Board’s will need to submit an approved and detailed transition plan to APRA by July 1, 2016 on how they intend to comply with the new, and as yet undefined, requirements for governance, including whether current directors can be considered independent.

Many experienced people in superannuation will likely not be classed as independent leaving a small pool from which superfunds can source an independent director, because the definition in the draft legislation is wide and ambiguous, a lawyer has said.

This means that, while superfunds will have until mid-2019 to implement these changes, the hardest part will need to be completed by a year’s time; namely figuring out how the RSE licensee (commonly the Trustee Company) is to be restructured, including changes to the constitution.

In a release APRA said a non-exhaustive list of the matters that may be required to be considered within a transition plan include:

• a list of current directors and whether they can be considered independent under the new definition;

• when the term of each current director expires;

• the board’s target for the number of directors on the board, and thus the target number of independent directors; and

• the board’s plans for each director throughout, and at the end of, the transition period, including whether any directors will be replaced and if so, when this is likely to occur.

In April Frydenberg said ASX’s corporate governance principals gave a “pretty good sphere” on how to define an independent, but he has since moved away from this, by creating a new set of requirements for classifying independents.

While the draft legislation spells out the high level requirement to have one-third independents on superannuation trustee boards is by July 1, 2019, it leaves to APRA the job of working out the details of the requirements and how they are to be applied. To this end, APRA is proposing to “amend Prudential Standard SPS 510 Governance (SPS 510) to, at a minimum, supplement the definition of independent director”.

APRA will be releasing a draft of the amended SPS 510 later in 2015 with a view to having the final prudential standard before the end of the year, but until these questions are answered, boards will find it difficult to build a definitive transition plan as they won’t know to which tune to dance, believes Maged Girgis, partner at Minter Ellison.

Girgis added the introduction of another definition of ‘independent director’ (alongside other definitions for the purposes of the ASX’s corporate governance principals and s601JA of the Corporations Act) means that some institutions, might have to apply all three legislative and prudential definitions within their Group.

A small pond

The new requirements look likely to result in an even smaller pool of superannuation experienced candidates with many caught out by the wide and ambiguous definition of ‘material relationship’.

“This is further exacerbated by the fact that the entire industry will be calling on the same small pool at or around the same time,” Girgis said.

This would include, but is not limited to, professional advisors, consultants and suppliers to superfunds. Partners at Allens, Michelle Levy and Geoff Sanders, said it was “less clear whether an employee of a related body corporate (that isn’t also a shareholder or service provider)” could be an independent director.

They added what isn’t caught by the definition are multiple directorships.

However, the exposure draft gives APRA the power to determine that a person is not independent if it is “reasonably satisfied that the person is unlikely to be able to exercise independent judgement in performing the role of a director of the licensee”. Conversely, APRA also has the power to declare someone independent even if they don’t meet the prudential standards.

These requirements would be introduced by replacing Part 9 of the SIS Act with a new Part 9 which omits any reference to equal representation on the trustee board.  Interestingly, it would not be an offence to contravene the new Part 9 of the SIS Act. This is because the Commonwealth government does not have the power to enforce changes to the RSE licensees’ constitution which sets out how it is to be structured, by the members of the Trustee Company.

However, like the current provisions of Part 9, the draft legislation to the SIS Act will allow APRA to place a stop-order on the trustee receiving employer contributions if the requirements of the new Part 9 are contravened.

Submissions in response to the draft legislation are due by Jul 23, 2015.