Concerns over independence time frame

02-Jul-2015

By Wouter Klijn

The draft legislation on the requirement for independent directors on superannuation boards may have been a long time coming, but the industry is concerned about the relatively short period that has been proposed to implement the new framework.

The federal government has set a three-year transition period that would apply from the date the proposed legislation receives royal assent.

Australian Prudential Regulation Authority (APRA)-regulated super funds that are established after 1 July 2016 will have to comply straightaway with the new governance measures.

“If you look on an individual fund basis, then you might say that three years is okay,” Australian Institute of Superannuation Trustees (AIST) chief executive Tom Garcia tells theinstoreport.

“But when you look at the whole industry, then it makes things more complicated.

“I understand that people always want these things done extraordinarily quickly, but you are talking about changing the governance structure of an enormous industry that looks after other people’s money.

“I think there is an element of risk if we rush.”

The AIST has always argued for a five-year transition period and Garcia says he hopes APRA will take a flexible approach in enforcing the requirements.

“Boards are going to have to, under the request from APRA, have their transition plan done by 1 July 2016,” he says.

“That will be around the detail of the potential size of the board, the configuration of the board, and one of the discussions we want to have with APRA is the level of detail beyond that, because you might have to move and change during the transition as people become available or unavailable.

“This is all about ensuring that boards maintain strong governance and that you are attending to the skills matrix of the board.

“There is really going to be a need for some flexibility.”

Availability of directors

Last Friday, the government released exposure draft legislation on the requirement for independent directors on boards of APRA-regulated superannuation funds, including corporate, industry, public sector and retail funds.

The draft legislation requires super fund trustee boards to have an independent chair and for at least one-third of the directors to be independent.

The government says its proposal is in line with recommendations of the 2010 Cooper review and the Financial System Inquiry (FSI).

Although the FSI recommended that boards have a majority of independent directors, including an independent chair, the government did not go that far.

“While the government has carefully considered this FSI recommendation, we consider that the proposal for one-third independent directors and an independent chair will substantially strengthen governance arrangements for the benefit of fund members,” Assistant Treasurer Josh Frydenberg said last Friday.

Apart from the number of new directors that need to be hired, Garcia says he believes the proposed legislation will require more than 25 super funds to replace their chair.

The Dawson Partnership principal Peter Dawson says the three-year time frame will put a strain on the search process for new chairmen and directors, but he believes there are enough experienced people looking for additional responsibilities.

“There is no doubt that head-hunting activity will increase; anybody working in executive search will be involved,” Dawson told theinstoreport.

“There is a limited gene pool of directors and chairs, but there are a number of senior executives across the financial services and superannuation industries who are looking to take on additional work.”

Although the proposal now made it clear how many independent directors boards will have to attract, he says it is still too early to see any direct response to the draft legislation.

“It is early stages; we don’t see much concrete activity,” he said.

“But there is more discussion taking place; boards knew it was going to happen and they now know it is a third [independent directors].”

Garcia agrees there will not be a ‘mad rush’ for independent directors.

“We have over 500 directors in our membership and 11 per cent of them are independent now,” he says.

“There will be the ability for boards to submit to APRA to reclassify directors as to whether they are independent or not and that will be the initial step.

“There will be a few processes that will need to be in place, what size the board is going to be, what configuration it should have, what we have now and where we should go to, before you can look at person X or person Y.

“Boards will have been thinking about this anyway, but they will now use this [legislation] to focus on how they are going to do this.

“I don’t think there is going to be a mad rush for independents.”

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