Deloitte’s report into Cbus governance has given a rare peek under the hood into the nitty-gritty of a super fund’s director selection process, and uncovered the disturbing finding that the board nomination and renewal process is dictated by directors’ self-assessment of their skills.
The consultant’s near-100 page report found that these assessments were rarely, if ever, scrutinised or confirmed by the company secretariat of United Super, the trustee of the Cbus fund.
While headlines from the report published last week have been mostly focused on Cbus’ CFMEU-related expenditure, the area of investigation with the largest number of recommendations (making up eight of a total of 26) is “design of fit and proper arrangements”, where the consultant dug deeply into how Cbus evaluates trustee directors on an initial and ongoing basis.
“There is currently no formal validation or review of directors’ skills self-assessment by the company secretariat team,” the report said.
“Although the board’s skills are ultimately assessed as a collective, there is no review or challenge of individual directors’ ratings to determine whether those ratings are reflective of an individual’s actual skills and experience or that the rating matrix is being applied consistently.”
Cbus directors evaluate themselves against two sets of criteria when they are nominated to the board: “skill set/knowledge base”, and “training/qualification”. The report said these criteria are designed so the talent pool available to the fund is not limited only to those with previous board experience.
From there, directors assess themselves as being “baseline”, “competent” or “expert” in each of their identified skill sets and are required to provide an explanation or rationale only if they rate themselves as an expert in any area.
But Deloitte found at least three issues with this approach. For one, these levels of knowledge are “open to a significant degree of interpretation”. A director can rate themselves as an expert in superannuation industry knowledge if they have experience in a “registered organisation”, which is defined as a “union, member, employer or industry association or NGO”, but these organisations are “unlikely” to provide direct superannuation knowledge.
Secondly, a Cbus director can become an “expert” at a skill by virtue of sticking around long enough on the board. For instance, Deloitte said “a director can rate themselves as expert in investment risk management by attending investment committee meetings and training over a 24-month period”, essentially allowing them to claim the status of “expert” without a formal qualification.
Finally, many directors are simply not providing serious supporting evidence. The report found that 51 per cent of the Cbus directors who rated themselves an expert in the most recent round of self-assessments did not give reasons for their rating, as required.
The consultant identified similar issues in the board renewal process.
“The trustee’s current approach places the emphasis on directors to self-identify any issues”, it said, rather than “undertaking an independent process” to see if they continue to be fit and proper.
Not a sin
Partner of financial services at law firm Mills Oakley, Zein El Hassan, says self-assessment itself is not a sin, and it is somewhat of a common component in many funds’ director-selection process. El Hassan says it is the trustees’ obligation to have rigorous oversight as to how correct the information is.
“You complete a form if you’re applying for a job, and then the person who is reviewing the form should be doing some sort of cross-checking to validate that information,” he tells Investment Magazine, but declined to comment on the Deloitte report or specific issues related to Cbus.
APRA has also made clear it believes that “self-assessment has limitations which can lead to a lack of consistency, challenge and/or accuracy in outcomes”, and that independent experts should be consulted on a regular basis.
“[Ensuring the self-assessment] properly ticks all the boxes, meets all the criteria, and the information that is given to the nominee is sufficiently clear, and the way in which they are self-assessing is sufficiently clear, that’s where the issue is,” El Hassan says.
The issue of self-assessment leads to a bigger conversation about how to get the right knowledge and skills mix onto a trustee board, and one common argument by profit-to-member fund critics is that the funds’ equal-representation model means funds pick directors based on union affiliation, not merit.
But El Hassan stressed that the equal representation model as set out in the Superannuation Industry (Supervision) Act “is not a barrier” to finding and appointing directors in the interest of fund beneficiaries.
Good on paper
“The law is designed to achieve an objective where the board consists of the people with the right skill sets, and who don’t have conflicts that carry a material risk,” El Hassan said. “The law is set up for success.”
For example, there is nothing to prevent a union or an employer group from nominating a former investing banking CEO to the trustee board, he said.
“The shortcomings are about the way in which different boards and sponsoring organisations go about trying to comply with the law,” he said.
That concern about what was actually happening in practice was the reason why there were two attempts to reform the law to introduce a one-third independent director rule, in 2015 and 2017, El Hassan said.
After all, the influence of personalities and relationships that give rise to conflicts of interest that could adversely impact the robustness of a director nomination is one major potential governance risk.
“Independence is like a proxy for having an independent mind and avoiding conflicts of interest,” El Hassan said.
“The thinking is that those independent directors will make better decisions in the interests of the members and not be pushing the interests of their sponsoring organisations.”
As the law currently stands, El Hassan said funds need to get serious about setting maximum director tenure, to ensure a regular refresh of the board.
“If there’s no vacant position on the board, the way in which you address the absence of skill on the board is through training and through access to advisers who have got that skill,” he said.
“That’s how you try to plug the gaps.”
