By Scott Donald, UNSW and Suzanne Le Mire, University of Adelaide

Independence is valued in many walks of life.  As a society we deem it important that our judges exercise independent judgment.  We expect our doctors to be free from any conflicts that might distort their judgment, for instance on which course of treatment to pursue.  We expect the same of trustees; they should be free from conflict and distraction and able to pursue the interests of their beneficiaries with single-minded determination.

Now consider the superannuation system.  Governance in the superannuation system is an amalgam of the private law world of trusts and the corporate world.  The government’s call for a proportion (usually one third) of individuals serving on superannuation fund boards to be independent from any formal or informal ties to outside parties echoes a move over recent decades to have greater independence on corporate boards.  The counter to this trend in the superannuation system has been the ‘equal representation’ model imposed on not-for-profit superannuation fund boards.  The thinking there is that since all directors on super fund boards are required to act in the best interests of all members, having representatives from key stakeholders nominated to the board ensures that the board remains responsive to their needs and doesn’t wander off in pursuit of some other set of objectives.

There remains some debate about whether the ‘equal representation’ model in fact needs an injection of independence of the type currently under consideration by the government.  It seems to us that irrespective of the answer to that, there are two things that should be urgently addressed.

The first is that if ‘independence’ is to be legislated for, then the definition should be clear and relevant.  The definition currently mooted in the draft Bill is derived from the corporate world and does not speak directly to the issues in the superannuation context.  The draft Bill seeks to address this by empowering APRA to elaborate on what type of ‘material relationship’ would preclude an individual from being considered independent in a given context.  With respect that simply passes the buck.  It leaves superannuation boards in an uncomfortable limbo about what might be necessary to comply with the legislative changes. What’s more it puts APRA in the position of legislator, administrator and regulator.  One doesn’t have to be critical of APRA to be uncomfortable with that situation. 

The second is that structural independence of the type sought in the legislation as currently drafted is unlikely to be enough to secure the benefits of independence sought by the government.  It is really ‘cognitive’ independence that is the goal.  That is, the willingness and capacity to exercise an independent judgment.  Formal ties to outside parties could clearly distract and possibly impinge on that willingness, but there are nuances in the superannuation context that mean that severing those ties might still not be enough.

One of the key differences between the corporate world and the superannuation context is that directors in the corporate world are accountable to the company’s shareholders.  They are appointed by the shareholders in a General Meeting and they report to that meeting.  There is no equivalent in the superannuation context.  Members receive regular reports of varying types but there is not the same level of scrutiny of the board, nor the mechanism of the General Meeting at which board members can be held to account.  Rather (in the overwhelming majority of cases) board members in a super fund are nominated by outside parties, usually a trade union or employer organisation.  Independent directors, to the extent they exist currently, are appointed by other board members.  Not surprisingly, many of those independent directors are sympathetic to the interests of the board members responsible for their appointment.  Like all board members, they are required to act in the best interests of all fund members, and so should not act in a partisan manner, but there is a very real risk that informal influences arising from the way they are appointed affect the judgment of these individuals.  Indeed the subterranean nature of the influence may pose an even more insidious threat to genuine, cognitive, independence than the representative model it is supposed to reform.

What is to be done?  Some funds have already instituted direct member elections for some of their board members, and that may be effective for other funds too.  Importantly, though, we think that the independence of those appointed to ‘independent’ roles on a superannuation fund board should be buttressed by regulation of the terms of their appointment.  These might properly be the domain of APRA as they would have to be designed and assessed in the unique circumstances of each fund.  Examples include: a minimum tenure, to ensure that directors are confident that they can voice unpopular views at the board table without risking being summarily replaced; remuneration to be paid directly to the individual for all positions (nominated and independent) to ensure that all members of the board appreciate that whilst serving on the board their sole loyalty is to the members of the fund; clear disclosure to members of the status of all board members (including the identify of their nominators, where relevant) as a way to promote accountability and the creation of a Governance Sub-Committee to oversee the nomination and appointment processes of the board and its sub-committees.  Consideration should be given to the support that is needed for independent action. Making the chair responsible for ensuring information flows effectively to independent directors is critical. Funds might also consider ensuring that independent board members have a discrete budget to spend on research and analytical tasks so that they are not beholden to the executives of the fund, and executive directors.  If the independent directors are actually to perform a disciplining role in the governance of Australia’s super funds, they need to be not just willing to perform the role; they must be capable of doing it justice also.

Scott Donald is Director of the Centre for Law, Markets and Regulation, UNSW Law.  Suzanne Le Mire is a senior lecturer at the Adelaide Law School, University of Adelaide. Drs Donald and Le Mire’s research is funded by a grant from the Centre for International Finance and Regulation.