Super funds must have good governance and independent directors

The one key question when evaluating the composition of a superannuation board should be whether it is structured to best serve and add value to the fund and its members.

This was first published in The Australian, 2 July 2015.

One of the most significant reforms to secure long term trust in Australia’s $2 trillion superannuation system is independence on the boards of all public offer funds. This reform realises the need for transparency and the removal of conflicts of interest in a system that must help to fund the future costs of the ageing population and our economic growth.

This fact was first recognised by the Super System Review instigated by the former Labor government in 2009 and chaired by Jeremy Cooper. The Cooper review stated that one third of superannuation fund directors needed to be independent before their views could genuinely influence board decisions.

The Financial System Inquiry chaired by David Murray went even further and last year recommended that public offer superannuation funds have a majority of independent directors, including an independent chair. The inquiry’s final report citied overseas research which suggests good governance adds one percentage point to pension fund returns.

The point has now been reinforced by the Government’s proposal to require superannuation funds to appoint an independent chair and have a minimum of one-third independent directors on trustee boards – but ideally aim for a majority of independent directors.

It’s difficult to argue why such important institutions as superannuation funds should not operate according to the highest internationally recognised standards of governance.

Good governance recommends that board of any public company should include a majority of independently-minded directors. This is especially true for entities with responsibility for public funds.

Ultimately, the one key question when evaluating the composition of a superannuation board should be whether it is structured to best serve and add value to the fund and its members. It should not be focused on whether a board has been structured to allow an interest group to be represented.

This applies as much to retail super funds as to their industry fund counterparts as both sectors have the same end goal of providing adequate investment returns for their members.

The absolute importance of independence is recognised in the ASX Corporate Governance Council’s guidelines which apply to all listed companies in Australia. Superannuation funds and their proxy advisers are involved in the development of these guidelines so it is reasonable to expect that they would also consider the substance of the ASX Corporate Governance Council’s recommendations suitable for their own operations.

In addition to appointing a majority of independent directors, the Australian Institute of Company Directors would also encourage super funds to adopt other aspects of the ASX Corporate Governance Council’s guidelines to further improve the composition of their boards.

These guidelines recommend that boards use a skills matrix which identifies the expertise they require so any gaps in skills or experience can be addressed and the right mix can be maintained going forward.

Tenure and diversity should be considered in looking at the composition of a board. Is the board, for example, dominated by directors who have held their positions for a considerable period, and thus risk being stale in their thoughts? And are there enough directors from different backgrounds and with appropriate gender diversity to ensure that “group-think” does not inhibit optimal decision-making?

Tenure and diversity should be considered in looking at the composition of a board. Is the board, for example, dominated by directors who have held their positions for a considerable period, and thus risk being stale in their thoughts? And are there enough directors from different backgrounds and with appropriate gender diversity to ensure that “group-think” does not inhibit optimal decision-making?

The equal representation model has so far restricted super funds from properly applying these accepted principles.

And as industry super funds merge and move away from their original strict member base – or more importantly when they become funds open to any member of the public regardless of their job, trade or profession – it is impossible to argue that equal representation still applies fairly.

It is also wrong to argue that the historical performance of a super fund would justify maintaining the status quo by allowing trustees on its board to be equally split between employee and employer representatives.

The performance of an entity – either share price gains for a listed company or investment returns for a super fund – is not the only test of whether its governance is effective. This is too simplistic. There are a number of examples in the past where listed companies or investment products have unravelled after several years of stellar gains, leaving investors short-changed as the result of poor governance practices.

Good governance instead provides for the long-term stability, sustainability and profitability of an entity. In the case of super funds, it should give investors the confidence that their assets are not just safely managed today but will able to generate a steady, reliable income stream as they retire in the decades ahead.

The oversight and transparency of our super funds has improved in recent times, partly due to regulatory reform but also due to the efforts of the industry. The challenge now is to maintain the momentum so that the governance of our retirement schemes is subject to the same process of continuous improvement that applies to the well-run boards of other organisations, including companies that are listed on the ASX.

Australia likes to boast that it has a world class private pension system that is the envy of other countries. In so many ways that is true. It is time that the conversation around this system matured into a similarly sophisticated one focused solely on delivering the right outcomes for fund members. The government’s proposals are a step in the right direction.