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Making a Difference

Trustee Training Corporate Governance and Fiduciary Responsibilities of Trustees On behalf of NAMAF Windhoek 18 and 19 August 2014 Presented by Esmé Prins-Van den Berg

Agenda Day 1: 18 August 2014

Corporate Governance Ethical Leadership Board of Trustees: Role and Responsibilities Trustees: Suitability, Role and Responsibilities Chairperson: Role and Responsibilities Principal Officer: Role and Responsibilities Board Committees Succession Planning 9.

Performance Management 10. Remuneration of Trustees 11. Conflicts of Interest 12. Removal of Trustees © Healthcare Navigator CC 2014 2

Corporate Governance

Discussion: What is corporate governance?

Why is it important?

Corporate Governance

Corporate governance = Compliance?

Relationship with the law “If all the boxes are ticked”, will the fund be successful?

Corporate Governance

King Report on Corporate Governance (King III) – Corporate governance mainly involves establishment of structures and processes with appropriate checks and balances that enable directors to discharge their legal responsibilities and oversee compliance with legislation – It is essentially about effective, responsible leadership – Corporate governance practices, codes and guidelines lift the bar of what is regarded as appropriate standards of conduct 2.

System by which business corporations are directed and controlled – Distribution of rights and responsibilities among different participants e.g. board, managers, shareholders, other stakeholders – Rules and procedures for making decisions – Structure to set objectives, means to achieve them and performance monitoring © Healthcare Navigator CC 2014 6

Corporate Governance

Appropriate board structures, processes and values by which a company is directed and controlled for company to achieve its purpose whilst keeping it under prudent control – It therefore enables directors to carry out their legal duties 4. ASX Corporate Governance Council – Corporate governance is system by which companies are directed and managed – It influences how the objectives of the company are set and achieved, how risk is monitored and assessed and how performance is optimised – Good corporate governance structures encourage companies to create value…and provide accountability and control systems… 5. If management is about running the business, governance is about seeing that it is run properly – – Supervising/monitoring management performance Ensuring accountability of management to shareholders and other stakeholders © Healthcare Navigator CC 2014 7

Balance between Performance / Achievement / Strategy and Compliance / Accountability / Transparency / Honesty © Healthcare Navigator CC 2014 8

Discussion: 1. Are there any benefits to Good Corporate Governance?

2. Is there a downside to Poor Corporate Governance?

2. Name companies with good and bad corporate governance. Why is it “good” or “bad”?

Benefits of Corporate Governance

Increases “value of entity” Gives confidence to market Enhances reputation of business Enhances empowerment of all stakeholders Improves efficiency Encourages innovation 7.

Enhances competitive advantages Meets financial, legal and statutory obligations 9.

Ensures accountability 10. Encourages proper decision-making 11. Eliminates conflicts of interest 12. Creates sustainable business © Healthcare Navigator CC 2014 10

Reasons for Benefits of Corporate Governance

Changes attitudes Guide to conduct business with honesty and integrity Sensitive to needs of affected persons Forces checks and balances 5.

Encourages open and transparent communication Basis for rewards based on performance and results Punishes those responsible for fraud Encourages business to establish high principles and ethics Not aimed at frustrating leadership, but encourages participative, performance-based leadership 10. Creates overarching goal for sustainable development 11. Not guarantee for business success but produces better operating results © Healthcare Navigator CC 2014 11

Why Corporate Governance?

Good governance = Good business sense

Discussion: 1. What are the Barriers and Challenges to Good Corporate Governance?

2. How do you overcome them?

Barriers to Corporate Governance

Conflicts of interest – own agendas Lack of focus, industry knowledge and experience Wrong remuneration / incentive strategies Not understanding roles Inadequate (business) skills and leadership Cost of compliance Might be disruptive to existing business model Communication between different levels in organisation Lack of understanding at Board level 14

How Overcome?

