GOVERNANCE OF MEDICAL SCHEMES Squaring the Circle THE ROLE OF A MEDICAL SCHEME TRUSTEE vs THE ROLE OF A COMPANY DIRECTOR Presented by MJ Brown The BHF Southern African Conference 22-25 July’07 Sun City

THE ROLE OF A MEDICAL SCHEME TRUSTEE vs THE ROLE OF A COMPANY DIRECTOR Squaring THE ROLE OF A MEDICAL SCHEME TRUSTEE vs THE ROLE OF A COMPANY DIRECTOR the Circle Introduction Qualification Trustees & Directors Executive vs non-executive King II application Structures and processes Responsibilities Summary The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City INTRODUCTION Squaring the Circle Extract from the Registrar’s comments in the CMS 2004/5 annual report on Governance “Poor behaviour in governance of schemes inevitably has the result of forcing costs up for medical scheme members while reducing the overall effectiveness of the scheme.” The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City INTRODUCTION Squaring the Circle J and L Hendrikse in their “Business Governance Handbook”, Juta 2004: “ Business governance contributes to business success by making leadership aware of the importance of making sound decisions that involve returns and risk, and of making the business responsible and accountable with integrity from top to bottom.” The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City INTRODUCTION Squaring the Circle Price Waterhouse Coopers in their Survey on Effective Management of SA Retirement Funds dated March 2007: “29% of funds have not done a King II compliance test 81% of boards have never evaluated their own performance or effectiveness 41% of funds have not made any assessment of trustees’ knowledge and understanding 61% of funds have not considered or formalised a governance policy” The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City INTRODUCTION Squaring the Circle J and L Hendrikse in their “Business Governance Handbook”, Juta 2004: “Corporate and business governance should not be seen as an added burden for businesses, but as a catalyst for improved compliance that leads to improved performance” The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City INTRODUCTION Squaring the Circle A medical scheme derives its initial existence from a sponsor whilst a company derives its initial existence from its founding shareholders: The sponsor/shareholder establishes the initial rules which are registered with the regulator Governance flows from these rules and legislation Trustees/directors govern the scheme/company & protect members’ interests Trustees/directors acquire their mandate to govern by being appointed to office The BHF Southern African Conference 22-25 July’07 Sun City

APPOINTMENT OF A DIRECTOR OF COMPANIES Squaring the Circle Elected by shareholders. (each director appointment is voted on separately) Bill lists persons who are disqualified from appointment as a director Juristic person Not consented to appointment Under legal disability Does not reside in the RSA Does not satisfy qualification in “rules” The BHF Southern African Conference 22-25 July’07 Sun City

DISQUALIFICATION OF A DIRECTOR OF COMPANIES Squaring the Circle A court has declared the person to be a delinquent director Prohibited in terms of public regulation An unrehabilitated insolvent Removed from office of trust, on grounds of misconduct Convicted in RSA or elsewhere and imprisoned without the option of a fine for theft, fraud, forgery, perjury, or an offence involving fraud, misrepresentation or dishonesty. The BHF Southern African Conference 22-25 July’07 Sun City

DISQUALIFICATION OF A DIRECTOR OF COMPANIES Squaring the Circle Disqualification means that a person must not: Be appointed, elected or consent to an appointment Make or participate in making a decision Exercise the capacity to affect a company’s financial standing Communicate advice, instructions or wishes to the directors, other than as a professional advisor in terms of a business relationship with the Coy. The BHF Southern African Conference 22-25 July’07 Sun City

APPOINTMENT OF A MEDICAL SCHEME TRUSTEE Squaring the Circle At least 50% are elected by the members Trustees not elected by the members are appointed or elected in terms of the rules Bill - Person may not be a trustee if: Employee, director, officer, consultant or contractor of any person contracted by the scheme to provide administrative, marketing or managed health care services or of its holding company, subsidiary, joint venture or associate. The BHF Southern African Conference 22-25 July’07 Sun City

