Jeremy Ellis of Saffery Champness discusses the importance of corporate governance from the perspective of an auditor.
Captive Review (CR): Do you think the demands of recent regulations will lead to better corporate governance for captives? Why or why not?
Jeremy Ellis (JE): There is a consultation paper circulating in Guernsey which aims to follow the core principles of the International Association of Insurance Supervisors (IAIS). Guernsey needs to keep pace with emerging international standards in insurance regulations and these could potentially have an impact on captives. Most people will understand the link between operating in a highly-regulated environment and the need to observe corporate governance standards. However, captives are not quite the same as other entities so not everything will apply across the board. Regulators need to look at captives slightly differently – it's not a one size fits all approach.
In general, companies need to be aware of corporate governance and certainly from an audit perspective, good corporate governance will provide us with greater comforts as far as internal controls are concerned. During the course of an audit we're required to highlight to those charged with governance any weaknesses in internal controls. Robust corporate governance will certainly help to reduce the number of issues that might need to be discussed for all sorts of entities, captives included. The right type of corporate governance, amended for specific entities, needs to be there for the protection of the shareholder, but this is somewhat different for a captive because the shareholder is nearly always the parent and will be well-informed; the parent company will have some sort of representation on the board.
A lot of the captive parents will be listed entities themselves and their subsidiaries will fit within the framework of the group as a whole and be governed accordingly, probably tailored to fit the needs of the captive. This helps us from an audit perspective because good strong corporate governance enables us to place better reliance on controls and rely less on substantive testing. If you've got a good control environment then it mitigates the risk of things going wrong.
CR: Are there any upcoming regulations in 2014 that will put increasing demands for corporate governance on captive managers?
JE: The outcome of the current consultation and any draft rules and guidance will not be known until sometime in the first quarter of 2014. There may not be huge changes to what is currently undertaken under the existing rules, but in general people are getting used to having to jump through more hoops as far as corporate governance is concerned. As far as captives are concerned, the consultation paper mentions that governance issues will be dealt with from time to time on a thematic basis. This will hopefully keep any potential changes to a minimum and not put too much pressure on the captive manager. They are used to working in a highly-regulated environment, with procedures already in place, so any upcoming changes should hopefully be readily incorporated into those existing systems.
CR: What steps should captive managers take to improve their corporate governance?
JE: Most captive managers have got good systems in place regarding corporate governance for the captives they manage. As part of our audit we have to look at adherence with laws and regulations and we generally find that managers are ensuring that the captives are meeting their obligations. It forms part of annual and ongoing reviews that they are complying with all of those regulations. It's probably largely a matter of keeping abreast of any changes and making sure that their systems are updated as and when necessary.
Captive managers have representation on the relevant industry committees that helped to mould the regulations which resulted in the consultation and therefore should be well informed as to any potential changes. From an audit side we need to make sure that they continue to have up to date systems in place for the captives that they manage. Any deficiencies in these systems and controls, which are effectively the systems and controls of the captive, will need to be discussed with those charged with governance.
CR: How important is it for a captive to have an independent director on the board?
JE: It's very important to have an independent director on the board. As with anything, a lot of people can get involved very heavily in the day-to-day side of things so it is very good to have someone who has no link to the parent company or the manager and can look at things in the cold light of day and raise questions.
They perform a similar function to us as an auditor: to examine things. We're required to challenge management and those charged with governance on estimates and decisions they've made in preparing financial statements and that's certainly where an independent director can help. Independent directors can ask questions based on their own skill sets, whether they've come from an insurance or accounting background, to challenge those decisions. Auditors and directors are asked not to take things at face value and to question why things have been done; if they've been done a certain way for a number of years, do they still need to be done that way going forward?
It should certainly give the overarching parent board some comfort to know that there is someone there who is asking questions. It also means that some questions asked by the auditors may have already been dealt with by the independent director. Hopefully that provides a clearer picture for us as auditors when we review the financial statements.
CR: How would the introduction of a cap on directorships affect the industry? Would this lead to better corporate governance?
JE: It's probably six of one and half a dozen of the other. There are people who would argue that if there was a cap on directorships it could limit the number of boards the most appropriately qualified candidates could sit on. The captive may end up having to appoint people who were not best qualified for the job. On the other hand it could be argued that a cap would enable captives to broaden their base of candidates, who may be able to provide a fresh perspective on corporate governance.
Not having a cap may result in a small pool of people getting the majority of the directorships which might lead to a better service because of their depth of knowledge and experience. Whether there is a cap in place or not, the most important point for captives is to ensure that they appoint the candidate that best suits their needs. As far as Guernsey is concerned, I do not think that a cap would have an impact on the quality of corporate governance as there are a large number of individuals with the appropriate qualifications to serve as an independent director.
An original version of this article was published in Captive Review's Guernsey Report 2014.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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