Bills Digest no. 40 2015–16
PDF version [810KB]
WARNING: This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Kai Swoboda
Economics Section
9 November 2015
Contents
The Bills Digest at a glance
Purpose of the Bill
Structure of the Bill
Background
Committee consideration
Policy position of non-government
parties/independents
Position of major interest groups
Financial impact
Statement of Compatibility with Human
Rights
Key issues
Key provisions—Schedule 1
Concluding comments
Date introduced: 16
September 2015
House: House of
Representatives
Portfolio: Treasury
Commencement: Sections
1–3, Schedule 1 and item 17 in Schedule 2 commence on Royal Assent. The
remaining items in Schedule 2 commence on 1 July 2016.
Links: The links to the Bill,
its Explanatory Memorandum and second reading speech can be found on the
Bill’s home page, or through the Australian
Parliament website.
When Bills have been passed and have received Royal Assent, they
become Acts, which can be found at the ComLaw
website.
Purpose of the Bill
- The
purpose of the Bill is to implement a board governance structure for certain
superannuation funds that requires at least one-third of trustee directors to be
independent and that the chair also be independent.
Background
- The
inclusion of independent directors on the board of listed companies emerged in
corporate governance policy in the early 1990s in Australia, with corporate
principles developed by the Australian Stock Exchange including that boards
comprise a majority of independent directors and that the chair should be an
independent director.
- The
2009–10 Cooper review of superannuation endorsed mandating that one-third of
directors be ‘non associated’ directors and the recent Murray Report of the
financial system supported mandating for a majority of ‘independent’ directors
and an ‘independent’ chair on superannuation fund boards.
Key elements
- The
Bill repeals the existing provisions of the Superannuation Industry
(Supervision) Act 1993 that establish the equal representation model and
replaces them with requirements that:
- the
chair of the registrable superannuation entity (RSE) licensee’s
board of directors must be independent from the RSE licensee (for RSE licensees
that are a body corporate)
- at
least one-third of the RSE licensee’s directors or trustees must be independent
from the RSE licensee
- the
RSE licensee must comply with any requirements of the prudential standards in relation
to the appointment or removal of directors who are independent from the RSE.
- The
meaning of independent from an RSE licensee includes conditions
under which a person is excluded. These encompass limits on shareholding
interests (subject to certain exclusions) and minimum periods for the person’s
business relationships that were material with the RSE licensee or trustee and
employment with certain related entities.
- The
regulator—the Australian Prudential Regulation Authority (APRA)—will be
empowered to develop prudential standards and also make determinations about
whether or not a person is considered independent from an RSE licensee.
Stakeholder concerns
- The
policy reasons for the measures proposed by the Bill are contested—although
there is general agreement about the importance of good governance at a board
level to entity performance.
- There
are differing views about whether requirements for independent trustee members
and an independent chair should be mandated or expressed in general principles
which individual boards can choose to implement.
Key arguments
- The
main arguments for the measures proposed by the Bill broadly relate to the
general acceptance of the principle that independent board members and chairs
bring improved decision making processes, a greater diversity of skills and
experience which will contribute to both strengthening the superannuation
system overall as well as member interests.
- The
main arguments against the measures proposed by the Bill include that the existing
equal representation model has performed well; the model is an important
feature of the superannuation system and is prevalent in many overseas pension
funds; and that there is a lack of evidence to support the changes as the
imposition of a principles-based framework creates a lack of flexibility for
boards and creates additional costs without any equivalent benefits.
The purpose of the Superannuation Legislation Amendment
(Trustee Governance) Bill 2015 is to amend the Superannuation Industry
(Supervision) Act 1993[1]
(SIS Act) and the Governance of Australian Government Superannuation
Schemes Act 2011[2]
to require that certain superannuation funds have at least one-third of directors
or trustees that are independent from the licensee of the fund
and that an independent director or trustee be chair of the
trustee board.
The Bill provides for a three year phase-in period for the
requirements from the day of Royal Assent—except for those provisions relating
to the Commonwealth Superannuation Corporation (CSC) which is the trustee of
various Commonwealth superannuation schemes, which will apply to new board
appointments from 1 July 2016.
There are two Schedules to the Bill:
- Schedule
1 implements the changes to the SIS Act
- Schedule
2 broadly implements similar arrangements in relation to appointments to the CSC.
Nature of governance
The term ‘governance’ when used in relation to an
organisation or business:
encompasses the system by which an organisation is controlled
and operates, and the mechanisms by which it, and its people, are held to
account. Ethics, risk management, compliance and administration are all
elements of governance.[3]
The terms ‘governance’ and ‘corporate governance’ are used
interchangeably in relation to organisations although the term ‘corporate
governance’ can have specific relevance to companies (as opposed to other forms
of business and non-business organisations). The concept of governance at an
organisation level has its roots in the development of corporations with the
separation of ownership (shareholders) from control (management) and how to
manage the principal–agent ‘problem’ that potentially arises due to the
different interests of management and other stakeholders.[4]
Importantly, the concept of governance covers structural
elements such as those that regulate how the management function is arranged
(such as board functions and membership) and the duties and obligations of
relevant people that are part of the organisation. It also covers elements that
may not be able to be directly regulated, such as ensuring that the relevant
people have appropriate skills and experience and a positive organisational
culture.[5]
Governance of superannuation funds
Superannuation funds in Australia are established under a
‘trust model’, whereby the trustee (which for superannuation funds is usually a
company) has an obligation to act in the best interests of its members. The use
of this trust model for superannuation funds is embedded in the SIS Act,
with all APRA-regulated superannuation funds operating as trusts, usually with
a company as the trustee.[6]
The individual directors of the trustee company (sometimes referred to as the
‘trustee board’ with the individuals referred to a ‘trustee directors’) are
required under the SIS Act to operate the fund in the best interests of
members—given that the sole purpose of the superannuation system is to provide
retirement benefits to members.[7]
Added on to the trust model are the licensing arrangements in the SIS Act,
which include adherence to relevant prudential standards covering a range of
corporate governance issues such as conflicts of interest and risk management.[8]
Independent directors
Interest in the concept of an independent
(also referred to as a ‘non-executive’) board director emerged in the corporate
governance literature in the 1980s and 1990s as greater recognition was given
to the role played by board directors that were separate to management (who are
referred to as ‘executive directors’ or ‘inside directors’) in bringing
additional expertise to the decision making process as well as providing a
check on
self-interest and abuse within corporate management.[9]
The application of a broader policy to mandate requirements
for the inclusion of independent directors on the board of listed companies was
included in a key UK governance review in 1992 (known as the Cadbury Review
after its chair Sir Adrian Cadbury).[10]
The Cadbury Review, commissioned at a time of increasing lack of investor
confidence in the honesty and accountability of listed companies and by sudden
financial collapses of some companies, supported minimum numbers of independent
directors, with the concept of independence based on independence of judgement
and independence of association:
Non-executive directors should bring an independent judgement
to bear on issues of strategy, performance, resources, including key
appointments, and standards of conduct. We recommend that the calibre and
number of non-executive directors on a board should be such that their views
will carry significant weight in the board’s decisions. To meet our
recommendations on the composition of sub-committees of the board, all boards
will require a minimum of three non-executive directors, one of whom may be the
chairman of the company provided he or she is not also its executive head.
