Making a Difference
Trustee Training
Corporate Governance and Fiduciary Responsibilities of
Trustees
On behalf of
NAMAF
Windhoek
18 and 19 August 2014
Presented by
Esmé Prins-Van den Berg
Agenda
Day 1: 18 August 2014
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Corporate Governance
Ethical Leadership
Board of Trustees: Role and Responsibilities
Trustees: Suitability, Role and Responsibilities
Chairperson: Role and Responsibilities
Principal Officer: Role and Responsibilities
Board Committees
Succession Planning
Performance Management
Remuneration of Trustees
Conflicts of Interest
Removal of Trustees
© Healthcare Navigator CC 2014
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Corporate Governance
© Healthcare Navigator CC 2014
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Discussion:
What is corporate governance?
Why is it important?
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Corporate Governance
Corporate governance = Compliance?
Relationship with the law
“If all the boxes are ticked”, will the fund be successful?
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Corporate Governance
1.
King Report on Corporate Governance (King III)
– Corporate governance mainly involves establishment of structures and processes
with appropriate checks and balances that enable directors to discharge their
legal responsibilities and oversee compliance with legislation
– It is essentially about effective, responsible leadership
– Corporate governance practices, codes and guidelines lift the bar of what is
regarded as appropriate standards of conduct
2.
System by which business corporations are directed and controlled
– Distribution of rights and responsibilities among different participants e.g.
board, managers, shareholders, other stakeholders
– Rules and procedures for making decisions
– Structure to set objectives, means to achieve them and performance monitoring
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Corporate Governance
3.
Appropriate board structures, processes and values by which a company is
directed and controlled for company to achieve its purpose whilst keeping
it under prudent control
– It therefore enables directors to carry out their legal duties
4. ASX Corporate Governance Council
– Corporate governance is system by which companies are directed and managed
– It influences how the objectives of the company are set and achieved, how risk
is monitored and assessed and how performance is optimised
– Good corporate governance structures encourage companies to create
value…and provide accountability and control systems…
5. If management is about running the business, governance is about seeing
that it is run properly
– Supervising/monitoring management performance
– Ensuring accountability of management to shareholders and
other stakeholders
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Balance between
Performance / Achievement / Strategy
and
Compliance / Accountability / Transparency / Honesty
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Discussion:
1. Are there any benefits to Good Corporate Governance?
2. Is there a downside to Poor Corporate Governance?
2. Name companies with good and bad corporate governance.
Why is it “good” or “bad”?
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Benefits of Corporate Governance
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Increases “value of entity”
Gives confidence to market
Enhances reputation of business
Enhances empowerment of all stakeholders
Improves efficiency
Encourages innovation
Enhances competitive advantages
Meets financial, legal and statutory obligations
Ensures accountability
Encourages proper decision-making
Eliminates conflicts of interest
Creates sustainable business
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Reasons for Benefits of Corporate Governance
1.
Changes attitudes
2.
Guide to conduct business with honesty and integrity
3.
Sensitive to needs of affected persons
4.
Forces checks and balances
5.
Encourages open and transparent communication
6.
Basis for rewards based on performance and results
7.
Punishes those responsible for fraud
8.
Encourages business to establish high principles and ethics
9.
Not aimed at frustrating leadership, but encourages participative,
performance-based leadership
10. Creates overarching goal for sustainable development
11. Not guarantee for business success but produces better operating results
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Why Corporate Governance?
Good governance = Good business sense
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Discussion:
1. What are the Barriers and Challenges to Good Corporate
Governance?
2. How do you overcome them?
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Barriers to Corporate Governance
1.
Conflicts of interest – own agendas
2.
Lack of focus, industry knowledge and experience
3.
Wrong remuneration / incentive strategies
4.
Not understanding roles
5.
Inadequate (business) skills and leadership
6.
Cost of compliance
7.
Might be disruptive to existing business model
8.
Communication between different levels in organisation
9.
Lack of understanding at Board level
14
How Overcome?
Avoid concentration of power
Buy-in
Policies and procedures → Clarity of principles → Consistency in
decision-making
Levels of authority → Accountability
Strong board commitment
15
International Principles
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Organisation for Economic Cooperation and
Development (OECD)
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Protection of Minority
Shareholder Rights
Transparent Disclosure
Effective Controls
Good Board Practices
5 Elements of Corporate Governance
Strong Board Commitment to Corporate Governance
Reforms
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International Corporate Governance Network
(ICGN)
Global Corporate Governance Principles
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ICGN: 9 Principles
1.
Corporate objective: Sustainable value creation
2.
Corporate Boards
–
Directors as fiduciaries
–
Effective board behaviour
–
Composition and structure of board
–
Role of chair
–
Lead independent director
–
Company secretary
–
Knowledge of company
–
Appointment of directors
–
Board and director development and evaluation
–
Related party transactions and conflicts
–
Board Responsibilities
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ICGN: 9 Principles
3.
Corporate Culture
–
–
–
–
–
–
–
4.
