Corporate Governance
The full Corporate Governance Statement can be found in the Society's Annual Report and Accounts to 31 December 2010 which is updated annually.
Click here to view Annual Report and Accounts 2010
Below are highlights as at 25 March 2011 based on the 2010 statement together with the Society's Principles and Practices of Financial Management and its statement on compliance with the UK Stewardship Code. If you would prefer not to read the whole statement you may go straight to one of the following areas:
Introduction
Governance by Directors
Management of the Society
Accountability and Audit
Policyholder communications
Going concern
Remuneration
Statement of compliance with the Combined and Annotated Codes
Principles and Practices of Financial Management
UK Stewardship Code
1. Introduction
The Society continues to aim to meet the highest standards in corporate governance and voluntarily adopts the relevant provisions of the Principles of Good Corporate Governance and Code of Best Practice (“the Combined Code”). The Board is responsible to the Society’s policyholders for good corporate governance.
The Combined Code on Corporate Governance — An Annotated Version for Mutual Insurers (“the Annotated Code”) was published by the Association of Mutual Insurers (“AMI”) and the Association of Friendly Societies (“AFS”) in July 2005. Mutual insurers who are members of the AMI, as was the Society, were required to adhere to this Annotated Code for all financial years beginning on or after 1 April 2005. The Society has adopted the relevant provisions of the Annotated Code. The AMI and AFS merged on 1 January 2010 to form the Association of Financial Mutuals (“AFM”) and the Society is now a member of the AFM.
During 2010, the Financial Reporting Council published the UK Corporate Governance Code (“the Governance Code”) and the AFM published the UK Corporate Governance Code — An Annotated Version for Mutual Insurers (“the Annotated Code”). The provisions in the Governance Code and its related Annotated Code apply to financial years beginning on or after 29 June 2010 and 1 November 2010 respectively. The Society will report against these Codes in its 2011 Report and Accounts.
Reference is made in this report to the provisions of the Combined Code, which applied for the reporting year ended 31 December 2010, and to the provisions of the Annotated Code, which applied for that reporting year, where the latter extends the relevant provisions of the Combined Code.
This report summarises the Society’s governance arrangements.
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2. Governance by Directors
The Board
The Board meets regularly to lead, control and monitor the overall performance of the Society. The Board’s principal functions are to determine the strategy and policies of the Society, to set out guidelines within which the business is managed and to review business performance. The Board considers and decides on all major matters of Society corporate strategy. There is a formal schedule of matters reserved for the Board’s decision. Senior management supply the Board with appropriate and timely information and are available to attend meetings and answer questions. The Directors are free to seek any further information they consider necessary and advice from the Company Secretary or independent professional advisers. Authority is delegated to the Chief Executive for implementing strategy and managing the Society.
The roles of Chairman and Chief Executive are separated and the Chairman has primary responsibility for the effective functioning of the Board.
Directors
The Board has three executive Directors: the Chief Executive, the Finance Director and the Chief Operating Officer. Peter Smith was a non-executive Director until he resigned on 31 March 2010. There are now five non-executive Directors on the Board. Their diverse experience, skills and independent perspective provide an effective review and challenge of the Society’s activities. The Chairman and the Deputy Chairman are elected by the Board. Peter Smith was the Deputy Chairman and Senior Independent non-executive Director until 31 March 2010. The Board appointed David Adams to these roles with effect from 1 April 2010, in succession to Peter Smith.
Click here to view Descriptions of the Board members
Click here to view a Specimen of the letter currently used for the appointment of new non-executive Directors
One of the Directors holds a policy with the Society. In the opinion of the Board, this does not interfere with the independence of the relevant Director. The Board reviews the independence of the non-executive Directors and has concluded that all the non-executive Directors should continue to be considered to be independent.