Avoid concentration of power Buy-in Policies and procedures → Clarity of principles → Consistency in decision-making Levels of authority → Accountability Strong board commitment 15

International Principles

Organisation for Economic Cooperation and Development (OECD)

5 Elements of Corporate Governance

Strong Board Commitment to Corporate Governance Reforms © Healthcare Navigator CC 2014 18

International Corporate Governance Network (ICGN) Global Corporate Governance Principles

ICGN: 9 Principles

Corporate objective: Sustainable value creation – Corporate Boards Directors as fiduciaries – Effective board behaviour – Composition and structure of board – Role of chair – Lead independent director – Company secretary – Knowledge of company – Appointment of directors – Board and director development and evaluation – Related party transactions and conflicts – Board Responsibilities © Healthcare Navigator CC 2014 20

ICGN: 9 Principles

– Corporate Culture Culture and ethical behaviour – Integrity – Codes of ethics and conduct – Bribery and corruption – Employee share-dealing – Compliance with laws – Whistle-blowing – Risk Management Effective and appropriate risk management – Dynamic management process – Board oversight – – Comprehensive approach Disclosure © Healthcare Navigator CC 2014 21

ICGN: 9 Principles

– – – – – – – Remuneration Alignment with long term strategy Link to value-creation Pay for non-executives Transparency Share ownership Shareholder approval and dialogue Employee remuneration – – – – Audit Robust and independent audit Ethical standards Internal audit Audit Committee role © Healthcare Navigator CC 2014 22

ICGN: 9 Principles

– – – – – – Disclosure and Transparency Transparent and open communication Timely disclosure Affirmation of financial statements Accounting standards Non-financial business reporting Disclosure of ownership – Shareholder Rights Accountability – Corporate Charter – Shareholder protection – Voting-related rights – Shareholder rights of action © Healthcare Navigator CC 2014 23

ICGN: 9 Principles

– – – – – – Shareholder Responsibilities Alignment Integration into mandates Integration into investment decision-making Collaboration Active and considered voting Commitment to principles – Internal corporate governance © Healthcare Navigator CC 2014 24

Liability

Failure to meet recognised standards of governance (even if not legislated) may render a board or individual trustee legally liable

Who is responsible for governance in medical aid funds?

Board of Trustees

BoT = Focal point of corporate governance

Monitor compliance with good governance practices © Healthcare Navigator CC 2014 27

King Report on Governance (King III)

Corporate Governance Principles Implementation: 1 March 2010 Application in SA: To all entities regardless of manner and form of incorporation or establishment – public, private and non-profit sectors…75 Corporate Governance Principles covered over 9 governance elements (chapters)

“Each principle is of equal importance and together forms a holistic approach to governance. Consequently ‘substantial’ application of this Code and the Report does not achieve compliance”

Customise according to applicable legislation Review has commenced…simplify Comply and explain © Healthcare Navigator CC 2014 29

King III: Governance Principles

Ethical leadership and corporate citizenship Boards and directors Audit Committees Governance of risk Governance of information technology Compliance with laws, rules, codes and standards Internal audit Governing stakeholder relationships Integrated reporting and disclosure © Healthcare Navigator CC 2014 30

King III Corporate Governance Principle 1 Ethical Leadership and Corporate Citizenship

Ethical Leadership

“Good corporate governance is essentially about effective, responsible leadership”

Responsible leadership characterised by ethical values: 1. Responsibility 2. Accountability 3. Fairness and 4. Transparency All deliberations, decisions and actions of BoT and Executive Management must be based on these values © Healthcare Navigator CC 2014 32

R esponsibility A ccountability F airness T ransparency

Principles of Governance (RAFT)

• Corrective action / integrity / fiduciary duties • Responsibility for actions and decisions • Balance legitimate interests and expectations • Meaningful analysis from outside © Healthcare Navigator CC 2014 33

Ethical Leadership

Characteristics of responsible leaders 1. Build sustainable businesses: Consider fund’s economic, social and environmental impact on community in which it operates through effective strategy and operations 2. Reflect on role of business in society and consider short-term and long-term impact of their personal and institutional decisions on economy, society and environment 3. Do business ethically 4. Do not compromise natural environment 5. Embrace a shared future with all fund’s stakeholders © Healthcare Navigator CC 2014 34

Conscience

Moral Duties of Trustees

• Act with intellectual honesty and independence of mind in best interests of fund and all its stakeholders • Rational decisions • Conflicts of interest to be avoided Inclusivity of Stakeholders • Essential for sustainability • Consider legitimate interests and expectations of stakeholders in decision-making and strategy Competence • Trustees must have knowledge and skills to govern fund effectively • Develop continually Commitment Courage • Trustees must be diligent in performing duties • Devote sufficient time to fund affairs • Trustees should have courage to: • Take risks associated with directing and controlling

successful, sustainable enterprise

• Act with integrity in all board decisions and activities © Healthcare Navigator CC 2014 35