Culture and ethical behaviour
Integrity
Codes of ethics and conduct
Bribery and corruption
Employee share-dealing
Compliance with laws
Whistle-blowing
Risk Management
–
–
–
–
–
Effective and appropriate risk management
Dynamic management process
Board oversight
Comprehensive approach
Disclosure
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ICGN: 9 Principles
5.
6.
Remuneration
–
Alignment with long term strategy
–
Link to value-creation
–
Pay for non-executives
–
Transparency
–
Share ownership
–
Shareholder approval and dialogue
–
Employee remuneration
Audit
–
Robust and independent audit
–
Ethical standards
–
Internal audit
–
Audit Committee role
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ICGN: 9 Principles
7.
8.
Disclosure and Transparency
–
Transparent and open communication
–
Timely disclosure
–
Affirmation of financial statements
–
Accounting standards
–
Non-financial business reporting
–
Disclosure of ownership
Shareholder Rights
–
Accountability
–
Corporate Charter
–
Shareholder protection
–
Voting-related rights
–
Shareholder rights of action
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ICGN: 9 Principles
9.
Shareholder Responsibilities
–
Alignment
–
Integration into mandates
–
Integration into investment decision-making
–
Collaboration
–
Active and considered voting
–
Commitment to principles
–
Internal corporate governance
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Liability
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Failure to meet recognised standards of governance (even if
not legislated) may render a board or individual trustee
legally liable
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Who is responsible for governance in medical aid funds?
Board of Trustees
BoT = Focal point of corporate governance
Monitor compliance with good governance practices
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King Report on Governance
(King III)
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King Report on Governance (King III)
Corporate Governance Principles
Implementation: 1 March 2010
Application in SA: To all entities regardless of manner and form of
incorporation or establishment – public, private and non-profit
sectors…75 Corporate Governance Principles covered over 9 governance
elements (chapters)
“Each principle is of equal importance and together forms a holistic
approach to governance. Consequently ‘substantial’ application of this
Code and the Report does not achieve compliance”
Customise according to applicable legislation
Review has commenced…simplify
Comply and explain
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King III: Governance Principles
1.
Ethical leadership and corporate citizenship
2.
Boards and directors
3.
Audit Committees
4.
Governance of risk
5.
Governance of information technology
6.
Compliance with laws, rules, codes and standards
7.
Internal audit
8.
Governing stakeholder relationships
9.
Integrated reporting and disclosure
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King III Corporate Governance Principle 1
Ethical Leadership and Corporate Citizenship
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Ethical Leadership
“Good corporate governance is essentially about effective,
responsible leadership”
Responsible leadership characterised by ethical values:
1.
2.
3.
4.
Responsibility
Accountability
Fairness and
Transparency
All deliberations, decisions and actions of BoT and Executive
Management must be based on these values
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Principles of Governance (RAFT)
Responsibility
• Corrective action / integrity / fiduciary
duties
Accountability
• Responsibility for actions and decisions
Fairness
• Balance legitimate interests and
expectations
Transparency
• Meaningful analysis from outside
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Ethical Leadership
Characteristics of responsible leaders
1. Build sustainable businesses: Consider fund’s economic, social and
environmental impact on community in which it operates through
effective strategy and operations
2. Reflect on role of business in society and consider short-term and
long-term impact of their personal and institutional decisions on
economy, society and environment
3. Do business ethically
4. Do not compromise natural environment
5. Embrace a shared future with all fund’s stakeholders
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Moral Duties of Trustees
Conscience
• Act with intellectual honesty and independence of mind in
best interests of fund and all its stakeholders
• Rational decisions
• Conflicts of interest to be avoided
Inclusivity of
Stakeholders
• Essential for sustainability
• Consider legitimate interests and expectations of stakeholders
in decision-making and strategy
Competence
• Trustees must have knowledge and skills to govern fund
effectively
• Develop continually
Commitment
• Trustees must be diligent in performing duties
• Devote sufficient time to fund affairs
Courage
• Trustees should have courage to:
• Take risks associated with directing and controlling
successful, sustainable enterprise
• Act with integrity in all board decisions and activities
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Ethical Leadership
Integrity should permeate all aspects and operations of fund e.g.
vision, mission and objectives should be ethically sound
Conduct of internal and external affairs should be beyond reproach
Driven from top
Ethical standards must be integrated into all the fund’s strategies
and operations (management policies)
– Material term of employment and supplier contracts
– Deal with suppliers that subscribe to similar standards of corporate
governance and ethics
Code of Conduct supplemented by ethics-related policies e.g. Giving
and receiving of gifts, supplier relations, etc. … powerful instrument
for guiding fund’s ethics performance
Board should ensure that fund’s ethics performance is assessed,
monitored, reported and disclosed…improve ethical culture
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Independence
Social
Responsibility
Transparency
Fairness
Accountability
Responsibility
Discipline
Ethics / Integrity
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King III Corporate Governance Principle 2
Boards and Trustees
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Medical Aid Funds Act
“Trustee” = Any person managing a registered fund
Minor disqualified to “manage affairs” of fund
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Financial Institutions and Markets Bill, 2013 (FIM Bill)
Board of Trustees (BoT)
– Charged with managing affairs of medical aid fund, elected / appointed under
fund’s rules
– Trustees must be “fit and proper” to manage business of fund…to be defined in
standards by NAMFISA
– At least 50% elected by members
– 1/3 to be independent? (standards)
– Disqualifications
• Director, officer, employee of administrator / its holding company,
subsidiary, JV or associate
• Consultant, contractor of administrator
• Financial institution / financial intermediary rendering financial services to
fund / BoT
– Chairperson may not be the PO, general manager or other senior officer of fund
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Size of BoT
King:
–
–
–
–
–
–
–
Collective knowledge, skills, experience and resources required to be considered
Evolving circumstances, needs of fund, nature of business
Sufficient trustees to structure board committees
Difficulties with quorums if board is too small
Regulatory requirements
Skills and knowledge needed to make business judgment calls
Size, diversity and demographics – must be effective
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What is a Trustee?
