Click the headings below for more information:
- I have had an approach. What due diligence should I undertake?
- What should a NED ask for?
- How are NEDs authorised?
- What material items should be in the NEDs Service contract?
What should a NED ask for?
While no list can be totally comprehensive or exhaustive, because each case should be considered on its merits, there are a number of common types of questions that can be asked and several documents that can be requested, which fall under the generic description of basic corporate data.
To help the potential NED make sure that they can reach an informed decision, they should, as part of their due diligence, request sight of, or discuss, the following items in respect of the company they are being invited to join:
Memorandum & Articles of Association
Bespoke Memorandum & Articles of Association, based on established models, will be drawn up for all incorporated companies in the UK and they are a matter of public record.
The two parts form the company’s constitution:
- The Memorandum of Association determines the company’s name, country and location of its registered office and clearly identifies what the company may do (the “objects clause”)
- The Articles set out the rules for the operation of the company and the holding of its shares
- The Articles, in particular, will provide the NED with valuable information about the way in which the company will conduct itself within a formal framework.
- The composition of the existing, or future, Board of Directors and the Company Secretary is essential
- The structure of the company, including its relationship to others in a group, should be requested
- The company’s governance structure, identifying the internal and Board Committees and how they inter-link should be requested. Governance Maps, as required by regulators, should satisfy this need.
- Key functions or departments should be identified along with the roles and names of Executives and managers at each level or tier of management
- Ideally, reporting lines should be made clear. An organogram or organisation chart would be sufficient to fulfil this objective
- A list of advisors, bankers, accountants, corporate lawyers and auditors should be provided; especially as they will normally feature in a company’s annual accounts
- An indication of the company’s short and medium term strategy should be sought or discussed
- A company’s corporate vision or mission statement, if they exist, may be useful in this context
- Business plans and forecasts should be requested
Company Specific Questions
By way of example only, a NED may wish to ask the company the following types of questions, although some of these will, of course, be dependent upon the exact nature of the company, e.g. whether it is an underwriting entity or intermediary:
- What are you looking to achieve in the next, say, five years of development?
- Who are your capital backers or major shareholders?
- What is your optimal business model?
- How will you grow your book of business?
- What are your key performance objectives?
These may be defined in terms of a return on capital or equity; a return over, say, a risk free rate; or specified ratios such as a combined loss ratio (for insurers)
- What has been your track record?
Recent reports and accounts should provide the answer
- What are your views of current market conditions?
- What economic factors will affect your business in the short term?
- Are you planning any mergers, acquisitions or take-overs of any books of business?
- What are the succession plans for key personnel?
- What is your remuneration policy?
- How do you attract and retain high quality talent for key positions?
- How would you characterise your relationship with the PRA and the FCA?
- Are you subject to any supervisory or enforcement action at present? Examples could include a Section 166 Skilled Person’s review, past business review and/or FCA or PRA enforcement investigations
- What does the latest risk report contain?
- How can assurance be given that stated risk controls are effective?
- What will be your planned mix of business next year, by class, by size, by premium income?
- What will be your planned mix of business next year, by insurance, direct, facultative or delegated underwriting authority?
- Will you have a reinsurance component to your portfolio?
- What will be the likely territorial analysis?
- Who are your major producers of business?
- What is the split of the business between retail and wholesale?
- How wide is the spread of customer or is the firm very dependent on a few?
- What is the customer retention level?
- What is the split of income between commission and fees?
- What range of markets is used?
- What is the company’s E&O claims experience?
- What is the firm’s cash and debt position?
- What does the most recent client money calculation look like?
- Again, this list is by no means exhaustive, but is offered as an indication only of the type of questions that may form part of a due diligence dialogue. Enquiries of this nature clearly need to be selective and particular, depending upon the type of company (e.g. insurer or intermediary).
The aspiring NED may seek or discuss examples of existing agendas and recent Board meeting minutes.
Methods of reporting and their content may form part of this due diligence along with an indication of the type of management information (MI) that is regularly supplied to the Board.
The NED to be appointed may enquire about behavioural issues, such as the style of leadership within the company and how, for example, the “tone from top” is set by the Board and communicated within the company.
Other issues of this type, such as the company’s ethical standards policy, how the company’s culture is determined, developed and communicated or even how relationships are fostered with customers, clients or shareholders might be areas worthy of discussion.
Information should be sought about the company’s finances. In addition to its most recent annual report and accounts, its track record of performance, anticipated profits, expense budgets and other relevant financial projections should be requested or discussed.
In an underwriting context, information may also be sought regarding claims reserves and how they have performed along with other aspects of financial soundness such as bad debt, investment performance and capital ratios.
For intermediaries, information may be sought regarding cash flow, credit control, client money controls, funding levels and profit margin levels across the broking business.
It would be legitimate to enquire about the company’s compliance regime; its relationship with its regulators; the results of past FSA ARROW (Advanced Risk Response Operating Framework) risk assessment visits, or themed reviews, or similar visits from regulators.
Also, enquiries should be made as to whether there has been any material recent correspondence with its regulators. If any risk mitigation programmes (RMPs) have been required or are in progress, including any attestations by the firm to its regulators, these, too, should be disclosed.
The aspiring NED may wish to enquire about the company’s attitude to risk and how risks are managed.
Discussions may take place on the company’s risk appetite; its risk register; its risk log; mitigation, including its lines of defence and whether any form of enterprise risk management (ERM) is in place.
Under the current Solvency II regime, the company’s latest ORSA (Own Risk & Solvency Assessment) should be of value.
D&O / E&O Liability Insurance
Information should be forthcoming about the company’s Directors’ and Officers’ liability insurance policy; including limits, security and intermediary.
Also, Deeds of Indemnity, if they exist to protect the NED, should be provided. Details of any Errors and Omissions or Professional Indemnity policies should also be sought.
It should be noted that restrictions were imposed by the 1928 Companies Act on Indemnification Clauses under Articles of Association. Two Insurance Institute of London Research Study Reports have been published which cover this subject; the most recent being 234A, entitled “Directors’ and Officers’ Liability Insurance” which came out in April 2010.
There has also been continued misunderstanding of the extent to which a company can indemnify its Directors and Officers, if they display a lack of experience and knowledge in relation to commercial matters, as exemplified by the “Guernsey Case” of August 2014.
At an appropriate stage, although not necessarily at the first interview, the NED’s fee, terms and conditions, including time commitments will need to be discussed along with participation on the Board itself and any of its Committees. These matters are dealt with more fully in the section on the NED’s service contract.
Other forms of Due Diligence
Under most circumstances, it would be quite legitimate to seek information about the company that is making an offer from other parties. However, this due diligence should ideally be conducted with the company’s permission in order to maintain confidentiality.
Any enquiries of this nature should be made in strict confidence, but appropriate conversations with recognised experts, close, trusted associates or market figures of renown can help to answer questions about corporate reputations and the wisdom of joining such a company’s Board.
Becoming an insurance NED in today’s highly regulated world is not to be taken lightly. Prospective appointees should make sure, as far as is reasonably possible, that a decision to accept an offer to join a particular Board is only taken once all the material facts have been considered.
This consideration will entail a demonstrably clear understanding of both the PRA’s and the FCA’s regulatory agenda and expectations.