Workshop on Corporate Governance (Case study: Parmalat and HIH)

1. PUBLIC Workshop on Corporate Governance(Case study: Parmalat and HIH) Yoshi Kawai Secretary General, IAIS IAIS-ASSAL Regional Seminar Buenos Aires, Argentina, 22-24November 2011

2. Parmalat - Background I All relevant information can be found in the handout • Founded by Calisto Tanzi in 1961 • Italy’s largest food company • Dairy products (UHT process milk) • In 1990s, business expansion and acquisition • TV business, football business, tourism business • In early 2000s, asset of €10 billion with over 36,000 employees in 139 plants. More than 200 companies • Bankrupt in 2003 (€4 billion cash and €8 billion bond disappeared) • Enron of Europe *case based on the public sources

3. Parmalat - Background II All relevant information can be found in the handout • Calisto Tanzi, dominant CEO • Insert his people in powerful positions • Board Member with “conflicts of interest” • Tanzi was Chair of BoD, not many non-exec. directors • Family-owned Committees (Executive, Internal Control) • External Auditor employees in 139 plants. More than 200 companies • Grant Thornton and Deloitte both had issues • Hiding losses through various subsidiaries, fictitious trades and securitisation schemes (€14 billion debt, 8x reported) • Financing through issuance of debt which resulted in downgrading *case based on the public sources

4. Parmalat - Background III All relevant information can be found in the handout • Ownership structure • (the diagram is a • simplified version!) *case based on the public sources

5. HIH – Background I All relevant information can be found in the handout • Founded by Ray Williams in 1968 • Australia’s 2nd largest non-life insurer • Workers comp., liability and indemnity • In Australia, UK and California (USA) • In late 1990s, asset of A$7 billion, revenue of A$4 billion and operating profit of A$60 million • Bankrupt in 2001 • Largest corporate failure *case based on the report of the HIH Royal Commission (www.hihroyalcom.gov.au)

6. HIH – Background II All relevant information can be found in the handout • Ray Williams, dominant CEO • CEO had no limits on authority, had much discretion • Powerless Board • Ready to accept, lack of critical analysis or challenge • Such a degree of respect to Williams • Lack of strategy, BoD not understand business or strategy • No involvement when entering or retreating from overseas • Other Senior Management without accountability • Performance review not tied to remuneration process • Reckless underwriting and fictitious financial reporting • Very dependant on consulting actuary when setting the amount of reserve • External auditor with conflicts of interest, lack of actuarial knowledge to monitor the sufficiency of reserves *case based on the report of the HIH Royal Commission (www.hihroyalcom.gov.au)

7. Question • What were the problems? • Which ICPs are relevant? • How should the supervisors acted? • Assume that your authority is supervising Parmalat

8. Instructions • Please divide up in to 4 separate groups (up to 10 member in a group) • You will be given certain time amongst your group members to discuss the case and address the questions • Each group will be given certain time to present their answers to the questions

9. Discussion • Discuss the following questions in your group • What were the problems? • Which ICPs are relevant? • How should the supervisors have acted? • Assume that your authority is supervising Parmalat

10. Group Presentation

11. Possible Solution - What were the problems? • They were poorly governed or mismanaged. • Epitomised by a lack of accountability for performance • Lack of integrity in the company’s internal processes and systems and a lack of attention to detail • Led to a series of business decisions that were poorly conceived and even more poorly executed • There was blind faith in a strong leader • Insufficient ability and independence to see what was being done or had to be done, etc. • Risks were not properly identified and managed • Unpleasant information was hidden, filtered or sanitised • Lack of sceptical questioning and analysis

12. Possible Solution - Which ICPs are relevant? • ICP 5 Suitability • Board Members, Senior Management and Key Persons in Control Functions must possess competence and integrity to fulfil their roles (Standard 5.2) • The insurer must demonstrate the suitability of Board Members, Senior Management, Key Persons in Control Functions and Significant Owners(Standard 5.3) • ICP 7 Corporate Governance Requirements to implement a corporate governance framework: • The Board shall set and oversee objectives and strategies (Standard 7.1)  • Structure and governance of the Board (Standard 7.3) • Duties of individual Board members (Standard 7.4) • Board oversight of risk management and control systems and functions  • Remuneration policy and practices (strategy and oversight) (St 7.6) • Reliable and transparent financial reporting (Standard 7.7)  • Transparency about the governance 

