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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.”

“Following the lessons learned from the Enron and Arthur Andersen experiences, CalPERS believes these companies have inadequate governance structures, particularly a lack of independence and conflicts of interest,” the statement said, listing Cincinnati Financial with a handful of technology companies (including Lucent Technologies and Gateway Computers).

“We’re disappointed that CalPERS apparently has rejected the decision of our shareholders to retain our current board composition,” Schiff said in a statement. Noting that 75% of shareholders rejected the CalPERS proposal, he said shareholders “agreed that our unique, agent-centered business model works best with directors selected for their qualifications, not to conform to an arbitrary quota or definition.”

“Currently, our 15-member board includes independent business executives alongside independent insurance agents who bring us a special ability to serve policyholders and agents in the communities where we do business,” the statement said.

Schiff also cited the fact that Cincinnati Financial has given shareholders a solid return under its current board structure, noting that the company had “a record of more than 40 years of increasing dividends.” He added that the companys five-year return to shareholders was 193%, compared to 166% for the S&P 500 Index.

The statement also suggested that the company had been recognized by organizations such as PricewaterhouseCoopers and Morgan Stanley for the “transparency and clarity” of its disclosures, and said it consistently received high financial strength ratings from the various insurance rating agencies.

Expanding on those remarks during the conference call, Schiff said: “We are not too happy that [CalPERS chooses] to group us with companies that have financial performance questions.”

He added that “we differentiate our company by giving agents personal access to company executives and elevating them to our board. We believe that by taking a cookie-cutter approach–that all boards and all companies are alike–CalPERS has shown how limited their approach is. They have shown that they are willing to overlook how we create value for our shareholders.”

Concluding his remarks on the subject, he said: “We know our strategy is successful and we are willing to defend it,” adding, “our agent members are independent business owners. They have their own offices to staff, their own payroll to cover and people to motivateto sell insurance in a correct way. They have many different insurance companies that they represent.”

is a senior editor of NU’s Property & Casualty/Risk & Benefits Management Edition.


Reproduced from National Underwriter Life & Health/Financial Services Edition, May 13, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.