Turmoil at the State Fund–and a proposal for reform

Given the recent news, one might think that the troubles at the State Compensation Insurance Fund are over. Two Board members and two senior officers, including the president, have been dismissed. Industry veteran Lawrence Mulryan has been appointed as an interim leader. Once the major newspapers caught up with the coverage of the Workers’ Comp Executive–which I publish–and wrote the story, the Legislature got into the act by setting an “oversight” hearing this week.

But State Fund’s scandalous troubles are just beginning.

There are two bills, one in each house–SB 746 by Senate Leland Yee, D-San Francisco, and AB1682 by John Benoit, R-Palm Desert–that deal with the governance of the State Fund. There is little doubt that these are placeholder bills for the governor’ office, which has been investigating the extent of the scandal for some time.

Make no mistake: The governor’s office acted as quickly as possible when it learned of the potential for scandal in the firing of Board members, and it hired lawyers to launch an investigation. Now it has fired two executive officers, one of which was State Fund’s president.

Senate Leader Don Perata and Sen. Mike Machado, who is chairman the Banking, Finance and Insurance Committee, will be overseeing the oversight hearings. They have declared their concerns over potential mismanagement at the State Fund, while simultaneously noting the importance of the Fund’s role and the need to keep insurance rates down.

But the Committee is saying that its intent is to look forward, not backward. Even more disturbing facts are about to be disclosed in the Executive’s series, which may change the governor’s and the Committee’s minds. Nevertheless, we offer here some ideas that we hope will bring trust and accountability back to State Fund’s operations.

We at the Workers’ Comp Executive have crafted draft legislation that could serve as a starting place to reform the governance of the State Fund. We’ve been working for months on these ideas, in consultation with some of the brightest minds in business and insurance. They currently are being discussed seriously in at least two branches of the government. The proposals can be viewed in detail at http://www.wcexec.com/articles/WCE05-20070329-001.pdf.aspx.

Our proposal calls for amending the to change the composition of State Fund’s Board of Directors from its present five to 21, all appointed to staggered terms by the governor at the recommendation of the Board. Five of those Board members shall be policyholders, and two of the five shall be small policyholders.

Fourteen of those members shall be independent members, meeting the standards of independence required for a company listed in the New York Stock Exchange.

We think the Board should be required statutorily to create several committees and subcommittees, with no committee holding a majority of policyholder members.
There would be a Nominating and Governance Committee, of which two-thirds shall be independent members: an Audit Committee, composed of all independent members; a Finance and Investment Committee, a majority of which shall be independent members; and a Legal Committee, which shall be two-thirds independent members and shall oversee both workers’ comp cases and other cases. The Legal Committee shall oversee what workers’ comp cases are suitable for appeal, the nature of the litigation, the choices in outside firms and the style in which general legal cases are prosecuted.

There would also be committees on Underwriting, Strategic Planning, Personnel and Operations.

The Workers’ Comp Executive also recommends that the legislation require a code of business conduct and ethics, addressing conflicts of interest, which includes the business opportunities that arise from the use of State Fund’s property, information or position. The legislation also should ensure that confidential information is protected; that strict rules are in place to ensure fair dealing with policyholders, claimants, suppliers, competitors and employees; and that reporting illegal or unethical behavior is encouraged.

Existing directors shall serve until their terms expire, and independent members of the board shall receive directors’ remuneration commensurate that paid to directors of publicly traded companies.

A requirement for at least one annual public meeting for the approval of the annual report and for such other matters as may be deemed appropriate by the Board.

Further, it is our recommendation that State Fund be separated from the Department of Industrial Relations and become its own agency.

Not included yet in our draft legislation is proposal that the directors be able to increase the number and salaries of CEA or vice presidents in order to recruit experienced talent from outside.

A final note: We hope that this proposal is received by all in the sprit in which it is offered–of openness to new ideas, of compromise and a desire for a better, more workable State Compensation Insurance Fund. Californians deserve no less.