Sun | Sep 15, 2019

Cedric Stephens | The social purpose of enterprise

Published:Sunday | January 21, 2018 | 12:00 AM

Laurence D. Fink, the founder and chief executive of the investment firm BlackRock, says: "Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society."

Mr Fink was described by The New York Times columnist Andrew Ross Sorkin as "one of the most influential investors in the world". His company, the world's largest investment firm, manages more than US$6 trillion in investments. That amount is one-third the 2014 size of the American economy.

Put another way, if BlackRock's investments were to be equally divided among Jamaica's population, each person would get nearly US$2.1 million, or J$262.5 million.

The 'social purpose' argument was part of a letter that Mr Fink wrote to the chief executives of some of the world's largest public companies last Tuesday. Mr Sorkin said that they are likely to cause a "firestorm in the corner offices of companies everywhere". Presumably, this is because companies everywhere are driven by economic aims.

What was the context for Mr Fink's remarks? He said that he saw "many governments failing to prepare for the future, (and) as a result, society, increasingly, is turning to the private sector and asking that companies respond to broader societal challenges" and not focus solely on making profit for shareholders.

I agree with Larry Fink. His comments apply to companies in the financial sector, especially to those in Jamaica's banking and insurance industries.

Last Tuesday, this newspaper devoted one of its pages to financial education. The content was provided by an entity that owns several companies in the financial sector. The message: its executives understand that in a country where 67 per cent of adults are financially illiterate, that is, only one in three adults is considered financially educated, according to Standard & Poor's 2015 Global Financial Literacy Study, they have a duty to educate consumers. Further, they have committed resources to solve the problem.

Some executives of local insurance companies and persons who sit on the boards of these firms operate as though these "broader societal challenges" do not exist. Solutions to societal problems reside with the state.

A government consumer agency official told me recently that she had to intervene in an insurance dispute. A local insurance carrier disputed a claim because one of its customers suffered from "carcinoma in situ". The term was used in the contract of insurance where the insurer should have known that more than two-thirds of the population would not have understood those Latin words and that non-medical consumers would not have understood what they meant.




Top management and board positions in the insurer, in contrast, include MBAs in finance or management, other postgraduate degrees in economics, law, actuarial science, doctorates, professional diplomas, and years of relevant experience! Medical News Today says "Carcinoma in situ is a type of breast cancer where a person has abnormal cells that have not spread beyond where they first formed. The words 'in situ' mean 'in its original place'".

The insurance regulator's use of language is not better than that of the entities it supervises. The Financial Services Commission's website is not consumer-centric even though its home page speaks to issues like financial education and literacy. Same can be said about its brochures "The Regulator and You" and "Pension Plan Trustees". They appear to have been written for technical persons like me instead of the 67 per cent. Many persons who work at FSC are graduates of institutions that teach linguistics. In the face of such widespread financial illiteracy, why doesn't its regulatory policies reflect this?

There are no minimum standards about how the terms and conditions of contracts are communicated pre- and post-sale. Yet, there is talk about greater financial inclusion.

How can there be greater financial inclusion under the current conditions? Most persons do not know what the FSC does and have negative perceptions about insurance and the companies that sell these products. Shouldn't the FSC be extending its focus beyond prudential regulations and model what its counterparts in other countries are doing?

The OECD is an organisation of 32 countries. Its 86-page Guidelines on Insurer Governance was revised after a period of comprehensive review and reissued in November 2017. They were first adopted in 2005 following the financial crisis. The foreword to the guidelines says that key updates include "disclosure of policies relating to ethics, business conduct, conflicts of interest, and public policy, including environment and [you have guessed correctly] social issues".

The International Association of Insurance Supervisors (IAIS) was established in 1994. It is a voluntary membership organisation of insurance supervisors and regulators from more than 200 jurisdictions, including Jamaica. Ninety-seven per cent of the world's insurance premiums come from its members.

IAIS's Insurance Core Principles (ICP) were adopted and revised in November 2017. They "provide a globally accepted framework for the supervision of the insurance sector. The ICP material is presented according to a hierarchy of supervisory material. The ICP statements are the highest level in the hierarchy and prescribe the essential elements that must be present in the supervisory regime in order to promote a financially sound insurance sector and provide an adequate level of policyholder protection, linked to specific ICP statements."

This is the start of a new year. The FSC's new executive director has been in office for less than six months. There were notices in last weekend's newspapers of several appointments to the commission's senior management. Today's column is my welcome statement to them. I sincerely hope that it will be interpreted as such.

- Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: