British insurers tell boards how to be better

What makes for an effective board of directors? There are guide books galore and academic studies that seek to turn hunches into evidence. But what makes any group work well – or poorly – is a subject fraught with complexity. The Association of British Insurers has decided to have a go at publishing its first version. Not content with the Guide to Board Effectiveness issues by the UK Financial Reporting Council six months ago, the ABI thinks it worthwhile to dwell somewhat longer over three areas of board practice that don't get a lot of attention from the FRC.

A guide to the players: Before we start, let's remember who these folks are. The Financial Reporting Council is the body that oversees the accounting and audit professions in the UK. A government-funded agency, it is also custodian of the UK Corporate Governance Code. Its guidance for directors grew out of the Higgs Review in 2003, which stresses the importance of independent, non-executive directors, reworked following the financial crisis by the Institute of Chartered Secretaries and Administrators. The ABI has two roles: A trade association for insurance companies, many of which are listed on the stock exchange, and a club of institutional investors. So the ABI guide on board effectiveness comes from experience of being companies and being investors.

The ABI reckons that boards ought to pay more attention

• Diversity: and especially the number and quality of women directors,
• Succession planning: making sure there are contingency plans in place for new directors and senior managers, and
• Board evaluation: the annual appraisal of performance that has been commonplace if not quite universal in the years since the Higgs Review put them firmly on the agenda.

"These issues do not stand alone, the ABI states. "Selecting the best individuals from a diverse talent pool, planning for succession and replacement, and regularly evaluating the board to determine its effectiveness, cover the lifecycle of a board. That is why they are important."

And the meaning? On diversity, the ABI thinks companies can do more, and probably ought to set targets and do more internally to fill the pipeline, especially with women who might then be in a position to win a place on boards without the need for quotas. On succession planning, it wants boards to go beyond just identifying potential candidates for board membership and get involved in looking at the planning for the whole top end of management. On evaluation, it wants to see companies explain the methodology they use, and to use a methodology that involves external advisers more rather than less.

These aren't particularly stunning insights or even challenges to board practice. But they are a higher level of prescription in an area of conduct that has long resisted prescription only to relent later on and comply. The ABI guide does, however, give companies another thing to stand behind in a bid to stave off mandatory measure. They can wrap themselves in the voluntarism of compliance, for a while longer at least. That suits well the membership, which sits on both sides of the divide between investor and investee.

Source document: The ABI guide, entitled "Report on Board Effectiveness – Highlighting best practice: encouraging progress" is a 52-page pdf file.