Home / Comment / APRA ruling on board tenure applying accepted governance norms

The employer-employee split worked well when not-for-profit funds were in their infancy. Today, in an era of member choice and the growing demands of retiree members, it’s a model that fails to cut the mustard.

Have you ever been so passionate about something that you’d be willing to even challenge your own family about it? For me, superannuation is such a passion, one which I’ve nurtured since migrating to Australia back in the late 1980s.

During my asset consulting days, I understood how my commercial value in this role extended beyond just recommending investment managers and/or asset allocation.

Sometimes our discussions would delve into board governance issues, comparing the differences between for-profit listed versus not-for-profits and/or mutual society boards.

I remember, constructively of course, asking the chair at one fund if they felt the board at Ford Motors (as an example) decided how many four-door cars versus hatchbacks were produced, or if the board set long-term targets, allowing management leeway (tracked via KPIs and other metrics, of course). Obviously, it was the latter.

The point of the question was to highlight just how fine a line it is as to where management and board responsibilities lie. It’s no different in the world of superannuation where there can be the added complications caused by two observable factors. One is a legacy issue; the other is what I half-jokingly like to call “corporate ADHD”.

Regarding the legacy of the not-for-profits, it’s worth remembering that the roots of our superannuation schemes date back to their former industry structure, where board composition was split between elected or appointed employer and employee representatives. It was a fledgling industry where the sums were small, and both employer and employee directors embraced the concept of a boardroom and factory-floor partnership with a missionary zeal. Board tenure simply wasn’t an issue.

But as superannuation matured and opened membership beyond its own industry, AKA ‘member choice,’ does this legacy employer/employee composition really matter to someone who’s chosen their superannuation for reasons divorced from where they work? And while we have a portion of independent, non-executive directors today, does it really matter to the average member in today’s open platform as to whether a director is employee- or employer-elected? They just want healthy returns and good service.

In the listed for-profit world, there are countless academic studies concluding that a maximum tenure, to retain “independent thought”, is nine years, or three terms of three years. In some countries, this has even been legislated, let alone often exercised via some ESG metrics. So APRA’s recent ruling limiting board tenure to a maximum of 10 years isn’t that different from what countless pension boards already do.

Many listed companies, in Australia and overseas, have their own board policy with regards to tenure. Not surprisingly, it’s about nine years. In the Australian Institute of Company Directors’ (AICD’s) report on tenure, it writes: “It is a good idea for a director’s tenure to be limited to encourage renewal … there are many benefits to bringing fresh perspectives on to a board.”

The second issue, or what I call “corporate ADHD,” stems from being easily distracted by the shiny things. By this I am referring to returns and agency league tables.

In the actuarial world of pension immunisation, such metrics cannot be found in any academic pension finance book. Yet, like it or not, it helps differentiate one fund from another – for a short time. Just as pension funds would not choose an investment from historical returns alone, the same is true with funds, as the power of mean reversion is deeply founded in gravity.

Yet top-performing funds attract positive attention despite having nothing to do with a fund’s long-term objective. We tell members the fund aims to deliver CPI-plus, only to have one in 10 years of negative returns and with a maximum draw-down of seven per cent. Yet there is no mention that “the fund aims to be top-quartile relative to our peers”.

In the accumulation phase, boards focussing on investment returns may be valid, but as increasing numbers of baby boomers head into retirement and push many funds into net outflows, capturing a different focus and perspective on outflows and member servicing needs new and different demands.

We’ve come from a world of asset capture to that of fund outflows. Even a top-performing fund won’t gather new assets and members when member satisfaction and service standards fail to meet expectations. Is it time to bring such administration functions inhouse again – no different to what funds are increasingly doing with investment? Having access to continued independent thought, as defined by tenure, should hopefully assist in this regard.