Ethical Leadership

Integrity should permeate all aspects and operations of fund e.g. vision, mission and objectives should be ethically sound Conduct of internal and external affairs should be beyond reproach Driven from top Ethical standards must be integrated into all the fund’s strategies and operations (management policies) – Material term of employment and supplier contracts – Deal with suppliers that subscribe to similar standards of corporate governance and ethics Code of Conduct supplemented by ethics-related policies e.g. Giving and receiving of gifts, supplier relations, etc. … powerful instrument for guiding fund’s ethics performance Board should ensure that fund’s ethics performance is assessed, monitored, reported and disclosed…improve ethical culture © Healthcare Navigator CC 2014 36

Independence Social Responsibility Discipline Ethics / Integrity © Healthcare Navigator CC 2014 37

King III Corporate Governance Principle 2 Boards and Trustees

Medical Aid Funds Act

“Trustee” = Any person managing a registered fund Minor disqualified to “manage affairs” of fund © Healthcare Navigator CC 2014 39

Financial Institutions and Markets Bill, 2013 (FIM Bill)

Board of Trustees (BoT) – Charged with managing affairs of medical aid fund, elected / appointed under fund’s rules – Trustees must be “fit and proper” to manage business of fund…to be defined in standards by NAMFISA – At least 50% elected by members – 1/3 to be independent? (standards) – Disqualifications • Director, officer, employee of administrator / its holding company, subsidiary, JV or associate • Consultant, contractor of administrator • Financial institution / financial intermediary rendering financial services to fund / BoT – Chairperson may not be the PO, general manager or other senior officer of fund © Healthcare Navigator CC 2014 40

Size of BoT

King: – Collective knowledge, skills, experience and resources required to be considered – Evolving circumstances, needs of fund, nature of business – Sufficient trustees to structure board committees – Difficulties with quorums if board is too small – Regulatory requirements – – Skills and knowledge needed to make business judgment calls Size, diversity and demographics – must be effective © Healthcare Navigator CC 2014 41

What is a Trustee?

King III advises that when considering the skills and suitability of a proposed trustee, the following dimensions require consideration: 1. Knowledge and experience required to fill gap on Board 2. Apparent integrity of individual 3. Skills and capacity of individual to discharge his/her duties to Board “Fit and proper” – What constitutes a “fit and proper” person?...standards

– Whose responsibility to determine who are fit and proper persons?

– Guidance by CMS in SA © Healthcare Navigator CC 2014 42

Proposed Fit and Proper Criteria (CMS)

Fit – competence and ability to do job Proper – person’s character and integrity Fit and proper person: Person who is financially sound, honest, reputable, reliable and competent to perform specific role Criteria for assessment – Honesty, integrity and reputation – – Competence and capability Financial soundness Standard: Overall standard to be met Disqualification and evaluation criteria: Not definitive list – Disqualification criteria: Could be automatically disqualified or disqualified taking account of range of criteria – Evaluation criteria: Non-compliance with single criterion does not necessarily result in person not being fit and proper…look at other factors © Healthcare Navigator CC 2014 43

Term of Office of Trustees

Medical Aid Funds Act and FIM Bill: No limit on terms specified King III – Staggered rotation – Terms > 9 years should be subject to particular rigorous review by Board to ensure independence © Healthcare Navigator CC 2014 44

What are the duties of the BoT and Individual Trustees?

All trustees have fiduciary duties

Specific Duties

MAF Act 1. Advise Registrar of contact details of PO / appointment of PO 5.

FIM Bill 2.

Take all reasonable steps to ensure interests of beneficiaries under Rules of fund and Chapter in Act protected at all times 3.

Act with due care, diligence, prudence and good faith Take all reasonable steps to avoid conflicts of interest Act with impartiality in respect of all beneficiaries Prepare annual report and submit to NAMFISA… prescribed requirements Disclose all payments / considerations to NAMFISA annually …offence File copy of administration contract with NAMFISA 9.

Monitor delegation to administrator according to contract and take remedial action, if applicable 10. Appoint auditor © Healthcare Navigator CC 2014 47

Specific Duties

11. Appoint a valuator 13. Manage or supervise management of business and affairs of fund with objective to maximise returns for members 14. Ensure financial resources are sufficient to discharge obligations 15. Ensure consumers (members) are fairly treated in accordance with contractual arrangements 16. Establish Audit Committee…requirements 17. Establish procedures to identify and deal with conflicts of interest… committee 18. Establish investment policies 19. Establish procedures with regard to fair treatment of members, including disclosure of information to them, protection of their personal information, prompt assessment and payment of legitimate claims and handling of complaints 20. As to be further prescribed in standards (NAMFISA) © Healthcare Navigator CC 2014 48

