  Without a regulatory mandate to change, these societies would go to their graves  – and some of them are well on the way there – fighting to maintain the status quo.  And while the status quo may be an effective way – perhaps the only way – for some of the leaders to retain their vice-like grip on control of their organizations, it is certainly not in the best interests of the long-term financial health of the society or its members.

That’s why in addition to supporting the application of the NAIC Corporate Governance Model Act to fraternals, the Alliance is also supporting legislation in Illinois, SB 3404, which includes a provision that would end the practice of fraternals electing their CEO.  That’s right, among a host of other solvency and governance components, SB 3404 would require fraternal CEOs to be hired by the society’s Board of Directors by January 1, 2019.

Many Alliance member societies have already made this transition.  And the vast majority of those that haven’t support this provision because they know that without a regulatory requirement to modernize their governance, the very constraints of that structure make it almost impossible for the society to update it on their own.

Certainly, the requirement to hire rather than elect a CEO cannot guarantee that any society will hire the perfect candidate.  However, it will ensure that the responsibility for making that decision rests where it should: on the shoulders of the Board of Directors.  Moreover, it will greatly enhance the chances of a CEO being hired based on his or her qualifications rather than being elected based on a popularity contest or the quality of the tchotchkes handed out to delegates at a convention.

And that, my friends, is no April Fool’s Day joke…

12 Responses

  1. When we don’t take care of business ourselves and keep our industry practices relevant, the regulators will do it for us.

    • I’m not sure that is a cure-all.
      If presidents are currently being elected by “popularity contests or the quality of the tchotchkes handed out”, why would the board elections be any different? If the board was unqualified, why would it be better to let a few unqualified people hire a CEO than a large number of unqualified people elect the CEO (I am assuming your position is that the delegates are unqualified to identify and vote for a qualified candidate or distinguish qualified from unqualified candidates)?
      It is a much bigger issue and one that hiring (versus electing) a CEO will not solve.

  2. Hi Joe Hearty Congratulations on the great work with respect to SB3404

  3. Joe, congratulations to you and the Alliance Board for embracing this Corporate Governance change. In my experience, a modern corporate governance leads to a modern mutual (fraternal). As you know, we went through a similar change here in the UK in 2006 and it proved to the the makings of the friendly societies and mutuals in the UK. Those who embraced the change thrived and grew as did the sector in the UK. The real golden nugget in the change was how mutuals engaged with their members/customers, the more engaged they were, the more advocacy they got from members, the more their businesses grew.
    Shaun Tarbuck, CEO, ICMIF

  4. Oh my, looks like I’ve struck a nerve. I’m not saying that a hired rather than elected CEO is the silver bullet for improved corporate governance. Karen is right, if a group of unqualified board members are responsible for hiring a CEO, the chances are that they will get it wrong. The “mandate to hire” provision must be accompanied by reforms to the board election process, to improve the chances that board members are elected based on their qualifications, not their contacts. But the fact is that fighting to preserve the status quo is a Quixotic quest. Fraternals should not simply accept that the corporate governance regulation is changing — they should embrace the movement and lead the initiative for reforms rather than have them forced down their throats by regulators.

    Joe Annotti

    • I agree with everything you are saying: execpt the “given” that a law requiring fraternals to elect a CEO is a great advancement. As membership socities, our goal should be to modernize, reform and improve our corporate governance while keeping as much power as possible in the hands of our members.
      Delegates can only elect as good as what they are given to elect. If people perceive a problem with the types of leaders that are being elected (I am not saying there is- I am interpreting others’ comments) perhaps it is because the delegates are not given quality candidates. If that is the case with some societies, the problem is so deeply rooted in the way that fraternals operate their lodges, elect their convention delegates, set qualifications for national office, etc., It would take an overhaul of the fraternal code and the internal revenue code to address these issues. Furthermore, a one size fits all corporate governnance model rule may cause more problems than good. Every law and rule that is changed to make fraternals operate exactly like for profit insurers is another excuse for regulators to revoke our exemption.
      So, I wholeheartedly agree that fraternals (as a whole) need to take a hard look at how they are operating both on the lodge level and the national level. They need to make changes to ensure that delegates and candidates are qualified for their jobs and that the infrastructure is laid for a continual stream of new and qualified candidates. This is hard work but it has to be done. If it isn’t then pretty soon the members won’t have any say at all in “their” societies.
      So rather than celebrate the first step in taking away members’ rights, we should be lamenting the fact that this is perceived as “necessary”.