Additionally, two of the three should be independent in the terms set out in
the next paragraph.
An essential quality which non-executive directors should
bring to the board’s deliberations is that of independence of judgement. We
recommend that the majority of non-executives on a board should be independent
of the company. This means that apart from their directors’ fees and
shareholdings, they should be independent of management and free from any
business or other relationship which could materially interfere with the
exercise of their independent judgement. It is for the board to decide in
particular cases whether this definition is met. Information about the relevant
interests of directors should be disclosed in the Directors’ Report.[11]
In Australia, an emphasis on corporate governance policy
arose in the early 1990s from a series of reports sponsored by the Business
Council of Australia known as the ‘Bosch reports’.[12]
Conducted at a similar time to the Cadbury Review, the first Bosch report
(published in 1991) included amongst the suggested principles for better
corporate practices and conduct, that independent directors were important.
However, rather than recommending any particular number of non-executive
directors the first Bosch report merely noted that it would be a useful
safeguard to appoint at least two directors who have no personal or
professional association with the company.[13]
The second Bosch report, which took account of the Cadbury Review
recommendations, was delivered in 2003. By that time, the suggestion that
directors be independent was more prominent, with the preference that the
majority of directors should be independent.[14]
The Australian Stock Exchange’s Corporate Governance
Council published its Principles
of Good Corporate Governance and Best Practice Recommendations in 2003.[15]
ASX-listed companies were to adopt the best practice recommendations and, if
not to disclose ‘why not’.[16]
One of the best practice principles espoused by the ASX Corporate Governance
Council was that ‘a majority of the board should be independent directors’.[17]
A further best practice recommendation was that ‘the chair should be an
independent director’.[18]
The most recent version of the ASX Principles of
Good Governance and Best Practice Recommendations, released in 2014 (third
edition), has retained this approach.[19]
The ASX principles, while not directly applying to superannuation funds,
provide a useful framework against which to assess the specific requirements
for the independence of superannuation fund trustee directors.
Trustee governance arrangements
Under existing arrangements, the trustee of an
APRA-regulated superannuation fund is known as an RSE licensee as
it operates under a Registrable Superannuation Entity licence issued by APRA
under Part 2A of the SIS Act.[20]
Part 9 of the SIS Act requires that the board of a corporate trustee for
a standard employer-sponsored fund of five or more members must consist of
equal numbers of employer representatives and member representatives—these are
referred to as the equal representation rules. The boards of such RSE
licensees may appoint an independent director if that is permitted under an
RSE's governing rules and is requested by the employer or member
representatives on the board.[21]
Superannuation fund trustees are subject to a broad range
of governance requirements including a range of operating standards established
in the SIS Act such as operating standards that form part of licensing
conditions, specified covenants that are to be part of the governing rules of
superannuation funds and prudential standards issued by the Australian
Prudential Regulation Authority (APRA).[22]
Policy development
The proposals included in the Bill have their origins in the
recommendations of a review of the superannuation system conducted in 2009–2010.[23]
While the recommendations relating to trustee board composition were largely rejected
by the Gillard Government,[24]
the Coalition’s 2013 election policy was broadly similar to the provisions of
the Bill.[25]
Cooper Review
The ‘Super System Review’, (known as the ‘Cooper Review’
after its chair Jeremy Cooper), led to a number of important changes under the
Gillard Government including the introduction of a low-cost default
superannuation product (‘MySuper’), efforts to improve the ‘back office’
efficiency of the superannuation system (‘Superstream’) and some changes to the
regulation of self-managed superannuation funds (SMSFs).[26]
In terms of superannuation fund governance, the final report
of the Cooper Review observed that trustee governance structures had not kept
up with developments in the industry and that there had been difficulties for
trustees and their trustee‐directors in understanding what is expected of
them.[27]
The recommendations to improve governance arrangements included creating a
distinct new office of ‘trustee‐director’ with all statutory duties
(including those which would otherwise be imposed by the Corporations Act
2001[28])
to be fully set out in the SIS Act[29]
and for an industry council to develop (with APRA coordination and in
consultation with stakeholders) a ‘Code of Trustee Governance’ for trustees of
superannuation funds and their trustee‐directors to assist with
identifying best practice in the industry.[30]
It is important to note that in formulating its recommendations, the Cooper
Review considered that the corporate governance arrangements that applied to
ASX-listed companies were a ‘reasonable starting point’ for the arrangements
that should apply to superannuation fund trustees ‘given the profound impact
the latter have on the retirement incomes of members’.[31]
In relation to the structure of the trustee board (the
matters which are the subject of this Bill), the Cooper Review recommended that
‘non-associated’ trustee members be mandated as part of trustee boards:
- if
a trustee board does not have equal representation, the trustee must have a
majority of ‘non‐associated’ trustee‐directors[32]
and
- for
those boards that have equal representation because their company constitutions
or other binding arrangements so require, the SIS Act should be amended
so that no less than one‐third of the total number of member
representative trustee‐directors must be ‘non‐associated’ and no less
than one‐third of employer representative trustee‐directors must be
non‐associated.[33]
The term ‘non-associated’ nominated by the Cooper Review was
derived from the concept of independent directors on company boards. However,
no clear definition of the term was provided, with the Cooper Review providing
an outline of what the term would cover:
For this purpose, the term ‘non‐associated’ would have a
different meaning from the term ‘independent’ in the SIS Act. For example, the
Panel believes that a member of the fund could be a ‘non‐associated’
trustee‐director. Non‐associated trustee‐directors would
still need to be free of connections to, or associations with, employer
sponsors, the appointor (other than by reason of the appointment itself),
entities related to the trustee, employer groups, unions, service providers and
should not be current or former executives of the fund or a related entity. Of course,
if a non‐associated trustee‐director is paid for their duties as a
trustee‐director, the fee should be paid only from fund assets and not by
any third party.[34]
Government response to the Cooper
Review
The Gillard
Government response to the Cooper Review recommendations (labelled as
‘Stronger Super’) was released on 16 December 2010.[35]
In relation to the recommendations about the appointment of non-associated
members to trustee boards, the Government did not support the proposals,
considering that the composition of a trustee board was a matter for the board
to determine.[36]
Coalition policy
At the time of the release of the Cooper Review’s trustee
governance recommendations and the subsequent Gillard Government response, the
Coalition expressed its view that the Cooper Review recommendations about
requiring independent directors to be appointed to boards should be
implemented. The then Shadow Minister for Financial Services and Superannuation,
Senator Mathias Cormann, noted in 2010 that:
The Minister shied away from outlining necessary reforms to
improve corporate governance of superannuation funds and to ensure competition
in the default fund market.
