State Fund Governance - A Proposal

Saturday, April 7, 2007 | 0

By J. Dale Debber

Given the recent news, one might think that the troubles at State Compensation Insurance Fund are over. Senior officers, including the president, have been dismissed, and industry veteran Lawrence Mulryan has been appointed as an interim leader. Once the major newspapers caught up with us and wrote the story, the legislature got into the act by setting an "oversight" hearing for March 28. But its troubles are just beginning.

Two bills have been introduced, one in each house, SB 746 (Yee) and AB 1682 (Benoit), which have to do with the governance of State Fund. There is little doubt that these bills are placeholder bills for the Governor's Office, which has been investigating the extent of the scandal for some time. Make no mistake. The Governor's Office acted as quickly as possible when it learned of the potential for scandal, firing board members and hiring lawyers to launch an investigation. Now it has fired two executive officers, one of whom was State Fund's president.

Workers' Comp Executive today presents draft legislation that it considers a starting place for revising the current methodology and future governance of State Fund. We've been working in conjunction with bright minds for some months on these ideas. They are being discussed in at least two branches of state government.

Following our series of stories, when the scandal finally hit the major papers, Senate President Don Perata and Banking, Finance and Insurance Committee Chair Senator Mike Machado, who will oversee the oversight, promptly declared their concerns over potential mismanagement, and maybe even gross mismanagement, at State Fund, while simultaneously noting how important its role is in keeping insurance rates down.

But the committee says that its intent is to be forward-looking, not backward-looking. Even more scandalous facts are about to be brought to light in our continuing series, which may change the governor's and the committee's mind. Nevertheless, we offer here some ideas for integrity, and we hope some insight toward the process of bringing trust and accountability back to State Fund's operations Setting the Stage

So far this decade, State Fund has been the subject of significant review by independent auditors, the Department of Insurance, and a Special Consultant chosen by the Governor's Office and appointed by the Board. There was a full-on review by the Gartner Group, and a special study ordered by then-Insurance Commissioner John Garamendi and performed by IBM, which was at the time, and still is, a major IT hardware and software consultancy services vendor to State Fund. State Fund's now-deposed president had control of their contracts. There have been other studies.

But none of these studies and reports exposed what the Executive has. Let's find out why. Jeanne Cain Enters Stage Left

In early 2005, the so-called "retirement" of State Fund President Dianne C. Oki came within proverbial minutes of the appointment by the governor of the new State Fund Board Chairman, California Chamber of Commerce lobbyist Jeanne Cain. Oki had recently spoken quite confrontationally while testifying before the legislature. It never occurred to Cain that an organization that size needed to replace its president immediately, and it took two weeks to appoint an interim president.

Cain also announced the hiring of consultant Neal Conolly to lead a national search for a new president, and to "...conduct an extensive review of State Fund's operations, searching for efficiencies and other opportunities for improvement."

While Cain was paying Conolly big bucks to hire an outside search firm, and the so-called audit, Tudor was bragging to his friends and others on the Executive Committee that he knew everywhere Conolly and his assistant were going, everything they were doing, everyone they were talking to and therefore that he was controlling what he was being told. Such was the power of Boss Tudor.

Ditto for the IBM report, when Tudor told others that he was managing every aspect of what was going into it and getting exactly the things he wanted to change.

Cain has no prior experience whatsoever managing an insurance company. And master manipulator Tudor was no fool. He sat next to Cain in Board meetings and made sure she knew what to ask so as not to look as inexperienced as she is. It did not take Tudor long to have Cain convinced he was the right man to become the permanent president of State Fund.

One report Tudor could not control, despite his best efforts, was the Annual Report of PriceWaterhouseCoopers, which reported in 2003 that the carrier was under surplus water by $1 billion. The report, accurate as it turned out, created a mess between State Fund and Commissioner Garamendi concerning risk-based capital, which resulted in major litigation, a standoff and finally a deal made between the commissioner's office and the governor, and which required legislation to end. Tudor fired the auditors and bought time to hold policyholder rates up, adding the funds to surplus for the next year's report. This publication was taken in by Tudor that time.

Democratic lawmakers should take this opportunity to demand of State Fund the same level of transparency demanded of all other public institutions. They should call for a sweeping change in State Fund's governance consistent with the requirements of publicly traded companies -- and be willing to pay enough to make certain that board members are the best and the brightest.

The Governance Proposal 21 Directors

Our proposal calls for amending the Insurance Code to change the composition of State Fund's Board of Directors from its present five to 21, all appointed at the recommendation of the Board by the governor, with staggered terms: Five of those Board Members shall be policyholders and two of the five shall be small policyholders. Fourteen of those members shall be independent members meeting the standards of independence required for a company listed in the New York Stock Exchange.

Standing Committees

We think the Board should be required statutorily to create several committees and subcommittees, with no committee holding a majority of policyholder members, as follows:

* Nominating and Governance Committee, of which two-thirds shall be independent members;

* Audit Committee, composed of all independent members;

* Finance and Investment, a majority of which shall be independent members;

* Actuarial;

* Strategic Planning;

* Personnel;

* Legal, which shall be two-thirds independent members and shall oversee both workers' comp cases and other cases. This committee shall oversee which workers' comp cases are suitable for appeal and in addition the nature of litigation and choices in outside firms and the style in which general legal cases are prosecuted;

* Underwriting;

* Operations.

Workers' Comp Executive recommends that the legislation include provisions that require, within 120 days of the effective date of this legislation, which we hope will be emergency legislation, that the Board adopt:

* A code of business conduct and ethics addressing conflicts of interest, business opportunities that arise from the use of State Fund's property, information or position;

* Confidentiality of information;

* A code outlining fair dealing with policyholders, claimants, suppliers, competitors and employees;

* Protection and proper use of assets;

* Compliance with laws, regulations, and rules;

* Encourage reporting of illegal or unethical behavior.

Existing Directors shall serve until their terms expire, and independent members of the board shall receive Directors' remuneration commensurate with that paid to directors of publicly traded companies.

A requirement for at least one annual public meeting for the approval of the annual report and for such other matters as may be deemed appropriate by the Board.

Further, it is our recommendation that State Fund be separated from the Division of Industrial Relations and become its own agency.

Not included yet in our draft legislation is a proposal that the Directors be able to increase the number and salaries of CEA or Vice Presidents to recruit experienced talent from outside.

A copy of the specifically worded proposed change to the law can be found in our resources section.

We hope it is received by all in the spirit in which it is offered -- that of openness to more ideas, and compromise toward a better, more workable institution.

To read the proposal click here.

J Dale Debber is the publisher of Workers' Comp Executive. This column was first published on Workers' Comp Executive Web site, http://www.wcexec.com/. It is republished with permission.

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