Corporate Governance

(Last updated 7 June 2007)

The full Corporate Governance Statement can be found in the Society’s Annual Report and Accounts to 31 December 2006 which is updated annually.

Click here to view Annual Report and Accounts 2006

Below are revised highlights as at 28 March 2007 based on the 2006 statement together with the Society's Principles and Practices of Financial Management.  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
Acountability and Audit
Policyholder communications 
Going concern
Remuneration Report
Statement of compliance with the Combined and Annotated Codes and AMI guidance
Principles and Practices of Financial Management

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 Myners Review of the Governance of Life Mutuals, which reported in December 2004, recommended that an annotated version of the Combined Code suitable for life mutuals should be produced. This was taken forward by the Association of Mutual Insurers (“AMI”) and the Association of Friendly Societies (“AFS”) and The Combined Code on Corporate Governance – An Annotated Version for Mutual Insurers (“The Annotated Code”) was published in July 2005. Mutual insurers who are members of the AMI, as is the Society, are 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.

Reference is made in this report to the provisions of the Combined Code and of the Annotated Code, where the latter extends the relevant provisions of the Combined Code.
 
This report summarises the Society’s governance arrangements.

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 Group 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 one executive Director, the Chief Executive. There are eight non-executive Directors on the Board, whose diverse experience, skills and independent perspective provide an effective review and challenge of the Society’s activities. The Chairman, Vanni Treves, and the Deputy Chairman, Peter Smith, are elected by the Board. Peter Smith has been nominated as the Senior Independent non-executive Director.

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

Some of the Directors hold policies with the Society. In the opinion of the Board, in no instance do these interests interfere with the independence of the relevant Director. All the non-executive Directors are considered to be independent.

Please refer to pages 18 to 20 of the Summary Financial Statement (and pages 22 to 24 of the Annual Report and Accounts 2006), for the Remuneration Report explaining the basis of remuneration for the executive and non-executive Directors.

Performance Evaluation
During 2006, 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 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 following appointment. The Society’s Articles require one-third of the Directors who are subject to retirement by rotation to retire at each Annual General Meeting and also that all Directors must submit themselves for re-election by rotation at an Annual General Meeting at least every three years. All appointments are subject to review by the Board, as advised by the Nominations Committee, at intervals not exceeding three years. The Board’s policy on remuneration is set out in the Remuneration Report.

Board Committees
The Board formally delegates specific responsibilities to five Board Committees, supported by senior management, which are established by the Board.

Click here to view The members of the Board Committees

The Audit Committee
Peter Smith chairs the Audit Committee, currently comprising four non-executive Directors. It meets at least four times a year. The duties of the Audit Committee include reviewing the Society’s compliance with the Smith Guidance (accompanying the Combined Code) on financial reporting, internal controls 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 FSA and reviews these items before their submission to the Board. The minutes of the Audit 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 Committee obtains confirmation from PricewaterhouseCoopers LLP that, in their opinion, their independence as auditors has not been compromised.

The Combined Code states that the Board should satisfy itself that at least one member of the Audit Committee has recent and relevant financial experience. The Board takes the view that, rather than an individual or individuals, the Audit 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 the Audit Committee, but others may attend at the invitation of the committee. The Audit Committee has indicated that any Director may attend its meetings if he or she wishes, and this opportunity has been taken up.

Click here to view The Terms of Reference for the Audit Committee

The Investment Committee
Until 31 December 2007, Andrew Threadgold chaired the Investment Committee. Since 1 January 2008, the Committee has been chaired by Ian Brimecome and comprises five non-executive Directors and the Chief Executive. It normally meets bi-monthly. It is responsible for managing credit, market and liquidity risk in accordance with the risk policies set by the Board. It sets policy for strategic asset allocation for the with-profits, non-profit and index-linked funds, delegating implementation to management. It also oversees the activities of the Society’s investment managers. The Committee receives advice from the Head of Actuarial Function.