Where are the reforms for example to ensure mandatory
disclosure of conflicts of interest, to require independent directors on
superannuation fund boards, disclosure of director remuneration and directors
of super funds to sit on a single fund and not hold multi-directorships.[37]
In August 2012, during the debate on a Bill that included
provisions relating to trustee governance arrangements, Senator Cormann
outlined how the Coalition viewed the recommendations of the Cooper Review and
would amend the existing arrangements, should it be in government, to include
‘the appropriate provision of independent directors on superannuation fund
boards’.[38]
In government, should we be successful at the next election,
we will implement the sensible corporate governance reform recommendations made
by the Cooper review that would see mandatory disclosure of conflicts of
interest, the appropriate provision of independent directors on superannuation
fund boards and which would force directors who want to sit on multiple boards
and where there is clearly an apparent risk of conflict of interest to be
required to demonstrate to APRA that they do not have in fact any foreseeable
conflicts of interest. There is also the issue of conflicts of interest in
relation to related party transactions that do need further tidying up when it
comes to corporate governance standards.[39]
In the lead in to the 2013 election, the Coalition’s
policy, although not specifically setting out what changes it would make, if
elected to government, questioned the equal representation model and stated
that ‘the Coalition will work with all relevant stakeholders to ensure
Australia’s superannuation system has appropriately high standards of corporate
governance’.[40]
Since its election in 2013, the Coalition government has
moved cautiously in pursuing changes to superannuation fund governance
arrangements. A November 2013 consultation paper entitled, Better
regulation and governance, enhanced transparency and improved competition in
superannuation, sought feedback on some of the specific areas that are
being proposed for change by the Bill, including:
What is the most appropriate definition of independence for
directors in the context of superannuation boards?
What is an appropriate proportion of independent directors for
superannuation boards?
Both the ASX Principles for listed companies and APRA’s
requirements for banking and insurance entities either suggest or require an
independent chair. Should superannuation trustee boards have independent
chairs?[41]
Financial system review
The time taken to implement the changes proposed by the Bill
since the 2013 election can be partly explained by the undertaking of the
Financial System Inquiry (known as the ‘Murray
Report’ after the chair of the review, former CEO of the Commonwealth Bank
David Murray AO).
In its final
report to the Government, delivered in December 2014, the Murray Report
arguably went further than the Cooper Review in that it recommended a majority of directors be independent and also
that the chair be independent.[42]
In making this recommendation, the Murray Report observed:
[i]ncluding independent directors on boards is consistent with
international best practice on corporate governance. Independent directors
improve decision making by bringing an objective perspective to issues the
board considers. They also hold other directors accountable for their conduct,
particularly in relation to conflicts of interest.[43]
Relevant consultation
2015 draft legislation
On 26 June 2015, then Assistant Treasurer, Josh Frydenberg, proposed
that all APRA-regulated superannuation funds, including corporate, industry,
public sector, and retail funds, have a minimum of one third independent
directors on their trustee board and an independent chair.[44]
His announcement coincided with the release of draft legislation covering
matters included in the Bill.[45]
Thirty-two submissions were received during the consultation period.[46]
Subsequently Treasury noted that there had been a number of ‘refinements’
included in the Bill such as:
- clarifying
that the independent chair is not in addition to the one-third share of
independent directors
- more
detail and a revised definition of independent including
amendments to the term ‘substantial shareholding’, and
- inserting
a regulation making power that will specify circumstances that would result in
a person being either independent or not independent.[47]
However, the broad policy proposals remain unchanged in
the Bill.
2015 draft prudential standards
APRA has recently undertaken consultation with the
superannuation industry for material that will support the changes proposed by
the Bill (prudential standards and guidance on governance matters).[48]
On 26 June 2015, APRA wrote to all RSE licensees seeking
feedback on initial proposals to amend its superannuation prudential framework
to support the changes outlined in the draft legislation.[49]
On 31 August 2015, APRA published two draft prudential
standards (‘SPS 510 Governance’ and ‘SPS 512 Governance Transition’) and two
draft prudential practice guides (‘SPG 510 Governance’ and ‘SPG 512 Governance
Transition’) for consultation.[50]
At the time, APRA noted that, subject to the passage of the legislation, it
expected to release the final prudential standards and prudential practice
guides in December 2015 with the prudential standards expected to take effect
on the date that they are registered on the Federal Register of Legislative
Instruments.[51]
Superannuation industry overview
As at 30 June 2015, there was over $2 trillion invested
by superannuation funds on behalf of members.[52]
While about one-third of this is held in self-managed superannuation funds
(SMSFs), the large superannuation funds—divided broadly into not-for-profit
funds (industry funds, corporate funds and public sector funds) and for-profit
funds (retail funds) account for a significant share of assets (figure 1).
Retail funds and industry funds are the more important part of the sectors in
terms of member accounts and assets—this largely reflects the closure of
defined benefit corporate and public sector schemes and the transition to
defined contribution schemes.[53]
The value of superannuation savings is likely to continue to
increase over the medium to long term, with various estimates putting the value
of assets managed by superannuation funds in the order of $6–9 trillion in
the mid–2030s.[54]
While the structure of the industry will continue to evolve, the expectations of
some analysts are for the SMSF sector to continue to account for around
one-third of superannuation assets and for there to be continuing consolidation
among retail and industry funds due to economies of scale and regulatory costs
and a slow decline in the prominence of corporate and public sector funds.[55]
Figure 1 Superannuation industry member accounts and assets,
by fund type (excluding SMSFs), 2004 to 2013
Source: APRA, Statistics:
quarterly superannuation performance June 2015, op. cit.
Senate Economics Legislation
Committee
On 17 September 2015, the Senate Selection of Bills
Committee referred the Bill to the Senate Economics Legislation Committee for
inquiry and report by 9 November 2015.[56]
The stated reasons for the referral by the Selection Committee were to consider
whether there is currently a problem with superannuation governance and what
impact the Bill would have on superannuation funds and their members and ‘to
ensure detailed scrutiny of the legislation and seek stakeholder input on the
impact of the bill’.[57]
At the time of writing this Bills Digest the Senate
Economics Legislation Committee had not reported on the Bill.
Senate Scrutiny of Bills Committee
The Senate Scrutiny of Bills Committee included some
comments on the Bill in its Alert Digest tabled in the Senate on 14
October 2015.[58]
The Scrutiny of Bills Committee drew attention to the creation of an offence to
contravene a direction to comply by APRA (proposed subclauses 92(4) of
the SIS Act) and to make the offence one of strict liability. The Committee
noted that the Explanatory Memorandum contained ‘a detailed explanation, which
comprehensively outlines the justification for the approach, including
addressing relevant principles outlined in the Guide to Framing Commonwealth
Offences, Infringement Notices and Enforcement Powers’ and that ‘[i]n light of
the detailed information provided the committee leaves question of whether the
proposed approach is appropriate to the Senate as a whole’.[59]
The Australian Labor Party (ALP) does not support the
Bill. In debate in the House of Representatives, some of the reasons given for
this position include:
- the
equal representation model for industry funds has performed well relative to
other parts of the industry
- a
‘one-size fits all’ governance model is not appropriate for superannuation
funds which should be able to appoint independent directors if they think it is
in the best interest of the fund rather than this being imposed by a
prescriptive approach and
- the
changes will impose significant costs on fund members.[60]
The Australian Greens do not support the Bill. In debate
in the House of Representatives, Mr Adam Bandt noted several reasons for
opposing the proposed changes including the absence of ‘glaring’ governance
problems in superannuation funds.[61]
Of the independent and other minor party members in the
House of Representatives, the Bill was supported by Ms Cathy McGowan and
opposed by Mr Bob Katter and Mr Andrew Wilkie.[62]
Mr Clive Palmer did not vote on the Bill.[63]
At the time of writing the views of independent and minor
party Senators have not been publicly expressed.