King III advises that when considering the skills and suitability of a proposed
trustee, the following dimensions require consideration:
1. Knowledge and experience required to fill gap on Board
2. Apparent integrity of individual
3. Skills and capacity of individual to discharge his/her duties to Board
“Fit and proper”
– What constitutes a “fit and proper” person?...standards
– Whose responsibility to determine who are fit and proper persons?
– Guidance by CMS in SA
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Proposed Fit and Proper Criteria (CMS)
Fit – competence and ability to do job
Proper – person’s character and integrity
Fit and proper person: Person who is financially sound, honest, reputable,
reliable and competent to perform specific role
Criteria for assessment
– Honesty, integrity and reputation
– Competence and capability
– Financial soundness
Standard: Overall standard to be met
Disqualification and evaluation criteria: Not definitive list
– Disqualification criteria: Could be automatically disqualified or disqualified taking
account of range of criteria
– Evaluation criteria: Non-compliance with single criterion does not necessarily
result in person not being fit and proper…look at other factors
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Term of Office of Trustees
Medical Aid Funds Act and FIM Bill: No limit on terms specified
King III
– Staggered rotation
– Terms > 9 years should be subject to particular rigorous review by Board to
ensure independence
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What are the duties of the BoT and Individual Trustees?
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All trustees have fiduciary duties
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Specific Duties
MAF Act
1. Advise Registrar of contact details of PO / appointment of PO
FIM Bill
2. Take all reasonable steps to ensure interests of beneficiaries under Rules
of fund and Chapter in Act protected at all times
3. Act with due care, diligence, prudence and good faith
4. Take all reasonable steps to avoid conflicts of interest
5. Act with impartiality in respect of all beneficiaries
6. Prepare annual report and submit to NAMFISA… prescribed requirements
7. Disclose all payments / considerations to NAMFISA annually …offence
8. File copy of administration contract with NAMFISA
9. Monitor delegation to administrator according to contract and take
remedial action, if applicable
10. Appoint auditor
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Specific Duties
11. Appoint a valuator
13. Manage or supervise management of business and affairs of fund with
objective to maximise returns for members
14. Ensure financial resources are sufficient to discharge obligations
15. Ensure consumers (members) are fairly treated in accordance with
contractual arrangements
16. Establish Audit Committee…requirements
17. Establish procedures to identify and deal with conflicts of interest…
committee
18. Establish investment policies
19. Establish procedures with regard to fair treatment of members, including
disclosure of information to them, protection of their personal
information, prompt assessment and payment of legitimate claims and
handling of complaints
20. As to be further prescribed in standards (NAMFISA)
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FIM Bill: Standard of Conduct for Trustees
Director and officer (trustee) of financial institution (fund) in exercising any
of powers and discharging any of duties of director or officer must
(a) Act with honesty and in good faith with a view to the best interests of
fund and its members and
(b) Exercise care, diligence and skill that reasonably prudent person would
exercise in comparable circumstances
Director, officer (trustee) and employee of financial institution (fund) must
comply with Act and Rules
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King III: Standard of Conduct
Each trustee has
1. Duty to exercise degree of care, skill and diligence that would be exercised
by reasonably diligent individual with
• General knowledge, skill and experience expected from person carrying
out same functions and
• General knowledge, skill and experience of trustee
2. Fiduciary duty to act in good faith and in manner trustee reasonably believes
to be in best interests of fund
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Boards and Trustees
BoT must direct, govern and be in effective control of fund
Board’s 2 main functions:
– Strategic direction
– Responsible for control of fund
Ultimate responsibility: Positive performance of fund in creating
value…consider legitimate interests and expectations of all stakeholders
Exercise leadership, enterprise, integrity and judgment in directing business
of fund so that it can survive and thrive
BoT and trustees should act in best interests of fund
– Best interests of fund = Best interest of collective membership
– Board has collective authority and decision-making, but trustees carry individual
responsibility
Board Charter: Board responsibilities
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King III: Role and Functions of Board
Board should
1. Appreciate that strategy, risk, performance and sustainability are inseparable
2. Provide effective leadership based on ethical foundation (Values: RAFT;
moral duties of trustees)
3. Ensure that fund is and is seen as responsible citizen
4. Ensure that fund’s ethics are managed effectively
5. Ensure that fund has effective and independent Audit Committee
6. Be responsible for governance of risk
7. Be responsible for IT governance
8. Ensure compliance with legislation and consider adherence to non-binding
rules, codes and standards
9. Ensure effective risk-based internal audit
10.Appreciate that stakeholder perceptions affect fund’s reputation
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King III: Role and Functions of Board
Board should
9. Ensure integrity of Board’s integrated report
10.Report on effectiveness of fund’s system of internal controls
11.Consider business rescue proceedings/turnaround mechanisms when fund
financially distressed
12.Appoint PO and establish framework of delegation of authority
13.Comprise a balance of power with majority of non-executive trustees
14.Appoint trustees through formal process
15.Ensure that induction, ongoing training and development of trustees
conducted through formal processes (Training policy)
16.Delegate functions to well-structured committees without abdication of its
own responsibilities
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King III: Role and Functions of Board
Failure to perform these duties could render trustee personally liable
FIM Bill:
– Fund could indemnify trustee against any liability, including legal defence costs,
that might be incurred as a trustee, but only if trustee acted honestly and in
good faith with a view to the best interests of the fund and its members
– Fund may purchase and maintain insurance for benefit of trustee against such
liability
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Discussion (Decision-Making):
Discuss decision-making by the BoT with specific reference to the
following matters:
