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Super fund directors and Independents’ Day

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.


Super spectator
September 21, 2015

The Bill introducing mandatory independent directors is confused.

With the very effective equal representation governance model, designed to balance the "opposing" interests of the unions and the employers in industry funds will be undermined and rendered less effective if a majority of independent directors is required and the two-thirds voting rule is removed. What the industry funds need is more experienced directors with super industry background. They do not need directors who are independent of the unions and employers.

On the other hand the retail funds have plenty if experience and super industry knowledge, but lack any directors who are truly independent of the bank-controlled trustees.

August 03, 2015

The debate misses the real (and mathematically valid) point (though Naresh touches on it) of the advantages of diversity (as distinct from diversification).

I would encourage people to read Prof Scott Page's work where he looks at pre -conditions to take advantage of collective "wisdom".
Importantly, one of these is "the calculus" condition which requires participants to have a minimum ability level to contribute. One of his conclusions is that a person’s “value” depends on his/her ability to improve the collective decision however, purely quantitative measures, such as IQ scores, SATs etc “may not be as important in determining a person’s potential contribution as a problem solver as would be measures of how differently that person thinks.”

The question is, does the current pool (be that an employer group, employee group or professional independent Director's) provide sufficient diversity in the first instance? and then is the group of Trustees selected for the specific Fund sufficiently diverse?

August 03, 2015

As we continue to debate the future composition of super fund boards, lets not forget diversity. My industry superannuation fund has three independent directors including the chair, all with just an investment management background. Where is the diversity of thinking? Superannuation funds are multifaceted, providing members with a range of services beyond just investment management. If the suggestion is a majority of independent directors, then we must ensure there is diversity in thinking at the Board level.

Anthony Serhan
July 31, 2015

It is not right to link superannuation returns to the debate about governance structures. There are many more meaningful reasons than the composition of boards that explain why investment portfolios and returns have been different between industry and retail funds historically. As this article attests, the debate should be about the future, and the best governance structures for what is now an incredibly large and important pool of assets for Australians.

David Brown
July 31, 2015

It's clear now that due to costs and liquidity both Industry and Retail funds are increasingly Performing in a similar way. While the June Chant West shows some difference, earlier versions, such as the December survey showed little difference, with Industry underperforming Retail out to five years. Chant West now delve as far back as the 15 year comparison to "prove" the point about Industry outperforming. Evidence of a real gap between the two, let alone a premium to Industry, is harder to find.

Anthony is correct, the returns generated 15 years ago came out of an entirely different context. Right now, pressures are forcing all funds to conform to a new normal. The future will belong to Boards who can process, assimilate, discuss and challenge new approaches for benefitting member returns.

July 31, 2015

It is difficult to argue against independence in the sense it is the opposite of 'conflicted'. The arguments advanced by the opponents for the one third proportion of independents plus the Chair seem to centre around the relative performance of industry funds (which the retail sector has now come to appreciate, and copy to an extent); and 'don't fix what ain't broken' plea.

While the performance argument seems prima facie reasonable, the many public scandals of being too close to the conflicted interests and duties of boards strike at the root of public confidence which given inertia and disengagement has not suffered too much. But the effect is insidious.

The don't fix that ain't broken is effectively an argument against innovation and progress. These would have argued for heavy ledgers and sharp pencils before calculators and computers and leaches before anesthesia.

But nominal independents can be bought too (as they have been). They can be silenced; they can follow, herd-like a dominant chair, or worse, the chief executive. Corporate cases and case studies are rife with recumbent independents.

For the industry with little or no capital cushion (no, the curiously named Operational Risk Financial Reserve requirement does not go far enough), the value of thinking and conscientious independence could make all the difference between current complacence and super achieving its rightful place ahead of other intermediation industries. Remember, slavery was condoned some centuries ago in almost all cultures.


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