Board Composition and Performance in Life Insurance Companies

Abstract

The past decade has witnessed a renewed emphasis on the quality of board governance worldwide. In the wake of a series of governance reports, particular interest has focused on the role and effectiveness of non-executive board members. This study seeks to add to our understanding of the governance role of non-executive directors by examining the use and usefulness of non-executives in insurance companies. The focus on the insurance industry, which includes both proprietary (stock) and mutual companies, allows us to examine the importance of board governance in the context of different ownership structures. Furthermore, by focusing our study in a period prior to the widespread adoption of the recommendations of the Cadbury Report by UK companies, our findings should more accurately capture the true role of board composition in a less-prescriptive governance environment. Our results suggest that mutual insurers utilize a greater proportion of non-executive directors and are less likely to have CEO/Chairman duality than their proprietary counterparts. This evidence is consistent with mutuals using stronger board governance to compensate for weaker ownership control. Proprietary companies, which are subject to stronger shareholder and capital market control, place less reliance on non-executive monitoring. Using a number of performance measures, we find no significant difference in the behaviour of mutual and proprietary companies with the exception of executive remuneration, (which is significantly higher for proprietary companies); furthermore there is no evidence that mutuals have outperformed their stock company rivals. Overall, our findings suggest that insurance companies emphasize different governance mechanisms depending on the specific monitoring problems they face.

Board Characteristics and Profit Efficiency in the United Kingdom Life Insurance Industry

“…As for the independent variables, the average board size is just over eight members and non‐executive directors on average account for approximately 37% of board directors in the sample. This proportion is similar to the 40% of outside director representation in UK life and non‐life insurers in 1992, reported in O'Sullivan and Diacon (2003). In contrast, about 16% of board members are actuaries.…”

“…Audit committees serve many important corporate governance functions, including strengthening the independence of non‐executive directors and other groups (e.g., actuaries) plus providing advice on operational, auditing and regulatory matters (Menon and Williams, 1994; and Klein, 2002). Such a role can help to mitigate agency costs arising from the separation of ownership from control, and so promote public confidence in the reported financial performance of life insurance firms (Adams, 1997b; and O'Sullivan and Diacon, 2003). Audit committees can also help managers to realize efficiencies through, among other things, advising on matters of risk and uncertainty, identifying resource wastage and poor operating practices, and strengthening the internal audit function.…”

“…For instance, Pi and Timme (1993) examine the relation between corporate control and bank performance and find that internal governance systems can directly influence organizational economic efficiency. A few studies (e.g., see Armitage and Kirk, 1994; O'Sullivan and Diacon, 1995 and 2003; and Boubakri et al, 2008) have also broadly investigated the relation between governance and performance in the insurance industry 2 . However, these previous studies on the corporate governance‐performance relation in the insurance industry invariably measure performance by accounting ratios.…”

The Cost Efficiency of Takaful Insurance Companies

“…To enable us to investigate the joint influence of all the independent variables on the cost efficiencies of Takaful insurers we report random-effects rather than fixed-effects panel estimations for two main reasons: (a) some board characteristics (e.g., CEO and NEXECS) have very limited time-series variations; and (b) Zhou 55 argues that a fixed-effects estimation that removes within-firm differences may not be 53 O'Sullivan and Diacon (2003). 54 For example, see Kennedy (1998, p. 213).…”

The relationship between ownership structure, capital structure and corporate governance practices

“…Since co-operatives and mutuals are not publicly listed, there are no external pressures for managers to perform, such as pressure from a threat of takeover or from a major shareholder (O'Sullivan and Diacon, 2003). For this reason Ang et al (2000) argue that agency costs are higher when an outsider manages the firm and agency costs tends to be inversely related to managerial ownership.…”