The shortage of insurance board skills amplified by regulatory limitations may be leaving UAE insurers challenged with boards that become ineffective or even dysfunctional over time, according to a new report from Insurance Monitor.
The report also highlighted how board composition is a key factor that may be inhibiting the discharge of the evolving responsibilities of the board. Insurance directors are now expected to engage more deeply in strategy, digital, risk, talent, marketing, IT and cyber protection on the back of technology disruption and other corporate failures.
In addition, the report noted that complexities pertaining to board size, diversity and tenure are key dynamics that impact board performance and that stronger emphasis should be placed on the quality of directors over the quantity of directors.
What is the ideal board size?
From a sample of 32 UAE insurers (listed and unlisted), Insurance Monitor found that board sizes range between four and nine members, with the majority (75%) of companies having between seven and nine members.
However, board sizes do not appear to be associated with company size in terms of either net equity, market cap or written premiums with the leading performer (Orient) steered by a smaller board of five directors.
While there is no one-size-fits-all approach to board size, the new focus for good corporate governance is placing stronger emphasis on the “quality” of board directors over the “quantity” of board directors and, while there is still a place for larger boards, in the grand scheme of things, less is more.
Research suggests that smaller boards are more active, more collaborative and make decisions faster. Smaller boards also trend towards having informal meetings and fewer committees than larger boards.
The right board size then narrows down to the balance of board skills required. A board should be large enough to get the board’s work done, yet small enough to work effectively as a team to communicate, deliberate and function as a cohesive group on both fiduciary duties and strategic plans.
Insurance board skills
Progressive insurers adopt a skill matrix to ensure the board’s effective composition and discharge of responsibilities. These are broadly grouped into governance skills, technical skills, personal attributes and non-skills based criteria.
The challenge for the global insurance industry in this era of disruption is a shrinking supply of C-suite executives vis-a-vis demand. This includes gaps in ready-to-promote leaders, competition for top talent, retention challenges, diversity shortages, and a lack of systemic talent management strategies that identify and develop true potential into leaders. The skills shortage is further amplified where regulatory limitations are at play.
Ethnicity and gender
Further, the report showed overall weak board diversity in terms of ethnicity and gender parity, whereby 98% of directors are male and Arab nationals. Only five insurers have non-Arab directors.
Factors driving board representation may include local regulations requiring the majority of directors to be UAE nationals (including the chairman) and shareholding structures, leaving little or no room for recruitment of directors based on technical skills and global networks.
While gender diversity in board composition continues to gain global attention, progress on this front remains modest. Among 32 UAE insuraers, women hold just 2% of board seats, ie, only five insurers have a female director on board.
Tenure
Director tenure is the next point of contention in optimising board effectiveness. While directors are elected through a voting mechanism, longstanding directors could compromise independence and objectivity, regardless of the institutional knowledge they have obtained. Investors are also said to view long-tenured directors as the lack of opportunity for new and/or diverse board candidates.
In the UAE, the term of directorship is limited to three years, although a director can be re-elected more than once.
The research noted that about one third of insurance directors in a sample of 33 UAE insurers are fairly new appointments (under three years) representing the “successor” bracket. A similar proportion of directors have been on board for between three and 10 years, representing the “experienced” bracket. However, at least 16 directors continue to hold board seats for over 20 and 30 years each.
From a sample of 88 insurance directors that resigned between 2012 and 2017, the average tenure was 7.6 years, and at least 18 directors held seats for over a decade.
These averages are expected to decrease going forward. With the increasingly digital society and focus on cyber security, social and digital media skills are increasingly desired board skills. This is expected to trigger a rise in younger board members to develop innovative technological ideas. M