Home / Bernie’s report analyses what it means to be ‘independent’

by Greg Bright

Bernie Fraser may not be what you’d think of as “independent” from the not-for-profit super fund sector. But his report on fund governance delivered last week represents the most reasoned assessment of “independence” so far presented for the industry’s and Government’s consideration.

The Fraser report, which came about because of the Government former Bill proposing a three-plus-three-plus three board of trustees as mandatory for all not-for-profit (NFP) super funds – but not commercial funds – contains several alternative recommendations.

Its big contribution to the debate, however, is Fraser’s analysis of what it means to be “independent” and whether or not that, however defined, is actually likely to enhance returns for members.

The Government has indicated that it will re-introduced the previously lapsed three-plus-three-plus-three bill, although no timetable has yet been suggested. The last time the bill fell foul of Senate cross-benchers.

The main recommendations in the Fraser report, which was commissioned by AIST and Industry Super Australia, are:

Boards of Directors

Members of NFP funds would be best served by strengthening the values, skills and experience of Boards of Directors. To this end, Boards should agree:

1. to make clear in their informal “charters” (which APRA will require of all Boards by 1 July 2017) that the unique commitment of NFP funds to their members (encapsulated in “all profits to members”) was unshakeable and should be embedded in the fund’s processes wherever appropriate (the extent to which such measures – including those which follow – require changes to constitutions will be a matter for each fund to consider)
   1. to require Board Nominations Committees to include a comprehensive assessment of candidates’ compatibility with the fund’s values when reporting on their suitability as prospective directors
   2. to require newly appointed (and reappointed) directors to confirm in writing at the time of their appointments that they understand the fund’s values , are comfortable with them , and see no conflicts with them

Skills/Selection Processes

1. as with “values”, to re-enforce in their “charters” the central importance of 
relevant skills and experiences in generating superior returns to members, and commit to maintaining an appropriate mix of skills and experiences on the Board at all times
   1. as a first step towards filling a director vacancy, the whole Board should discuss and agree a detailed skill/experience profile tailored to the vacancy in question, having regard to current and prospective gaps in the Board’s skill set
   2. in equal representation funds, where the relevant sponsoring organisation puts forward a nominee to fill a vacancy (either from within its own ranks or from “outside” those ranks) that nominee shall be appointed if a majority of the Board agrees that the nominee satisfies the Agreed Skill Profile (and other relevant requirements)
   3. policies should be developed (and approved by the Board) to deal with rare but possible situations where the Board and sponsors are unable to reach agreement on the proposed appointment; this should include the Nominations Committee process being activated to assess a wider field of candidates (again paying particular attention to the Agreed Skills Profile), and make its recommendations to the Board
   4. where a new director position has been created to fill a particular – and possibly urgent – gap in the desired skill mix the Nominations Committee process should be activated at the outset, with relevant inputs from the Board in respect of the Agreed Skill Profile, experience and any other requirements
   5. the Board should have effective processes to liaise as appropriate with sponsoring organisations on these recommendations in respect of values, skills and selection processes; this should include the opportunity for limited representation of sponsoring organisations at meetings of the Nominations Committee.

Board Chairs

2. In the interests of their members , NFP funds should always appoint the best of the available candidates ( from within the existing Board or , if necessary , from outside ) as Chairs , whether or not that person was ” independent ” , and irrespective of any previously established rotational arrangements .

Board Renewal

3. All funds are required to have policies for regularly evaluating the performance of Boards, and for “renewing” Boards to stay abreast of changing operational environments. Given the critical role of skills and experience in the performance of NFP funds, Boards of these funds should pay particular attention to renewal policies, including:
   1. “tenure” policy – this is one of those areas where reasonable discretion is likely to 
deliver better outcomes than rigid rules , partly because of size and other differences across funds but partly also because it makes sense to extend tenure where a director’s continued engagement and contributions were demonstrably valuable to the fund; for these reasons Boards should adopt a pragmatic approach to tenure, including a preparedness to argue for extended periods of tenure in “exceptional circumstances”.
   2. gender balance – one area where a firm target could improve Board Governance is gender equality and AIST should establish and monitor a target to achieve gender equality on Boards across the NFP sector as a whole by mid-2022.
4. As part of their on-going policies to improve communications with members, Boards of NFP funds should commit to addressing a range of Board governance issues in their annual reports to members and at other times and in other ways (such as member conferences and workplace meetings) as appropriate.
5. AIST members (who cover the whole of the NFP sector) should give consideration to these recommendations (including 3 (ii) above) in the course of finalising their draft Governance Code.