FIM Bill: Standard of Conduct for Trustees

Director and officer (trustee) of financial institution (fund) in exercising any of powers and discharging any of duties of director or officer must (a) Act with honesty and in good faith with a view to the best interests of fund and its members and (b) Exercise care, diligence and skill that reasonably prudent person would exercise in comparable circumstances Director, officer (trustee) and employee of financial institution (fund) must comply with Act and Rules © Healthcare Navigator CC 2014 49

King III: Standard of Conduct

Each trustee has 1. Duty to exercise degree of care, skill and diligence that would be exercised by reasonably diligent individual with • General knowledge, skill and experience expected from person carrying out same functions and • General knowledge, skill and experience of trustee 2. Fiduciary duty to act in good faith and in manner trustee reasonably believes to be in best interests of fund © Healthcare Navigator CC 2014 50

Boards and Trustees

BoT must direct, govern and be in effective control of fund Board’s 2 main functions: – – Strategic direction Responsible for control of fund Ultimate responsibility: Positive performance of fund in creating value…consider legitimate interests and expectations of all stakeholders Exercise leadership, enterprise, integrity and judgment in directing business of fund so that it can survive and thrive BoT and trustees should act in best interests of fund – – Best interests of fund = Best interest of collective membership Board has collective authority and decision-making, but trustees carry individual

responsibility

Board Charter: Board responsibilities © Healthcare Navigator CC 2014 51

King III: Role and Functions of Board

Board should 1. Appreciate that strategy, risk, performance and sustainability are inseparable 2. Provide effective leadership based on ethical foundation (Values: RAFT; moral duties of trustees) 3. Ensure that fund is and is seen as responsible citizen 4. Ensure that fund’s ethics are managed effectively 5. Ensure that fund has effective and independent Audit Committee 6. Be responsible for governance of risk 7. Be responsible for IT governance 8. Ensure compliance with legislation and consider adherence to non-binding rules, codes and standards 9. Ensure effective risk-based internal audit 10.Appreciate that stakeholder perceptions affect fund’s reputation © Healthcare Navigator CC 2014 52

King III: Role and Functions of Board

Board should 9. Ensure integrity of Board’s integrated report 10.Report on effectiveness of fund’s system of internal controls 11.Consider business rescue proceedings/turnaround mechanisms when fund financially distressed 12.Appoint PO and establish framework of delegation of authority 13.Comprise a balance of power with majority of non-executive trustees 14.Appoint trustees through formal process 15.Ensure that induction, ongoing training and development of trustees conducted through formal processes (Training policy) 16.Delegate functions to well-structured committees without abdication of its own responsibilities © Healthcare Navigator CC 2014 53

King III: Role and Functions of Board

Failure to perform these duties could render trustee personally liable FIM Bill: – Fund could indemnify trustee against any liability, including legal defence costs, that might be incurred as a trustee, but only if trustee acted honestly and in good faith with a view to the best interests of the fund and its members – Fund may purchase and maintain insurance for benefit of trustee against such liability © Healthcare Navigator CC 2014 54

Discussion (Decision-Making):

Discuss decision-making by the BoT with specific reference to the following matters: 1. Requirements for proper decision-making.

2. How to deal with disagreement of trustees.

3. Voting.

4. Effect of decisions on dissenting trustees.

Board Agendas and Material

Foundation of each decision: Intellectual honesty based on all relevant facts Independent from management Objective judgment based on sufficient management information, independently from management – Trustees should have unrestricted access to all fund’s info, records, documents, management, staff, etc. subject to processes established by Board – FIM Bill: Fund must make information, including accounting records, about fund, available to trustees to enable them to perform responsibilities and exercise their duties under Act BoT or trustees should be able to at expense of fund take independent advice in connection with duties, if necessary and after following due process established by BoT © Healthcare Navigator CC 2014 56

Regular Board Agenda Items

Management accounts Strategy Risk Register IT Governance Compliance Stakeholder relationships Fund’s reputation © Healthcare Navigator CC 2014 57

Board Oversight: Documents

Code of Conduct Board Charter Ethics-related policies Risk Register Risk management policy and plan Internal Audit Charter IT Governance Charter and Policies Compliance Policy 9.

Stakeholder strategy and policies 10. Conflict of Interest Policy 11. Integrated report © Healthcare Navigator CC 2014 58

Frequency of Board Meetings

Sufficient scheduled meetings to discharge duties Minimum of 4 advisable Circumstances of fund to influence © Healthcare Navigator CC 2014 59

Empowered Board

Small, cohesive Board Independent Open and free communication Experience and expertise Access to intelligible financial and operational performance information Power rests in Board – Take decisions jointly – Independent discretion – Regular meetings © Healthcare Navigator CC 2014 60

What are the functions and duties of the Chairperson?

