Fraser review fails investors

Bernie Fraser’s long-awaited report on industry superannuation governance represents a missed opportunity to lift the quality of governance in this important sector.

This article appeared in The Australian Financial Review on 20 February 2017 (subscription may be required).

Most disappointingly, the losers from this failure to embrace reform are the many Australians whose retirement incomes are managed by the industry superannuation sector. Industry super funds have much to be proud of in terms of their past performance for members.

Yet as the funds’ own advertisements say, past performance is not a reliable indicator of future performance.

An industry that highlights a ‘member first’ ethos – and a review led by one of its founding fathers – should be at the forefront of looking for ways to strengthen and improve governance standards.

Instead, the Fraser Review represents a defence of the status quo – boards dominated by unions and employers, fighting off calls for a greater role for directors independent of these interests.

While independence on boards is not a magic cure-all, it is widely recognised as key plank of good corporate governance. Indeed, the Fraser report itself acknowledges that over time, more directors of industry funds are likely to be independent in order to ensure their boards have the skills and knowledge necessary to protect the retirement savings of their members.

Despite acknowledging this, the report fails to embrace the value of ensuring there are independent directors with the necessary skills on these boards sooner rather than later, nor the impacts of the “equal representation” rule.

Instead it claims that many of the arguments for mandated minimum numbers of independents rely upon assertion, rather than reason and evidence. Mr Fraser goes so far as to call this the “Age of Assertion”, which seems to be his take on “fake news”.

Ironically, the report itself draws on a series of assertions that fly in the face of earlier research.

Two government reviews, the Cooper Review in 2010 commissioned by the Labor Party and the Financial Systems Inquiry in 2014 commissioned by the Coalition, have recommended increasing the proportion of independent directors on industry superannuation fund boards.

The Cooper review, commissioned in the wake of the GFC, made particularly strong arguments for the appointment of independent directors. It pointed out that the equal union/employer representation model of many industry superannuation funds was outdated following the introduction of fund choice, and left many significant groups unrepresented. Key among those are pensioners themselves and those who have joined the fund because of fund choice rather than employee affiliation. It also pointed out the potential for conflict between the trustee‐directors’ responsibility to the third-party organisation that appointed them as opposed to the funds’ members.

Research by Professor Alex Frino, commissioned by the AICD’s Governance Leadership Centre, also shows that balanced boards, that is, those with between 30 per cent and 60 per cent of independent directors, outperform others, with evidence strongest in the 40 per cent to 60 per cent category.

If politics is the art of the possible, what does it say about the state of the body politic when common-sense measures to improve the corporate governance of a sector responsible for protecting our retirement incomes can’t progress?

It would be one thing if the Fraser review laid out an alternative approach to reform for stakeholders to consider. But it spends so much time defending the existing model that it fails to consider the opportunity to improve the quality and structures of governance for their own members.

Australians are sick and tired of seeing obfuscation and delay on needed reforms. The government and the cross-bench gave the industry superannuation sector an opportunity to put a better corporate governance model forward, and they failed to do so. Australians who trust industry super funds with their retirement incomes shouldn’t be asked to accept further delays.