Australia’s peak superannuation regulator has urged super funds to embrace the principle of independent directors, saying they improve board governance.
Helen Rowell, a member of the Australian Prudential Regulation Authority’s senior executive group, told an industry conference in Sydney on Wednesday that boards with independent directors delivered more robust decision-making and helped to ensure that trustees acted in the best interests of members rather than self-interest.
Ms Rowell’s comments come at a critical moment in the debate over superannuation governance, with the Federal Government considering proposals to overhaul the rules for appointing directors to super funds.
In a wide-ranging speech on APRA’s strategic priorities for regulating superannuation, Ms Rowell said it was important that all superannuation boards had “the right skills and capabilities”.
“APRA’s experience, over many years and across all industries, suggests that having at least some independent directors on boards best supports sound governance outcomes,” she said.
“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.”
Industry funds are campaigning against mandatory independent directors, arguing that existing method of appointing employer and union representatives to boards has worked well.
However, APRA is already encouraging super funds to appoint independent directors to improve the competency and governance of boards.
“Irrespective of any changes that the government may make to requirements for the composition of superannuation boards, APRA expects trustees to adopt robust director appointment and board renewal processes that seek to ensure that boards have the breadth of capability needed to meet their obligations to members into the future,” Ms Rowell said.
“And we would encourage all boards to actively consider the value that independent directors can add.”
Ms Rowell did not say whether APRA supports mandating that super boards comprise a majority of independent directors, as was recommended by the Murray Inquiry.
Trustees told to lift game
Ms Rowell questioned whether trustees of superannuation funds were meeting governance standards set by APRA in terms of the investment decisions they made.
She said APRA required trustees to have a clear view of their investment objectives, effectively implement an investment strategy and rigorously monitor performance.
“That may not sound particularly new or insightful – but it is critically important, and not necessarily well achieved in practice,” Ms Rowell said.
“Some trustees appear to lack an understanding of their investment strategy and underlying investments, are over-reliant on service providers or have significant weaknesses in their investment governance and investment risk management frameworks.”
Ms Rowell also cautioned super funds about setting up in-house investment management operations, rather than relying on external fund managers.
Several industry super funds including Australian Super have announced plans to expand their in-house investment management operations in the next few years.
“APRA has noted in other forums that trustees seeking to manage investments in-house need to ensure that they have appropriate governance arrangements in place, and the necessary skills and resources required to effectively manage and monitor their investments,” she said.
“We have also set clear expectations regarding the due diligence and ongoing monitoring that we expect to be undertaken by trustees in respect of each product or option that is offered to members – particularly where product promoters are involved.”