Legislation is not the best way to achieve independence on super fund boards
Governance Institute remains a strong supporter of independence on superannuation fund boards. From when the debate on governance on super fund boards started early in 2014, we made the key point that a majority of independent directors is the best outcome, as they need to be able to influence how the board is operating.
But another key point we have been making since that time is that a principles-based approach to defining independence is much better than a black-letter law approach. We strongly believe that it would be preferable for the legislation to set out the principle of independence, but not prescribe a definition. The problems that each new definition of independence in each new version of the bill throw up confirm that trying to deal with this in legislation is not the way to go.
While we supported the legislation introducing a requirement of one-third independent directors as at least a pragmatic, first step if a black-letter law approach was taken, we think it’s time now to take a step back and consider a different approach.
We are on the record as recommending a mechanism similar to the ASX Corporate Governance Council — for example, a Superannuation Governance Council, as recommended by the Cooper Review — which could flesh out how the principle of independence could be assessed and applied in a way that is difficult to achieve in legislation or prescriptive prudential standards. As noted in the Cooper Review, ‘APRA could coordinate membership of the council and provide secretariat support’.
The ASX Corporate Governance Council’s principles set out criteria against which independence can be assessed, but it cannot be assumed that independence of judgment is lost if only some of those criteria are met. The criteria are examples of interests, positions, associations and relationships that may raise doubts about independence and require consideration, but they do not prescribe a loss of independence.
The Council’s Principles and Recommendations have played a vital role in improving corporate governance in Australian listed companies since the release of the first edition in 2003. Their history is one of practical statements on governance which have brought meaningful change to governance practice. We have seen with Sarbanes-Oxley in the US that black-letter law approaches do not have the same effect. And if it is outcomes that we are most interested in, then a principles-based approach better serves the needs of Australians who seek good governance of the funds holding their retirement savings.
For these reasons, we think that the bill should not proceed in its current form — the current definition does not achieve the spirit of independence it is seeking to achieve. If we take a principle-based approach, it could potentially be incorporated into an amended bill to replace the current prescriptive definition of independence.