Statement of corporate governance practices
Last updated: April 10, 2017
At Economical Mutual Insurance Company (“Economical” or the “Company”), we believe that sound and effective corporate governance is fundamental to enhancing our Board of Directors’ (the “Board”) ability to guide the management of Economical (“Management”) in its efforts to generate long-term value. We uphold standards of corporate governance that reflect applicable legal and regulatory requirements and a thoughtful approach to emerging practices. Although we are not a public company in Canada, our corporate governance practices are voluntarily described below in accordance with National Instrument 58-101 –Disclosure of Corporate Governance Practices, which has been adopted by Canadian securities regulators.
Throughout this statement, references to documents and information available on our website can be found at www.economical.com. In addition, any information located on the website is available in print to any of our mutual policyholders upon request to our Corporate Secretary at the address set out on page i of our 2017 Management Proxy Circular (the “Circular”). Our website and any information located on our website do not form part of this Appendix “A.” Information as to membership on Board committees is current as of the date of the Circular.
Ethical business conduct
Code of conduct
We have adopted a Code of Business Conduct (our “Code of Conduct”) that governs the behaviour of our directors, officers and employees and those of our subsidiaries, and describes expected business conduct grounded in our belief that trust and integrity are the foundation of our business. A copy of our Code of Conduct is available on our website.
Economical is committed to the highest level of legal and ethical standards in business conduct. Each person covered by our Code of Conduct is required to act responsibly, ethically and professionally. Our Code of Conduct sets out procedures for monitoring compliance and describes other steps taken to encourage and promote a culture of ethical business conduct.
Covered persons are required to avoid actual and potential conflicts of interest and are subject to obligations regarding, among other things, the protection and proper use of corporate assets and opportunities, confidentiality of corporate information, and compliance with applicable laws.
Covered persons are required to acknowledge their obligations under our Code of Conduct annually and to report known or reasonably suspected violations in accordance with our ethics reporting program. Every new employee is required to review the Code of Conduct upon beginning work. Every year, each director, officer and employee is required to provide written confirmation that he or she has read, and will comply with, the Code of Conduct. We also have a mandatory online learning program to enhance understanding throughout our organization of the values and principles outlined in our Code of Conduct.
As part of its commitment to support ethical decision-making, our Board ensures that effective mechanisms are in place for employees to raise ethical concerns. Our ethics reporting program provides for a toll-free hotline and website that are maintained by an independent third party. Employees can use any of those channels to anonymously and confidentially report any accounting or auditing concern, suspected fraudulent activity or breach of our Code of Conduct. If employees prefer, they can refer concerns to their leader or departmental manager. Our ethics reporting program has processes in place to protect employees who report an incident in good faith or participate in the investigation of a report.
Compliance with our Code of Conduct is monitored by Management and reported to Board committees. Significant concerns regarding questionable accounting, controls or auditing matters are automatically communicated to the Chair of the Audit Committee. Bona fide breaches of the Code of Conduct are dealt with promptly after an investigation has been undertaken. If, after an investigation, it has been determined that a breach of the Code of Conduct has occurred, a decision will be made as to the appropriate corrective and/or disciplinary action that will be taken.
The Board monitors compliance with the Code of Conduct primarily through our Corporate Governance Committee, which receives regular reports from Management on the attestation process and compliance status, including notices of any material deviation from the Code of Conduct and any corrective action taken.
In addition, the Audit Committee is responsible for monitoring compliance with the Code of Conduct in relation to concerns or complaints relating to accounting, internal accounting controls or auditing matters, and for ensuring all such issues are resolved in a satisfactory manner.
Conflicts of interest
Through annual directors’ questionnaires, directors are asked to identify relevant outside business dealings and other companies or entities with which they have relationships. These responses assist the Board and Management in identifying
actual or potential conflict of interest situations in advance. If a director’s business or personal relationships present a material personal interest in a business matter or relationship that conflicts, or appears to conflict, with the interests of Economical or its subsidiaries, the issue will be referred to the Board Chair.
Appropriate steps will then be taken to determine whether an actual or apparent conflict exists and to determine whether it is necessary for the director to be excused from discussions relating to the issue.