Board of Trustees: Chairperson

Leadership = main role Presiding officer at meetings Ensure smooth functioning of board in interest of good governance Represents board Not domineering…seek to achieve maximum participation to function as effectively as possible Carries responsibility if anything goes amiss….. failure….. position at risk No conflict of interest Independent Number of outside chairmanships © Healthcare Navigator CC 2014 62

King - Chairperson: Specific Functions

Set ethical tone for BoT and fund Provide overall leadership without limiting principle of collective responsibility Identify and participate in selecting board members (through Nomination Committee) Oversee succession plan for board and PO Formulate annual work plan for board with PO 7.

Preside over board meetings, ensure use of time productively and encourage collegiality among board members Manage conflicts of interest Monitor collective functioning of board, performance of individual trustees and interaction at meetings 9.

Ensure trustees play full and constructive role in affairs of fund 10. Be collegial with board members and management 11. Act as link between board and management © Healthcare Navigator CC 2014 63

King - Chairperson: Specific Functions

12. Play lead role in removal of non-performing/unsuitable trustees 13. Ensure complete, timely, relevant, accurate, honest and accessible information placed before board 14. Meet individual trustees annually about evaluating their performance 15. Know trustees’ strengths and weaknesses 16. Mentoring to develop skill and enhance trustees’ confidence and encourage their contributions at meetings 17. Ensure trustees aware of responsibilities - induction programmes and

continuing professional education

18. Ensure good relations maintained with fund’s strategic stakeholders (and members) 19. Building and maintaining stakeholders’ trust and confidence in fund 20. Upholding rigorous standards of preparation for meetings 21. Ensure execution of board decisions © Healthcare Navigator CC 2014 64

Delegation of Responsibilities Principal Officer Board Committees

Principal Officer

FIM Bill

Principal Officer (PO) – – CEO Fund appoints PO – PO member of BoT – “Fit and proper”…standards – Namibian citizen and resident in Namibia…exceptional circumstances foreigners – Minor disqualified to be a Principal Officer – Authorised to act on behalf of fund © Healthcare Navigator CC 2014 67

Which responsibilities should be delegated to the PO?

King: Delegation of Responsibilities Principal Officer (CEO)

Appointment of executive team, succession planning and performance appraisals Develop fund strategy for consideration and approval by BoT Develop annual business plans and budgets Monitor and report to BoT on performance of fund and compliance Establish organisational structure Setting tone in providing ethical leadership Compliance with legislation and corporate governance principles Application by fund of best practices © Healthcare Navigator CC 2014 69

Board Committees

Delegation of Responsibilities: Board Committees

Important element of governance process – Effective way of managing Board workload – BoT retains fiduciary responsibilities and accountability (FIM Bill: No limit on responsibilities) Clearly agreed reporting procedures and written scope of authority – Committees must have sufficient authority to perform duties and fulfil purpose Terms of Reference 1. Composition 2. Objectives, purpose and functions 3. Delegated authorities 4. Tenure 5. Reporting mechanism to Board Performance evaluation © Healthcare Navigator CC 2014 71

Board Committees

Frequency of meetings – As appropriate and necessary – Standing Committees: Quarterly – Audit Committee: Audit cycle – Disputes Committee: As and when necessary – Others: As and when necessary Examples of Committees – Risk – Remuneration – Nomination – Audit (Statutory) – Governance – Disputes © Healthcare Navigator CC 2014 72

King III: Committees

Audit Committee Nomination Committee Remuneration Committee Risk Committee © Healthcare Navigator CC 2014 73

Discussion (Succession Planning): 1. Discuss whether succession planning should be considered in a medical aid fund.

2. How could succession planning be achieved in practice?

3. Consider the Board and Executive Management.

Discussion (Performance Management): 1. Discuss the value of performance management of trustees.

2. Are there any benefits to the fund?

3. How should performance management be conducted?

4. What should be done with the outcome of the process?

Discussion (Remuneration): 1. Discuss whether trustees should be remunerated.

2. How and by whom should an appropriate level of remuneration be determined?

3. Is there any preferred model for remuneration?

Conflicts of Interest What is a “conflict of interest”? Provide examples of such conflicts in the medical aid fund environment.

