In many countries that were once ruled from afar by a despotic overlord, their Independence Day is a cause for celebration, a day off and few fireworks. In ‘super’ land in Australia, the imposition of ‘independents’ is being met with quite the opposite reaction.
A short consultative period has recently ended for draft legislation that will require all APRA regulated super funds to have a minimum one-third independent directors, and an additional independent chairperson. APRA further proposes a majority of both the Board Audit & Risk and Board Remuneration Committee be composed of independent directors. The regulator will be given sweeping powers to assess individuals on their independent status.
Why do we need independence?
While the new law is now seen as being largely inevitable, the debate has turned to the detail of the legislation. What does independent mean?
Much of the initial discussion mistakenly danced with a definition borrowed from the world of listed companies. However, super funds are trusts where the members have no direct ownership of assets, have no right to vote in its affairs and have only a fractional economic interest, making it impossible for even the best paid fat cat to amass a substantial holding (within the meaning of The Corporations Act 2001).
There may be applications of this in retail or corporate super, where the trustee might conceivably become a creature of an ‘owner’ of the trustee, but the one-third independent rule has already been put in place voluntarily by members of the FSC (Financial Services Council).
The Government turns for justification to David Murray’s Financial System Inquiry which echoes research from across the globe. Improving pension fund governance improves pension outcomes. Further, the best governance comes from competent board leadership.
The very question that outcomes need to improve has come under attack. A media release from the Australian Institute of Superannuation Trustees (AIST) categorically refuted the Government’s premise, quoting Tom Garcia, CEO of AIST:
“There is absolutely no evidence to suggest our governance model is broken or that forcing boards to include a mandated third of independent directors would benefit members.”
However, the research has been around for a while, and is quite clear. As the line from Hamlet goes: “The lady doth protest too much methinks.”
The 2008 OECD report (Fiona Stewart and Juan Yermo, Pension Fund Governance – Challenges and Potential Solutions) says:
“Many of the problems in pension fund governance emerge from a weakness in the governing board. These can take several forms: … Selection on the basis of representatives of stakeholders: … often selected on the basis of their status in a trade union or employer, rather than their specific knowledge or experience on pension issues.”
Keith Ambachtsheer from the Rotman Institute at the University of Toronto has several studies linked with him which show a positive link between performance enhancements in the region of 1 to 2% pa and good governance, robust discussion at board level, and boards composed of experienced investors with specific knowledge of markets.
Implications for investment insourcing
As a proponent of the so called ‘Canadian model’ of super funds insourcing investment expertise, what we seem to forget in Australia is that Ambachtsheer only advocates such a technical move of skills in-house within the context of an expert board. His definition of governance includes:
“Oversight effectiveness issues involving clear delegation to management but within appropriate skill and knowledge set at board level.”
(Ambactsheer, Capelle and Lum, Rotman Institute, June 2007, ‘The State of Global Penion Fund Governance Today: Board Competency Still A Problem’).
Roger Urwin from Towers Watson, a similarly outspoken advocate of insourcing investment skill also supports this only within a context of what he describes as “Selection of the board and senior staff guided by their numeric skills, capacity for logical thinking, ability to think about risk in the probability domain” and “ leadership being evident at the board, investment committee and executive level”.
(Gordon Clark and Roger Urwin – Best practice pension fund governace, Dec 2007, Journal of Asset Management Vol 9).
What are we expecting from independence?
Within super funds, the conflict which this legislation seeks to remove is the influence of the well-meaning founders of the system. As much as unions have contributed significant benefits to the welfare of all Australians through the advent of our present superannuation system, there remains the potential that a proprietorial influence could be hindering the introduction of the best-practice described by a growing body of international research.
Whether the employer rep or the union rep, both groups claim a paternalistic right to set an agenda beyond that of returns for members. No matter how well-intentioned their motives, the modern world of public offer super does not sit easy with an historical view of collectiveism expressed through super. Quite simply, the sytem has moved on from its original collective industrial-relations agenda to a widespread series of individualised investment accounts.
Additionally, the conflicts manifest in the very collectivism that was a virtue of the industry fund movement from the beginning. The instinct to pool resources through related parties under the umbrella of the industry funds brought much needed scale to an infant industry.
However, for many trustees in the past, that meant wearing several hats both as provider and buyer of services. Similar conflicts are common across corporate life, but trustees acting as promoters for fund managers and sitting as directors of related-party providers has been a characteristic of super from the start.
While Ambachtsheer and Urwin want to legislate for competence, the Australian government wants to legislate for robust and self-critical board discussion. It is difficult to see how the one or two independent directors presently on boards could have had a numerically effective voice in some of the sacred cow issues of recent years.
Furthermore, the current classification by super funds of independence is partisan. The former Labor Premier of Victoria, The Hon. John Brumby, is the independent chair of MTAA as well as Deputy Chair of Industry Super Australia, the umbrella organisation for several providers of services including funds management. The Hon. Steve Bracks AC was originally appointed as independent chair of Cbus (2009-2013), (although now an ACTU appointee). Angela Emslie is the independent chair of HESTA as well as a Director of Frontier Advisors, their asset consultant, and a Member of the Industry Super Australia Advisory Council. Previously Angela was simultaneously a director of several super funds.
In a strict sense, these directors may meet requirements of independence, and retired members of related ‘bodies corporate’ (in the words of the proposed legislation) may qualify after suitable periods or by degrees of separation. However, while governments certainly can’t legislate for competence, so too should they never try to legislate for political thinking.
Barring a trustee because of former or present union sympathies seems an impossible task for APRA and unless we opt for a far-off despotic overlord to impose such rules, I am hoping that someday, in our comfortable retirement, we can all come to celebrate Independents’ Day.
David M Brown is Chief Investment Officer at PacWealth Capital in Port Moresby; Licensed Investment Manager of the largest private sector super fund in PNG, NasFund; a Non-Executive Director of ASX-listed Clearview Wealth; and has managed pension, superannuation and insurance assets in the UK and Australia for over 25 years.