1. Requirements for proper decision-making.
2. How to deal with disagreement of trustees.
3. Voting.
4. Effect of decisions on dissenting trustees.
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Board Agendas and Material
Foundation of each decision: Intellectual honesty based on all relevant
facts
Independent from management
Objective judgment based on sufficient management information,
independently from management
– Trustees should have unrestricted access to all fund’s info, records,
documents, management, staff, etc. subject to processes established by
Board
– FIM Bill: Fund must make information, including accounting records, about
fund, available to trustees to enable them to perform responsibilities and
exercise their duties under Act
BoT or trustees should be able to at expense of fund take independent
advice in connection with duties, if necessary and after following due
process established by BoT
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Regular Board Agenda Items
1.
2.
3.
4.
5.
6.
7.
Management accounts
Strategy
Risk Register
IT Governance
Compliance
Stakeholder relationships
Fund’s reputation
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Board Oversight: Documents
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Code of Conduct
Board Charter
Ethics-related policies
Risk Register
Risk management policy and plan
Internal Audit Charter
IT Governance Charter and Policies
Compliance Policy
Stakeholder strategy and policies
Conflict of Interest Policy
Integrated report
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Frequency of Board Meetings
Sufficient scheduled meetings to discharge duties
Minimum of 4 advisable
Circumstances of fund to influence
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Empowered Board
Small, cohesive Board
Independent
Open and free communication
Experience and expertise
Access to intelligible financial and operational performance information
Power rests in Board
– Take decisions jointly
– Independent discretion
– Regular meetings
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What are the functions and duties of the Chairperson?
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Board of Trustees: Chairperson
Leadership = main role
Presiding officer at meetings
Ensure smooth functioning of board in interest of good governance
Represents board
Not domineering…seek to achieve maximum participation to function as
effectively as possible
Carries responsibility if anything goes amiss….. failure….. position at risk
No conflict of interest
Independent
Number of outside chairmanships
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King - Chairperson: Specific Functions
1.
2.
Set ethical tone for BoT and fund
Provide overall leadership without limiting principle of collective
responsibility
3. Identify and participate in selecting board members (through Nomination
Committee)
4. Oversee succession plan for board and PO
5. Formulate annual work plan for board with PO
6. Preside over board meetings, ensure use of time productively and encourage
collegiality among board members
7. Manage conflicts of interest
8. Monitor collective functioning of board, performance of individual trustees
and interaction at meetings
9. Ensure trustees play full and constructive role in affairs of fund
10. Be collegial with board members and management
11. Act as link between board and management
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King - Chairperson: Specific Functions
12. Play lead role in removal of non-performing/unsuitable trustees
13. Ensure complete, timely, relevant, accurate, honest and accessible
information placed before board
14. Meet individual trustees annually about evaluating their performance
15. Know trustees’ strengths and weaknesses
16. Mentoring to develop skill and enhance trustees’ confidence and encourage
their contributions at meetings
17. Ensure trustees aware of responsibilities - induction programmes and
continuing professional education
18. Ensure good relations maintained with fund’s strategic stakeholders (and
members)
19. Building and maintaining stakeholders’ trust and confidence in fund
20. Upholding rigorous standards of preparation for meetings
21. Ensure execution of board decisions
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Delegation of Responsibilities
Principal Officer
Board Committees
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Principal Officer
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FIM Bill
Principal Officer (PO)
–
–
–
–
–
–
–
CEO
Fund appoints PO
PO member of BoT
“Fit and proper”…standards
Namibian citizen and resident in Namibia…exceptional circumstances foreigners
Minor disqualified to be a Principal Officer
Authorised to act on behalf of fund
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Which responsibilities should be delegated to the PO?
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King: Delegation of Responsibilities
Principal Officer (CEO)
1.
2.
3.
4.
5.
6.
7.
8.
