Internal and External Governance Mechanisms: evidence from the UK insurance industry

Abstract

This paper examines the relationship between internal and external governance mechanisms employed by UK insurance companies. The different external control mechanisms available to owners in mutual and proprietary companies suggests that different internal governance mechanisms may be employed to monitor managers. Data for the study has been obtained from a detailed questionnaire survey of UK insurance companies. We find a higher proportion of non‐executive directors and a greater likelihood of separating the roles of company chairman and CEO in insurance companies compared to similar studies of UK quoted companies. Even though the proportion of non‐executive directors does not differ significantly between mutual and proprietary insurers, the proportion of non‐executives who are former executives is greater in the case of proprietary companies. This suggests that mutual companies are more likely to employ non‐executives for monitoring while proprietary companies place more importance on retaining the business expertise of former executives. We find that UK insurance companies have utilised remuneration and audit committees since the mid 1980s. We also find that remuneration committees in mutual companies possess a greater proportion of non‐executive directors than remuneration committees in proprietary companies.