Does Your Captive Insurance Company Suffer from Bad Directors?

Imagine a group of businesspeople, all standing and visibly frustrated with one of their colleagues, lounging at his desk with feet up, seemingly unbothered. This scenario sets the stage for a crucial topic we've seldom addressed: the impact of bad directors on captive insurance companies. Inspired by the National Association of Corporate Directors (NACD) and Michael Pocalyko's insightful article, "A Field Guide to Bad Directors," we dive into identifying whether your captive insurance company might be suffering from ineffective directors.

According to NACD, a "bad director" is described as follows.

They are our least welcome colleagues, thankfully scarce on the best boards. But there they are, all around us. They frustrate experienced, productive corporate directors. They are often the first shock for new corporate directors. They always take a heavy toll on executive management. They are more noticeable in the tough times, when a company undergoes financial stress, transition, or reorganization—or more generally, in economic recession. They divert us from best-practice corporate governance. They use up time, our most precious unrecoverable resource. They provoke us, raise personal conflict levels, and create unnecessary heat and light during boardroom and committee interactions. They disrupt communitarian decision making. They reactively disturb careful strategy and planning. They abound in bad companies.

Taking a closer look at your captive insurance company's board of directors, does anyone fit this profile?

Characteristics of Bad Directors

The NACD article outlines four key traits of bad directors as follows.

1. Inattention to Detail

   We were surprised by the first characteristic, which described these directors as always focusing on the "big picture." In the past, we've argued that directors should not get bogged down in tactical issues, which are best handled by management. However, upon further reading, we realized the author was concerned about directors who avoid "deep data dives" in finance, risk management, or resource allocation. In other words, they don't spend the necessary time and effort to understand important information and why management brings it to the board's attention.

   From our perspective, while board members should not be involved in creating tactical plans, they must understand the detailed information presented to them and why it's significant. Ignoring this information because it requires too much thought means a board member is not fulfilling their fiduciary responsibility.

2. Narrow Field of Focus

   Often disguised as hidden agendas, these directors may publicly express support for the captive's goals while working covertly to serve their own interests. This behavior shows up most often in group captives or risk retention groups, where loyalty to individual members can overshadow loyalty to the captive insurer.

3. Entitlement

   Some directors feel inherently deserving of their position. This entitlement can be prevalent in member-driven organizations where board seats are often awarded based on membership size or capital contribution, rather than competency.

4. Inadequacy

   This broad category includes incompetence, laziness, noncooperation, lack of integrity, stubbornness, and unwillingness to learn. Such deficiencies, if left unaddressed, can severely hinder the board's effectiveness.

Addressing Bad Directors

How should your captive insurance company tackle the issue of bad directors? We advocate for annual board self-assessments, comprising individual evaluations by each board member and a collective assessment by the entire board. Additionally, the board chair should conduct one-on-one interviews to gather insights on each member's performance and their perceptions of their peers.

While this process can be time-consuming and met with resistance, it is crucial for maintaining a high-functioning board. Identifying and addressing the shortcomings of bad directors is essential for the health of your captive insurance company.

As we plan to explore board self-assessment methodologies in a future article, we encourage you to reflect on whether any of your directors exhibit these problematic traits.