Like a listed company, it’s important for a superannuation trustee board to comprise appropriately qualified people who, collectively, are able to exercise independent judgement that is in the best interests of their stakeholders or beneficiaries – without favouring one group over another.
But does that necessarily mean that it should be mandatory for superannuation boards to have a number of independent directors, especially when there is no such requirement for listed companies?
It’s entirely appropriate to look at the governance of superannuation fund boards and discuss the merits of independent directors, given the growing significance of superannuation to both the Australian economy (105 per cent of GDP and growing according to the 2013 figures in the most recent Towers Watson Global Pension Assets Study) and to the members it serves.
So let’s look at the board appointment process, what independence on boards really means and whether independent directors should be mandated in superannuation.
While there is no real evidence supporting the case for the compulsory appointment of independent directors, I agree with Towers Watson global head of investment content Roger Urwin, who said it should be encouraged as best practice – especially where it can add value to the overall composition and decision-making of the board.
While he supports having independents on a board as global best practice and “a desirable feature”, Mr Urwin also commented during an interview earlier this year with The Australian Financial Review that: “There is a matter of trust between super funds and members that can be secured by trustees having an affinity with the mission of the fund. You don’t necessarily get that with independents”.
David Gonski pointed out at the 2014 Conference of Major Superannuation Funds that diversity on a board leads to higher performance, since ideas are more likely to be tested and different points of view aired. But does diverse necessarily mean independent, and what is the definition of independence in the superannuation context?
The three broad categories frequently proposed are independent of management, independent of material commercial relationships, and independent of “sponsor organisations”.
While the first two are broadly accepted, this latter category causes most of the controversy and discussion in the industry. And even where there is broad agreement, often there is still disagreement on the precise details of who to exclude in each category.
Another significant point Mr Gonski made was that experts on the board should also be all-rounders who “can contribute to the board as a whole and not just on their subject matter area”.
In its 2012 report, the Productivity Commission stated that it was broadly supportive of not mandating any particular structure for superannuation fund boards at this time and would not want to see any restrictions placed on board structures without having a sufficient evidentiary basis.
For any superannuation fund, the board appointment process needs to be transparent, with clear nomination and approval processes. The board should be actively involved in the nomination process, to ultimately ensure its ability to make good decisions on behalf of fund members.
At a minimum, this should involve a clear communication to all potential candidates about the board’s expectations of new directors, such as the need to satisfy APRA’s “fit and proper” requirements, set out in SPS 520, and includes having sufficient skills, knowledge and experience to perform the role.
This compares to the ASX Corporate Governance Principles and Recommendations, where listed companies are urged to establish a nominations committee. They see the committee’s role as being to:
- Assess on an ongoing basis the board’s and organisation’s needs in terms of skills, knowledge and experience for directors, CEO and senior management;
- Ensure proper succession planning for the board and key executives; and
- Assess and review board performance and director development.
While a nominations committee is not essential in smaller or non-listed organisations, entities without one should ensure they have other processes in place that address the issues which a nominations committee would otherwise consider.
So should the appointment of independent directors be compulsory? I haven’t seen any compelling evidence to date that supports compulsion.
In time, this might change, but until then we should promote independent directors as best practice when they add to the overall diversity and decision-making of the board.
Where superannuation trustees are satisfied with their current board and believe they do not need independent directors, I’d suggest they document their reasoning and consider communicating it to their members.
I think it’s also time there was more discussion on the appropriate definition of an independent director, to obtain more widespread agreement in the industry.
In the meantime, if a board chooses to appoint independent directors, then I suggest that it discloses to its members the independence criteria they adopted, and to regularly re-assess their independent directors against those criteria as circumstances may change over time.
