Monday, December 4 was technically the first day of the new California legislative session. As always, there will be much to do in 2007, and Governor Schwarzenegger already has set out an aggressive agenda for change. Looking to the world of workers’ compensation, it would be easy to say that all is right with the world, or at least that problems still facing workers and employers can be resolved with relative ease and without need for major legislation. But that would be a mistake.
In 2006, the legislature began to look closely at the operations of State Compensation Insurance Fund and determined there was need for change.
Assembly Bill 2125 (Vargas), the Department of Insurance omnibus bill, was amended at the last minute to create a detailed procedure involving the governor and the Insurance Commissioner in the event SCIF became financially impaired. The legislation successfully resolved ongoing litigation between the commissioner and SCIF over the scope of the commissioner’s oversight of the fund.
In addition, despite strenuous lobbying against it by SCIF management and its paid lobbyists, Senate Bill 1452 (Speier) clarified the ability of the state auditor to conduct reviews of SCIF and determine whether it is meeting its statutory mandate.
Imagine so recalcitrant a public enterprise that the state auditor needs to go to the legislature for clarification, and you would define California’s State Fund over the past several years. Then imagine that same agency spending money on a highly paid lobbyist to try to kill the bill.
Once the legislative session adjourned, and after the potential for conflicts of interest involving two board members was exposed by Workers’ Comp Executive, the very public resignation of two board members “amid concerns over possible conflicts of interest” was reported in general media around the state. This has brought much-needed further scrutiny into the accountability and transparency of SCIF’s operations.
SCIF is not subject to open-meeting laws or public records requirements, even though it is organizationally a division of the Department of Industrial Relations. SCIF is run by a president selected by a five-member board of directors, the only requirement for selection being that the director is a policyholder.
SCIF is a multibillion-dollar public enterprise fund. Its smaller peers across the country seem to be able to function quite well with a much higher degree of transparency than is present in California. State Compensation Fund of Arizona, for example, functions year in and year out even though it is subject to that state’s open-meeting law. In North Dakota, where there is no private workers’ compensation insurance market, the board of directors of its exclusive state fund—Workforce Safety & Insurance—has embraced the governance directive “…to ensure that every aspect of its operation meets or exceeds private industry standards.” North Dakota’s WS&I has adopted model governance standards and has a larger and more diverse board than does SCIF. Colorado’s Pinnacol Assurance has a seven-member board and operates ethics, audit and compensation committees within that structure.
The five-member policyholder board structure for state funds is no longer appropriate in the modern business world. Many states adopted such a structure decades ago when state funds were being established. California’s board structure has been the same, as far as we can determine, since 1913.
Over time, as in the case of Arizona, public access to the operations of quasi-governmental agencies increased. Not so in California. In the case of Colorado and North Dakota, board membership and independence increased. Not so in California. Private insurers, whether stock or mutual, now follow strict corporate governance guidelines for directors’ independence. For companies listed with the New York Stock Exchange, corporate governance rules require directors who can make decisions independent of management. Not so in California.
Corporate governance guidelines that establish directors’ independence and qualifications, and committee structure to assure this independence, are required to be disclosed to the public. Certainly, developing such standards for SCIF could be accomplished while not sacrificing the legislature’s authority over the workers’ compensation system or SCIF’s tax-exempt status.
There is no sound reason for SCIF to be held to any lesser standard of governance than for any other business enterprise. The public has a right to expect that its institutions will be free from the type of conflicting influences that independent boards are intended to prevent.
The past several years have seen SCIF in continuous conflict with the legislature, the Insurance Commissioner, and now the governor.
Even assuming that SCIF is financially healthy, and that it is fairly participating in the continued recovery of a competitive insurance market, there is still a compelling need to bring its governance into the 21st century. The “bottom line” is no longer enough in today’s world of accountability and transparency, and simply replacing two board members is no substitute for much-needed reform.