Appointment of executive team, succession planning and performance
appraisals
Develop fund strategy for consideration and approval by BoT
Develop annual business plans and budgets
Monitor and report to BoT on performance of fund and compliance
Establish organisational structure
Setting tone in providing ethical leadership
Compliance with legislation and corporate governance principles
Application by fund of best practices
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Board Committees
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Delegation of Responsibilities: Board Committees
Important element of governance process
– Effective way of managing Board workload
– BoT retains fiduciary responsibilities and accountability (FIM Bill: No limit on
responsibilities)
Clearly agreed reporting procedures and written scope of authority
– Committees must have sufficient authority to perform duties and fulfil
purpose
Terms of Reference
1.
2.
3.
4.
5.
Composition
Objectives, purpose and functions
Delegated authorities
Tenure
Reporting mechanism to Board
Performance evaluation
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Board Committees
Frequency of meetings
–
–
–
–
–
As appropriate and necessary
Standing Committees: Quarterly
Audit Committee: Audit cycle
Disputes Committee: As and when necessary
Others: As and when necessary
Examples of Committees
–
–
–
–
–
–
Risk
Remuneration
Nomination
Audit (Statutory)
Governance
Disputes
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King III: Committees
1.
2.
3.
4.
Audit Committee
Nomination Committee
Remuneration Committee
Risk Committee
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Discussion (Succession Planning):
1. Discuss whether succession planning should be considered in
a medical aid fund.
2. How could succession planning be achieved in practice?
3. Consider the Board and Executive Management.
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Discussion (Performance Management):
1. Discuss the value of performance management of
trustees.
2. Are there any benefits to the fund?
3. How should performance management be conducted?
4. What should be done with the outcome of the process?
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Discussion (Remuneration):
1. Discuss whether trustees should be remunerated.
2. How and by whom should an appropriate level of
remuneration be determined?
3. Is there any preferred model for remuneration?
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Conflicts of Interest
What is a “conflict of interest”?
Provide examples of such conflicts in the medical aid
fund environment.
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Conflict of Interests
1.
2.
3.
4.
Trustee in position to influence business of fund / other decisions that
could result in financial / other gain for trustee / family / business
associates or provide improper advantage to others to detriment of
fund
Interests of third parties become more important than fund interests
Competing professional, personal and financial obligations/interests
that would make fair fulfilment of duties difficult
King III:
– Personal interests of trustee or persons closely associated with him/her
should not take precedence over interests of fund
– Certain conflicts of interest are fundamental and should be avoided
– Others should be disclosed
Avoid
Declare interests at every Board and Committee meeting
Disqualification vs Recusal
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Removal of Trustees
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Removal of Trustees
Should there be a process to remove trustees from the Board?
When and how should trustees be removed from the Board?
Section 46 Medical Schemes Act (SA)
“(1) The Council may, by notice in writing, remove from office a member of the
board of trustees of a medical scheme if it has sufficient reason to believe that
the person concerned is not a fit and proper person to hold the office
concerned.”
King III
Fund Rules
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End of Day 1
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Agenda
Day 2: 19 August 2014
1.
Audit Committees
2.
Governance of risk
3.
Governance of Information Technology
4.
Compliance
5.
Internal audit
6.
Governing stakeholder relationships
7.
Integrated reporting and disclosure
8.
Applying the Principles
9.
Case Studies
10. Closure
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King III Corporate Governance Principle 3
Audit Committee
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Audit Committee
BoT must appoint auditor
Duties of auditors
Fund must establish Audit Committee
– At least 2 trustees
– At least 1 must be independent within meaning of standards
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Audit Committee: King III
Fulfils vital role in corporate governance
Identify and manage financial risks
Board and management should be committed to supporting and
maintaining an effective Audit Committee
Board approve written ToR
Board appoints chairperson
Meet at least twice per year
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Audit Committee
1.
2.
3.
4.
5.
6.
7.
8.
Ensure integrity of integrated reporting and internal financial controls
Comment on financial statements, accounting practices and internal financial
controls…keep BoT apprised
Consider factors that may predispose management to present incomplete /
misleading picture of fund’s position, performance or sustainability
Evaluate significant judgments and reporting decisions affecting integrated
report made by management
Monitor enforcement actions against fund…involved in response to
monitoring actions
Consider evidence that might indicate previous information published was
incorrect…public correction
Carefully consider forward-looking statements of financial or sustainability
information…proper appreciation of key drivers
Address following in respect of risk management:
– Financial reporting risk
– Fraud risk as it relates to financial reporting
– IT risks as it relates to financial reporting
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Audit Committee: King
Audit Committee should have understanding of:
1.
2.
3.
4.
5.
6.