Major interest groups, including those in the superannuation
industry, peak union and business groups and others have different views on the
merits of the proposals included in the Bill (table 1).
Support for the Bill
Key interest groups that have indicated their support for
the Bill include the Financial Services Council (FSC),[64]
the Association of Superannuation Funds of Australia (ASFA),[65]
the Australian Chamber of Commerce and Industry (ACCI),[66]
the Australian Institute of Company Directors (AICD)[67]
and the consumer group Choice.[68]
The broad view of these groups is that the measures included in the Bill will
strengthen the superannuation system and protect consumers.
Opposition to the Bill
Key interest groups that oppose the measures included in the
Bill include the Australian Institute of Superannuation Trustees (AIST),[69]
Industry Super Australia (ISA),[70]
the Corporate Superannuation Association[71]
and the Australian Council of Trade Unions (ACTU).[72]
In general, these groups question the need for the proposed arrangements given
the performance of the equal representation model.
The Australian Industry Group (AIG) and National Seniors
Australia support the provisions in the Bill that mandate one-third independent
directors but do not support the requirement that the chair be an independent
director.[73]
The broad rationale for not supporting the requirement that the chair be
independent is that the board is best placed to decide who has the skills and
capacity to fulfil the role of chair.
While the Governance Institute of Australia had previously
supported some of the measures proposed by the Bill, it does not support the
Bill in its current form and recommends a non-prescriptive approach to
governance be taken.[74]
A number of industry groups made specific recommendations on
aspects of the Bill in their submissions to the Senate Economics Committee
inquiry into the Bill and in submissions to previous consultation processes on
governance issues. Some of these are discussed in the key issues and provisions
section below.
Table 1 Summary of the positions of major interest groups
on the Bill
Organisation
|
Position
|
Primary rationale
|
Superannuation industry
|
|
|
Australian
Institute of Superannuation Trustees
|
Oppose
|
‘The
proposed changes however, abolish the legislative basis for equal
representation on superannuation fund boards and disrupt the governance
structures of the sector that has consistently outperformed, providing the
highest returns for members’.[75]
|
Industry
Super Australia
|
Oppose
|
The
measures are ‘ill-conceived’, ‘unnecessary’, ‘not supported by evidence’,
‘costly’, ‘poorly focussed’, ‘ineffective’ and the outcomes are ‘unexpected’.[76]
|
Association
of Superannuation Funds of Australia
|
Support
|
‘This
support should not be seen as a criticism of current governance structures,
but instead recognises changing community expectations, increased complexity
and risk in running superannuation businesses, and significantly higher
regulatory standards and liability’.[77]
|
Financial
Services Council
|
Support
|
‘[the
reforms] create a minimum standard of governance to better protect consumers
that are members of all types of APRA-regulated superannuation funds’.[78]
|
Corporate
Superannuation Association
|
Oppose
|
‘The
proposed compulsion for trustee boards to include a minimum one-third of
independent members creates high cost for corporate funds and their members
but without equivalent benefits.’[79]
|
Related peak bodies
|
|
|
Australian
Council of Trade Unions
|
Oppose
|
‘The
current model is a proven success and a key part of the nation’s retirement
income system. Supporting the structures which have made this system
successful is endorsement of the success of the current model and its key
features – low cost and high outcome’.[80]
|
Australian
Chamber of Commerce and Industry
|
Support
|
‘[C]onflicts
of interest can be quite subtle and a sufficiency of independent directors
makes conflicts of interest more likely to be perceived, recognised and
called out. Independent directors can reshape a culture so that the board or
trustees are more questioning which makes much less likely a closed culture
of group think or accommodating acceptance’.[81]
|
Council
of Small Business Australia
|
Support
|
‘All
types of superannuation funds have been effected by governance failures from
time to time and the reforms will provide an important, additional layer of
protection against future failures’.[82]
|
Australian
Industry Group
|
Support,
but does not support independent chair
|
‘[T]he
requirement to have one-third independent directors, if introduced and
administered in an appropriate way, could build on and accelerate the gradual
trend towards a greater proportion of independent directors on superannuation
boards’.
‘Our view is that the Board should be free to determine the best person from
those available to chair the Board’.[83]
|
Consumer organisations
|
|
|
Choice
|
Support
|
‘Requiring
a minimum one third independent directors on boards and an independent chair
is a sensible change that will strengthen the superannuation system for the
benefit of consumers’.[84]
|
National
Seniors Australia
|
Support,
but does not support independent chair
|
‘[I]ncreasing
independence in the board composition is important in improving
accountability of fund management to members. The nature of these funds is
that accountability is limited and the addition of independent directors will
enhance accountability and protection of member interests’.
‘[T]he
proposed change is one of the prescriptive measures that is simply unhelpful.
The chair needs to be the best person for the job as decided by the board – ‘independent’
or otherwise. It needs to be the best person for that role’.[85]
|
Other
|
|
|
Australian
Institute of Company Directors (AICD)
|
Support
|
‘Greater
independence on the boards of superannuation trustee companies should be
encouraged, consistent with internationally recognised principles of good
governance ... a requirement that at least one-third of the board be
independent ... is supported’.[86]
|
McKell
Institute
|
Oppose
|
‘[T]he
representative model most closely satisfies the objectives of meeting the
best interests of members and maximising Australian’s retirement incomes. All
the facts support this overall finding’.[87]
|
Governance
Institute of Australia
|
Oppose
|
‘Given
the problems we identify in the revised definition of independence in the
Superannuation Legislation Amendment (Trustee Governance) Bill 2015 ... now is
the time to step back and have a discussion about the governance outcomes for
superannuation funds that should be sought, rather than a political
discussion as has dominated all consultation on this issue to date’.[88]
|
The Explanatory Memorandum notes that the Bill has a nil
financial impact.
[89]
As required under Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed
the Bill’s compatibility with the human rights and freedoms recognised or
declared in the international instruments listed in section 3 of that Act. The
Government considers that the Bill is compatible as it does not raise any human
rights issues.[90]
Do we need to mandate a minimum share
of independent directors and an independent chair for superannuation funds?
The threshold question to address in debate about the
provisions of the Bill is whether certain superannuation funds should have
specific governance requirements in relation to the composition of the trustee
board to require one-third independent trustee directors and an independent
chair. Arguments for and against the proposal canvas a number of issues
including the appropriateness of mandating a specific model, the financial
costs in adopting new governance arrangements for the funds involved and the
potential benefits to the sector and fund members of such changes.
