Views have been expressed recently about super funds nominating directors to boards of ASX listed entities. In the history of the corporation, directors appointed as a nominee of another entity have been commonplace. The most typical contemporary case is a nominee director representing a majority shareholder where there is regular consultation and lobbying on general or specific topics.
But there are examples of looser arrangements where there is a lower level of consultation with and commitment to nominators. In some cases, apart from the manner of their appointment, nominees differ in no other way from other directors. An example of this latter arrangement might be a wish on the part of a super fund or funds to have an expert on renewable energy appointed to a fossil fuel company board. The point of them being there might be purely for their expertise.
Why then does there seem to be an air of anxiety about super funds appointing nominee directors? Is it merely because it’s new or is there something deeper at stake?
Super funds have been investing in and governing significant unlisted and private equity assets for two decades in many cases. It would be hard to imagine that such funds wouldn’t be able to identify people with suitable skills and experience to take on similar roles in the ASX listed space.
It would be startling to think that a fund would, for example, appoint one of its own employees with little or no relevant industry or corporate governance experience. So, this can’t be a genuine problem.
Legendary management guru Peter Drucker wrote about the impact of pension funds on corporate governance in the United States in his 1976 book The Unseen Revolution, later renamed The Pension Fund Revolution.
What he prophesied was that worker’s savings channelled into large US pension funds would have significant influence on corporate governance, particularly on ‘social responsibility’ issues. Perhaps nominee directors will be how this impact manifests in Australia as our large super funds are effectively ‘universal owners’ of a wide range of businesses.
Some prominent company directors have pointed to what are quite ‘humdrum’ problems with super funds nominating directors to listed boards. These have included the need for nominees to manage conflicts of duty and interest, nominees passing commercially sensitive information about the listed entity to the super fund and so on. These and other nuances of director fiduciary obligations come up in the vast majority of cases involving any nominee director joining a board. They are real issues, but they are well-known and manageable in practice.
While neither the Corporations Act nor the ASX Corporate Governance Council’s Code of Conduct deals explicitly with nominee directors, there are established practices revolving around board protocols and common sense to work through these issues. It’s just part of the normal governance of listed entity boards.
The last point to make is that diversity of thinking and style around the board table is a virtue in an increasingly uncertain and complex world. Why would it matter if there were a director with a decarbonisation agenda, for example, on the board? What would be the problem if there were a highly qualified company director urging a major fossil fuel company to diversify towards renewable alternatives to align with genuine Paris targets?
Rio Tinto has recently made final investment decisions in large scale solar and onshore wind projects in its aluminium and alumina businesses in central Queensland. Each project has broken the record for being the largest of its type so far in Australia. For large super funds to meet their net-zero by 2050 targets, these are precisely the sorts of things they will be looking to companies in their portfolios to be doing.
The biggest eight Australian super funds, measured by total funds under management, alone had over $1.35 trillion in assets in June 2023. The sheer scale of super is driving this trend, as is the increasing tendency for super funds to do more investing directly themselves.
Then there are the emerging pressures on funds: climate-related financial disclosure is coming their way soon as ‘asset owners’. Will this be a further reason for a super fund to consider nominating a director in specific, carbon-intensive investments?
Another pressure is the slew of legal actions the super sector is copping from ASIC on ‘greenwashing’ (misleading or deceptive statements about how green a particular fund or investment option is). Gilding the lily on sustainability by super funds has become very expensive for those who have been caught out. This might be another reason for funds to get closer to the action by appointing nominee directors to boards.
For all these reasons, it could be expected that some large super funds would nominate directors to particular ASX-listed entities along the pathway to 2030 and 2050. At this stage, it looks like both a foreseeable and manageable development.
