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What is Corporate Governance?

Corporate governance is the framework of systems, principles and processes by which a company is governed. These guidelines define responsibilities and provide a roadmap for directors/managers to establish corporate decisions and policies. Governance standards are established upon company formation and are defined in company bylaws or operating agreements. Further guidelines may also be established by regulatory agencies. Corporate governance provides direction as to how a company should be managed so that it can fulfil its business objectives and goals while protecting the interests of the shareholders and complying with all regulatory requirements.

Why is it important?

Good corporate governance is especially important for closely held businesses. The relationship between the captive and the owner or insured should be clearly differentiated. Businesses should ensure that corporate transactions are completely segregated from the owner’s non-business transactions. These transactions should be conducted on an “arms length” basis and clearly documented. Documentation of corporate governance is included in a corporate binder. This binder “tells a story” of the life of the company from formation to present including minutes of meetings, bylaws, corporate resolutions, share certificates, agreements and various registers. By following good corporate governance and maintaining proper documentation, companies protect themselves and their directors/managers from personal liability resulting from claims against the business.

Captive owners have to be especially diligent with corporate governance given the conflict of interest that can easily arise from being both the insured and insurance company. This conflict of interest is mitigated in various ways:

• Use of a captive manager’s expertise in underwriting, accounting and reporting
• Use of third party service providers including tax, audit, investment and legal professionals, actuaries, and claim adjustment services
• Use of industry expertise to comply with changing federal guidelines including risk distribution
• Adhering to regulatory guidelines of state of domicile
• Establishment of and adherence to a conflict of interest policy

In today’s environment where captives are under increased scrutiny by regulators and the IRS, good corporate governance is especially important. Regular meetings should be held, management actions should be approved and documented, and board oversight should be evident. When an examination occurs, corporate minutes and other documentation are reviewed and can provide evidence that the company is operating according to policies established at formation and within regulatory and legal guidelines.

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