Arguments for the measures
One of the main arguments for the measures proposed by the
Bill relates to the general acceptance of the principle that independent board
members and chairs bring improved decision making processes, a greater
diversity of skills and experience which will contribute to both strengthening
the superannuation system overall as well as member interests.[91]
To support this view, the Government points to the conclusions drawn by the
Cooper Review and the Murray Report and that the approach is consistent with
international best practice on corporate governance.[92]
These broad arguments are supported by a number of major interest groups
including the FSC, ACCI, the Council of Small Business Associations of
Australia and consumer group Choice.[93]
The FSC notes:
The minimum standard of governance provided for in the Bill
will protect consumers from circumstances where the judgement of
non-independent directors may be influenced by the interests of a subset of the
membership, a shareholder or a sponsoring organisation.
Arguments that the reforms are not necessary because funds
with no independent directors have a track record of good investment
performance misrepresent the purpose of the reforms. The focus of the reforms
is governance and the behaviour of boards, not investment performance. All
superannuation funds, be they retail, industry, public or corporate funds, have
the capacity to improve their governance process.[94]
Arguments against the measures
The main arguments against the measures proposed by the Bill
include:
- that
the equal representation model has performed well
- the
equal representation model is an important feature of the superannuation system
and is prevalent in many overseas pension funds
- there
is a lack of evidence to support the changes and
- the
imposition of a principles-based framework, creating a lack of flexibility for
boards and creating additional costs without any equivalent benefits.[95]
The AIST sums up many of these arguments, noting that:
The lack of evidence to support governance changes highlights
a significant flaw in this proposed reform process. Regulated superannuation
funds are a major contributor to the Australian economy, with the
not-for-profit superannuation sector representing more than $650 billion in
funds under management. While good governance practices should be encouraged
and pursued at all times, AIST submits that mandatory changes to board
composition will mean significant changes to the culture of these large
financial institutions and disruption to fund activities, without any evidence
of the need for such reform, or an articulated benefit to the members. These
changes will also come at a substantial cost (both through implementation and
ongoing higher director fees) - to be borne by the members.[96]
Trustee arrangements for pension
funds overseas
Governance arrangements for pension funds overseas provide
some reference for the changes proposed by the Bill. It is important to
distinguish between arrangements applying to corporations generally and those
applying to pension funds in particular.
As noted earlier, support for a corporate board to comprise
a majority of independent directors and an independent chair gained momentum in
governance reviews in the 1990s and 2000s and these requirements are now
established in key governance documents such as the ASX’s Principles of Good
Corporate Governance and Best Practice Recommendations. A recent summary of
board independence requirements by the Organisation for Economic Co-operation
and Development (OECD) concluded that almost all jurisdictions had introduced a
requirement or recommendation with regard to a minimum number or ratio of
independent directors—three jurisdictions (India, Hungary and the United
States) had introduced a binding requirement for a majority independent board,
while the others had taken a ‘comply or explain’ approach.[97]
The Explanatory Memorandum notes arrangements in Canada and
the United Kingdom for corporations where it is recommended that a majority or
at least one-half of boards should be comprised of ‘unrelated’ or ‘independent’
directors.[98]
Importantly, individual companies in Canada and the United Kingdom are not
required to implement such a structure but are only required to report about
adherence to such a principle.[99]
A 2015 report by Mercer on the governance of superannuation
(pension) funds examined the prevalence of independent directors on pension
funds across a number of countries.[100]
This research found that in nearly all OECD countries, boards for occupational
pension arrangements are comprised of an equal number of employer and employee
representatives but that this approach needed to be considered in the context
of the different legal framework operating in many OECD countries.[101]
Possibly the most relevant to Australia, given the use of the trust model are
arrangements in the United Kingdom for defined contribution schemes that
require a majority of independent trustees or a majority of non-affiliated
trustees depending on the type of scheme.[102]
Does an ‘independent’ board improve
performance?
There is a broad economics-based literature on the
relationship between good governance practices and firm performance, with
studies examining the relationships between structural governance practices
such as board size, independent directors, independent chairs, use of sub-committees
and other matters and performance as measured by profitability and share price.
In general, these studies have found mixed results on the
impact of independent directors on firm performance.[103]
A 2010 review of empirical literature on the effects of independent directors
on firm performance found that there was no strong evidence about the presence
of a majority of independent directors:
[T]he notion that firm performance improves with the presence
of a majority or supermajority independent directors on the board of firms is
yet to have conclusive evidence. In fact, a good number of the studies point to
the fact that the presence of more executive directors on the board positively
affects firm performance than can ever be contemplated under a board with
majority or supermajority independent directors. In the same vein some studies
clearly point out that in some instances, the presence of independent directors
makes positive firm performance impossible.[104]
More relevant to the provisions of this Bill are studies
that have examined the impact of independent directors on the performance of superannuation
(or ‘pension’) funds.[105]
These include:
- A
2008 study of US public sponsored pension plans over the period 2001–2005 on
the impact of outside or independent trustees on investment performance. The
study found no relationship between board composition and characteristics and
investment performance as measured by the excess return of the fund but that
‘board composition plays an important role in plan funding status and asset
allocation decisions’.[106]
- A
2012 study of defined contribution funds in Poland over the period 1999–2010
found a positive correlation between the number of outsiders on the board and
the pension unit return. The study also found that other characteristics such
as the age or the education of the board members or the Chairman may be
important.[107]
- A
2013 study of the influence of various governance arrangements including the
proportion of independent directors on superannuation funds trustee boards in
Australia for 2009 and 2012. The study found that there was a beneficial impact
of independent directors on industry fund boards but that this relationship was
negative for retail funds and concluded that ‘the beneficial impact of
independent directors on [i]ndustry [fund] boards gives great weight to the
Cooper recommendation for appointment of one-third independent directors’.[108]
- A
2015 study of the relationship of between various governance arrangements and
fees for non-for-profit superannuation funds between 2009–10 and 2011–12. The
study concluded that the relationship for board independence had mixed results
and the results from the analysis were insignificant.[109]
While industry groups aligned with the industry
superannuation funds cite evidence that industry funds have outperformed retail
funds as a justification for not proceeding with the proposed changes, there is
no empirical evidence that the changes would further improve the performance of
affected funds.[110]
As part of its 2012 examination of default fund
arrangements, the Productivity Commission noted that the equal representation
model has generally operated well to date, but that some arguments for an equal
representation structure become less compelling as funds actively broaden their
membership beyond their traditional base.[111]
At that time, the Productivity Commission did not support mandating a
particular governance structure:
The Commission considers that issues relating to board
structure are important. However, overall, there is a lack of compelling
evidence to suggest that any one model of board structure should be viewed as
clearly preferable in all cases. Therefore, the Commission does not consider it
appropriate at this time for a particular structure to be mandated. Further,
the Commission would not want to see restrictions placed on board structures
