Composition is Superior to Independence

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Treasury’s superannuation governance discussion paper (28.11.2013) has prompted a further round of debate around whether appointing a minimum proportion of independent Board Directors is worthwhile.

Board independence

The paper had asked:

  • how an independent Director should be defined for Superannuation Trustee Boards;
  • whether Superannuation Trustee Board Chairmen should have to be independent; and
  • what proportion of a Superannuation Trustee Board should be independent.

Then-Assistant-Treasurer Arthur Sinodinos indicated that he agreed with the stipulation in the ASX Principles and Recommendations that Boards comprise a majority of independent directors. Yet Treasury received 90 submissions, many of which disagreed with this proposition.

Others noted the benefits of independence and also pointed out that retail superannuation funds must implement FSC Standard No. 20, requiring that Superannuation Trustee Boards have a majority of independent Directors and an independent chairman, from 1 July 2014.

So what should we make of this?

True, consistency makes life easier in a complex and demanding world. It also seems reasonable that participants in an industry with $1.8 trillion assets under management should be held to the same standards as top Australian listed companies. (To give an indication, our four major banks reported total assets of just under $3 trillion in their 2013 annual reports.)

Yet, let us take a step back.

What benefit accrues by having independent Directors on the trustee Board of superannuation organisations?

According to the AICD’s submission, independent Directors:

  • Can represent and protect the interests of significant groups that are unrepresented under the equal representation model;
  • Can assist employer and member representatives by providing a fresh perspective as well as bringing different skills and knowledge, particularly where member representatives and employer representatives may have had similar backgrounds, experience or training;
  • can bring specialist investment, finance, director or trustee experience, which employer and member representatives may lack;
  • may be able to reduce the risk of industrial instability inherent in the equal representation model; and
  • may bring substantial company-specific knowledge where employer and member representatives may not understand the superannuation fund, the superannuation entity or the superannuation industry generally.

While these are all good points, we wonder if mandating a number of independent Directors will in and of itself achieve those aims. Really, the focus should be on appointing the right Board for the fund’s situation, majority independent or otherwise. The right Board will:

  • Represent key stakeholders;
  • Be comprised of Directors with a diverse range of backgrounds and experience;
  • Possess a broad palette of skills (financial, legal, technological, marketing, sales, etc); and
  • Have personalities that complement each other.

Having a composition that fulfils these ideals is the first step to a Board’s becoming forward-looking and high-performing.

To test the Board’s current composition, it could conduct a performance review of its functioning including a Board Capability Matrix (see ASX Corporate Governance Principles and Recommendations – Recommendation 1.6  and 2.2) examining:

  • How the Board is performing against its goals and how the fund is performing against the market;
  • Whether the Board is adequately representing key stakeholders;
  • Whether there is enough diversity in terms of Director experience and  background; and
  • How well current Director skills meet future skill requirements.

The review may lead to development for the Board or individual Director training and would also inform what criteria should be sought under any Board improvement or renewal process.

Resulting appointments may be Directors who would be considered independent, which may require more flexibility than currently available under the Superannuation Industry (Supervision) Act 1993 (SIS Act) – as other submissions have noted.

If desired, an “if not, why not” recommendation regarding independent Directors could be implemented for the sake of the abovementioned consistency, as long as the final choice rested with the Board.

After all, fund members benefit from having a Board where the strengths and background of its Directors create a well-informed and performing team, not one where its composition fulfils an arbitrary guideline.

In next month’s newsletter we’ll discuss what the right Board can do to perform. If you would like to supercharge the performance in your organisation, Egan Associates conducts Board reviews and Board Capability Matrices. Call us now.

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