Fraser proposes code to replace board quota

Industry fund boards should not have to have a portion of independent directors.

17-Feb-2017

By Sarah Kendell

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A report from former Reserve Bank of Australia governor Bernie Fraser has recommended industry superannuation funds comply with a mandatory governance code as an alternative to government proposals to mandate one-third independent directors on fund boards.

The report, commissioned by Industry Super Australia and the Australian Institute of Superannuation Trustees, said the government’s Superannuation Legislation Amendment (Governance) Bill, which failed to pass the Senate and lapsed when parliament was dissolved last year, did not set out a coherent argument on the need for a given proportion of independent board directors.

While the explanatory memorandum of the bill had mentioned “independence of mind” and the ability to hold other directors and fund managers “more accountable”, Fraser argued it wasn’t clear that only independent directors could possess these characteristics, as retail funds with a greater percentage of independent directors often generated worse returns and behaviour report card scores.

The report concluded that rather than rely on independent board directors to serve these functions, industry funds would be better served by adopting a governance code that specified the values, skills and expertise all board members needed.

Recommendations for the code included that board nominations committees assessed a candidate’s compatibility with the fund’s values, that they agreed skill profiles for a board vacancy based on experience gaps in the current board, and that funds achieved gender equality on all boards within five years.

However, the Financial Services Council (FSC) maintained the report had skirted around the issue of bringing industry funds into line with the more rigorous governance standards of other funds regulated by the Australian Prudential Regulation Authority (APRA).

“In a compulsory retirement system managing $2.1 trillion of retirement savings, consumers have a right to ensure their retirement nest eggs are governed by the highest possible standards and that these should be both consistent across all types of APRA-regulated super fund – retail, industry and corporate – and enforceable under a single legislative framework,” an FSC spokesperson told financialobserver.

“The benefits of having independent board directors are clear – they will not be influenced by related party conflicts of interest; and they bring diversity, expertise and experience to the table.”

Minister for Revenue and Financial Services Kelly O’Dwyer said the report did nothing to change the government’s mind about reintroducing the original legislation to the current parliament.

“Mr Fraser’s report was initiated as a delaying tactic to stop reforms to superannuation governance that have been in the pipeline since 2010,” O’Dwyer said.

“What is clear from this almost 15-month review is that we could have had very reasonable independence requirements legislated since 2015.”

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