Integrated reporting, which includes financial reporting
Internal financial controls
External audit process
Internal audit process
Corporate law
Risk management and have adequate level of comfort regarding fund’s
process for identifying, managing and reporting risk
7. Sustainability issues
8. IT governance as it relates to integrated reporting
9. Governance processes within fund
10. IFRIS, GAAP, Guidelines of Global Reporting Initiative (GRI), other financial /
sustainability reporting standards, regulations, guidelines
Statutory duties: Audit Committee’s decision prevails
Duties assigned by the BoT: Board retains ultimate decision-making
ability
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King III Corporate Governance Principle 4
Governance of Risk
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Governance of Risk
Systematic, documented, formal risk assessment
Documented risk management policy and plan support fund’s strategy
…to be developed by management
Effective ongoing risk assessment process
Risk Committee… could be assigned to Audit Committee
–
–
–
–
Review risk management progress and maturity of fund
Effectiveness of risk management activities
Key risks facing fund
Responses to address key risks
PO accountable to Board
Board should ensure that management monitors risk management plan
effectively and continually
BoT should regularly receive and review Register of fund’s key risks
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Governance of Risk
BoT should annually set risk tolerance levels
BoT responses to risks:
–
–
–
–
–
–
–
Avoid
Treat, reduce or mitigate
Transfer risk exposure
Tolerate or accept risk
Exploit risk
Terminate
Integrated approach
Integrated report: Risk disclosure
– Undue, unexpected or unusual risks
– Current, imminent or envisaged risk that may threaten long-term
sustainability
– Views on effectiveness of fund’s risk management processes
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King III Corporate Governance Principle 5
Governance of Information Technology
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Governance of IT
IT essential to manage transactions, information and knowledge
necessary to sustain fund
IT Governance = Framework that supports effective and efficient
management of IT resources to facilitate achievement of fund’s strategic
objectives… must deliver value to fund and mitigate IT risk
Governance of information and technology
BoT’s responsibility
BoT should
– Understand strategic importance of IT
– Assume responsibility for governance of IT
– Place IT governance on board agenda
IT Governance Charter and policies
– Decision-making rights
– Accountability framework
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Governance of IT
IT strategy should be integrated with fund’s strategic and business
processes… improve fund’s performance and sustainability
Require IT internal control framework… independent assurance to BoT
of effectiveness
Disaster recovery arrangements and business continuity plan
Negative impact of IT on environment should be considered
Good governance principles should apply to all parties in supply chain
for acquisition and disposal of IT goods and services
Compliance with IT laws, rules, codes, standards, guidelines and leading
practices
Responsibility for provision of IT goods and services delegated to
another party, all parties, including BoT, remain accountable for
enforcing and monitoring effective IT governance
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Governance of IT
Information records = most important information assets… evidence of
business activities
Information management
– Protection of information
– Management of information
– Protection of personal information
Board should ensure processes in place to ensure complete, timely,
relevant, accurate and accessible IT reporting
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King III Corporate Governance Principle 6
Compliance
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Compliance
Board’s responsibility to monitor compliance…Regular Board agenda
item
Fund must comply with applicable laws and consider adherence to nonbinding rules, codes and standards
Identification of laws, rules, codes and standards
Shortcomings in laws and proposed expected changes…handle in ethical
and responsible manner
Extent of reliance placed by BoT on Committee / function if delegated
depends on BoT’s assessment of knowledge, effectiveness and
experience of Committee / function
Trustees should sufficiently familiarise themselves with general content
of applicable laws, rules, codes and standards to adequately discharge
their fiduciary duties in interests of fund and their duty of care, skill and
diligence… Induction and ongoing training
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Compliance
Compliance risk = Risk of damage arising from non-adherence to law and
regulations to fund’s business model, objectives, reputation, going
concern, stakeholder relationships or sustainability
Non-compliance: Identify, assess and respond to through risk
management processes
Compliance policy
– Management develops
– BoT approves
Disclosure in integrated report
– How compliance function discharged
– Material and immaterial, but often repeated regulatory penalties, sanctions
and fines imposed on fund / officers
– Consider impact on fund, breaches of confidentiality and agreements with
other parties
PO accountable to BoT
Include in Code of Conduct… Compliance culture
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Compliance
How could a BoT discharge its responsibility in respect of compliance?