All material related party transactions, including those in which a director or executive officer has a material interest, require the approval of our Corporate Governance Committee which may subsequently refer the matter to the full Board for its consideration. In each case, a director who has a material interest in a transaction or agreement would be required to declare his or her interest, refrain from voting and, if necessary, decline to participate in any directors’ meeting or part of a directors’ meeting dealing with the transaction or agreement.
The Board may grant a specific, limited waiver under our Code of Conduct if it determines that the waiver is appropriate under the circumstances. Each situation will be considered separately on its merits and a decision in one case has no bearing on any other. In most circumstances, it is unlikely that a waiver will be granted.
Board of directors
The Board annually determines whether each director of Economical is an independent director, as defined under Canadian securities laws, by analyzing his or her conduct and relationships with Economical, its affiliates, and others.
A director will be considered to be independent if he or she has no direct or indirect material relationship with us, being a relationship which could, in the view of the Board, be reasonably expected to interfere with the exercise of the director’s independent judgment. Canadian securities laws specify circumstances in which directors will be deemed not to be independent, including additional criteria that apply to Audit Committee members.
Based on information provided by our directors as to their personal circumstances and the applicable legal tests, a majority of our Board members serving during 2016 were independent directors. The Board has determined that, of the ten active directors listed in the Circular, only Rowan Saunders (and Karen Gavan, prior to her retirement) is not considered to be independent by virtue of his position as Economical’s President and CEO. The other three director nominees presented for election at the Annual Meeting of mutual policyholders of Economical scheduled for May 8, 2017 (the “Meeting”) (John Bowey (Board Chair), Elizabeth DelBianco, and Barbara Fraser), as well as the other remaining directors (Daniel Fortin, Gerald Hooper, David Wilson, Dick Freeborough, Micheál Kelly, and Michael Stramaglia), have all been determined to be independent directors.
Certain directors serve on the boards of other public companies in Canada. Information regarding those directorships appears in each director’s biography on pages 7 – 11 of the Circular.
The Board is ultimately responsible for supervising the management of the business and affairs of Economical and, in doing so, is required to act in our best interests. The Board has adopted a written mandate to confirm and formalize the Board’s ongoing duty and responsibility for the stewardship of Economical. A copy of the Board’s mandate is available on our website.
The Board discharges its responsibilities either directly or through its committees. Specific responsibilities set out in the Board’s mandate include:
- appointing and supervising Management—including final approval of all officer appointments, their compensation, and the oversight of succession planning;
- strategic planning—including oversight over our business, financial and strategic plans, and annual operating budget;
- monitoring financial performance—including the review of our ongoing financial performance and results of operations, and review and approval of our public financial disclosure;
- risk management—including the identification of principal business risks and the implementation of appropriate systems to effectively monitor and manage those risks;
- establishing policies and procedures—including the approval and monitoring of policies and procedures related to corporate governance, internal controls, and ethical business practices;
- communication and reporting—including the oversight of the timely and accurate disclosure of financial reports and other material corporate developments; and
- other responsibilities—including those related to position descriptions, orientation and continuing education, nomination of directors and Board evaluations.
The Board has delegated certain responsibilities to its committees and requires each to perform certain advisory functions and make recommendations to the Board in accordance with written mandates.
Management is expected to provide effective leadership in all aspects of the activities of Economical, to maintain our corporate culture and motivate employees, and to communicate effectively with employees, brokers, policyholders, and other industry participants. The Board also requires from Management timely information concerning the business and affairs of Economical, including financial and operating information and information concerning industry developments as they occur, all with a view to enabling the Board to discharge its stewardship obligations effectively.
The Board currently has five standing committees: an Audit Committee, a Human Resources and Compensation Committee, an Investment Committee, a Corporate Governance Committee, and a Risk Review Committee. In addition, the Board strikes special purpose committees from time to time.
Each committee has a written mandate, which it is required to reassess at least once every three years. The results of those assessments are reported to the full Board. In carrying out its duties, each committee may retain and terminate any outside advisor without Board approval at our expense at any time and has the authority to determine its advisors’ fees and other retention terms. Individual directors may, in consultation with the Chair of the Corporate Governance Committee, also engage outside advisors, as required, at our expense in connection with fulfilling their duties and responsibilities. A copy of each standing committee’s mandate is available on our website.