Click here to view Terms of Reference for the Investment Committee

The Legal Audit Committee
Fred Shedden chairs the Legal Audit Committee, currently comprising three non-executive Directors and the Chief Executive. It considers significant legal matters affecting the Society. The Committee meets as required by the demands of the business. The Chairman invites management and professional advisers to attend as appropriate.

Click here to view Terms of Reference for the Legal Audit Committee

The Remuneration Committee
Jean Wood chairs the Remuneration Committee, currently comprising 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 for the terms of remuneration for non-executive  Directors. More information on the work of the Remuneration Committee is given on pages 18 to 20 of the Summary Financial Statement (and on pages 22 to 24 of the Annual report and Accounts 2006).

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
Vanni Treves chairs the Nominations Committee, comprising two 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.

The Board appointed Ian Reynolds as a non-executive Director with effect from 1 October 2006 and Ian Brimecome as a non-executive Director with effect from 12 January 2007. The Board’s intention to make appointments of new non-executive Directors was announced in the Annual Report and Accounts/Summary Financial Statements 2005 issued to members in April 2006. It included the Board’s intention to use a search consultancy to interview candidates and make suitable recommendations. It also included an invitation to anyone who believed he or she could add substantial value to the Board to put his or her name forward for consideration in the process.

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 18 of the Annual Report and Accounts 2006. Details of the number of meetings of committees of the Board and attendance by members of those committees are also on page 18.

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.

Subsidiary company governance (last updated 6 August 2007)
The Society’s main subsidiaries throughout the year (2006) were University Life Assurance Society and Equitable Life Finance plc.

University Life, a life assurance and annuity business, has been closed to new business since 1976. The Society announced on 20 December 2006 that it had agreed to sell University Life to Reliance Mutual Insurance Society Limited. The sale completed on 1 June 2007.

On 6 August 1997 Equitable Life Finance plc issued £350m 8% Undated Subordinated Guaranteed Bonds, the proceeds of which were lent to the Society. In January 2005, following offers to Bondholders, the Society repurchased £179m of the bonds. The outstanding subordinated bonds with a principal value of £171m were redeemed, at par, on 6 August 2007 in accordance with the terms and conditions of the bonds.

The company, Equitable Life Finance plc, has a separate Board comprising two Directors (who are Directors of the Society). Its Chairman is Charles Thomson.  The Board of Equitable Life Finance plc meets as necessary to consider all matters relevant to the effective operation of the continuing business, including governance.

Each of the other subsidiary companies has a Board of Directors that meets as appropriate to consider the matters relevant to those companies.

3. Management of 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. Tim Bateman holds the roles of With-profits Actuary and Head of Actuarial Function.

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. The With-profits Actuary has prepared a report to policyholders confirming that the Board has taken into account the interests of policyholders in a reasonable and proportionate manner in exercising its discretion in 2006. A copy of this report will be available on the Society’s website and, on request, to members.


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 Committee on behalf of the Board and the Audit 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 2006 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 internal 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 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 Investment Committee provides oversight and monitoring of the Society’s investment managers;
• The Society’s Compliance Officer monitors the HBOS compliance function as it relates to the Society on a day-to-day basis in accordance with the Society’s compliance strategy;
• 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, customer service, 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 Committee has delegated authority from the Board for the review of the Society’s internal control and risk management systems.

A Risk Committee, consisting of all members of the Executive Team, meets monthly. Significant internal and external risks are identified and evaluated and accountability for their management is allocated to appropriate individuals. The Risk Committee determines the actions required and their adequacy and monitors progress.

There is a clear risk management  framework and methodology, 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 tolerance 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; and
• The application of detailed modelling to assess the sensitivity of the Society’s position to economic andbusiness scenarios.

The framework described above is designed to comply with the regime for prudential management of insurance companies contained in the FSA’s Handbook.

There is a discussion in the Financial Review on pages 7 to 13 of significant risks the Society.

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 Committee and are reported to the Audit 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.

Monitoring and corrective action
The The management function reports the results of the risk assessment and other significant changes to risks to the Risk Committee, Audit Committee, Investment Committee and the Board.

