Illustrator Dennis Balogh

Jay Fishman

How has governance changed in the past few years?

Jay S. Fishman, chairman and CEO of property casualty insurer The Travelers Companies Inc. (TRV), describes corporate governance as this: “At its best,” he says, “corporate governance is an independent, knowledgeable and engaged board of directors providing effective oversight and working closely with management to create long-term shareholder value.”

But the financial crisis, he says, exposed the need for better oversight and management of risk. In fact, with the chance to help frame the discussion, under Fishman’s leadership, Travelers joined the NYSE’s Commission on Corporate Governance, an independent advisory commission the Exchange formed in 2009 to examine U.S. corporate governance and the overall proxy process. “As one Federal Reserve official recently noted, ‘Regulation is too important to be left to regulators alone,’” Fishman says. “Public companies bear the primary responsibility for restoring trust in the financial markets.”

Fishman does not mean that responsibility for oversight rests solely with CEOs and boards. 
“I firmly believe that shareholders, counterparties, regulators and credit-rating agencies all play an important role in helping management and the board establish the appropriate risk profile for a company,” he says.

But for those stakeholders to do their jobs, transparent disclosure of a company’s risks is key, insists Fishman, 57. “Consider what the world would look like today if the companies that recently collapsed had been more transparent in disclosing their risks to the market. Don’t you think that the reaction of shareholders, regulators and the credit markets would have discouraged these companies from such aggressive risk profiles? In my judgment, such increased disclosure may very well have been of long-term benefit to some of these companies.”

For its part, Travelers provides specific, quantitative disclosure in its public filings relating to its catastrophe modeling, explains Fishman. “This disclosure describes the likelihood that various events may occur and the magnitude of the related potential exposure.”

“If a management team sets unreasonable goals, they can drive employees to take unjustifiable risks.”

Risk management, especially in the context of recent events, has a lot to do with goals, says the CEO, who wrote in Travelers’ 2009 shareholder letter, “We believe that unrealistic goals drive unreasonable actions.” Fishman suggests that most employees work hard and try to give management what they ask for. “If a management team or board sets unreasonable goals,” he says, “they can, knowingly or not, drive employees to take unjustifiable risks to meet those goals.”

Travelers, says Fishman, strives to deliver a mid-teens return on equity over time, a goal that the CEO calls “challenging, yet appropriate to encourage our employees to thoughtfully balance risk and reward, and to avoid risks for which we are not appropriately compensated.” Fishman says that “recognizing that risk is an inherent component of all business activity, the challenge of management and the board is to establish an appropriate risk appetite, then make sure effective procedures are in place to manage the company’s actual risk profile consistent with its risk appetite.”

In addition to oversight and management of risk, Fishman says, one of the most important responsibilities a CEO has today is to develop the next generation of the company’s leaders. “While I hope to remain in my position for many years to come,” he says, “the board and I spend a lot of time discussing succession planning. Developing our talent is something we take seriously.”

Fishman adds that Travelers is fortunate to have developed a “very deep bench” of executive talent. “Many of our executives have worked at Travelers and in the industry for many years,” he explains. “Other executives bring important experience from outside the industry. Their experience at Travelers and at other companies gives us important perspective, as well as a healthy appreciation for both the paths to success and potential pitfalls to avoid.” — Sharon Kahn