Our Audit Committee currently has four members: Dick Freeborough (Chair), Micheál Kelly, Gerald Hooper and Michael Stramaglia. Each committee member is an independent director who meets the additional independence criteria that apply to audit committees under Canadian securities laws. The Audit Committee has direct communication channels with our Finance department and meets directly with our external auditors, internal auditors, and Appointed Actuary on a regular basis. The Audit Committee mandate outlines the Audit Committee’s responsibility for, among other things:
- overseeing the integrity of our financial statements, financial reporting process, and control environment;
- reviewing our annual and interim financial statements, annual management’s discussion and analysis (“MD&A”), and related public disclosure prior to their release to the public;
- recommending to the Board the external auditors to be appointed for the purpose of preparing or issuing an auditors’ report or performing other audit, review, or attest services for us;
- approving annual internal and external audit plans and overseeing the Board’s relationship with internal and external auditors including their independence, performance, and compensation;
- pre-approving permitted non-audit services provided to us by our external auditors and their affiliates;
- establishing policies and procedures for the receipt, retention, and treatment of complaints regarding accounting or auditing matters, internal controls, and disclosure controls and procedures, and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters, internal controls, and disclosure controls and procedures; and
- reviewing and approving our hiring policies regarding past and present partners and employees of our external auditors.
Our internal and external auditors provide us with ongoing assurance of their independence, report directly to the Audit Committee, attend each quarterly meeting of the committee, and meet with its members without the presence of Management when appropriate.
Each current and proposed member of the Audit Committee is “financially literate” within the meaning of Canadian securities laws and has the ability to perform his or her responsibilities as an Audit Committee member. The Audit Committee members bring significant skill and experience to their committee responsibilities, including a mix of academic, professional, and board- level experience in accounting, business, and finance, from both within and outside the financial services industry. For additional information concerning Messrs. Freeborough, Kelly, Hooper and Stramaglia, please see their director biographies on pages 7 – 11 of the Circular.
The Audit Committee has adopted policies and procedures for the pre-approval of services performed for us by our external auditors, the objective of which is to support the independence of our external auditors. See page 4 of the Circular under the heading “Pre-approval policies and procedures”.
Human resources and compensation committee
The current members of the Human Resources and Compensation Committee are Elizabeth DelBianco (Chair), Daniel Fortin, David Wilson and Barbara Fraser. If elected at the Meeting, we intend to re-appoint Mses. DelBianco and Fraser to the Human Resources and Compensation Committee to maintain its current composition. Each member of the committee is an independent director. The Board has adopted a written mandate which outlines the responsibilities of the Human Resources and Compensation Committee with respect to, among other things:
- recommending to the Board the compensation paid to our President and CEO and, after obtaining the recommendation of the President and CEO, approving the compensation paid to other members of senior Management;
- reviewing retention, development, and succession plans for senior Management;
- approving the adoption of, or amendments to, incentive compensation plans and grants or awards under such plans, subject to shareholder or Board approval, as appropriate;
- approving the “Statement of executive compensation” section of our Management Proxy Circular; and
- periodically reviewing and making recommendations to the Corporate Governance Committee regarding the adequacy and form of directors’ compensation.
The current members of the Investment Committee are Gerald Hooper (Chair), Rowan Saunders, Michael Stramaglia and David Wilson, each of whom is an independent director other than Rowan Saunders, our President and CEO. If elected at the Meeting, we intend to re-appoint Mr. Saunders to the Investment Committee to maintain its current composition. The Board has adopted a written mandate which outlines the responsibilities of the Investment Committee with respect to, among other things:
- the investment, management, and performance of the Company’s investable assets in compliance with applicable law, including the Insurance Companies Act (Canada);
- the investment risk management policies and procedures of the Company relating to its investable assets, as embodied in the Company’s investment policy statement;
- the investment, management and performance of assets held by the Company’s defined benefit pension plan in accordance with the statement of investment policies and procedures for the Company’s defined benefit pension plan; and
- the selection of, and work performed by, investment managers for the Company and its pension plans.