without such restrictions having a sufficient evidentiary basis, particularly
given the potential impact they could have on competition for default listing.[112]
Costs and benefits associated with
implementing the proposed arrangements
Implementing the measures proposed by the Bill is estimated
to cost the affected superannuation funds $12.3 million per year in
ongoing costs and $8.5 million in start-up costs.[113]
These costs included some trustee directors changing from being appointed by
unions or business groups to being appointed as an independent member by the
board as well as 30 per cent of affected boards increasing in size to meet
the new requirements.[114]
Implementation costs estimated by Industry Super Australia
(ISA)—the peak industry body for industry superannuation funds—prepared on the
basis of the proposed measures in the draft Bill were for a five-year cost of
between $89 million and $168 million.[115]
In relation to this Bill ISA noted that:
[T]he Government’s assessment of direct costs is unrealistic
and understates these costs. The estimate is flawed because it (i) ignores the
inevitable upward pressure on director fees that will occur with the
appointment of a large number of directors (ii) does not consider the costs
that retail funds will bear in implementing the charges; and (iii) makes no
provision for knock-on costs arising from the need to restructure the boards of
subsidiaries of funds.[116]
The Corporate Super Association provided estimates for
implementation costs for different sized corporate superannuation funds:
- a
medium sized corporate superannuation fund ($670 million in assets and
3,600 members) had estimated base additional costs of $150,000, an
increase of 10 per cent on administration fees and
- a
larger fund with close to $5 billion in assets had estimated increased
costs of $160,000 per annum.[117]
Unlike the costs, the benefits of the measures proposed by
the Bill do not have a specific monetary value. As noted previously, the key
benefits advocated by the Government and organisations that support the Bill
relate to the general acceptance of the principle that independent board
members and chairs bring improved decision making processes, a greater
diversity of skills and experience which will contribute to both strengthening
the superannuation system overall as well as member interests.[118]
A separate argument for the measures proposed by the Bill
advocated by the FSC relates to an expected pressure for mergers between
subscale and inefficient funds which will lower fees for superannuation
consumers.[119]
Existing arrangements
Part 9 of the SIS Act includes specific governance
arrangements relating to the composition of the trustee of a superannuation
fund. As stated above, the equal representation rules provide for equal
representation of employer and member representatives and allows for the
appointment of an additional independent trustee or additional independent
director.[120]
The terms independent director and independent
trustee are defined in the SIS Act so that the director or
trustee is not a member of the fund, is not an associate nor an employee of an
employer or employee sponsor of the fund and is not in any capacity a
representative of a trade union or other organisation representing the
interests of the fund.[121]
Non-adherence to the equal representation rules may result in a fund being
directed not to accept any contributions made to the fund by an employer sponsor.[122]
Appointing more than one independent director to funds with
equal representation boards requires the fund to apply for an exemption to the SIS
Act.[123]
The equal representation rules also provide some additional requirements under
the Superannuation Industry (Supervision) Regulations for a decision by the
trustee board to be valid only where at least two-thirds of the total number of
directors voted for it.[124]
Provisions of the Bill
Item 1 of Schedule 1 to the Bill repeals and replaces
Part 9 of the SIS Act. The new Part 9 contains the substantive elements
of the changes that will require at least one-third of trustees to be independent,
for the chair to be independent. To that end it includes a list
of circumstances in which a person will be independent for the
purposes of the new Part 9.
Repeal of equal representation
model
The new Part 9 does not include any reference to the equal
representation model. However, the Explanatory Memorandum notes that the
representation of employer and employee groups is still provided for. ’The
composition of superannuation trustee boards, beyond the one-third independent
directors prescribed, will remain at the discretion of the board’, with
trustees able to enshrine equal representation (or voting rules) in their
constitution.[125]
The removal of the equal representation model is opposed by
several interest groups including AIST and ISA.[126]
AIST notes that:
We oppose the removal of equal representation from the
legislation and consequently the guaranteed voice of the members through their
representation on the board, or alternatively on a policy committee. Similarly,
the removal of equal representation eliminates the guaranteed voice to
employers.
... both a member and an employer voice in a mandatory savings
system are vital and that it should be preserved in all sectors of the
APRA-regulated superannuation industry. The representative model ensures a deep
knowledge of the membership, representation of their respective interests in a
mandatory system, and proper consideration of all relevant issues in the
pursuit of the best possible outcomes for members.[127]
The retention of the model for the remaining two-thirds of
the board was supported by ASFA, who noted some potential unintended
consequences such as a superannuation fund board comprising one-third
independent directors and two-thirds employer representatives (meaning members
would have no direct representation on the trustee board) or two-thirds member
representatives (meaning employer groups would have no direct representation).[128]
RSE licensee must have independent
directors or trustees and an independent chair
Proposed section 86 provides that the chair of the
RSE licensee’s board of directors must be independent from the RSE licensee
(for RSE licensees that are a body corporate), that at least one-third of the
RSE licensee’s directors or trustees must be independent from the RSE licensee
(the chair is included in meeting the one-third requirement) and that the RSE
licensee must comply with any requirements of the prudential standards relation
to the appointment or removal of directors who are independent from the RSE.
As previously noted, the requirement in proposed section
86 that the chair be required to be independent was not supported by AIG
and National Seniors Australia who otherwise supported the one-third
independent requirements. This position was based on the view that the board is
best placed to decide who has the skills and capacity to fulfil the role of
chair.[129]
AIG noted that:
The general governance argument in support of having an
independent chair is based on a very different notion of independence than the
one put forward in this Bill – namely independence from the senior management.
While we agree that Chairs should not be part of the
management team, we do not believe the case has been made that the best Chair
for a fund would be “independent” as defined in this Bill.
Our view is that the Board should be free to determine the
best person from those available to chair the Board.[130]
Meaning of ‘independent’
Proposed section 87 lists the circumstances in which
a person will be independent from an RSE licensee for the
purposes of satisfying the independent director requirements in proposed
section 86 as follows:
- first,
a person is considered to be independent from an RSE licensee unless certain
conditions—relating to a nominated shareholding interest in the RSE licensee ownership
arrangements and certain business and employment relationships with the RSE
licensee—are present:
- a
specified nominated thresholds limit of under five per cent shareholding
interest (subject to certain exclusions) for an RSE licensee that is a body
corporate in the share capital of the RSE licensee and in the share capital of
the body corporate that is related to the RSE licensee
- a
specified three-year minimum period for the person’s business relationships
that were material with the RSE licensee or trustee and
- a
specified three-year minimum period for the person’s employment as a director
or executive officer of the RSE licensee, a body corporate that is related to
the RSE licensee, with any of the individual trustees if the RSE is a group of
individual trustees, an employer-sponsor of the fund who is a large employer
and an organisation (representing the interests of one or more
employer-sponsors or representing the interests of members of the fund who has
the right to appoint directors or trustees of the RSE licensee) (proposed
subsections 87(1)–87(3))
- second,
there is a regulation-making power under which a person falls within the
meaning of independent if certain circumstances apply (proposed
subsection 87(3)) and
- third,
APRA may determine, under a process outlined in proposed sections 88 and 89,
whether a person is independent from an RSE licensee or not (proposed subsection
87(4)).
