Look­ing for Mu­tual ben­e­fits

Pol­i­cy­hold­ers seem to be on the out­side

Finweek English Edition - - Openers - SHAUN HAR­RIS

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.

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