Corporate governance committee
The current members of the Corporate Governance Committee are Barbara Fraser (Chair), Elizabeth DelBianco, Micheál Kelly and John Bowey. If elected at the Meeting, we intend to re-appoint Ms. Fraser, Ms. DelBianco, and Mr. Bowey to the Corporate Governance Committee to maintain its current composition. Each member of the committee is an independent director. The Board has adopted a written mandate which outlines the responsibilities of the Corporate Governance Committee with respect to, among other things:
- developing and maintaining a healthy and effective corporate governance framework and culture;
- reviewing the overall size, composition, independence, and effectiveness of the Board;
- recommending to the Board candidates for Board membership;
- recommending to the Board candidates qualified for appointment or reappointment to Board committees;
- supervising the annual Board, committee and director evaluation process;
- overseeing director orientation and continuing education;
- acting as our Conduct Review Committee, and fulfilling the Board’s statutory obligations with respect to related party transaction oversight;
- approving the “Statement of corporate governance practices” section of our Management Proxy Circular; and
- in consultation with the Human Resources and Compensation Committee, periodically reviewing and making recommendations to the Board regarding the adequacy and form of directors’ compensation.
Risk review committee
The current members of the Risk Review Committee are Michael Stramaglia (Chair), Dick Freeborough, Daniel Fortin and Gerald Hooper, each of whom is an independent director. The Board has adopted a written mandate which outlines the responsibilities of the Risk Review Committee with respect to, among other things, assisting the Board in fulfilling its oversight responsibilities with respect to the management of the enterprise risk management framework with a view to promoting the achievement of agreed upon risk-adjusted returns and allocating capital accordingly. Specific responsibilities include overseeing:
- the initial identification of major areas of risk facing the Company and the development of strategies to manage and mitigate those risks; the review of Management’s assessment of compliance with approved risk management policies and policies, practices and controls related to the Company’s capital structure;
- the review of the annual report on the Company’s financial condition and periodic stress testing;
- the review of the Company’s own risk solvency assessment;
- the effectiveness of the Company’s enterprise-wide regulatory compliance management program and framework; and
- the review and monitoring of the Company’s capital management plan to support continued solvency based upon both regulatory requirements and its own assessment of the Company’s risk profile.
Board and committee meetings
The Board meets regularly to review our business operations and financial results. In addition to meeting in relation to annual and quarterly financial results, the Board meets to approve non-financial disclosure documents (such as the Circular) and during the fourth quarter as part of our business and strategic planning process. Special meetings are called as necessary, the frequency and nature of which depend on the circumstances and the particular opportunities or risks that we face.
The Chair of any committee may, at any time but with appropriate notice, call a meeting of the Board to consider any matter of concern to it. In addition, meetings of the Audit Committee or the Risk Review Committee may be called at any time at the request of the external auditors, the Appointed Actuary, the Chief Risk Officer or the Chief Financial Officer.
Board and committee meetings include Management reports to review and discuss specific aspects of our operations. We do not hold regularly scheduled meetings attended only by our independent directors; however, each Board and committee meeting agenda includes one or more in camera opportunities during which independent directors may meet by themselves and any independent director may request additional time for this purpose.
We have written position descriptions for our Board Chair, committee chairs, individual directors, and President and CEO. In accordance with its mandate, the Corporate Governance Committee meets periodically to review each of those position descriptions and recommends changes to the Board where necessary.
The Board Chair is responsible for the management, development and effective performance of the Board, and for providing leadership to the Board in carrying out its duties. The current Board Chair is John Bowey, an independent director. The Chair’s specific responsibilities include:
- guiding the conduct of the Board;
- acting as a liaison between the Board and Management; and
- ensuring that appropriate procedures are in place to allow the Board and its committees to function effectively, efficiently, and independently of Management.
Committee chairs are responsible for, among other things, scheduling, setting agendas for and presiding over committee meetings, and acting as a liaison between the committee and the Board.
Directors are generally expected to possess appropriate knowledge of our business, and regulatory and industry issues, to effectively contribute to the Board and its committees and to apply independent judgment on matters brought before them.
The President and CEO is responsible for, among other things, overseeing our day-to-day business affairs, leading our strategic planning and budgeting processes, supervising senior Management, and implementing systems to ensure the integrity of our internal controls, management information systems, and financial reporting.
