comment by Greg Bright
After first being proposed by former assistant treasurer Arthur Sinodinas in 2012, when still in opposition, legislation was finally introduced into parliament last week to mandate that APRA-regulated super funds will be required to have at least one-third of their trustee boards as independents, as defined by APRA. The debate has largely already run its course but the industry has until July 23 to formally comment.
A bit like the introduction of investment choice within super funds more than a decade ago, many industry participants, particularly among not-for-profit funds, consider the move an unnecessary additional cost which will not necessarily deliver better outcomes to members.
However, the trend to have more independents on boards has permeated business, government and other functions involving publicly raised funds and responsibilities in recent years. As many supporters of the move note: big super funds have demanded the same of the companies they invest in for several years. It was first raised in super in 2009 by Jeremy Cooper’s Super System Inquiry.
The proposed legislation, which is unlikely to meet much opposition in Canberra, is for one-third independents and an independent chair. Independence is defined fairly narrowly as someone who has not been a director or executive of an entity which has had a material relationship with the trustee of the fund in the past three years.
One of the undisputed anomalies of the current system, which the industry is united in opposing, is the prohibition on a trustee director also being a member of the fund. Hopefully that disappears among the proposed changes.
But what would have been a better outcome for members rather than a mandated rule on the number of independents is a voluntary code of conduct and detailed guidelines on good governance for super fund boards, including all aspects of diversity and competence. For an excellent impartial discussion paper on board compositions from Mercer see here.
Industry funds tend to present the “if it ain’t broke don’t fix it argument”, noting their general outperformance of retail funds over many years. It is true but probably doesn’t count for much in the current environment. Just as with the wider trend for more choice and control by members as their super fund account balances grew through the 1990s and 2000s, the trend to more independents on boards is here to stay.
What would be more valuable is a broader discussion on funds and fund manager governance, noting that there are many important aspects which simply cannot be mandated. Competence and truly independent thought, diversity of backgrounds such as ethnicity and socio-economic roots and integrity are very difficult to quantify. But they are probably more important than whether or not a director has previously been involved with the fund or its sponsors.
More easily quantified points of governance should also be included in the discussion and form part of an APRA-overseen set of guidelines. These include things such as gender diversity, age and length of time spent on the board, how many boards a trustee can sit on, specialised education (particularly for investments) and, perhaps, remuneration.
A favourite of mine, which is unlikely to be widely adopted any time soon, is trustee director elections. A handful of funds have versions of annual meetings with elections and some, such as AustralianSuper, have annual forums for members for open discussion. There are lots of issues involved with annual meetings and elections, including significant cost, but I think if listed companies with hundreds of thousands of shareholders can do it, so can big super funds. In the very least members should be allowed to vote on significant fund mergers which may change the whole character as well as risk/return profile of their fund.
There are various estimates of how many new directors will be required under the proposal. Assuming independents will still be able to have multiple directorships – another governance question which should be considered by boards – it’s probably between 200-300 new directors. That should not be such a big ask given the number of industry executives who have been restructured into early retirement in recent years. And there will be a three-year transition period.