Bernie Fraser’s year-long review of governance standards in the not-for-profit superannuation sector has concluded that the Turnbull Government’s push to force all funds to appoint independent directors is unwarranted.
It will surprise few that the Fraser Review, commissioned by the Australian Institute of Superannuation Trustees and Industry Super Australia in December 2015, has backed those groups’ prevailing view.
The review was launched as an eleventh-hour salvo as the industry groups sought to scuttle legislation that would force all super funds to appoint a minimum of one-third independent directors, including an independent chair.
Fraser, a former Reserve Bank of Australia governor and Treasury secretary who was also a longstanding director of AustralianSuper and an Industry Super spokesperson, concluded that the government had “failed to make its case” for the benefits of independent directors.
Minister for Financial Services Kelly O’Dwyer was scathing in her response to the report, which she labelled a “delaying tactic to kill off reforms that have been in the pipeline since 2010”.
“I am pleased that ISA and AIST have finally conceded to the release of Mr Fraser’s report, but it is a shame it has been exposed for what it always was, a lobbying document to kill off legislation that applies equally across the entire sector,” O’Dwyer said.
As an alternative to the government’s proposed minimum of independent directors, the Fraser Review has recommended the industry adopt a mandatory code of conduct to lift board standards.
Timed to coincide with the release of the Fraser Review on Thursday February 16, 2017, AIST published a draft code slated for introduction from July 1, 2017. However, the code would not come into effect until July 1, 2018, following a 12-month transition period.
O’Dwyer said there was nothing in the report that negated the need for the government’s independent directors bill and that the AIST’s draft code appeared to “at best entrench the status quo and at worst further dilute the value of independent directors on superannuation fund boards”.
“What is clear from this almost 15-month review is that we could have had very reasonable independence requirements legislated since 2015,” she said.
‘Values and skills’ over independence
Fraser aimed to make a case that the values and skills of individual directors mark a “weightier” issue than how many of the directors sitting around the board tables of funds happen to be independents.
“This is not to imply that ‘independence’, as such, is unimportant, or that independent directors and chairs cannot bring critical values and skills (they can and do in many cases); rather, this is to argue that the priority from the perspective of members of not-for-profit funds should be squarely on the latter,” Fraser said. “The limited recommendations in this report seek to promote members’ interests by elevating the sources of potentially greatest benefit to them – the values, skills and experience of their boards – to top billing, ahead of independence, as such.”
Fraser noted that neither the not-for-profit nor the for-profit superannuation sector has “escaped scot-free from the appalling governance practices that have dogged the banking sector” over the past decade.
“In the not-for-profit sector, relatively isolated and short-lived incidents (Cbus and MTAA Super come to mind) have attracted [a certain notoriety that] seems to be out of proportion to the actual harm inflicted on members,” he said. “In the retail sector, the mention of just two words – financial planners – is sufficient to evoke visions of scales of harm and injustice that have heavily weighed down for-profit funds.”
Fraser said that despite these “regrettable lapses” in parts of both sectors, the Australian superannuation industry has maintained relatively high governance standards overall.
“The industry has grown rapidly in a short period but has avoided the worst of the financial difficulties, bad behaviour and customer backlashes that have dogged many other financial institutions and sullied their brands.”
Independence from what?
He said “much of the credit” for this outcome should go to the work of the Australian Prudential Regulation Authority. Even so, one of the objections the review raises to the government’s bill is that it would give the APRA an over-riding power in determining whether a prospective director of a superannuation fund qualifies as independent.
Fraser said the debate about independence boiled down to the question, “Independence from what?”
“To the extent that the answer is independence from executive management, this is hardly an issue for the governance of not-for-profit funds, which, in effect, ban executive directors from their boards,” he argued. “A broader – and arguably better – answer to the question is to view independence as a defence from all the dangers and obstacles that can get in the way of pursuing a clear and committed objective. Such independence is never absolute but it is inherently more substantial for member-focused, not-for-profit funds than it is for retail funds.”
Fraser argued that the historical track record of superior investment returns not-for-profit funds have delivered was a symptom of their superior governance standards.
Key Fraser Review recommendations for not-for-profit super fund governance include:
- Develop the AIST Fund Governance Framework for Not-For-Profit Superannuation Funds into a mandatory code effective from July 1, 2017 [plus a 12-month transition period].
- Formalise standards to ensure directors appointed have the appropriate culture, values and skills for strong oversight.
- Improve professional, educational, cultural and gender board diversity.
- Continue to operate under a majority representative trustee structure; clarify that all directors are independent of management and that the chair is the best candidate for the role, as determined by the board.
- Improve accountability to members on governance issues through regular two-way communication via annual general meetings or fund briefings.