The Board sets the level of compensation for directors, based on the recommendations of the Corporate Governance Committee and input from the Human Resources and Compensation Committee. Directors who are also employees of Economical or of any of our affiliates do not receive any additional compensation for acting as a director of Economical or of any of our subsidiaries.
From time to time, the Corporate Governance Committee reviews the amount and form of compensation paid to directors, taking into account the workload, responsibilities, and risks involved in being an effective director. The committee’s review may be conducted with the assistance of outside consultants. For additional information regarding the compensation of directors, see page 13 of the Circular.
The Human Resources and Compensation Committee, composed entirely of independent directors, is responsible for making recommendations to the Board regarding the employment terms of our President and CEO, and for reviewing and approving the recommendations of the President and CEO regarding the compensation of our other executive officers. The Human Resources and Compensation Committee is also responsible for reviewing and making recommendations to the Board regarding awards under our short- and medium-term incentive plans. The Human Resources and Compensation Committee meets in camera to discuss the base salary, annual incentives, and other compensation awarded to our President and CEO.
See “Human Resources and Compensation Committee” on page 40 for more information about that committee. Details of executive compensation and our compensation consulting arrangements are disclosed on pages 15 — 36 of the Circular.
Nomination of directors
The responsibilities of the Corporate Governance Committee, which is composed entirely of independent directors, include serving as our nominating committee for new directors. It recommends nominees for election at our annual meeting to the Board and also new candidates for Board membership as the need arises. We do not have a formal retirement policy or specific term limits for our directors, but expect that they will serve only so long as they are able to dedicate the time, energy and resources necessary to make a meaningful contribution to the Board, which are factors we consider during our annual assessment of board effectiveness. The intended initial term for our Board Chair is five years, with eligibility for further three year terms, subject to review in advance of renewal.
Candidates for nomination as director come to the attention of the Corporate Governance Committee from time to time through incumbent directors, Management, or third parties and may be considered at meetings of the committee at any point during the year. If the committee believes at any time that the Board requires additional candidates for nomination, it may poll directors and Management for suggestions or conduct research to identify possible qualified candidates either directly or through a third-party search firm.
A skills matrix is prepared to support each search to reflect the prevailing context at the time of the search, taking into account the current and anticipated needs of the Board and its committees in light of the opportunities and risks facing the Company, its strategy, and its succession planning needs. At a minimum, each candidate will have demonstrated: the highest personal and professional integrity; significant achievement in his or her field; experience and expertise relevant to our business; a reputation for sound and mature business judgment; the commitment to devote the necessary time and effort in order to fulfil his or her duties effectively; and, where required, financial literacy. Candidates are also screened for conflicts of interest and material relationships that could impact his or her independence. In addition, the composition of the Board must meet residency and affiliation requirements specified by applicable laws and regulations.
The Corporate Governance Committee’s process for identifying and evaluating director nominees generally involves the following (with or without the assistance of a retained search firm): compiling names of potentially eligible candidates; evaluating those candidates against the factors described above and a relevant skills matrix; conducting background and reference checks; conducting interviews with candidates and/or others; meeting to consider and approve final candidates; and, as appropriate, preparing and presenting to the Board the committee’s recommendations.
Under our bylaws, directors hold office for rotating three-year terms. Ordinarily one-third of our directors stand for election at each annual meeting, to serve for three-year terms or until their successors are elected or appointed.
Board diversity and renewal
The Board believes that a board made up of strong directors with the right skill sets, who also represent diverse personal experiences and backgrounds, promotes better corporate governance. We currently have two women directors appointed to the Board, resulting in the Board’s current composition of 20% women.
The Board has adopted a written board diversity policy relating to multiple dimensions of diversity, over and above the identification and nomination of women directors. The objective of the policy is to promote better corporate governance by enabling the Board to deliberate with broader perspectives and deeper insight. Under the policy, when identifying candidates to recommend for election to the Board, the Corporate Governance Committee will give consideration to diversity factors such as gender, age and ethnicity, along with business experience, functional expertise, personal skills, and integrity, taking into account the level of diversity currently on the Board. In addition, the Corporate Governance Committee may engage a qualified independent external advisor to conduct a search for candidates that meet our diversity factors. Every year, the Corporate Governance Committee assesses the effectiveness of the Board diversity policy by considering the extent to which its objectives have been met and making such recommendations to the Board as it deems necessary or appropriate, and the committee believes that the objectives of the policy are currently being met. In adopting the board diversity policy, the Corporate Governance Committee and the Board considered the utility of diversity targets (such as a target regarding women on the Board) and determined not to do so, on the basis that it would not be desirable to quantify specific targets given the broad mix of diversity factors to be considered and the relatively small size of our Board.