  5. I guess we’re going to have to “agree to disagree” on this issue. An innovative option for improving the quality of board members that at least one society has used is carving out a handful of seats on the board for “outside” or “independent” directors. That way a society can actively recruit experts in certain disciplines — legal, accounting, community service, marketing, etc. — that they may have difficulty finding within their membership. I also think that term limits or age limits on board members is a good idea to keep new blood flowing. My fundamental disagreement is on the potential impact such regulation could have on the fraternal tax exemption. If governance changes can enhance fraternals’ ability to operate more efficiently and provide more and better services to members. And if by doing so that enhances a society’s ability to attract new members and generate more financial and volunteer resources to fulfill the society’s mission, we can make a much better case to Congress that our exempt status deserves to be not only protected, but promoted.

  6. Last post- I promise ; )
    (at least you know people are reading- right??)

    I have no problem with innovative ways to improve the quality of candidates for office (whether it be the board or the national officers). I am ALL for that.

    I am also ALL for fraternals operating more efficiently, providing more and better services and fufilling their mission.

    The importance of modernization and good corporate governance is not lost on me having been a “large firm” corporate lawyer and practicing law for 20+ years. However, I have also been a part of the fraternal system since birth and I guess our perspectives just differ on how important a “say” in governance is to fraternal members and what the best way is to achieve our modernization goals.

  7. Thanks to Karen and all others who’ve engaged on this issue. I welcome and appreciate your comments (and, yes, it’s nice to know that somebody’s reading these posts!) and look forward to working with the Alliance Board of Directors and members to enhance the future of the fraternal model while respecting the traditions on which that model was built.

  8. Joe: Great work in Illinois and on this article. We are fans of your diligence in many respects.

    This entry in your blog is ironically timed with discussions at our fraternal. I would like to play the “devil’s advocate” on this topic. Corporate governance as described above seems to be a forgone conclusion. Yet, hard evidence that it will improve things seems scant. So, I am compelled to say the following:

    Your comment implies people who “cling to the past…” somehow can be saved with more competent CEO’s. I think that societies are “going to their graves” for reasons Warren Buffet as CEO could not correct. Our organization has been electing officers during its 104 years and continues improving. The idea of changing conjures the saying “if it ain’t broke, don’t fix it.”

    The implication that to “modernize their governance,” societies must adopt a corporate governance model makes me think of the contents of every WSJ issue dating back through the last 5 years. Weren’t there a steady stream of “modern” corporations—many in the financial sector—whose “corporate governance” led to their demise? How can we assume fraternals will fare better? After all, the aforementioned corporations hired “competent CEOs”. Did they not?

    If the goal of fraternals is to be more like a corporation, then this will certainly work towards getting us there. However, fraternals need to address the problems that make them less relevant, which have more to do with members not fully understanding the benefits of belonging to a society.

    In conclusion, I would not rule out corporate governance in our fraternal’s future, but I think the net positive impact will be minimal. As with the GM CEO, having one person to nail for a problem makes great television, not necessarily great governance (her predecessors were lauded for leading the GM comeback, were they not?). I anxiously await the Senate hearings for the GM Board Members to be held accountable, but I won’t hold my breath.


    Tim Percic

    • Thanks for your thoughtful comments, Tim. I believe that the traditional fraternal governance model is indeed broken since fraternal market share has plummeted from 30% in the early 1900s to approximately 3% currently, and that membership overall has been steadily declining. (In just the past 16 years, Alliance societies have seen the total number of certificate holders shrink by 12%.) I am also basing my views – and the Alliance is basing its policy position – on the extensive research we’ve conducted on effective corporate governance models, as well as dozens of discussions I’ve had with executives and board members of fraternals who have modernized their governance and achieved remarkable results both in improved financial and fraternal performance.

      It is true that some societies can be successful with an old-fashioned “elect-the-president” system. But the societies that are attracting regulators’ attention due to poor financial performance that threatens the financial security of their members are almost invariably those with an antiquated governance structure that has resulted in consistent, poor decision-making by the leadership. It’s these organizations that regulation focuses on – and unfortunately others have to comply with such regulatory mandates.

      It takes highly-qualified, thoroughly-vetted executives and board members to make the tough decisions that are needed to develop products that appeal to a wide variety of individuals who all share a common bond; invest assets to yield appropriate returns; recruit and retain agents who embrace fraternalism; recruit and engage volunteers who support the mission of the society; and to downsize or merge when solvency is an issue. There is no perfect solution, but we’re convinced that a modern corporate governance structure reduces reliance on luck and increases the chances that meaningful change can be implemented which paves the way for fraternal success.

      I look forward to discussing this with you and your colleagues at the Presidents Mid-Year Meeting later this month in Savannah.

  9. Thanks Joe for this interesting insight and your forward-looking stance. From the European/international standpoint, I can only say your thoughts are shared by many of our mutual insurers’ members.
    For your information, please find the link to the OECD Guidelines on Insurer Governance, to which we (ICMIF, representing the mutual and cooperative insurance sector) contributed. Happy to answer any questions you might have.

    Click to access 48071279.pdf

    Best wishes,

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