Performance evaluation
During 2010, the Board reviewed its own performance and that of its Committees. With assistance from the Nominations Committee, it also reviewed the performance of individual Directors. The non-executive Directors met under the leadership of the Senior Independent non-executive Director to review the performance of the Chairman. In conducting these reviews, the Board had regard to the guidance on performance evaluation accompanying the Combined Code. The Board recognised that, in accordance with the Combined Code, any term beyond six years for a non-executive Director should be subject to particularly rigorous review and should take into account the need for progressive refreshing of the Board.
The Board considers that it has the appropriate balance of skills and experience to meet the requirements of the Society’s business.
Appointments to the Board
Directors must retire and seek re-election at the first Annual General Meeting (“AGM”) following appointment. The Society’s Articles require one-third of the Directors who are subject to retirement by rotation to retire at each AGM and also that all Directors must submit themselves for re-election by rotation at an AGM at least every three years. The revised Annotated Code, published by the AFM in November 2010, provides that, for larger mutuals such as the Society, all Directors should submit themselves for annual re-election. The Board has decided that all the Society’s Directors will retire and offer themselves for re-election at the 2011 AGM.
All appointments are subject to annual review by the Board, as advised by the Nominations Committee. The Board’s policy on remuneration is set out in the Remuneration report.
Board Committees
The Board formally delegates specific responsibilities to three Board Committees, supported by senior management, which are established by the Board.
Click here to view The members of the Board Committees
The Audit and Risk Committee
With effect from March 2010, the Audit Committee was reconstituted as the Audit and Risk Committee and its terms of reference were amended to reflect explicit responsibility for monitoring risk matters.
Keith Nicholson chairs the Audit and Risk Committee, which currently comprises three non-executive Directors. The Audit and Risk Committee meets at least four times a year. Its duties include reviewing: the Society’s compliance with the Guidance on Audit Committees (accompanying the Combined Code) on financial reporting; internal controls; the Society’s risk appetite; identification and management of key risks and risk management systems; the internal and external audit processes; and procedures for handling allegations from whistleblowers. The Committee receives and reviews reports on these matters during the year. The Committee assists the Board in fulfilling its responsibilities in respect of the Annual and Interim Financial Statements and Annual Regulatory Returns to the Financial Services Authority (“FSA”) and reviews these items before their submission to the Board. The minutes of the Audit and Risk Committee meetings are circulated to the Board.
The Committee has a meeting at least once a year solely with the external auditors and with the internal auditors. The external auditors attend key meetings and have direct access to the Chairman of the Committee. The Committee keeps the relationship between the Society and its auditors under review and considers their independence, including the extent of their fees from non-audit services. As part of the review, the Audit and Risk Committee obtains confirmation from PricewaterhouseCoopers LLP that, in their opinion, their independence as auditors has not been compromised. The Committee approves the terms of engagement and the remuneration to be paid to the external auditors in respect of audit services provided. Any non-audit services to be provided, where the fees are expected to exceed a specified amount (currently £100,000), require approval from the Audit and Risk Committee.
The Audit and Risk Committee has primary responsibility for making a recommendation to the Board on the appointment, reappointment and removal of the external auditors. In considering such matters, the Committee takes into account a number of factors including the firm’s independence and whether it would be appropriate to invite tenders for the role of external auditors.
PricewaterhouseCoopers LLP have acted as the Society’s external auditors since 2001 and the Society has not made the role of external auditor subject to formal tender process in that time. In recommending the reappointment of PricewaterhouseCoopers LLP as the Society’s external auditors and not making the role subject to tender, the Committee has considered the need for continuity of experience in the external auditor, in particular in periods of significant challenge and now in a period of likely major change (with the move to the Society undertaking administration of its business itself, rather than through a third party provider). There was a rotation of the Audit Partner at PricewaterhouseCoopers LLP in 2006 in line with recognised practice for external auditors. The standard period for rotation of Audit Partner for companies such as the Society is seven years.