The Corporate Governance Committee and Board also considered the appropriateness of establishing fixed term limits for directors and determined not to do so, on the basis that it would not be appropriate to establish such limits. Imposing an arbitrary term limit would unnecessarily expose the Company to losing the contribution of directors who have valuable business experience and insight into the Company’s operations, and who could continue to make significant contributions to the Board and the Company. Given the Board’s current composition, relatively small size and recent renewal (with three new directors, or 30% of the Board’s current composition, having been first appointed in the past three years), the Corporate Governance Committee and Board believe that term limits are not necessary to achieve the objective of bringing fresh ideas and viewpoints to the Board. See also “Director nominations” on page 43.
Instead, our Corporate Governance Committee relies on its annual assessment of board effectiveness as a board renewal mechanism, to determine if changes to Board composition are appropriate.
Our Human Resources and Compensation Committee oversees the diversity programs we have in place for employees at all levels of the Company, including our executives.
We believe that diversity is a key driver in contributing to our success, and we actively promote a culture of inclusion and collaboration. In September 2016, we launched our first Diversity and Inclusion Think Tank where participants worked together to lay the foundation for Economical’s diversity and inclusion strategy. The strategy is expected to be deployed in 2017.
We have a strategic commitment to developing a gender-diverse talent pool and consider the level of representation of women in executive officer positions when making executive officer appointments, by considering factors such as gender along with business experience, functional expertise, personal skills and integrity. As at December 31, 2016, women represented 64% of our overall workforce, including 39% of our executives, 48% of our other Management roles, and 62% of our other supervisory roles. Given the broad range of diversity dimensions and our active promotion of a culture of inclusion and collaboration, we have not established diversity targets concerning executive positions.
Orientation and continuing education
The Corporate Governance Committee has established an orientation program for new directors, which includes information on the role of the Board, its committees and individual directors, as well as relevant company and industry information. Each new director receives up-to-date information on our corporate and organizational structure, recent public disclosure documents and financial information, our corporate documents (including our letters patent and bylaws), copies of Board and committee mandates and key corporate policies, including our Code of Conduct, as well as details regarding directors’ and officers’ indemnification and insurance coverage. Each new director attends an orientation session covering our values and strategy, as well as presentations by our senior Management. As well, new directors have regular and ready access to fellow directors and to senior Management.
Presentations are made regularly to the Board and committees to educate and keep them informed of industry trends and changes within Economical and in legal, regulatory and industry requirements and standards. The Corporate Governance Committee reviews information on available external education opportunities and ensures directors are aware of relevant opportunities. We provide our directors with an annual budget of $3,000 each to fund participation in external education and development opportunities.
Board and director evaluation
The Corporate Governance Committee is responsible for annually assessing the effectiveness and contribution of the Board as a whole, of each Board committee, and of individual directors. A formal assessment process is conducted every other year, which involves the circulation of self-assessment questionnaires to the full Board (in the case of Board and director evaluations) and to each committee member (for the relevant committee evaluation). The results of the assessment questionnaires are compiled and forwarded to the Chair of the Corporate Governance Committee. Evaluation results are reported to the Corporate Governance Committee and to the full Board after the assessment is complete.
Every year, the Board Chair, the Chair of the Corporate Governance Committee, or both of them together interview each director to obtain their feedback, to discuss any aspect of the Company’s corporate governance that the director may wish to discuss, and, every other year when the formal assessment process is conducted, to discuss evaluation results. The Chair of the Corporate Governance Committee evaluates the performance of the Board Chair in that role based on feedback and evaluation results and meets privately with the Board Chair to share the results of that evaluation. All self-assessments and interviews are strictly confidential to encourage full and frank commentary from our directors.