Conflict of Interests

Trustee in position to influence business of fund / other decisions that could result in financial / other gain for trustee / family / business associates or provide improper advantage to others to detriment of fund Interests of third parties become more important than fund interests Competing professional, personal and financial obligations/interests that would make fair fulfilment of duties difficult King III: – Personal interests of trustee or persons closely associated with him/her should not take precedence over interests of fund – Certain conflicts of interest are fundamental and should be avoided – Others should be disclosed Avoid Declare interests at every Board and Committee meeting Disqualification vs Recusal © Healthcare Navigator CC 2014 78

Removal of Trustees

Should there be a process to remove trustees from the Board?

When and how should trustees be removed from the Board?

Section 46 Medical Schemes Act (SA)

“(1) The Council may, by notice in writing, remove from office a member of the board of trustees of a medical scheme if it has sufficient reason to believe that the person concerned is not a fit and proper person to hold the office concerned.”

King III Fund Rules © Healthcare Navigator CC 2014 80

End of Day 1

Agenda Day 2: 19 August 2014

Audit Committees Governance of risk Governance of Information Technology Compliance 5.

Internal audit Governing stakeholder relationships 7.

Integrated reporting and disclosure Applying the Principles Case Studies 10. Closure © Healthcare Navigator CC 2014 82

King III Corporate Governance Principle 3 Audit Committee

Audit Committee

BoT must appoint auditor Duties of auditors Fund must establish Audit Committee – At least 2 trustees – At least 1 must be independent within meaning of standards © Healthcare Navigator CC 2014 84

Audit Committee: King III

Fulfils vital role in corporate governance Identify and manage financial risks Board and management should be committed to supporting and maintaining an effective Audit Committee Board approve written ToR Board appoints chairperson Meet at least twice per year © Healthcare Navigator CC 2014 85

Audit Committee

Ensure integrity of integrated reporting and internal financial controls Comment on financial statements, accounting practices and internal financial controls…keep BoT apprised Consider factors that may predispose management to present incomplete / misleading picture of fund’s position, performance or sustainability Evaluate significant judgments and reporting decisions affecting integrated report made by management Monitor enforcement actions against fund…involved in response to monitoring actions Consider evidence that might indicate previous information published was incorrect…public correction Carefully consider forward-looking statements of financial or sustainability information…proper appreciation of key drivers Address following in respect of risk management: – Financial reporting risk – – Fraud risk as it relates to financial reporting IT risks as it relates to financial reporting © Healthcare Navigator CC 2014 86

Audit Committee: King

Audit Committee should have understanding of: 1. Integrated reporting, which includes financial reporting 2. Internal financial controls 3. External audit process 4. Internal audit process 5. Corporate law 6. Risk management and have adequate level of comfort regarding fund’s process for identifying, managing and reporting risk 7. Sustainability issues 8. IT governance as it relates to integrated reporting 9. Governance processes within fund 10. IFRIS, GAAP, Guidelines of Global Reporting Initiative (GRI), other financial / sustainability reporting standards, regulations, guidelines Statutory duties: Audit Committee’s decision prevails Duties assigned by the BoT: Board retains ultimate decision-making ability © Healthcare Navigator CC 2014 87

King III Corporate Governance Principle 4 Governance of Risk

Governance of Risk

Systematic, documented, formal risk assessment Documented risk management policy and plan support fund’s strategy …to be developed by management Effective ongoing risk assessment process Risk Committee… could be assigned to Audit Committee – Review risk management progress and maturity of fund – – Effectiveness of risk management activities Key risks facing fund – Responses to address key risks PO accountable to Board Board should ensure that management monitors risk management plan effectively and continually BoT should regularly receive and review Register of fund’s key risks © Healthcare Navigator CC 2014 89

Governance of Risk

BoT should annually set risk tolerance levels BoT responses to risks: – Avoid – Treat, reduce or mitigate – – Transfer risk exposure Tolerate or accept risk – Exploit risk – Terminate – Integrated approach Integrated report: Risk disclosure – Undue, unexpected or unusual risks – Current, imminent or envisaged risk that may threaten long-term sustainability – Views on effectiveness of fund’s risk management processes © Healthcare Navigator CC 2014 90

King III Corporate Governance Principle 5 Governance of Information Technology

Governance of IT

IT essential to manage transactions, information and knowledge necessary to sustain fund IT Governance = Framework that supports effective and efficient management of IT resources to facilitate achievement of fund’s strategic objectives… must deliver value to fund and mitigate IT risk Governance of information and technology BoT’s responsibility BoT should – Understand strategic importance of IT – Assume responsibility for governance of IT – Place IT governance on board agenda IT Governance Charter and policies – Decision-making rights – Accountability framework © Healthcare Navigator CC 2014 92

