The independent chair of Equip Super, Andrew Fairley, believes the fund’s skills-based trustee selection is the way forward for the sector.
IM: Let’s start with the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, because it is so top of mind for everyone. In your view, what is the single most important finding that can come out of the inquiry in terms of changing the behaviours of the sector to be more aligned with member outcomes?
AF: What’s come through in the royal commission is the lack of regard that a number of organisations have for the member – the people they are serving. They don’t seem to have an innate understanding of their obligations. There is an obligation at law, and there are statutory obligations, to act in the best interests of members, and that means the best financial interests. I hope the royal commission shines a light on the practices that are unacceptable, and the regulator takes this seriously and acts, rather than saying ‘tsk tsk’ from the sidelines.
I’m also very upset by the fact members of our funds and others are concerned with the headlines that are tainting us all with the same brush. The real issue is that so much of this is about trust, which is the root of the whole system. Members give us their money with a confident expectation that we will behave and deliver them the best possible outcome. This has struck at the heart of trust. Miscreant organisations need to mend their ways.
Systemically, what do you think has gone wrong in the super sector?
It’s about the use of power attached to large pools of assets. Management expert Peter Drucker outlined the dangers of success in his book The Unseen Revolution: How pension fund socialism came to America. In that book, he wrote that the real danger is that large pools of assets could be hijacked by four groups: business, organised labour, government, and the financial services industry.
I think the financial services industry in Australia has tried to highjack this huge pool of superannuation money and so has organised labour. Business and government need to step up [on behalf of members] and say we’re just as important as the other two groups.
What was the reason for the breakdown of your mooted merger with Energy Super, and what has the board learnt from that?
The Equip Super board has no regard for where [prospective board members] come from – whether employer, employee, union representative or independent. Each prospective trustee has to go through the same rigorous process to become a board member. The reason the Energy Super merger didn’t proceed was because the trustees of Energy Super were not prepared to follow that process.
The only criteria the Energy Super board thought was appropriate for trustee selection was a measure of ‘fit and proper’, which is a self-selection process.
This is why we have a long tail in this industry. I’m concerned there are a number of trustees and executives who are reticent to discuss mergers because there are no roles for them in the new regime. This is one reason we went to the Australian Prudential Regulation Authority three years ago for an extended public offer licence, so we could be trustees of more than one fund.
There is a prism of self-interest. I have had a number of discussions with funds where it is evident to me that unless they can place trustees or executives, they won’t have the conversation. This is what made the Rio Tinto merger so easy. We took one director and five staff and it was a win/win for both funds’ members. Since the merger, we have reduced our management expense ratio from 92 basis points to 88 and had $12 million of savings in the first year.
There would be significant benefits to be derived from a national energy fund, which was our big-picture vision for the merger with Energy Super, but it didn’t even get to the first stage because their trustee board was not prepared to buy into the skills assessment process we had. It might have meant that some of their trustees wouldn’t have been appointed.
In 2014, the Equip board conducted a skills assessment using a skills matrix developed in consultation with Heidrick & Struggles. This assessed what skills were needed to manage a $7 billion superannuation fund – which the fund was at the time – and what skills we had. Then we could ascertain we had a gap. Following on from that, we knew what we wanted. And there have been times in the past we didn’t have the skills we needed.
The skills you absolutely need on a superannuation board are strategy, investment, actuarial, audit, risk and finance, HR and management, legal and governance, and disruption.
You are also chair of the Foundation for Alcohol Research and Education. you have seen the alcohol industry influence public perceptions in ways that favour its sectional industry interests, rather than the public good. Do you see any parallels with this behaviour in the superannuation industry and what can be done to change that?
The Australian Institute of Superannuation Trustees (AIST) publicly posits and advocates the view that equal representation is the preferred and obvious model to have in industry superannuation funds in Australia.
Our experience at Equip is we take the view that one-third independent directors is a great benefit and ensures we can backfill for the skills we need. Our appointment process allows us to know we always have skills we need.
The governance code AIST has drafted rests on the assumption that equal representation is the best model.
We don’t accept that.
You have spoken before about the mantra of Harvard marketing professor Ted Lovett, which is, “Don’t compete, be unique.” Can you talk about that in the context of Equip Super?
My belief is that you have to position yourself to minimise the competition for the sector where your seeds will prosper. We recognise that while we are an industry fund, we are a small ‘I’ industry fund. None of our stakeholders can parachute people onto our board.
We have an electoral process and skills filter, including an assessment of ‘fit and proper’ and an independent assessment of investment skill and risk and compliance.
We have now moved to a point where we are more likely to get the right people.
We have changed our electoral model for members so individuals have to nominate into the particular skill required. We were recently recruiting for positions of investment skill and technology/disruption/strategy skill and got 20 applications for each; and remember, these are all members. Those applications then went to Heidrick & Struggles, which came back to us with a shortlist of three. Our board sub-committee then assessed them and made a recommendation to the board. Having our skills matrix means we can conduct this process into prosperity.
Our skills-based board is one of our unique propositions.
We also pride ourselves on our low cost of operations (88 basis points), consistent investment performance, and our consistency and quality of decision-making.
You have openly shared your professional vision, which is “to be respected as a thought leader and change agent in my fields of operation”. How has it shaped you, and guided you, in the context of your role as chair of equip?
In everything I’ve done, whether that has been in my work in travel and tourism, in superannuation or as a lawyer,
I have always been looking after the assets of other people.
In eco-tourism, I was committed to the quadruple bottom line: make financial sense, look after the environment, benefit the local people and celebrate the culture. If you live by those principles, you are a fiduciary and a steward of their culture, jobs and livelihood. There is no difference in the circumstances of a super fund. I am a fiduciary.
I want to be judged on how well I’ve looked after other people’s money, not how much money I’ve made. If you know what’s right, and what ethics, values and integrity look like, then you know you’ve done the right thing and you haven’t charged for something you haven’t delivered.
At Equip, what is the most important conversation you are having around the board table this year?
We’ve had some reflections before our board meeting about the egregiousness of what’s come out of the royal commission and how differently people consider their responsibilities.
But around the board table, we are talking about investments. Some components of that, like medium-term asset allocation, are constantly being addressed. ESG is something we’ve spent a lot of time on and we’ll continue to do so.
Disruption is also a major issue and we want to harness the benefits of that. We now have a disruption expert on our board. We are constantly reviewing costs and whether we can do what we are doing better, [along with examining] how we are going to achieve our end goal, which is a minimum of $35 billion by 2025.
It is appropriate in that context to look for mergers and we have learnt a lot. We won’t tread the old ground, and we know our organisational values and what we are looking for, which is to create a fund that will be outstanding.
What is your most important piece of advice on how to chair a constructive board meeting?
I think you need to look at how you can draw the best out of all the board members. I allow the conversation to flow within the time allowed but if someone hasn’t contributed, I always ask them to express their view.
There is no place to hide on our board, you’ll have to have a view. That’s the way you engage and get the best out of the skills you have.
We also spend time at the beginning of each meeting on one important strategic discussion. We do that when we are fresh and can come to a view and have clear direction.
I also think it is important to meet for a modest dinner the night before the board meeting. It is important to get to know one another so we know where we’re coming from. Collegiality comes from knowing each other’s backgrounds.