The Combined Code states that the Board should satisfy itself that at least one member of an Audit Committee has recent and relevant financial experience. The Board takes the view that, rather than an individual or individuals, the Audit and Risk Committee as a whole should be considered and has concluded that it does have the requisite skills and experience.
The Combined Code states that no one other than the Committee Chairman and members should be entitled to be present at a meeting of an Audit Committee, but others may attend at the invitation of the Committee. The Audit and Risk Committee has indicated that any Director may attend its meetings if he or she wishes.
Click here to view The Terms of Reference for the Audit and Risk Committee
The Remuneration Committee
Cathryn Riley chairs the Remuneration Committee, which comprises three non-executive Directors. The Committee is responsible for recommending to the Board the terms of remuneration for executive Directors, including incentive arrangements for bonus payments, and the terms of remuneration for non-executive Directors. More information on the work of the Remuneration Committee is given in the Remuneration report in the Annual Report.
The Combined Code states that the Remuneration Committee should have delegated responsibility for setting the remuneration for executive Directors and the Chairman. The Remuneration Committee makes recommendations to the Board on such matters but the decisions are taken by the Board.
Click here to view Terms of Reference for the Remuneration Committee
The Nominations Committee
Ian Brimecome chairs the Nominations Committee, which comprises three non-executive Directors and the Chief Executive. The Committee assists the Board in ensuring that the composition of the Board is appropriate to govern the Society effectively, that suitable candidates are identified to fill vacancies or to add to the strength of the Board, and that the Society, wherever possible, meets the relevant principles and provisions of the Combined Code and the Annotated Code. The Committee also reviews, on an ongoing basis, the appropriateness and suitability of each Director for continuing membership of the Board. The Committee meets as necessary to consider and make recommendations to the Board regarding the appointment of Directors and the continuing suitability of the Society’s Directors.
Click here to view Terms of Reference for the Nominations Committee
Board and Committee meetings
Details of the number of meetings of the Board and attendance by Directors are given on page 17 of the Annual Report and Accounts 2010. Details of the number of meetings of Committees of the Board and attendance by members of those Committees are also on page 17.
Taking advice
The Board and its Committees, subject to defined procedures and parameters, take advice from professional advisers, enabling them to manage the risks and issues arising from the Society’s affairs. Each Director has access to the Company Secretary. They may also obtain independent professional advice, at the Society’s expense, about any matter concerning the Society relevant to their duties, subject to defined procedures and parameters.
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3. Management of the Society
The Executive Team meets regularly, usually weekly, to manage business activities. Papers are prepared and presented to the Board and its Committees by the Executive Team. Martin Sinkinson holds the role of Head of Actuarial Function. Rob Merry is the Society’s With-profits Actuary.
The Head of Actuarial Function advises on the Society’s ability to meet obligations to policyholders, the risks that could have a material impact on this, and the capital needed to support the business. He also advises the Board on the methods and assumptions to be used for the assessment of the value of the Society’s assets and liabilities, and reports on the results. The With-profits Actuary advises the Board on key aspects of the discretion to be exercised in the treatment of with-profits policyholders, including advice on bonus rates.
The Society retains responsibility for investment strategy and policy, instructing independent investment managers and advisers to implement desired changes to asset allocations within the portfolio. The Society’s Executive Team, taking advice from the Head of Actuarial Function, liaises with the investment advisers to oversee day-to-day investment matters.
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4. Accountability and Audit
The Directors are ultimately responsible for the Society’s system of internal control and for reviewing its effectiveness, including any outsourced activities. This system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable, not absolute, assurance against material loss or misstatement. The Directors actively seek to minimise the exposure to risks and, in doing so, take into consideration the materiality of the risks to be managed and the cost-effectiveness of the relevant aspects of internal control in light of the particular environment in which the Society operates.
The Society has outsourced its administration activities to HBOS and it liaises with HBOS to review the appropriateness of the internal control environment and to consider specific needs or requirements of the Society.