The use of specific thresholds of three years and a
shareholding interest of five per cent to determine independence from
ownership, business and employment arrangements are broadly similar to the ASX Principles
of Good Corporate Governance and Best Practice Recommendations and the
Financial Services Council’s FSC Standard No. 20: Superannuation
Governance Policy.[131]
A key term used to establish these thresholds relates to
circumstances that are ‘material’ to a business relationship that the person or
RSE licensee may have had—a circumstance that the Explanatory Memorandum notes
will depend on the circumstances in each case.[132]
The rationale for the regulation-making power is ‘to
determine circumstances in which a person is considered independent regardless
of the circumstances in new section 87(1)’.[133]
The rationale for the power for APRA to make determinations is to ‘allow APRA
to respond to situations where a person’s circumstances and his or her capacity
to exercise independent judgement is clear but for reasons such as timing,
restructures and acquisitions’.[134]
A number of views have been expressed by major interest
groups on the overall drafting of the independence requirements and some of the
specific elements:
- AIG
considers that:
- the
provisions of new paragraph 87(1)(c)(ii), which prescribe that a person would
not be independent if they were a director or executive officer of a body
corporate that is related to the RSE licensee create the potential for a
practice to emerge where non-independent directors were more likely than
independent directors to be appointed to subsidiary or joint venture boards—where
it may make very good sense for a Board member of a fund to also serve on the
board of a subsidiary or joint venture and
- the
provisions of new paragraph 87(1)(f)(i), which prescribes that a person would
not be independent if they were, or had in the previous 3 years been, an
executive officer or director of an employer-sponsor who employs more than
500 members of the fund, would ‘impose ongoing compliance costs or, more
likely, give rise to a reticence to appoint to the boards of large funds
current or recent directors or officers of domestic organisations with large
numbers of employees’.[135]
- ASFA
considers that the definition of independent should be amended to enable a
director to sit on the board of multiple related RSEs under the same financial
conglomerate group as an independent director, rather than RSE licensees having
to rely on the real uncertainty of an APRA determination.[136]
- ISA
provide a range of circumstances under current arrangements that may need to be
changed under the independence requirements relating to relationships and
governance arrangements in the not-for-profit environment.[137]
- The
Governance Institute of Australia considers that ‘any strictly prescriptive
definition will inevitability lead to difficulties’ and that ‘now is the time to
step back and have a discussion about the governance outcomes for
superannuation funds that should be sought’.[138]
While the Governance Institute of Australia had previously supported proposals
for one-third independent directors and an independent chair on superannuation
fund trustee boards it now considered that ‘it would be best if the Bill did
not proceed’.[139]
Determinations of independence
Proposed sections 88–90 create a process whereby APRA
may determine an application by an RSE licensee that a person is independent
from the RSE licensee. APRA may also determine, on its own volition, that a
person is not independent from an RSE licensee. In making a positive
determination that a person is independent, or a negative determination that a
person is not independent, APRA is required to take into account the terms of proposed
section 87 about circumstances that prevent a person from being independent
as well as the circumstances prescribed by regulations. The Explanatory
Memorandum notes that ‘one situation where the power to determine a person to
be independent is where a person’s circumstances mean that they do not meet the
independence requirements, but they are considered to be capable of exercising
independent judgement’.[140]
APRA has indicated that it expects to use the power in proposed
section 90 (determination that a person is not independent) infrequently on
the basis that ‘the legislative definition should provide sufficient
information to undertake a robust assessment of a director’s independence in
most circumstances’.[141]
Importantly, proposed section 92 empowers APRA to
direct an RSE licensee of a registrable superannuation entity to comply with
the terms of new Part 9 of the SIS Act if the licensee has contravened
Part 9 on one or more occasions and APRA is satisfied that the seriousness or
frequency, or both, of the contraventions warrants giving the direction. Proposed
subsection 92(4) creates an offence of strict liability if an RSE licensee,
without reasonable excuse, contravenes the APRA direction.[142]
Transitional provisions
Part 3 of Schedule 1 to the Bill provides for
a transitional period for existing funds of three years from the date of Royal
Assent for the new Part 9 to take effect by providing that
requirements do not apply if the RSE licensee complies with any requirements of
the transitional prudential standards.[143]
This effectively provides for a period of three years for
trustee boards to change their composition. Some interest groups, such as ISA,
saw this period as being too short with AIST arguing for a five year period.[144]
AFSA supported a three year period but considered that it should not commence
until the relevant requirements (including the prudential standards) are
finalised, and suggested a transitional three year period commencing on 1 July
2016 or three years after Royal Assent, whichever is later.[145]
Key provisions—Schedule 2
The provisions of Schedule 2 to the Bill apply similar
arrangements to the Commonwealth Superannuation Corporation (CSC). The CSC is
the trustee for a number of Commonwealth public sector superannuation and
military superannuation funds including the:
- Commonwealth
Superannuation Scheme (CSS)
- Military
Superannuation and Benefits Scheme (MilitarySuper)
- Public
Sector Superannuation Scheme (PSS)
- Public
Sector Superannuation accumulation plan (PSSap)
- Defence
Force Retirement and Death Benefits Scheme (DFRDB Scheme)
- Papua
New Guinea Scheme (PNG Scheme).[146]
Under the Governance of Australian Government
Superannuation Schemes Act the CSC is comprised of a Chair and ten other directors.
The Bill reduces the number of other directors from ten to eight.[147]
Currently, three of the other directors are nominated by
the Australian Council of Trade Unions and two are nominated by the Chief of
the Defence Force.[148]
The Minister chooses the five other directors, but must consult with the
Defence Minister before making the appointment.[149]
The Chair of the CSC is appointed by the Minister after
agreement is given by the Board.[150]
Under the Bill, the number of directors nominated by the
Australian Council of Trade Unions is reduced from three to two.[151]
The number of other directors who are chosen by the Minister is reduced from
five to four.[152]
Items 11 and 15 translates this smaller overall number of
directors in reducing the quorum at a meeting of the Board or decisions taken
without a meeting from nine to six.
The amendments in Schedule 2 to the Bill to the Governance
of Australian Superannuation Schemes Act provide for similar independence
requirements as will be applied to superannuation funds by the amendments in Schedule
1 to the Bill—that is, one-third of the total of nine directors must be independent.
Items 1 and 2 operate so that a person is independent
from CSC if the person satisfies the provisions of section 87 of the SIS
Act as amended by the Bill. Those directors who are not nominated by the
Australian Council of Trade Unions or the Chief of the Defence Force must be independent
from CSC.
Item 3 (proposed subsection 12(7) of the Governance
of Australia Government Superannuation Schemes Act provides that a
person’s appointment as a director to be independent from CSC is
not invalid if, after the appointment, the person ceases to be independent
from CSC. However, item 4 inserts proposed subsection 17(5A)
to expand the available reasons for the Minister to terminate the appointment
of a director to include that they have ceased to be independent from CSC.
Item 16 provides that the application of amendments
relating to appointments and termination of existing appointments does not
apply to those that occur prior to Royal Assent. Item 17 provides
that appointments to the board (with the exception of those appointed by the
Chief of the Defence Force) in the period between Royal Assent and 1 July
2016 will cease on the earlier of, the term of appointment, or the end of 30
June 2016.