DISQUALIFICATION OF A TRUSTEE Squaring the Circle Is a broker or an employee, director, shareholder, officer, consultant or contractor of a person which provides broker services Otherwise has a material relationship with any person contracted by the medical scheme to provide administrative, marketing, broker, managed health care or other services, or with its holding company, subsidiary, joint venture or associate. We find the same restrictions on the appointment of the principal officer. The BHF Southern African Conference 22-25 July’07 Sun City

QUALIFICATION OF A TRUSTEE Squaring the Circle Fit and proper requirement remains in the Bill How do we measure fit and proper? When do we measure fit and proper? Nominations for trustee appointment should contain a statement by the nominee confirming his/her fit and proper status. Trustees should approve all nominations for “fit and proper status” before election The BHF Southern African Conference 22-25 July’07 Sun City

QUALIFICATION OF A TRUSTEE Squaring the Circle Fit and proper measurement should be applied throughout the period of appointment by way of: Disclosure of interests Assessment of trustee performance (individually and collectively) Measure fit and proper against the Company’s Act disqualification clauses and/or holders of political office ito the constitution. Removal of a trustee requires CMS approval The BHF Southern African Conference 22-25 July’07 Sun City

EXECUTIVE VS NON-EXECUTIVE Squaring the Circle Companies have 3 categories of directors Executive Non-executive Independent non-executive (Chairman is usually a non-executive director) A correct balance is sought in decision making with independent input Executive is accountable to the Board and can vote in decision making process The BHF Southern African Conference 22-25 July’07 Sun City

EXECUTIVE VS NON-EXECUTIVE Squaring the Circle Medical schemes have 2 categories of trustees Elected by members (usually one is chairman) Appointed or elected by the Board of Trustees Principal officer is the chief executive officer but has no voting power at the Board of Trustee meetings Trustees are not involved in executive functions of the scheme. The BHF Southern African Conference 22-25 July’07 Sun City

EXECUTIVE VS NON-EXECUTIVE Squaring the Circle There is no difference between responsibilities and accountability of executive and non-executive directors to stakeholders Executive directors have hands on responsibility and accountability checked and controlled by non-executive directors. The BHF Southern African Conference 22-25 July’07 Sun City

EXECUTIVE VS NON-EXECUTIVE Squaring the Circle The responsibility and accountability of trustees is somewhat more onerous than that of directors. In as much as they are more distant from the executive functions than are the directors of a company. The PO has no voting rights at BoT meetings. Trustees carry ultimate accountability and responsibility. The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City KING II APPLICATION Squaring the Circle Applies equally to directors and trustees. All companies listed on JSE Banks, financial and insurance entities as defined in financial services sector legislation Public sector enterprises and agencies that fall under the PFMA All other companies should consider applying the code Medical schemes adopt the code. The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City KING II APPLICATION Squaring the Circle Seven characteristics of good corporate governance: Discipline Transparency Independence Accountability Responsibility Fairness Social responsibility The BHF Southern African Conference 22-25 July’07 Sun City

STRUCTURES AND PROCESSES Squaring the Circle Board of Directors duties include Management Care and skill (at a level of a reasonable director) Fiduciary Disclosure Conflict of interest and secret profits Liability {Section 91(1) of the Bill} The BHF Southern African Conference 22-25 July’07 Sun City

STRUCTURES AND PROCESSES Squaring the Circle Board of Trustees duties include: Sec 57(4) of the Act Management, controls and record keeping Communication with members PI Insurance Obtain expert advice Compliance with the Act Confidentiality of beneficiary medical matters Fiduciary responsibilities The BHF Southern African Conference 22-25 July’07 Sun City

STRUCTURES AND PROCESSES Squaring the Circle Bill has new section 57A: “The BoT and the PO shall establish and maintain an adequate and effective process of corporate governance, which shall be consistent with the nature, complexity and risk inherent in the activities and the business of the scheme” The BHF Southern African Conference 22-25 July’07 Sun City