The effectiveness of the Society’s system of internal control, including financial, operational and compliance controls and risk management, is reviewed by the Audit and Risk Committee on behalf of the Board, and the Audit and Risk Committee has reported on the outcome of its review to the Board. The principal components of the Society’s system of internal control and developments in 2010 are detailed below.
Control environment
The Society is committed to the highest standards of business ethics and conduct, and seeks to maintain these standards across all of its operations. The Society regularly reviews its governance manual confirming the governance structure for the business and the guiding policies for the organisation.
An appropriate organisational structure for planning, executing, controlling and monitoring business operations is in place in order to achieve the Society’s objectives. The structure is reviewed and updated on a regular basis, taking into account the pressures on and conflicting priorities of the Society’s business, to ensure that it provides clear responsibilities and control for key areas. Separate functions have been established for risk management, internal audit and programme management.
Control procedures
The Society operates a number of control procedures to safeguard the policyholders’ assets and investments, including:
- Physical controls, segregation of duties and reviews by management;
- Forums for the Executive Team and HBOS, now part of the Lloyds Banking Group, to monitor controls and other matters in relation to (i) finance, (ii) operations, (iii) human resources, (iv) information technology, (v) projects and (vi) risk, audit and compliance;
- The Executive Investment Committee provides oversight and monitoring of the Society’s investment managers;
- The Society’s Risk and Compliance function monitors HBOS compliance arrangements in so far as they relate to the Society on a day-to-day basis in accordance with the Society’s compliance strategy. The Executive Risk Oversight Committee, chaired by the Risk and Compliance Director, provides oversight for the Society’s risk management and regulatory compliance arrangements;
- The contractual arrangement with HBOS dated 1 March 2001 that establishes operational delegations and outline service levels;
- Implementation and testing of an appropriate Business Continuity Plan;
- Preparation and monitoring of detailed budgets for functional business segments; and
- A programme management function to structure, co-ordinate, monitor and report on the very significant projects within the programme management function.
Information and communication
Monthly management information in respect of financial performance, service to and fair treatment of policyholders, complaints handling and investment performance is prepared and reviewed by senior management, the Executive Team and the Board. Additionally, projects have their own management information processes.
The Society prepares an annual business plan and budget to assist in the monitoring of results, assets, liabilities and investment performance. Actual performance against these plans is actively monitored and, where appropriate, corrective action is agreed and implemented.
Risk management
The Audit and Risk Committee has delegated authority from the Board for reviewing the Society’s internal control and risk management systems, that the Society’s risk appetite is appropriate for its needs and that key risks are identified and managed.
A Risk Oversight Committee, consisting of members of the Executive Team together with the risk managers, meets regularly, normally monthly. Significant internal and external risks are identified and evaluated and accountability for their management is allocated to appropriate individuals. The Committee has an explicit oversight function for risk management. The Risk Oversight Committee determines the actions required and their adequacy, and monitors progress.
There is a clear risk management framework and methodology, which includes:
- The approval of risk policies by the Board covering each of the key risk categories of credit, market, liquidity, operational and insurance risks;
- The agreement by the Board of risk appetite for each of the key risks facing the Society and key risk indicators for the monitoring of these risks;
- Risk identification and management procedures for major projects;
- The detailed reporting and review of material risks, including operational risks and those that impact the solvency of the Society.
The framework described above is designed to comply with the regime for prudential management of insurance companies contained in the FSA Handbook.
Internal audit
The Society has an internal audit capability to provide assurance over the operation of the system of internal control. The programme of internal audit reviews is based on the Society’s risk register and the internal audit programme is designed to provide assurance that the risk-mitigating actions, identified by management, and the risk register are working effectively. The internal audit plan and activities are reviewed by the Risk Oversight Committee and are reported to, and approved by, the Audit and Risk Committee.
