The insurer made the Sacramento, Calif.-based pensions fund list because of its practice of appointing independent agents that sell business for the company to its board of directors, creating the appearance of a conflict. Cincinnati Financial executives disagreed that there was a conflict, and a move by CalPERS to create a strictly independent, unaffiliated board of directors was defeated. (See NU, May 6, page 6).

In the climate of suspicion over corporate governance that exists post-Enron and post-WorldCom, if insurers have agents on their boards, is that a problem or an advantage?

“Any person who serves on a board has the potential of conflict of interest,” observed Frederick J. England Jr., chairman of the board of Hastings Tapley Insurance Agency. “A person who serves on a board should only be focused on what is of benefit to the company he or she is serving.”

Mr. England, whose agency is based in Woburn, Mass., brings a unique perspective to the issue. Besides being an independent agent, he has been on a number of different non-insurance company boards. His experience includes sitting on the board of Insurance Services Office, which is located today in Jersey City, N.J. He served for six years beginning around 1994, when insurance company executives gave up their governance and an independent board of directors was appointed.

Because an independent agent represents a number of different insurers, argues Mr. England, the agent is not as “vulnerable” to the actions of that company as a direct agent. What agents can also bring to the table, he points out, are a lot of ideas, opinions and arguments from a different vantage pointone that members of the board who are not agents would not have.

“There is not inherently a conflict, and knowledge of the sales culture of the company is helpful,” said Mr. England, adding that when an agent sits on a board, he or she must be careful with the knowledge they gain.

He also noted that Cincinnati Financial appears to be the only company today with agents on the board.

There are times where conflicts could arise, Ronald Duska, professor of professional ethics at The American College in Bryn Mawr, Pa., pointed out. Decisions the company makes that affect the relationship with brokers and agents, especially in the areas of compensation, could prove to be one area of potential conflict where their objectivity can be called into question.

Just the appearance of conflict, he noted, can create problems.

“It is better” for the agent and the company “to bend over backward to avoid a conflict of interest,” Mr. Duska remarked.

However, the make-up of the board is also important, Mr. Duska pointed out. He said that while the company may be looking for agents input, there needs to be a proportional amount of totally independent members. In Cincinnati Financials case, one-third of the board is totally independent, which he called a good number for any board. And the companys independent audit committee is totally independent.

“That should be enough to approve of this sought of thing,” Mr. Duska concluded.

“If a person who does business with a company sits on a board, is that the inherent conflict?” asked William E. Baily, an attorney in Boston and special council for the Insurance Information Institute based in New York City. “Like so many, there is the potential for conflict and there is real conflict of interest.”

“The real simple answer is if the member demonstrates he or she has a conflict, the member should be terminated. It is the board members responsibility to make sure he or she is honest and aboveboard and brings a good return to the company.”

“Being an agent should not exclude them from the board,” Mr. Bailey said. Such exclusions should apply “only if they misbehave.”

Mr. Bailey also underscored the importance of the audit committee in making sure the board is doing its job and is “being run on the up and up.”

“You are looking for a balanced board,” commented John McCarrick, a defense attorney for Duane Morris LLP in Briarcliff Manor, N.Y.

“On one hand, you want directors with knowledge and independence to ride herd on and hold management accountable on conduct and practice. On the other hand, you do not want people who do not understand the business and cannot provide insight. You dont want people who are beholden to the executive head. You want people with insight.”

The most important element to making a good board is to having people who are willing to stand up to a strong-willed chairman or chief executive officer, advised Mr. McCarrick. They should also be people who understand the complexities of financial transactions and reporting, and who are willing to take the time to study the reports.

“The amount of preparation done for a board meeting cannot be proportional to the amount of time it takes to travel to the board meetings,” Mr. McCarrick said.

“To me the great danger is that heads of companies have huge influence over who serves on boards,” noted Mr. England, noting that they may then also be able to exert influence on a board member to cooperate with management. “A board member has to be strong and have opinions.”

However, Mr. England said, to appoint a board made up totally of people with no inside understanding of how the business is run is an overreaction. Such a board, he suggests, would not be able to function well.

“There are certain issues that inside directors should not participate in and recuse themselves from,” he added, offering another solution to avoiding conflicts.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, July 22, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.