The proposed legislation was widely seen as targeting industry super funds, aimed at the part of the retirement-savings industry that is best-performing and (compared to the for-profit sector) largely scandal-free.
The proposals included a requirement for all APRA-regulated superannuation funds to have at least a third of their trustees be “independent” from the sponsors of the funds. The government said the move would increase:
“the range of expertise and experience on the board. It is also consistent with the standards applied by APRA to the boards of other regulated entities such as banks and insurance companies and more broadly to ASX-listed companies which must comprise a majority of independent directors”.
What the government had in its sights was the 50/50 representative model of industry funds established in the 1980s during the union push to make superannuation a right of all Australian workers. The industry funds were set up with a governance model that has traditionally been described as “industrial democracy” – it ensures an equal say in the running of the funds by the elected representatives of employees.
The government’s approach was modelled on the rules which have applied to listed corporations in Australia since the scandals associated with HIH and Enron unfolded in the early 2000s. It is a model first developed in the United States, which aimed to protect the interests of shareholders by constraining CEOs. The US corporate governance model is widely held to be a mainstay of economic “financialisation” as it is styled internationally.
In a 2008 speech to the H.R. Nicholls Society, Liberal MP Paul Fletcher made it clear he saw industry funds largely as “advancing the power and economic influence of the union movement”. That half of the trustees of the industry funds are nominated by employer organisations does not seem to matter in this analysis. The legislation has duly been dismissed as ideological. But is there an economic case for independent trustees?
Research in the area of superannuation or pension fund governance is limited, but overwhelmingly points to two key requirements of a super fund board. It should have a significant proportion of member representatives (trade union officials or members elected to the board through other processes) and trustees with financial industry experience. The main reason why independents are brought onto the boards of funds with representative governance models is to bring more financial expertise to the board. It is not their independence that matters, it is their training and experience. Independence from trade union influence has not been demonstrated to be a relevant factor in the financial performance of retirement-savings funds.
Instead, research has shown that substantial union involvement in superannuation governance leads to better outcomes for members. In Australia, this has meant consistent financial outperformance by industry funds, better member services and more active trustee involvement in environmental, social and governance issues. The industrial democracy model of superannuation governance has proved an outstanding success in Australia. And increasingly, the representative model has been adopted internationally as the most suitable for retirement-savings funds, not the American corporate governance model.
The case for independents is typically assumed rather than proven. The introduction of independence provisions in the corporate world in the 1990s and 2000s is widely acknowledged to have fostered more professionalism among company directors at the time. Having a slew of independent directors on the board of Trio Capital, however, did nothing to stop Australia’s largest superannuation fraud six years ago.
Instead, the government’s reforms are based in the Murray report’s false claim that the governance arrangements of industry super funds have not influenced their superior performance. The not-for-profit sector of the superannuation industry has been the most innovative, establishing a range of associated businesses (including ME, Frontier Advisors and IFM Investors), driving down costs, improving member services and providing competition to the traditional for-profit providers – and it has done this largely without the aid of finance industry “independents”. Some of the industry funds have appointed independent directors, but it is training and experience that trustees need most, not independence from the trade-union sponsors of the funds. The government’s proposed reforms had the economics all the wrong way round.
It is hard to see what this initiative would have brought to the superannuation table other than a weakening of the democratic underpinnings of the not-for-profit sector. The creation of an army of $100,000+ a-year finance-industry “independents” is certainly in the best interests of finance-industry insiders, but it is not clear what benefit the reform would have entailed for super fund members. The bill reflected regulatory capture by the for-profit sector and was promoted in a manner that questions the Coalition government’s commitment to evidence-based public policy.