Looking for Mutual benefits
Policyholders seem to be on the outside
PROVIDING SERVICES for people once they’re dead is good business. Not just funeral services, but particularly underwriting insurance policies – the colloquially called funeral policies that all assurance companies offer and some specialise in.
Measured in terms of policyholders, Avbob is the leader in its industry. And looking at its financial performance, it’s a well-run business in many respects. But it operates under an archaic structure that many would question in the modern business world and could promote excesses within the organisation.
There’s an “Avbob Act” – the Private Act No 7 of 1951, under which it’s incorporated. That makes it a mutual assurance society that’s in effect “owned” by its roughly 828 000 policyholders. However, it’s really questionable whether those policyholders have any idea, or indeed any interest, in the way Avbob is run.
Finweek was alerted to alleged abuses at the assurer by Avbob employees.
We contacted Avbob’s senior management, who didn’t want to respond verbally to the long list of allegations. However, it did agree to reply in writing. Avbob also forwarded its latest annual financial statements to Finweek, that in terms of disclosure are fairly good for an organisation not subject to JSE listing requirements. Much of the financial information used to support accusations of management excess is disclosed in the annual report.
The main concern of the unnamed employees seems to be the level of increases executive directors have been handing to themselves over the past few years – to themselves, because while the remuneration committee is chaired by the non-executive chairman of the main board, it includes one of the two executive directors.
CEO Arnoldus Greeff and executive director Louis de Klerk have been granted annual increases in excess of 20% for the past few years. A note to the financial statements shows that Greeff’s salary is R1,92m and De Klerk’s R1,19m, which, together with bonuses, benefits and pensions total R2,97m and R1,86m respectively.
A further note shows that for the financial year to 30 June 2006, the combined packages of both executive directors increased by 23,1%.
That’s a pretty generous increase, particularly on top of earlier increases. How is that justified?
In the written response signed by group secretary Patrick Gearty, Avbob says: “The board is of the opinion that the remuneration packages of the two executive directors are not excessive and the increases granted over the last couple of years were given, specifically, to bring their packages in line with that of the market. With regard to Mr De Klerk, he was appointed as a senior general manager on 1 March 2000 and joined the board as an executive director on 19 September 2001.”
We could question why the remuneration committee let those packages get so far behind “the market” in the first place so that large increases became necessary. However, we understand Greeff is retiring later this year and will be succeeded by De Klerk. To an outsider it might look like the outgoing CEO is having his salary boosted to add value to retirement provisions and that the incoming CEO is having his package fast-tracked.
But another concern was the level of performance bonuses awarded to executives and general managers.
Says Avbob: “It’s a known fact that senior executive remuneration packages have over the last few years been made up largely of share options. Because of the performance of the equity market the value of these options can run into millions of rand. In the light of this, the performance bonuses paid are therefore not considered excessive.”
Now that’s getting a bit tenuous. By all means give management performance bonuses, but in the case of Avbob surely against criteria relating to the performance of the society? Executives at listed companies can, through good company performance, influence the share price and value of their options.
But at times the share price or equity market in general will turn down for reasons that have nothing to do with the executives. And then they have to watch the value of options shrink and there’s nothing they can do about it. Seems Avbob management want the upside of the market but no downside, as listed company directors’ experience.
However, Avbob does say that operational criteria are used in determining performance bonuses, like net new business, administrations costs, investment income, turnover and management responsibility. And as with all assurers, investment income is a big number in the accounts. So a downturn in the market could feasibly affect bonuses.
Our question remains: Is a mutual society structure appropriate for an organisation that in most other respects conducts itself as a modern business organisation? And with the “owner” policyholders probably scattered throughout SA, can they have any influence when concerns such as those raised above occur?
Avbob says it didn’t need to demutualise, as life assurers in SA did for various reasons, and the “original need to provide a dignified funeral and funeral cover, which led to the establishment of Avbob in 1921, is still extremely relevant today”.
It’s a debate we could write pages on. But, more immediately, it seems a structure needs to be put in place to encourage more active policyholder engagement with the board. That could perhaps avoid the type of allegations currently flying about.
Avbob head office in Pretoria.