What parts of the broad policy are
NOT in the Bill?
While the Bill contains the main elements of the policy
relating to independent trustee directors and the chair being independent,
there are some matters canvassed as part of the overall policy that are not
included in the Bill.
Mandatory public reporting on whether
an RSE trustee has a majority of independent directors or not
The Explanatory Memorandum notes that all RSEs will be required
to publicly report (on an ‘if not, why not’ basis) in the annual report of each
of their RSEs whether they have a majority of independent directors or not.[153]
The intent of this requirement is to provide RSE trustees with ‘with the
opportunity to provide a clear indication of the rationale underlying their
composition. In particular, it allows the board to explain how it believes that
its chosen composition will best serve the interests of fund members’.[154]
This policy is not in the Bill. As noted in the Explanatory Memorandum this will
take effect for financial years beginning from 1 July 2019 and be implemented
through changes to the reporting requirements in the Corporations Regulations
2001.[155]
Such a requirement for ‘if not, why not’ reporting on board
composition is based on the ASX Principles of Good Corporate Governance and
Best Practice Recommendations, which provides that listed entities that do
not adopt the recommended principles are required to explain why it has not
adopted a recommendation.[156]
The ASX notes that:
Requiring this explanation ensures that the market receives
an appropriate level of information about the entity’s governance arrangements
so that:
- security holders and other stakeholders in the
investment community can have a meaningful dialogue with the board and
management on governance matters;
- security holders can factor that information into
their decision on how to vote on particular resolutions; and
- investors can factor that information into their
decision on whether or not to invest in the entity’s securities.
The “if not, why not” approach is fundamental to the
operation of the Principles and Recommendations.[157]
The requirement for such reporting was opposed by a number
of superannuation industry organisations including ISA, ASFA and AIST, for a
number of reasons including additional red tape, confusion about compliance
with ‘best practice’ and have the potential to lead to appointments for
compliance purposes rather than on merit.[158]
Industry Super Australia noted:
The proposed requirement would make bad law. It would require
funds to report against a standard that is not required of them, and may create
a perception that a trustee who has complied with proposed section 86(1) is
nonetheless avoiding its legal obligations.[159]
APRA prudential standards and
guidance
As previously noted, on 31 August 2015, APRA published
two draft prudential standards (‘SPS 510 Governance’ and ‘512 Governance
Transition’) and two draft prudential practice guides (‘SPG 510 Governance’ and
‘SPG 512 Governance Transition’) for consultation.
The prudential standards and guidance provide additional
detail about how the requirements for independent trustee directors and an
independent chair are implemented in practice. Some important elements of the
governance prudential standards that are separate to those outlined in the Bill—but
arguably consistent with its application—cover prescriptive requirements for
the composition of a board:
- a
majority of directors present and eligible to vote at all Board meetings must
be non-executive directors
- the
board must have in place a procedure for assessing, at least annually, the
performance and independence of individual directors
- ‘Remuneration
Committee’ membership[160]—the
chair must be an independent director and at least one-third of the members of committee
must be independent, and
- ‘Audit
Committee’ membership[161]—the
chair must be an independent director, at least one-third of the members must
be independent and the chair of the board may be a member of the committee, but
may not chair.[162]
A number of interest groups including ASFA, AIST and ISA do
not support the mandating of independent directors and an independent chair
largely on the basis that it should be up to the board to determine the
appointments but also because it may lead to an overall board size that is not
appropriate or may not lead to the ‘best’ members to be appointed to such
committees.[163]
ASFA noted that:
By mandating a minimum number of independent directors on the
[audit and remuneration committees], trustee boards could be forced to remove
non-independent committee members with audit and remuneration experience from
these two committees and replace them with directors who, while independent,
have little or no experience in these areas.[164]
The prudential standards and guidance reflect the draft Bill
as released in August 2015. APRA has indicated that further changes will be
made to the standards. For example, APRA notes that following changes to the meaning
of independent in the Bill (which means that a person will not be
considered to be independent if they have, or have had, a business relationship
with the RSE licensee that is, or was at the time, material to either the
person or the RSE licensee) the standards will be changed to include a
requirement for RSE licensees to establish, as part of their governance
framework, a policy which addresses how the materiality of such relationships
will be determined when assessing the independence of current or potential
directors.[165]
The policy reasons for the measures proposed by the Bill
are contested. While there is general agreement about the importance of good
governance at a board level to entity performance, there are differing views
about whether requirements for independent trustee members and an independent
chair should be mandated or expressed in general principles which individual
boards can choose to implement.
There are also different views as to whether the success
of the equal representation model, under which superannuation funds can choose
to appoint independent members or even chairs to their boards, will be affected
by the changes proposed by the Bill. At one end of the spectrum, the measures
proposed by the Bill can be viewed as a pragmatic response to a general move
towards appointing more independent members to such boards—one which some funds
are already implementing. However, others argue that the success of the equal
representation model is an important part of the superannuation system and that
there is little evidence that the changes proposed by the Bill are required or
desirable.
Members, Senators and Parliamentary staff can obtain
further information from the Parliamentary Library on (02) 6277 2500.
[1]. Superannuation Industry
(Supervision) Act 1993 (SIS Act), accessed 3 November 2015.
[2]. Governance of Australian
Government Superannuation Schemes Act 2011, accessed 3 November
2015.
[3]. Governance
Institute of Australia (GIA), ‘Governance
foundations’, GIA website, accessed 24 September 2015.
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[8]. Australian
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[14]. Ibid.,
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[16]. Ibid.,
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[17]. Ibid.,
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[18]. Ibid.,
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[19]. ASX
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[20]. Under
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[21]. APRA,
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specified in section 52 of the SIS Act and include a covenant for each
trustee to act honestly in all matters concerning the entity and to perform the
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[30]. Ibid.,
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[31]. Ibid.,
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[32]. Ibid.,
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[33]. Ibid.,
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[34]. Ibid.,
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[116]. Ibid.,
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[117]. Corporate
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[119]. Ibid.,
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[120]. Superannuation Industry
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[121]. SIS
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[122]. SIS
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[123]. APRA,
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[133]. Ibid.,
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[134]. Ibid.
[135]. AIG,
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[137]. ISA,
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[141]. APRA,
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[142]. The
penalty for the offence is 60 penalty units, which is equivalent to $10,800.
[143]. The
content of APRA’s draft prudential standards relating to the Bill is discussed
further below.
[144]. ISA,
Submission, op. cit., pp. 28; AIST, Submission, op. cit., p. 20.
[145]. ASFA,
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[146]. Commonwealth
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[147]. Item
7 of Part 2 of Schedule 2 to the Bill amends subsection 11(2) of the Governance
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[148]. Governance of Australian
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[149]. Governance
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[150]. Governance
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[151]. Item
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[152]. Item
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[153]. Explanatory
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[154]. Ibid.
[155]. Ibid.
[156]. ASX
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[157]. Ibid.
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[160]. The
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[161]. The
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