13. Possible Solution - Which ICPs are relevant? • ICP 7 Corporate Governance, Standard 7.9: • The Board shall have policies and procedures to ensure that Senior Management: • carries out the day-to-day operations effectively and in accordance with the insurer’s strategies, policies and procedures  • promotes a culture of sound risk management, compliance and fair treatment of customers  • provides the Board adequate and timely information  • provides to the relevant stakeholders and the supervisor the information required 

14. Possible Solution - Which ICPs are relevant? • ICP 8 Risk Management and Internal Controls The supervisor requires an insurer to: • establish, and operate within, effective systems of risk management and internal controls • have effective internal control functions with the necessary authority, independence and resources • have an effective risk management function capable of assisting the insurer to identify, assess, monitor, manage and report on its key risks in a timely way • have an effective compliance function capable of assisting the insurer to meet its legal and regulatory obligations and promote and sustain a corporate culture of compliance and integrity. • have an effective actuarial function capable of evaluating and providing advice to the insurer regarding technical provisions, premium and pricing activities (etc), and compliance with related statutory and regulatory requirements • have an effective internal audit function capable of providing the Board with independent assurance in respect of the insurer’s governance, including its risk management and internal controls.

15. Possible Solution - How should the supervisors have acted? Prerequisite for Action: ICP 1 Objectives, Powers and Responsibilities of the Supervisor • Primary legislation clearly defines the objectives of insurance supervision and the mandate and responsibilities of the supervisor and gives the supervisor adequate powers to conduct insurance supervision, including powers to issue and enforce rules by administrative means and take immediate action(Standard 1.2) ICP 4 Licensing (Standard 4.3) Licensing requirements and procedures are clear, objective and public, and are consistently applied, requiring: • the applicant’s Board Members, Senior Management, both individually and collectively, Significant Owners and Key Persons in Control Functions to be suitable; • the applicant to satisfy capital requirements; • the applicant to have a sound corporate or group structure and governance framework that does not hinder effective supervision; and • the applicant to have sound business and financial plans.

16. Possible Solution - How should the supervisors have acted? Supervisory Review / Preventive Measures ICP 9: The supervisor has an integrated, risk-based system of supervision that uses both off-site monitoring and on-site inspections to examine the business of each insurer, evaluate its condition, the quality and effectiveness of its Board and Senior Management and compliance with legislation and supervisory requirements. The supervisor obtains the necessary information to conduct effective supervision of insurers and evaluate the insurance market. ICP 10: The supervisor takes preventive and corrective measures that are timely, suitable and necessary to achieve the objectives of insurance supervision.

17. Possible Solution - How should the supervisors have acted? Enforcement ICP 11: The supervisor enforces corrective action and, where needed, imposes sanctions based on clear and objective criteria that are publicly disclosed. • The supervisor should have used its power to enforce corrective action in a timely manner (Standard 11.1) • The supervisor should have used its means to address management and governance problems, including the power to require the insurer to replace or restrict the power of Board Members, Senior Management, Key Persons in Control Functions, significant owners and external auditors (Standard 11.4)

18. Possible Solution - How should the supervisors have acted? • The supervisor should have required the insurer to demonstrate the adequacy and effectiveness of its corporate governance framework (Standard 7.10) • The supervisor should have required that Board Members, Senior Management and Key Persons in Control Functions possess competence and integrity to fulfil their roles (Standard 5.2) and should have required the insurer to demonstrate their suitability (Standard 5.3) • The supervisor should have taken appropriate action to rectify the situation with regard to the lack of suitability of Board and Senior Management and Key Persons in Control Functions (Standard 5.5), e.g. suspended Board members, Senior Management or Key Persons in Control Functions • The supervisor could have imposed sanctions or threatened to revoke the license if they did not comply • Ultimately, the supervisor could have revoked the license (ICP 4 Licensing).

19. Conclusion Good governance structures and processes are the foundation for all business activity and supervisors need to address issues of governance and internal controls at an early stage (in the licensing process) and on a continuous basis.

20. Thank you very much! Any questions? www.iaisweb.org yoshihiro.kawai@bis.org