Governance of IT

IT strategy should be integrated with fund’s strategic and business processes… improve fund’s performance and sustainability Require IT internal control framework… independent assurance to BoT of effectiveness Disaster recovery arrangements and business continuity plan Negative impact of IT on environment should be considered Good governance principles should apply to all parties in supply chain for acquisition and disposal of IT goods and services Compliance with IT laws, rules, codes, standards, guidelines and leading practices Responsibility for provision of IT goods and services delegated to another party, all parties, including BoT, remain accountable for

enforcing and monitoring effective IT governance

Governance of IT

Information records = most important information assets… evidence of business activities Information management – Protection of information – Management of information – Protection of personal information Board should ensure processes in place to ensure complete, timely, relevant, accurate and accessible IT reporting © Healthcare Navigator CC 2014 94

King III Corporate Governance Principle 6 Compliance

Compliance

Board’s responsibility to monitor compliance…Regular Board agenda item Fund must comply with applicable laws and consider adherence to non binding rules, codes and standards Identification of laws, rules, codes and standards Shortcomings in laws and proposed expected changes…handle in ethical and responsible manner Extent of reliance placed by BoT on Committee / function if delegated depends on BoT’s assessment of knowledge, effectiveness and experience of Committee / function Trustees should sufficiently familiarise themselves with general content of applicable laws, rules, codes and standards to adequately discharge their fiduciary duties in interests of fund and their duty of care, skill and diligence… Induction and ongoing training © Healthcare Navigator CC 2014 96

Compliance

Compliance risk = Risk of damage arising from non-adherence to law and regulations to fund’s business model, objectives, reputation, going concern, stakeholder relationships or sustainability Non-compliance: Identify, assess and respond to through risk management processes Compliance policy – Management develops – BoT approves Disclosure in integrated report – How compliance function discharged – Material and immaterial, but often repeated regulatory penalties, sanctions and fines imposed on fund / officers – Consider impact on fund, breaches of confidentiality and agreements with other parties PO accountable to BoT Include in Code of Conduct… Compliance culture © Healthcare Navigator CC 2014 97

Compliance

How could a BoT discharge its responsibility in respect of compliance?

– – Regular item on Board agenda Define reporting requirements – Board reports – Risk register – Compliance audits – Compliance officer – Agreements with outsource parties © Healthcare Navigator CC 2014 98

King III Corporate Governance Principle 7

Internal Audit

Required as result of complexity of business, organisational dynamics and regulatory environment Required by funds …must be independent and objective Board must ensure effective risk-based audit – Risk-based approach (vs Compliance approach) – Allows assessment of whether process intended to serve as control is an appropriate risk measure – Risk-based internal audit plan to be agreed with Audit Committee Report functionally to Audit Committee to ensure respect and cooperation of BoT and management Internal Audit Charter…approved by BoT… generally through Audit Committee …informed by strategy of fund Internal controls needed for: – Financial matters – – Operational issues Compliance issues – Sustainability issues © Healthcare Navigator CC 2014 100

Internal Audit

Internal audit’s key functions: – Evaluate fund’s governance processes, including ethics – Perform objective assessment of effectiveness of risk management and internal control framework – Systematically analyse and evaluate business processes and associated controls – Provide information regarding instances of fraud, corruption, unethical behaviour and irregularities Total outsourcing of function… PO responsible to oversee, manage, inform and take accountability for effective functioning Report on effectiveness of system of internal controls to BoT Integrated report – BoT must report on effectiveness of system of internal controls – Disclose if no internal audit function established and explain how adequate assurance of effective governance, risk management and internal control environment maintained © Healthcare Navigator CC 2014 101

King III Corporate Governance Principle 8 Governing Stakeholder Relationships

Governing Stakeholder Relationships

Stakeholders = Any group that can affect achievement of fund’s strategy and long-term sustained growth or be affected by fund’s operations – Members – Suppliers – Customers – Regulators – Employees – – Unions Media – Analysts – Consumers – Society in general – Auditors – Communities © Healthcare Navigator CC 2014 103

Governing Stakeholder Relationships

Board is ultimate custodian of corporate reputation and stakeholder relationships …regular board agenda item Stakeholder-inclusive approach stimulate appropriate dialogue between fund and its stakeholders… build and maintain trust and confidence Stakeholders that could materially affect operations of fund should be identified, assessed and dealt with as part of risk management process Stakeholders’ assessments of fund result in formation of corporate reputation – Reputation based on how well fund performs compared with legitimate interests and expectations of stakeholders (Generally contributes to economic value of companies) – Must deal with stakeholder perceptions… cannot ignore © Healthcare Navigator CC 2014 104

