Regular readers of this column would be well aware of the ongoing debate about the governance of superannuation. However, amid all the claims and counter claims about the merits of the various governance models that exist in our industry and the hysteria about unions “controlling” superannuation, some of the really important issues around board independence have been ignored.
When talking about independence in superannuation, we should be clear about exactly what sort of independence we’re after.
Within the not-for-profit sector, boards are almost all made up of an equal number of representative directors appointed by either a union or an employer sponsoring body. This model reflects the occupational heritage of the compulsory superannuation system, and the view that member representation and mutual ownership are important in delivering the best retirement outcomes for workers.
Equal representation boards work collaboratively with employer and employee sponsoring bodies when considering trustee-director appointments to ensure that only the most appropriate people, capable of contributing to the whole-of-board skill-set, are appointed.
By law, these boards can, and do, appoint directors outside of sponsoring bodies when they identify a need to enhance their whole-of-board skill set.
But the reason additional directors are appointed to the boards of not-for-profit funds has nothing to do with the funds – or the boards – seeking more independence or impartiality. This point seems to be lost on those agitating for more so-called independents on the boards of not-for-profit funds.
This is why the term “non-associated director” is a more correct way of describing this category of directors.
In the corporate world, best practice in governance includes the presence of independent directors on a board. The ASX Corporate Governance Principles define an independent director as a non-executive director who is not a member of management and who is free of any business or other relationship that could materially interfere with the independent exercise of his or her judgement.
AIST believes that the same broad principle of independence is relevant to the governance of superannuation and we have recommended to the regulator that the governing legislation for not-for-profit funds be amended to reflect this view.
Clarify your goals
Currently, directors of some retail funds are mostly drawn either from the fund itself or from the executive of the bank or financial institution that owns the fund, and typically provides superannuation services back to it. As research from APRA has shown, the inherent conflicts in this arrangement have the potential to erode members’ returns.
By contrast, all the directors of not-for-profit funds are non-executive and free of any material relationship with the fund: sponsoring organisations – be they employer bodies or unions – are not in the day-to-day business of providing superannuation services.
This high standard of independence far exceeds new governance requirements in the recently released Financial Services Council’s draft standard for retail funds. While a commendable step forward from the current arrangements, the standard stops short of requiring all directors of retail funds to be non-executive and free from conflict of interest.
Given the planned rise in mandated-super contributions from 9 to 12 per cent by 2019, it is timely to shine a spotlight on super-fund governance. But when we talk about independence in the governance of super, we must be clear on what we want and what matters for members.