Good governance is essentially an affirmative response to the question, “Do we run our business effectively?” Aspects of governance include effective risk management and compliance, ethical standards, greater board diversity, and disclosure. The existence of a captive can be seen as “proof” of governance through formalized risk funding and reporting in a licensed, regulated, legal entity.
Because captives themselves have boards and investable assets, they can reflect and augment their parents’ ESG strategies. Consider the case of a national specialty retailer that was looking to enhance its ESG profile. The company already had a strong commitment to making a positive impact on society and the environment, but was unsure how its captive could play a role in that effort until it realized the impact captives have on corporate governance. As a regulated insurance entity, a captive promotes active risk management and provides active oversight and control, offering the parent a structured way to make informed decisions about risk.
Captives not only enhance the risk profile of their parents to commercial insurers, but they also provide a natural risk management forum for organizations’ risk management, legal, finance, accounting, human resources, and internal audit teams.