The Society also receives regular reports from HBOS in relation to the findings of internal audit reviews HBOS has conducted that are relevant to the Society.
The Society’s internal audit function has been provided by Grant Thornton in recent years. During 2010, the Society conducted a tendering exercise for the provision of these services and appointed KPMG as the Society’s internal auditors with effect from 1 January 2011.
Monitoring and corrective action
The risk management function reports the results of the risk assessment and other significant changes to risks to the Risk Oversight Committee, Audit and Risk Committee, Executive Investment Committee and the Board. Assurance is provided to the Audit and Risk Committee and the Board on the effectiveness of the key controls through:
- Monthly consideration by the Risk Oversight Committee of key risks, controls effectiveness and adequacy of mitigating actions;
- Annual review of effectiveness of key internal controls by the Executive Team;
- Reporting by the Society’s internal audit function on the key controls reviewed. In performing this work, reliance is placed where possible on the HBOS risk management and internal audit functions that review systems and controls operated by HBOS on behalf of the Society and on information received from and appropriate disclosures having been made by HBOS to the Society;
- Reporting on the compliance environment and the management of significant regulatory risks by the Society’s Risk and Compliance Director;
- Reports received from the Society’s risk management function on specific elements of risk and their management;
- Reporting by the forums (referred to above - Control procedures), comprising representatives from the Society and HBOS, of key risks, controls and mitigating actions arising from the processes operated by HBOS on behalf of the Society. This includes tracking the implementation of agreed actions from Internal Audit and Compliance reviews; and
- The work of other independent advisers commissioned to report on specific aspects of internal control.
The Audit and Risk Committee monitors the status of corrective actions for the improvement of effectiveness of the system of internal control.
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5. Policyholder communications
The Board is committed to a policy of open, two-way communications with policyholders.
The Board commissioned research among members during 2010 in order to understand their views. Written surveys were conducted among those who attended the AGM and, later in the year, among a larger group selected at random. A series of focus groups was also held.
The views of members informed the Board’s thinking, for example, in their response to the Government compensation scheme, in the Society’s submission to the Independent Commission advising the Government and in the new approach to distributing capital to policyholders.
The Society wrote to members in August 2010 to encourage them to make their views on Government compensation known directly to the Minister and, in December, members were provided with an update on key developments.
The Annual Report is mailed to all members each year and further information is available on the Society’s website and on request for members without Internet access.
At the AGM, the members of the Board are available to answer questions. Separate resolutions are proposed on each issue so that they can be given proper consideration. Resolutions are dealt with on a show of hands unless a poll is called. The Society counts all proxy votes and will indicate the level of proxies lodged on each resolution, after it has been dealt with on a show of hands. The proxy form specifically provides for members to be able to abstain on a resolution or resolutions if they wish.
The Board has a member relations strategy, the purpose of which is to help members of the Society to take an interest in its governance. The strategy is available in the corporate governance section of the Society’s website.
The member relations function within the Society implements the member relations strategy on behalf of the Chairman. It is responsible for the provision of realistic, appropriate and proportionate information to members and for organising the AGM.
The member relations function provides answers to members in respect of corporate issues (whereas our customer services people answer questions relating to members’ policies). The member relations function is accessible to members through a dedicated email address: member.relations@equitable.co.uk and through a special postal address: Member relations, The Equitable Life Assurance Society, Walton Street, Aylesbury, Buckinghamshire HP21 7QW..
Click here to view the Society's member relations strategy
The Society has produced ‘A guide to how we manage the with-profits fund’. This is a simpler, easier to follow version of the Principles and Practices of Financial Management (“PPFM”). In 2011, the Society made significant changes to the PPFM in order to reflect its new risk-based objectives and the distribution of capital. The latest version of the PPFM is always available on the Society’s website and the revised guide was issued to policyholders with their annual statements in March 2011.
