Independent Agents As Board Members: Conflict OrAdvantage?

In this highly relationship-driven business, one advantage tobeing an independent agent is the freedom to choose insurancecompany partners. While retaining that freedom, however, how closeshould an agent get to a company he or she represents?

Does an agent who serves on a companys board of directors riskindependence and cross the line of conflict of interest?

In April, that question was raised by the California PublicEmployees Retirement System, the nations largest pension fund,which placed insurer Cincinnati Financial Corp. on its annual focuslist as one of the five “worst examples of poor financial andgovernance performance.” (See related story, page 10.)

The insurer made the Sacramento, Calif.-based pensions fund listbecause of its practice of appointing independent agents that sellbusiness for the company to its board of directors, creating theappearance of a conflict. Cincinnati Financial executives disagreedthat there was a conflict, and a move by CalPERS to create astrictly independent, unaffiliated board of directors was defeated.(See NU, May 6, page 6).

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

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

Mr. England, whose agency is based in Woburn, Mass., brings aunique perspective to the issue. Besides being an independentagent, he has been on a number of different non-insurance companyboards. His experience includes sitting on the board of InsuranceServices Office, which is located today in Jersey City, N.J. Heserved for six years beginning around 1994, when insurance companyexecutives gave up their governance and an independent board ofdirectors was appointed.

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

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

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

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

Just the appearance of conflict, he noted, can createproblems.

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

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

“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 attorneyin Boston and special council for the Insurance InformationInstitute based in New York City. “Like so many, there is thepotential for conflict and there is real conflict of interest.”

“The real simple answer is if the member demonstrates he or shehas a conflict, the member should be terminated. It is the boardmembers responsibility to make sure he or she is honest andaboveboard 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 theymisbehave.”

Mr. Bailey also underscored the importance of the auditcommittee in making sure the board is doing its job and is “beingrun on the up and up.”

“You are looking for a balanced board,” commented JohnMcCarrick, a defense attorney for Duane Morris LLP in BriarcliffManor, N.Y.

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

The most important element to making a good board is to havingpeople who are willing to stand up to a strong-willed chairman orchief executive officer, advised Mr. McCarrick. They should also bepeople who understand the complexities of financial transactionsand reporting, and who are willing to take the time to study thereports.

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

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

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

“There are certain issues that inside directors should notparticipate in and recuse themselves from,” he added, offeringanother 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 serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.