Board Composition and Performance in Life Insurance Companies

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Abstract
The past decade has witnessed a renewed emphasis on the quality of board governance worldwide. In the wake of a series of governance reports, particular interest has focused on the role and effectiveness of non‐executive board members. This study seeks to add to our understanding of the governance role of non‐executive directors by examining the use and usefulness of non‐executives in insurance companies. The focus on the insurance industry, which includes both proprietary (stock) and mutual companies, allows us to examine the importance of board governance in the context of different ownership structures. Furthermore, by focusing our study in a period prior to the widespread adoption of the recommendations of the Cadbury Report by UK companies, our findings should more accurately capture the true role of board composition in a less‐prescriptive governance environment. Our results suggest that mutual insurers utilize a greater proportion of non‐executive directors and are less likely to have CEO/Chairman duality than their proprietary counterparts. This evidence is consistent with mutuals using stronger board governance to compensate for weaker ownership control. Proprietary companies, which are subject to stronger shareholder and capital market control, place less reliance on non‐executive monitoring. Using a number of performance measures, we find no significant difference in the behaviour of mutual and proprietary companies with the exception of executive remuneration, (which is significantly higher for proprietary companies); furthermore there is no evidence that mutuals have outperformed their stock company rivals. Overall, our findings suggest that insurance companies emphasize different governance mechanisms depending on the specific monitoring problems they face.