–
–
–
–
–
–
–
Regular item on Board agenda
Define reporting requirements
Board reports
Risk register
Compliance audits
Compliance officer
Agreements with outsource parties
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King III Corporate Governance Principle 7
Internal Audit
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Internal Audit
Required as result of complexity of business, organisational dynamics
and regulatory environment
Required by funds …must be independent and objective
Board must ensure effective risk-based audit
– Risk-based approach (vs Compliance approach)
– Allows assessment of whether process intended to serve as control is an
appropriate risk measure
– Risk-based internal audit plan to be agreed with Audit Committee
Report functionally to Audit Committee to ensure respect and
cooperation of BoT and management
Internal Audit Charter…approved by BoT… generally through Audit
Committee …informed by strategy of fund
Internal controls needed for:
–
–
–
–
Financial matters
Operational issues
Compliance issues
Sustainability issues
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Internal Audit
Internal audit’s key functions:
– Evaluate fund’s governance processes, including ethics
– Perform objective assessment of effectiveness of risk management and
internal control framework
– Systematically analyse and evaluate business processes and associated
controls
– Provide information regarding instances of fraud, corruption, unethical
behaviour and irregularities
Total outsourcing of function… PO responsible to oversee, manage,
inform and take accountability for effective functioning
Report on effectiveness of system of internal controls to BoT
Integrated report
– BoT must report on effectiveness of system of internal controls
– Disclose if no internal audit function established and explain how adequate
assurance of effective governance, risk management and internal control
environment maintained
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King III Corporate Governance Principle 8
Governing Stakeholder Relationships
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Governing Stakeholder Relationships
Stakeholders = Any group that can affect achievement of fund’s strategy
and long-term sustained growth or be affected by fund’s operations
–
–
–
–
–
–
–
–
–
–
–
–
Members
Suppliers
Customers
Regulators
Employees
Unions
Media
Analysts
Consumers
Society in general
Auditors
Communities
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Governing Stakeholder Relationships
Board is ultimate custodian of corporate reputation and stakeholder
relationships …regular board agenda item
Stakeholder-inclusive approach stimulate appropriate dialogue between
fund and its stakeholders… build and maintain trust and confidence
Stakeholders that could materially affect operations of fund should be
identified, assessed and dealt with as part of risk management process
Stakeholders’ assessments of fund result in formation of corporate
reputation
– Reputation based on how well fund performs compared with legitimate
interests and expectations of stakeholders (Generally contributes to
economic value of companies)
– Must deal with stakeholder perceptions… cannot ignore
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Governing Stakeholder Relationships
Respond to legitimate interests and expectations of stakeholders
– Interest / expectation of stakeholder is legitimate, if a reasonable and
informed outsider would conclude it to be valid and justifiable on legal,
moral or ethical basis in circumstances
Management to define strategy and policies for management of
relations with all stakeholder groupings… adoption by Board
Complete, timely, relevant, accurate, honest and accessible information
BoT to adopt responsible communication programme
Board should guard against using legal or other processes to frustrate /
block constructive engagement by stakeholders… might be appropriate
BoT should encourage stakeholders to attend AGMs
Disclose in Integrated Report nature and outcomes of dealings with
stakeholders
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King III Corporate Governance Principle 9
Integrated Reporting and Disclosure
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Integrated Reporting and Disclosure
Holistic and integrated representation of fund’s performance iro finances
and sustainability
Report effectively about
– Goals and strategies of fund
– Performance regarding economic, social and environmental issues
Serve to align fund with legitimate interests and expectations of its
stakeholders
Audit Committee: General oversight
Prepare annually
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Integrated Report
Disclose information that is complete, timely, relevant, accurate, honest and
accessible and comparable with past performance of fund and include
forward-looking information
Annual Financial Statements and
commentary of BoT on financial results
Stakeholder dealings
Ethics performance
Committees
Assessment of trustee independence
Risk disclosure and process of risk
management
Remuneration report
Sustainability (‘non-financial’) information
(Must allow stakeholders to understand key
issues affecting fund and effect of fund’s
operation on economic, social and
environmental well-being of community)
Compliance: How function discharged
Review of finance function
Effectiveness of internal controls
IT Governance
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Applying the Principles
Discussion 1
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ABC Medical Aid Fund entered into a termination and restraint agreement with a trustee,
Mr. X, in terms of which:
(a)
(b)
(c)
(d)
Mr. X resigned from the Board on an agreed date;
Mr. X would not stand for nomination as a trustee again;
ABC Medical Aid Fund paid Mr. X R962 500 as consideration for his resignation; and
ABC Medical Aid Fund paid Mr. X R700 000 as consideration for a restraint of trade
covenant.
Discuss the following:
Certain of the trustees of ABC are unhappy with the agreement and wish the Board to
pursue a legal process to declare the agreement invalid and recover the payments from Mr.
X. The Board is divided on this matter and approach you for advice. Consider this
agreement against the principles of good corporate governance and advise the Board of
any action to be taken, if indicated. Motivate your answer. Give particular attention to the
following aspects:
1.
2.
3.
4.
Appropriateness and lawfulness of the agreement.
Trustee duties.
Decision-making process followed by the Board when reaching the initial agreement.
Process that dissenting trustees in respect of the initial agreement should have
followed.
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Liberty Medical Scheme (2013)
Former trustee of Liberty Medical Scheme ordered by High Court to pay
back R1.7m received as settlement to resign from BoT and as a “restraint
of trade” payment
High Court found that BoT
– Did not have power to enter into settlement agreement
– Acted outside law
– Breached their fiduciary responsibilities, which included
• Duty to avoid conflict of interest and
• Always act in best interests of beneficiaries of fund
Court stated that it was highly undesirable in terms of policy that
trustees were induced by attractive restraint payments to be loyal and
honest
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Applying the Principles
Discussion 2
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ABC Medical Aid Fund has a Board of Trustees consisting of 8 members of
which 50% is elected by the membership and the balance appointed by the
Board. It is administered by a third-party administrator and has a fulltime
Principal Officer.
Discuss the following:
1.
2.
3.
The Principal Officer has resigned and the Board has not filled the vacancy
yet. Could the chairperson act as Principal Officer until an appointment
has been made? Motivate.
The Board has issued a tender for marketing services to be supplied to the
fund. Three trustees have established a marketing company in which all of
them have shares. This company has also tendered for the business of the
fund. Advise the Board on how they should deal with this matter.