Governing Stakeholder Relationships

Respond to legitimate interests and expectations of stakeholders – Interest / expectation of stakeholder is legitimate, if a reasonable and informed outsider would conclude it to be valid and justifiable on legal, moral or ethical basis in circumstances Management to define strategy and policies for management of relations with all stakeholder groupings… adoption by Board Complete, timely, relevant, accurate, honest and accessible information BoT to adopt responsible communication programme Board should guard against using legal or other processes to frustrate / block constructive engagement by stakeholders… might be appropriate BoT should encourage stakeholders to attend AGMs Disclose in Integrated Report nature and outcomes of dealings with stakeholders © Healthcare Navigator CC 2014 105

King III Corporate Governance Principle 9 Integrated Reporting and Disclosure

Integrated Reporting and Disclosure

Holistic and integrated representation of fund’s performance iro finances and sustainability Report effectively about – Goals and strategies of fund – Performance regarding economic, social and environmental issues Serve to align fund with legitimate interests and expectations of its stakeholders Audit Committee: General oversight Prepare annually © Healthcare Navigator CC 2014 107

Integrated Report

Disclose information that is complete, timely, relevant, accurate, honest and accessible and comparable with past performance of fund and include forward-looking information Annual Financial Statements and commentary of BoT on financial results Stakeholder dealings Ethics performance Assessment of trustee independence Remuneration report Compliance: How function discharged Effectiveness of internal controls Committees Risk disclosure and process of risk management Sustainability (‘non-financial’) information (Must allow stakeholders to understand key issues affecting fund and effect of fund’s operation on economic, social and environmental well-being of community) Review of finance function IT Governance © Healthcare Navigator CC 2014 108

Applying the Principles Discussion 1

ABC Medical Aid Fund entered into a termination and restraint agreement with a trustee, Mr. X, in terms of which: (a) Mr. X resigned from the Board on an agreed date; (b) Mr. X would not stand for nomination as a trustee again; (c) ABC Medical Aid Fund paid Mr. X R962 500 as consideration for his resignation; and (d) ABC Medical Aid Fund paid Mr. X R700 000 as consideration for a restraint of trade covenant.

Discuss the following: Certain of the trustees of ABC are unhappy with the agreement and wish the Board to pursue a legal process to declare the agreement invalid and recover the payments from Mr. X. The Board is divided on this matter and approach you for advice. Consider this agreement against the principles of good corporate governance and advise the Board of any action to be taken, if indicated. Motivate your answer. Give particular attention to the following aspects: 1.

Appropriateness and lawfulness of the agreement.

Trustee duties.

Decision-making process followed by the Board when reaching the initial agreement.

Process that dissenting trustees in respect of the initial agreement should have followed.

Liberty Medical Scheme (2013)

Former trustee of Liberty Medical Scheme ordered by High Court to pay back R1.7m received as settlement to resign from BoT and as a “restraint of trade” payment High Court found that BoT – Did not have power to enter into settlement agreement – Acted outside law – Breached their fiduciary responsibilities, which included • • Duty to avoid conflict of interest and Always act in best interests of beneficiaries of fund Court stated that it was highly undesirable in terms of policy that trustees were induced by attractive restraint payments to be loyal and honest © Healthcare Navigator CC 2014 111

Applying the Principles Discussion 2

ABC Medical Aid Fund has a Board of Trustees consisting of 8 members of which 50% is elected by the membership and the balance appointed by the Board. It is administered by a third-party administrator and has a fulltime Principal Officer.

Discuss the following: 1.

The Principal Officer has resigned and the Board has not filled the vacancy yet. Could the chairperson act as Principal Officer until an appointment has been made? Motivate.

The Board has issued a tender for marketing services to be supplied to the fund. Three trustees have established a marketing company in which all of them have shares. This company has also tendered for the business of the fund. Advise the Board on how they should deal with this matter.

Three trustees’ terms’ of office will expire at the next Annual General Meeting. One of them is a Board appointed member. He has already served five 3-year terms as a trustee. The Board is divided as to whether this person should be appointed for another term. You are requested to advise the chairperson of the Board on how to deal with this matter.

Case Studies

Pro Sano (2003)

Trustees used funds of medical aid fund to settle personal tax liabilities of R4 million Trustees ordered the fund to pay for a tax consultant for personal tax advice If you were the Regulator, how would you react?