The Royal Commission’s Final Report has effectively ended the debate surrounding the mandatory appointment of independent trustee directors to the boards of superannuation funds, while not making a specific recommendation on board composition.
In the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Commissioner Kenneth Hayne made nine recommendations in relation to superannuation.
The Commissioner’s recommendations focused on avoiding conflicts of interest, increasing accountability, proposed changes to how superannuation products can be offered, and called for single default superannuation accounts.
Not one of the Commissioner’s recommendations related to the composition of superannuation trustee boards, nor made reference to the appointment or removal of trustee directors.
Yet the Commissioner may have effectively ended a long debate surrounding the mandatory appointment of independent trustee directors to the boards of superannuation funds through his commentary.
A majority of independent board directors is often presented as the solution to the agency problem of a separation between the ownership and the control of modern corporations.
In Australia, the ASX recommends that the majority of a listed entity’s board comprise independent directors. In a similar vein, the regulator, Australian Prudential Regulatory Authority (APRA), requires that boards of banking and insurance entities have a majority of independent directors and an independent chair. It is therefore not surprising that similar governance models have been proposed to be applied to the trustee boards of superannuation funds.
In 2010, the Super System Review into the governance, efficiency, structure and operation of Australia’s superannuation system recommended that the Superannuation Industry Supervision (SIS) Act be amended to mandate the appointment of independent ‘non-associated’ trustee directors. The Review called for the appointment of a majority of independent trustee directors for superannuation trustee boards that do not have equal representation, and at least a third of independent directors to be appointed to superannuation boards who have followed the equal representation model. The equal representation model provides for half of trustee directors to be appointed by employer representatives and half by member representatives.
The Review’s call for the mandating of independent trustee directors was followed by a Federal Government consultation into superannuation governance, which in a 2013 consultation paper stated that a threshold issue for superannuation governance is the number of independent directors.
The following year, the Financial System Inquiry went further than the Super System Review, calling for a majority of independent trustee directors, and an independent chair, to be mandatory for all public offer superannuation funds.
These recommendations informed Federal Government legislation which required that all APRA regulated superannuation fund trustee boards are comprised of at least one-third independent trustee directors, and an independent chair. While APRA endorsed this proposed change, it was opposed by many in the superannuation industry, and ultimately Parliament.
Opposition to the proposed changes didn’t centre on questioning the value that independent directors can add to trustee boards. Rather, opponents questioned why the governance models of highly performing funds, including the equal representation model and variants of it, were being dismissed in favour of a single model to be mandated across the superannuation industry.
Following several unsuccessful attempts to pass the legislation, proposals to mandate the appointment of independent trustee directors have not been included in recent superannuation legislative packages.
There have at times throughout this debate been a conflation between arguments in support of appropriately skilled trustee boards and the advocacy of a particular board composition model over another.
Commissioner Hayne spent significant time inquiring into the ownership structures, nomination processes, and board compositions of a range of superannuation funds in order to determine if a particular model of trustee governance better serves members over another.
Hayne was typically candid in his assessment:
“I do not consider that these matters are best dealt with by prescriptive rules about board numbers or composition or prescriptive rules about nomination or selection processes. Rules of that kind have sometimes sought to use the notion of ‘independence’ as the relevant criterion. But rules prescribing board numbers or composition or prescribing particular forms of nomination or selection processes distract attention from the basic requirement of ensuring that the board is, as far as possible, constituted, at all times, by directors who, together, will form a skilled and efficient board.”
Trustee boards with the appropriate collective skill sets, who renew those skills through term limits, and at all times prioritise the interests of fund members over all others, will be best placed to perform their fiduciary duties in the Commissioner’s view.
He sees no merit in mandating board composition or appointment processes through legislation, and feels that superannuation funds should not adapt the board appointment processes of publicly listed companies. Rather, he suggests that each superannuation fund focus on how it can best apply the sound and proper governance principles he highlights.
While making no formal recommendations on superannuation governance, the Commissioner’s view carries significant weight, and will do so for many years. His assessment of superannuation governance is likely to mark the end of proposals to mandate the structures of superannuation boards, and instead prescribe a renewed focus on the collective skills and capabilities of trustee boards.