Insights

There is no single model of good corporate governance. However, some common elements underlie good corporate governance.^[1]  This article will focus on two key aspects underlying good corporate governance, namely size and gender diversity.  It will provide an overview of the applicable legal and regulatory framework affecting regulated entities and whether this has indeed impacted or re-shaped the entities’ board composition.

One size does not fit all!

A recurring question which is often posed by applicants and existing licensed entities is – What is the minimum number of directors who should sit on the board? There isn’t a straightforward answer to this question as there are a number of factors which impinge on the size of the board such as the nature and complexity of the business, territorial scope, the volume of business, etc.

Advocates of smaller boards mention efficiency, agility, faster decision-making and wider accountability as outcomes of more concentrated boards.  On the other hand, positive attributes which are associated with larger boards include a wider spectrum of expertise, knowledge and experience, and diversity in age and gender.

The present Malta legal and regulatory framework applicable to insurance undertakings and insurance intermediaries does not seek to mandate or define an exact minimum number of board members.  Indeed, in this context, the law gravitates around the principle of proportionality when it comes to the composition of the board.  For example, the Corporate Governance Guidelines for Public Interest Companies state: “The exact composition and balance on a board will depend on the circumstances and business of each enterprise”.  In a similar vein, Chapter 1 of the Insurance Rules issued under the Insurance Business Act (Cap. 403) provides that “The competent authority will consider the collective suitability of the board”.

It is only Chapter 5 of the Insurance Distribution Rules on the Criteria of Sound and Prudent Management that hints at the adequacy in the size of the direction and management of an enrolled insurance intermediary by stating that an enrolled person shall be regarded as carrying out (re)insurance distribution activities in a sound and prudent manner if it “is directed and managed by a sufficient number of registered persons and persons who are fit and proper persons to hold the positions which they hold, where applicable”.  An almost identical position is proposed for adoption in the upcoming MFSA Corporate Governance Code through the inclusion of a Supporting Provision which states that “The Board should be of sufficient size that the balance of skills and experience is appropriate for the type of business and that changes to the Board’s composition can be managed without undue disruption. The Board composition should ensure timely and effective decision making”.

From a practical perspective, a closer look at the present board size of locally licensed insurance undertakings and insurance intermediaries^[2] shows that the size of the entities’ boards varies.

As of March 2022, out of a total of 69 locally licensed insurance undertakings, 82% had a board size of between 4 to 7 members 9% had a relatively small board composed of up to 3 members and the remaining 9% had a board of more than 7 members.  These figures equate to an average board size of 5 members.

A similar landscape is reflected in the board size of insurance agents, insurance brokers and insurance managers licensed under the Insurance Distribution Act (Cap. 487) where the average board size is 4 members. Insurance brokers have amongst the smallest and largest boards, with 22% of insurance brokers having a board of up to 2 board members and 14% of the insurance brokers having boards composed of more than 5 members.

Variety is the spice of life!

Whilst variety is the spice of life, diversity is a key ingredient for board effectiveness.  Diversity can take different forms such as age, gender and nationality.  This article focuses on one of these forms, namely gender diversity.

Over these past years, the subject of gender diversity has gained recognition and popularity in the sphere of corporate governance.  We have experienced the adoption of several initiatives such as the introduction of gender quotas, disclosure requirements and female participation targets aimed at addressing gender imbalances and at enhancing gender diversity.  At a European Union level, a number of member states including Belgium, France, Italy and Germany have introduced national mandatory gender quotas for listed entities. At a national level, we have recently experienced the implementation of the changes to the Constitution of Malta which now allocates up to 12 additional parliamentary seats to women if the threshold of 40% of the proportion of Members of Parliament is not reached.

But what is driving this gender diversity movement? Research has shown that gender diversity on the boards contributes to instilling new perspectives and approaches, enhancing cooperation and innovation, creating a more collaborative boardroom culture and enriching board discussion and debate.  Environmental, Social, and Governance (ESG) investment is also playing an important role in enhancing gender diversity, in view that institutional investors are placing more focus on non-financial indicators as part of their investment decision-making process.

Despite the above, it is surprising to note that to date there is still no reference to the importance of gender diversity in the local legal and regulatory framework applicable to insurance undertakings and insurance intermediaries.  Even the upcoming MFSA Corporate Governance Code fails to capture this factor as a principle of good governance. Indeed, an analysis of the female participation rate on the boards of local insurance undertakings and insurance intermediaries evidences that the positive outcomes of gender diversity have not to date been embraced by such boards.

As depicted in the charts below, as of March 2022, 45% of the boards of local insurance undertakings were all composed of male members whereas 40% of the boards have just one female member. The remaining 12% have up to 2 female members and the other 3% hold more than 2 female board members.  Taking a deeper dive into these statistics, one notes that in 74% of the boards of insurance undertakings where there is female participation, female members represent up to one-third of the board, in 21% of such boards female members constitute between one-third and one-half of the board, whereas in 5% (i.e. 2 insurers) of such boards, two-thirds of the board is composed of female participants.

In so far as insurance intermediaries, one can notice a similar position to that of insurance undertakings, with close to an average majority (47%) of the boards of all insurance agents, insurance brokers and insurance managers being composed of only male members. Insurance agents are the least gender-diverse amongst insurance intermediaries.  In 20% of the intermediaries’ boards, female participation constitutes an average of 25% of the whole board followed by an average of 19% where female participation represents between 30% to 40% of the board composition. An average of 9% of the insurance intermediaries’ boards are composed equally of male and female members. Two insurance brokers stand out as having their board composed solely of female members. In the case of one insurance manager, two out of three board members is a female.

Concluding remarks

The above analysis brings two main conclusions:

1. In so far as board size is concerned, there appears to be a general consensus amongst insurance undertakings and insurance intermediaries that an average of 4 to 5 members represents a typical board size.
2. There is still a long way to go in so far as female representation on the boards of insurance undertakings and insurance intermediaries. This reality may be improved by implementing flexible working practices and by enhancing the regulatory framework and introducing initiatives similar to those seen in other member states to instil a greater degree of gender balance and reaping the fruits of gender diversity.

^[1] G20/OECD Principles of Corporate Governance 2015

^[2] Insurance Intermediaries means Insurance Agents, Insurance Brokers and Insurance Managers

Credit: All graphs – Malta Business Registry