Three trustees’ terms’ of office will expire at the next Annual General
Meeting. One of them is a Board appointed member. He has already
served five 3-year terms as a trustee. The Board is divided as to whether
this person should be appointed for another term. You are requested to
advise the chairperson of the Board on how to deal with this matter.
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Case Studies
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Pro Sano (2003)
1.
2.
Trustees used funds of medical aid fund to settle personal tax liabilities
of R4 million
Trustees ordered the fund to pay for a tax consultant for personal tax
advice
If you were the Regulator, how would you react?
What is the applicable governance principle(s)?
Conclusion: CMS served notices for the removal the trustees on the
basis that they were not fit and proper
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Omnihealth Medical Scheme (2003)
1.
2.
3.
4.
5.
Agreement with administrator not properly recorded, resulting in
Omnihealth paying R25m more than what administrator entitled to
No written contract for provision of managed health care services,
resulting in fund paying R6.5m that it had not contracted to pay
Loyalty scheme allowed, which did not comply with legislation and which
cost members R9.5 million
Reinsurance contracts implemented without authorisation of BoT, which
lost almost R16 million of members’ money in reinsurance premiums
Bad debts accrued to about R30 million due to failure to stop payments for
“members” in arrears with their contributions
If you were the Regulator, how would you react?
What is the applicable governance principle(s)?
Conclusion: CMS served notices for the removal of trustees on the basis
that they were not fit and proper
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Liberty Medical Scheme (2013)
LHH is the holding company of the administrator
2 trustees (including chairperson) of Liberty Medical Scheme
(LMS) made following proposal to LHH:
– Marketing company to be established in which 2 trustees and LHH to
have shares
– Company to provide marketing services to LMS
– If proposal not accepted
• Administration agreement would be terminated by LMS and
• Amalgamation between LMS and another scheme being pursued at
the time to be frustrated
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Liberty Medical Scheme (2013)
If you were the Regulator, how would you react?
What is the applicable governance principle(s)?
Conclusion:
– CMS invoked process to determine whether chair was fit and proper to
hold office as trustee (other trustee resigned)
– Chair applied for interdict against CMS to abandon process
– Appeal dismissed with costs…Chair resigned
– Personal benefit of trustees…serious conflict of interest
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Medshield (2013)
1. Trustees failed to recover illegal payments to brokers (R28m) … Paid
brokers for “research” (not used by fund) in addition to statutory fees
only iro new members < 42 years
2. Obstructed inspection of fund
3. Chairperson not member of fund when elected to BoT contrary to Rules
4. Chairperson also acted as CEO of fund contrary to Rules
5. Chairperson earned excessive remuneration: Salary as CEO and trustee
6. BoT irregularly elected: Service Provider apparently “orchestrated”
proxies ensuring election of certain trustees who incidentally became
members of fund just before AGM
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Medshield
If you were the Regulator, how would you react?
What is the applicable governance principle(s)?
Conclusion:
– Court placed scheme under curatorship
• Trustees demonstrated flagrant disregard of provisions of Medical
Schemes Act and Rules of fund
• Trustees failed to comply with relevant regulatory demands to address
non-compliance
• Conflicted relationship
– Trustees held personally liable…Punitive cost order against trustees for
behaviour (attorney-client scale)
– Relationship with service provider resulted in trustees becoming conflicted
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Sizwe Medical Scheme (2013)
1.
2.
3.
4.
BoT not properly constituted ito fund Rules and legislation
Allegations of irregularities and election fraud
Principal Officer appointed by BoT whilst no quorum present
Principal Officer refused to cooperate with provisional curator and
was constantly absent from office
If you were the Regulator, how would you react?
What is the applicable governance principle(s)?
Conclusion:
–
–
–
–
–
Court placed scheme under curatorship
Punitive cost order against fund (attorney-client scale)
Failure to comply with Rules and legislation
Appointment of Principal Officer unlawful
Principal Officer not acting in interest of fund
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Hosmed (2013 / 2014)
1.
2.
3.
4.
5.
Trustees selectively wrote off debt owed to Hosmed by their employer benefited employer and themselves, but prejudiced fund, its
beneficiaries and other employer groups…Failed to disclose this conflict
of interest and did not recuse themselves from meetings
Trustees lied under oath iro signature of procurement agreement
(irregular procurement)
Trustees procured marketing material in irregular manner
Trustees conducted investigation in unfair and aggressive way resulting in
employer groups leaving the fund - fund lost almost 3 000 members
Trustees failed to manage their personal finances responsibly (2 trustees
had numerous judgments against them related to debt) - this meant that
they were unlikely to run a fund properly
If you were the Regulator, how would you react?
What is the applicable governance principle(s)?
Conclusion:
– CMS removed trustees…not fit and proper
– Court placed scheme under provisional curatorship
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Discussion:
What are the lessons to be learned from these case studies?
Was proper governance applied in these funds?
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Conclusion
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When you don’t give up, you cannot fail!
..\Barcelona.mp4
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Discussion / Questions?
Thank You
esme@healthcarenavigator.co.za
www.healthcarenavigator.co.za
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