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Friendly approach

Appointed by the Treasury following the Penrose report on Equitable Life, Paul Myners is charged with reviewing the corporate governance of life mutuals.

The Association of Friendly Societies has responded positively to the Myners consultation paper but it believes that certain issues still need to be discussed further. The history of friendly societies goes back over 200 years when they were first set up by individuals to provide collective funds to pay for a decent burial.

Although over the ages their size and activity may have grown, they still remain fervently wedded to the ethos of self-help and personal responsibility under a mutual banner. Indeed, being member-owned and controlled, societies have always been conscious of the virtues of maintaining good corporate governance. Today, the AFS represents around 60 leading societies selling life insurance and savings products to people of all walks of life but particularly to those with limited means.

The AFS does not believe that the situation and circ-umstances which led to the Equitable Life problems were specific to a mutual model. Indeed, there have been other notable failures of governance in proprietary financial serv-ices companies both before and since Equitable Life. It is also the case that a significant number of changes and imp-rovements have been introduced, many by the FSA, since Equitable Life&#39s problems, pecifically, the approved persons regime, realistic reporting and, this year, a new framework for with-profits funds.

These have all served to strengthen governance and controls. Notably, the latter example removes one key issue at Equitable Life, which was the concentration of too much power and authority that resulted from combining the role of chief executive and appointed actuary.

The review also looks at the role played by institutional shareholders for proprietary companies and whether mutuals, without an equivalent group, are subject to effective scrutiny and challenge about their performance. In our res-ponse, the association points out that institutional shareholders are only one source of external scrutiny. A mutual&#39s performance is subject to challenge and assessment by analysts, media commentators, credit rating agencies and intermediaries and in the final analysis by their policyholders.

Many friendly societies&#39 policyholders have a very active level of involvement. The mechanisms for this range from informal policyholder meetings to the appointment of policyholders to their boards/committees of Management. In our response, we suggest that many friendly societies are an excellent mut-ual role model at a time when some mutual financial services organisations have sought to prevent any active involvement by their policyholders.

Another area under review is the relevance for mutuals of the combined code, which must be adhered to by listed companies. Research undertaken by the association shows that many friendly societies do comply with the relevant aspects of the code. Yet some parts of the code specifically relating to shareholders are clearly not applicable.

The association does, however, support the development of a combined code specifically for mutuals. The majority of the current combined code would be wholly applicable to mutuals but this could be extended to cover such areas as dialogue and communication with policyholders and the rights of policyholders and how they can be exercised.

Similarly, the process for nominating, appointing and assessing the competence of board members is well covered in the combined code and could be applied to mutuals.

All boards – whether mutuals or proprietaries – should have a good mix of executive and non-executive directors. All directors have a responsibility to represent the interests of stakeholders, be they policyholders and/or shareholders. The composition of a mutual&#39s board should be broadly similar to that of a proprietary company, assuming broadly equivalent scale and complexity and that the balance of power should rest with the non-executive directors, as is often the case with proprietary companies.

The review is also looking at the quality and quantity of information supplied to boards to establish whether this is adequate for their needs. The association points out that the information supplied to boards as a matter of course has improved significantly since the problems at Equitable Life.

This will be further strengthened this year with the introduction of realistic reporting and the transfer of responsibility for verifying the liabilities of a life company from the appointed actuary to the board. The association does not bel-ieve that the nature of the life industry is any more challenging to boards in terms of their ability to understand the performance of a company than is the case in other sectors.

The nature of the relationship between proprietary companies and their shareholders and mutuals and their policyholders (being the providers of capital) is also examined. The association feels that there must be a clear separation between policyholders/ shareholders as the providers of capital and the management and control of a company, be it mutual or proprietary.

Just as it would be inappropriate for shareholders to bec-ome engaged in the day to day running of a proprietary company, so it would be inappropriate for policyholders to be unduly involved in the running of a mutual company. Indeed, the approved persons regime makes clear the importance of individuals engaged in running a regulated company having the right skills and knowledge.

In conclusion, the association is keen to remain actively engaged in the Myners review and can see real benefit in the development of a mutual combined code. The diversity provided by friendly societies is of fundamental importance to ensuring that some of the less affluent in our society have an opportunity to protect their families and save for the future.

We are very hopeful that the recommendations due to be published before the end of the year will recognise this.


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