Also, each year reports are produced by the Board and by the With-profits Actuary on how the with-profits fund has been managed. In the interests of keeping costs down, these documents are made available on the corporate governance section of the Society’s website. They are also available to members on request. If there are material changes in these documents the Society draws them to the attention of policyholders.
The member relations strategy is reviewed annually by the Board, who also receive reports on issues raised, feedback from members and recommendations for improvement.
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6. Going concern
As noted in Note 1 to the financial statements on page 30 of the Annual Report and Accounts 2010, the Directors consider the adoption of the going concern basis to be appropriate in the preparation of the financial statements. A detailed assessment of the going concern basis is provided in the Financial review on pages 8 and 9 of the Annual Report and Accounts 2010.
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7. Remuneration
The composition and responsibilities of the Society’s Remuneration Committee are set out above. The Remuneration Committee is the Board Committee established by the Society with responsibility for recommending remuneration policy to the Board. In particular, the Remuneration Committee is responsible for recommending the terms of remuneration for executive Directors, including incentive arrangements for bonus payments and the terms of remuneration for non-executive Directors. The Committee reviews remuneration policy at least once a year. The Committee’s recommendations are made on the basis of rewarding individuals for the scope of their responsibilities and their performance. All incentive and bonus schemes are established and monitored by the Committee. The Committee seeks to meet the standards set out in the Combined and Annotated Codes and due attention is also given to the FSA’s Remuneration Code and other corporate governance initiatives albeit these are not binding on the Society. Proper regard is paid to the need to retain good quality, highly motivated staff and the remuneration paid by organisations similar to the Society is taken into account. In this respect, during 2010, the Society received information from Towers Watson. The Committee considers Towers Watson to be independent of the Society.
Details of Directors' remuneration can be found on pages 19 to 23 of the Annual Report and Summary Financial Statements 2010 and on pages 21 to 23 of the Annual Report and Accounts 2010.
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8. Statement of compliance with the Governance and Annotated Codes
The Board considers that the Society has applied the relevant principles and has complied with all the relevant provisions of the Combined Code and the Annotated Code (and associated guidance) throughout the year except for the matters explained in this report and summarised below. The Board does not regard the exceptions as a material departure from the principles and provisions of the Combined Code and the Annotated Code.
The Board continues to seek to adopt the relevant provisions of the Combined Code, including formalisation of service level agreements with outsourced providers.
Non-executive Directors are not appointed for a specific term. However, each Director’s continued appointment is subject to periodic review by the Board, assisted by the Nominations Committee, at least annually. The Society’s Articles of Association require that all Directors must seek re-election at the AGM at least every three years.
Decisions regarding the remuneration of executive Directors and the Chairman are taken by the Board, following recommendations from the Remuneration Committee.
The Board considers that, rather than an individual or individuals needing to have recent and relevant financial experience, the Audit and Risk Committee as a whole should be considered as having the requisite skills and experience.
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9. Principles and Practices of Financial Management
The Society has produced a detailed statement about how it manages the with-profits fund. The document is called Principles and Practices of Financial Management (PPFM) and complies with the requirements laid down by the Financial Services Authority. The document is intended to assist knowledgeable observers to understand the way in which the with-profits business of the Society is conducted. The Society has also produced a much simpler, easier to follow version of the Principles and Practices in Plain English called 'A guide to how we manage the with-profits fund'.
Click here to view A guide to how we manage the with-profits fund
Click here to view Annual report to with-profits policyholders
Click here to view Changes to the PPFM
Click here to view Principles and Practices of Financial Management (PPFM)
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10. UK Stewardship Code
The Society does not deal with investment management directly as this has been outsourced to BlackRock, as well as some other providers.
BlackRock will be dealing with the issues arising under the Code in the first instance, and they have confirmed that they comply with the Code.
Click here to view BlackRock's statement on their compliance with the UK Stewardship Code.
Our mandate with BlackRock requires them to report on activity in this area and we will monitor this on a regular basis.
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