A super impact

Changes to legislation proposing an increase in the number of independent directors on superannuation boards is likely to lead to greater demand for skilled directors in the sector. Domini Stuart reports.

Superannuation funds could soon be looking for 200 new directors and 40 new chairs. According to the Australian Institute of Super Trustees (AIST), this is how many board members they will need to replace if a new law is passed requiring all of their chairs and one-third of their directors to be independent.

The proposed legislation would have the biggest impact on the not-for-profit (NFP) sector – most funds in the retail sector have had boards with a majority of independent directors since the Financial Services Council made this a membership requirement two years ago. If it goes ahead, it will create a significant opportunity for people with the right skills and experience to further their boardroom career.

“We’re certainly seeing a lot of interest in these roles,” says Eva Scheerlinck GAICD, AIST executive manager, governance and stewardship. “There are a lot of highly skilled people around who want to make a contribution to the retirement future of working Australians.”

The necessary skills

One of the stated objectives of the legislation is to broaden the pool of experience in the boardroom. But, as Scheerlink points out, the boards looked after by the AIST have 50/50 member and employer representation which, in itself, brings a diversity of skills and backgrounds to the table.

“A number of funds also have extensive independent representation on their boards,” says Graham Willis FAICD, managing partner at Watermark Search International. “Some will need to change very little, if at all.”

Another objective is to increase the accountability of decisions made by directors, with a particular focus on conflict of interest.

“Independence in itself doesn’t make a director more accountable, exclude potential conflicts of interest or guarantee the necessary know-how,” says Scheerlinck. “As with any organisation, the goal should always be a board with the right mix of skills to achieve its strategies and objectives.”

This will usually include basics such as law, accounting, finance and governance with the addition of specialist skills as required.

“It will be helpful if a potential director has a skill set that is in high demand, such as a deep understanding of how the digital economy does and will operate, investment management expertise or a strong knowledge of legislation that has an impact on the sector,” says Ruth Medd MAICD, chair of Australian Ethical Superannuation and executive chair of Women on Boards.

As the board members of a superannuation fund are both directors and trustees, they must be capable of negotiating a more complex regulatory environment.

“In addition to complying with all of the regulation that applies to corporations, directors must meet the requirements of Superannuation Industry (Supervision) Regulations legislation, which includes prudential and operating standards,” says Bronwyn Morris FAICD, chair of LGSuper. “They must satisfy APRA’s ‘fit and proper’ requirements. Trustee boards are also subject to trust law – in particular the common-law duty to act as a fiduciary in the best interests of fund members, which increases the focus on responsibilities relating to the control of assets.”

Trustees also have an obligation to act in the best interest of members. “A corporate board is primarily responsible for protecting and managing shareholders’ interests,” says Steve Gibbs, chair of Australian Ethical Investments. “A superannuation fund has a second group of highly engaged stakeholders – the people whose retirement income depends on its performance. Balancing these interests can present a challenge.”

Scheerlinck believes that directors’ values should be closely aligned with the goals of the fund. “When you’re a trustee looking after other people’s money, you have to care about who those people are,” she says.

As most superannuation funds are member-based, they might look for experience in this kind of organisation. “We also look for evidence of strong analytical skills as there will be a great deal of debate around investment strategy,” says Kevin Jurd MAICD, leader of Spencer Stuart’s Board Practice for Australasia. “And, as investments are becoming increasingly complex, experience with managing multiple investment portfolios can also be beneficial.”

Directors with past experience should ensure their knowledge is up to date. “Governing a superannuation fund is very different today from 20 years ago,” says Willis. “I strongly recommend that anyone considering a role on a board does one of the courses designed to provide an understanding of the current governance framework and the role of a director and trustee.”

A good starting point

Despite the complexity of the environment, a superannuation fund could be a good place to launch a boardroom career.

“This will depend on the skills and experience of the individual and also the overall composition of the board,” says Gibbs. “A lot of these organisations have been around for many years and their directors have a great deal of experience. They are able to provide a supportive learning environment for a first-time director.”

Jurd believes that every candidate should have had some exposure to the boardroom. “This may not necessarily be as a director, but it is important to have an understanding of what the obligations and challenges are going to be,” he says. “With about $650 billion under management in the NFP sector alone, this is not a job to be taken lightly.”

Improving gender balance

There is still some debate as to how much the new legislation will actually achieve. “I’m chairman of a company that has a retail superannuation fund and I also have a background in industry and public sector superannuation,” says Gibbs. “In my experience, the current model of equal representation, with the option of adding independent directors where appropriate has served its purpose. For instance, I’ve never come across any evidence of funds being poorly governed or members losing money. I don’t expect to see any dramatic improvements in governance overall, but there could be other benefits associated with the change.”

One benefit might be more women in the boardrooms. Despite a rise of 5 per cent since 2013, just 26 per cent of trustees in the top 140 superannuation funds are female.

“All sectors have improved but we’ve seen the greatest gains in the retail and public sectors,” says Medd. “Industry and corporate funds are still at the bottom of the pack. The new legislation could help, however because of increasing regulation and the need for specific skills, we expect progress to be steady but slow.”

To help accelerate the process, Women on Boards recently launched a Marketplace for Directors and, in partnership with Aberdeen Asset Management, will host a quarterly lunch and other networking activities.

“Anyone wanting to be appointed to one of these boards needs to know the players in the sector,” Medd continues. “We’re making it easier for aspiring female directors to meet fellow trustees, male chairs, compliance committee members and high-profile guest speakers.”

Lost opportunities

Interest in the new boardroom positions may be running high, but some of the most sought-after directors might not be willing to accept an offer.

One barrier could be lower fees. “In the NFP sector, fees vary according to the skills the fund wants to attract, the difficulty of getting specific skills and the broad benchmarking that occurs in the market, but they’re unlikely to match those paid to directors of retail funds and ASX-listed companies,” says Willis. “This is consistent with the ‘best interest of the members’ approach and, personally, I don’t believe most directors will have an issue with this. I think we’ll find that, for the majority, fees will be a third- or fourth-order item.”

However, directors could also lose out on income from other boards. “Conflict of interest is a major issue for superannuation fund boards and the problem is increasing as the financial services and technology sectors continue to converge,” says Jurd.

“Taking on the responsibility for $60,000 or $70,000 a year could put paid to opportunities to earn $100,000 or more, so we encourage would-be directors to think very carefully about what would come off the table if they accepted one of these positions. I have known directors to relinquish their seat on a super board after just a year or so when they have been approached by a bank. This isn’t a pleasant call to make to a chairman when it appears that you have simply used the board to further your career,” she says.

Too much too soon?

If the law is passed, the changes will happen quickly. New directors should be prepared to manage the associated risks.

“Superannuation funds will have three years from the date the legislation receives royal assent to implement the changes and they will have to draw up a transition plan in the first six months,” says Scheerlinck. “We’re not sure this gives them time to introduce all of the new directors in a measured and considered way, particularly as the requirement to appoint an independent chair means that the leadership will be changing at the same time.

“This is a process that shouldn’t be rushed. It is vital that boards can continue to function at a high level during the transition period and that their culture and corporate knowledge are passed on and preserved.”