Assurance is provided to the Audit Committee and the Board on the effectiveness of the key controls through:

• Monthly consideration by the Risk 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 Compliance Officer;
• Reports received from the Society’s risk management function on specific elements of risk and their management;
• Reporting by the forums (referred to on page 20 – 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 Committee monitors the status of corrective actions for the improvement of effectiveness of the system of internal control.

5. Policyholder communications and member relations
The Board is committed to a policy of openness in its communications with policyholders.

At the Annual General Meeting, 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. Since the 2005 AGM, the proxy form has specifically provided for members to be able to abstain on a resolution or resolutions if they wish. All policyholders can gain access to the Society’s Annual Report and Accounts and further information on its website.

During 2006, the Board adopted a member relations strategy. The purpose of this strategy is to help members of the Society to take an interest in its governance.

Click here to view the Society's member relations strategy

The member relations function within the Society implements the member relations strategy on behalf of the Chairman and the Chief Executive.

The member relations function is responsible for the provision of realistic, appropriate and proportionate information to members and for organising the Annual General Meeting.

The member relations function is accessible to members through a dedicated e-mail address: member.relations@equitable.co.uk and through a special postal address: Member Relations, The Equitable Life Assurance Society, Warwick Court, Paternoster Square, London EC4M 7DX.

In order to understand the views of members, the Board has during the year commissioned market research among members. The Board has always sought to keep all relevant stakeholders informed on all major issues and, during the year, letters were sent to all members covering key issues – for example, the Interim Review, the agreement with Canada Life, and Pensions Simplification.

The member relations strategy is reviewed annually by the Board who also receive reports on issues raised, feedback from members and recommendations for improvement.

6. Going concern
As noted in Note 1 to the financial statements on page 30, 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 page 13.

7. Remuneration Report
The composition and responsibilities of the Society’s Remuneration Committee are set out on pages 18 and 19. The Remuneration Committee’s recommendations are made on the basis of rewarding individuals   or the scope of their responsibilities and their performance. Where possible, the Committee seeks to meet the standards set out in the Annotated Code. Proper regard is paid to the need to retain good quality, highly motivated staff and the remuneration being paid by competitors of the Society is taken into consideration. In this respect, the Committee has received information and advice from remuneration consultants, KPMG and Towers Perrin.

8.Statement of Compliance with the Code of Best Practice
Combined and Annotated Codes
The Board considers 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 Committee as a whole should be considered as having the requisite skills and experience.

AMI guidance
The Society has, in some instances, not complied with the guidance on the Annotated Code issued by the AMI in December 2005, or in some cases not throughout the year in question. These instances are as follows:

The Society’s Articles of Associationcurrently require at least 1,000 members (eligible to vote at General Meetings) to requisition a resolution to be put to an AGM or to requisition a General Meeting, whereas the AMI guidance specifies 500 members as a reasonable requirement. Changes to the Articles to bring them in line with the AMI guidance are being proposed at the AGM.

The Board did not consider it appropriate or practical to hold a vote of members on the sale of most of its non-profit annuity book of business to Canada Life. The non-profit annuitants’ benefits were not affected by the transfer and the annuitants were not members of the Society (in respect of those benefits). Furthermore, reassurance arrangements needed to be in place before the transaction was announced. The transfer was subject to the scrutiny of an Independent Expert and the FSA together with the approval of the High Court – where members and other  policyholders were able to lodge any objections to the transaction with the Court.

A specimen letter of appointment of non-executive directors now appears on the Society’s website but it did not appear throughout the year in question.

The Society’s member relations strategy now appears on the Society’s website but the member relations function and the member relations strategy were not fully in place and the member relations strategy did not appear on the website throughout the year in.

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 new 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 (April 2006)

Click here to view Annual report to with-profits policyholder (April 2008)

Click here to view Changes to the PPFM (October 2007)

Click here to view Principles and Practices of Financial Management (PPFM)