STRUCTURES AND PROCESSES Squaring the Circle CMS may publish guidelines and requirements for disclosure to assist the BoT and PO to establish and maintain adequate and effective processes of corporate governance. The disclosures to be to the Registrar and trustees must record the extent to which the scheme has met the prescribed guidelines in the manner and format as the CMS may from time to time determine The BHF Southern African Conference 22-25 July’07 Sun City

STRUCTURES AND PROCESSES Squaring the Circle Company legislation calls for the Board to appoint sub committees but only prescribes an Audit Committee whilst referring to a remuneration committee. Medical scheme legislation calls for a BoT to appoint sub committees but only prescribes an Audit Committee The BHF Southern African Conference 22-25 July’07 Sun City

STRUCTURES AND PROCESSES Squaring the Circle King II recommends the following corporate governance processes: Audit Committee Remuneration Committee Risk evaluation and management Board and committee charters or ToR Internal audit Board self evaluation (and sub committees) Integrated sustainability reporting Code of ethics The BHF Southern African Conference 22-25 July’07 Sun City

COMMON RESPONSIBILITIES Squaring the Circle Election and appointment of Board Nominees not disqualified Fit and proper Understand duties Appointment of CEO Appointment of sub-committees Audit Committee Remuneration Committee Others as identified The BHF Southern African Conference 22-25 July’07 Sun City

COMMON RESPONSIBILITIES Squaring the Circle Risk assessment and management plan Strategic planning Codes of ethics and conduct Disclosure of conflict of interests Terms of reference and charters Stakeholder relations The BHF Southern African Conference 22-25 July’07 Sun City

COMMON RESPONSIBILITIES Squaring the Circle Compliance with legislation Corporate governance processes BEE Fraud prevention and protection plan Internal audit External audit Safety health and environment (SHE) Social involvement The BHF Southern African Conference 22-25 July’07 Sun City

TRUSTEE RESPONSIBILITIES Squaring the Circle Contribution and benefit structures Provider negotiations Protection of the member Member and beneficiary relations Regulated by CMS Financial reporting to comply PMB REF SHI?? The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City SUMMARY Squaring the Circle Directors and Trustees carry similar responsibilities and are accountable to their respective stakeholders. Directors are responsible in terms of legislation, their own rules and regulators such as CIPRO and SARS. Trustees are responsible in terms of legislation, own rules and particularly to the Registrar of Medical Schemes. The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City SUMMARY Squaring the Circle Suitability for appointment differs Directors appointed by shareholders after careful consideration of suitability Trustees appointed by members which may be for “political” or “other” reasons as opposed to “skill” and “experience” Trustees must be “fit and proper” to accept appointment The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City SUMMARY Squaring the Circle Disqualification Directors according to prior behaviour patterns as defined in the Companies Act Trustees if involved in any way with the administrator, marketing and/or the managed care organisation providing services to the scheme, and Trustees if a broker or employed by a broker Trustees – what about prior behaviour patterns?? The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City SUMMARY Squaring the Circle Boards of directors have executive and non-executive structure Company CEO is an executive director Boards of trustees are basically non-executive Scheme PO is the CEO but is not a trustee The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City SUMMARY Squaring the Circle All public companies, financial and insurance institutions should follow King II governance processes It is recommended that other large companies follow King II Medical schemes are not required to follow King II but as insurance institutions should do so. CMS evaluates scheme governance compliance against King II The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City SUMMARY Squaring the Circle Duties and responsibilities are similar. Trustees have additional specific roles as set out in section 57 of the Act Common accountability to members Company shareholders Scheme members The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City SUMMARY Squaring the Circle Companies are under supervision of the DTI, FSB and JSE (where applicable) Companies subject to income tax Schemes are subject to detailed supervision by the Registrar for Medical Schemes Approval of contribution and benefit structures Statutory and REF returns Credentialising, inspection and discipline on business functions and financial standards The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City CLOSURE Squaring the Circle Questions Recommendations The BHF Southern African Conference 22-25 July’07 Sun City