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Can independent agents be trusted to serve as independent directors on the board of an insurance company? That question is at the heart of a dispute between Cincinnati Financial Corp. and the nations largest pension fund.
A history of solid returns and the independent business decisions of independent agents should be sufficient to demonstrate the qualifications of agents who serve on the company's board of directors, Cincinnati Financial Chairman John J. Schiff Jr. said during a conference call to report earnings.
Schiff began his remarks by expressing disappointment about a battle over the composition of the companys board being waged by California Public Employees Retirement System.
CalPERS, the holder of more than 700,000 shares in Cincinnati Financial, issued a press statement naming the insurer among five companies it says have the worst corporate governance structures, contending that independent agents cannot be considered independent directors on an insurer's board.
In a shareholder proposal submitted by CalPERS, the pension fund defines an "independent director" as one that "is not, and is not affiliated with a company that is, an advisor or consultant to the company, or a significant customer or supplier of the company," among other qualifications. The proposal was included in a March 8 Cincinnati Financial proxy statement.
"Through this proposal, we promote strong, objective leadership on the board," CalPERS said, citing a November 1992 survey of Fortune 1000 corporations, which found 93% thought a majority of the board should consist of outside independent directors.
CalPERS noted that only one-third of Cincinnati Financials board was independent under its definition, with the remainder comprised of agents who do business with the company and company executives. Six independent agents sit on the 15-member board.
Cincinnati Financials board, in the same proxy statement, recommended that shareholders vote against the resolution to shake up its membership.
"We recognize that independent directors play an important role in the affairs of the company. But the interests of shareholders also need to be protected by board members who are not independent, because they are shareholders and executive officers and insurance agents who sell our products, and thus have intimate knowledge of the company and its business," the board reasoned.
After the CalPERS proposal was rejected by shareholders at the companys April 6 meeting, CalPERS made the battle more public. Later in April, the fund released a statement with its "Focus List" of five companies "which represent some of the worst examples of poor financial and governance performance."
