Dissenting Report by Labor Senators
1.1
Labor Senators are concerned
that this bill is seeking to impose a significant ideological shift from a
model of trustee governance to model of shareholder governance, that
there is no clear and compelling evidence that the changes are warranted, and
that there is widespread concern the definition of 'independence' contained in
the bill is ambiguous.
1.2
The most concerning aspect of this bill is that it blindly conflates and
confuses trustee governance with shareholder governance, rather than
contrasting the two. Under a trustee governance model, board directors have a
fiduciary duty to their trustee-members: the customers who are buying
into the fund. Under a shareholder governance model, board directors have a
fiduciary duty only to their shareholder owners. This Bill will impose a
model of shareholder governance on boards currently operating under a trustee
governance model.
1.3
Hearings have revealed supporters of the bill demonstrating a troubling
pattern of cherry picking favourable data, attempting to present unrelated
data, and failing to present quantitative evidence to support many of their
assertions.
1.4
An alarming majority of submissions expressed concerns at the ambiguous and
prescriptive definition of 'independence' contained in the bill (including some
submissions expressing in-principle support the bill).
Referral and conduct of the inquiry
1.5
Labor
Senators note that this bill was dumped into the House of Representatives by
outgoing Assistant Treasurer Josh Frydenberg two days after the leadership
spill that ended Tony Abbott's Prime Ministership. The bill demonstrates an
ideological commitment to replace a model of trustee governance with one of shareholder
governance.
1.6
In Minister Frydenberg's
second reading speech to the House, he makes several factual errors, including
some contradicted in the Explanatory Memorandum. The most egregious claim is
his assertion that the bill will bring Australian superannuation funds in line
with international best practice:
This bill amends the Superannuation Industry (Supervision)
Act 1993 to introduce a higher standard of governance for superannuation funds,
in line with domestic and international best practice.[1]
1.7
But sections 2.48-2.50 of the Explanatory Memorandum for this bill clarify
that pension funds in New Zealand, Canada, the US and the UK operate quite
differently, usually under an equal representation model:
(2.48) ...The New Zealand Superannuation Schemes
Act 1989 does not have this independent trustee requirement and, therefore,
non‑KiwiSaver superannuation schemes (including complying schemes) have
no qualification requirements attached to the role of the trustee.
(2.50) In Canada, multi-employer plans established
pursuant to a collective agreement are governed by a board of trustees composed
in accordance with the plan or collective agreement (typically equal
representation — that is, that the board of a corporate trustee must consist of
equal numbers of employer representatives and member representatives; In the
United States, multi‑employer (Taft‑Hartley) funds must have equal
representation of employers and employees; In the United Kingdom, at least one‑third
of trustees must be member‑nominated.[2]
1.8
Minister Frydenberg explicitly
re-states his commitment to a model of shareholder governance:
The changes fulfil the government's election commitment to
align governance in superannuation more closely with the corporate governance principles
applicable to ASX listed companies.[3]
1.9
But the changes proposed in the bill go far beyond an alignment with the
ASX principles, which offer a voluntary framework for boards to consider. This bill
will impose highly prescriptive changes, coupled worryingly with an ambiguous definition
of independence. This was confirmed in testimony provided during hearings by Vicki
Wilkinson of Treasury, who clarified 'it is broader than the ASX definition'[4]:
1.10
Minister Frydenberg goes on to erroneously
claim that the bill is consistent with the Cooper review
recommendations:
The changes this bill makes are consistent with the Cooper
review recommendations and observations.[5]
1.11
But the changes proposed in this bill are not consistent
with the Cooper Review recommendations, which proposed (in frustratingly dense
text), that non-equal representative trusts (i.e. retail and bank owned funds)
should have a majority of 'non‐associated'
trustee‐directors[6];
and that funds with an equal representative trustee structure:
...that no less than one‐third
of the total number of member representative trustee‐directors must be non‐associated, and no
less than one‐third
of employer representative trustee‐directors
must be non‐associated.[7]
1.12
Despite the
unfortunate circumstances surrounding the introduction of the bill and the
erroneous claims made by Minister Frydenberg, Labor Senators acknowledge the
cooperation of Government Senators on the Senate Economics Legislation
Committee in agreeing to hold two public hearings in Sydney and Melbourne, and
allowing the invitation of witnesses broadly critical of the bill and its
objectives.
Conflating two different models of governance
1.13
As Labor Senators note above,
both Minister Frydenberg's second reading speech and the Treasurer's
Explanatory Memorandum conflate and confuse shareholder governance with
trustee governance, rather than contrasting the two – but Labor Senators note with exasperation that this
distinction is clearly made in both the Cooper review and also in the Treasury consultation
paper, and that these have been referenced quite clearly in sections 1.14 and 1.21
respectively of this report.
1.14
The Productivity Commission
has previously warned against imposing a new structure on super boards. Its
2012 inquiry 'Default Superannuation Funds in Modern Awards' examined
fund governance and concluded that it was 'not persuaded that additional
prescriptive criteria are warranted'[8].
1.15
The Association of
Superannuation Funds of Australia (ASFA)
submitted that by imposing a single model on all superannuation funds, that the
bill may have unintended consequences:
It should also be recognised that there are many different
structures and sizes across the sector and a 'one size fits all' approach may
have unintended consequences particularly for small non-public offer funds. As
such, it is important that the final legislation and the APRA prudential
standards are sufficiently principles-based and place the accountability for
the best outcomes for fund members on the Trustee Boards[9].
1.16
In testimony before the committee,
Mr Tom Garcia of the Australian Institute of Superannuation Trustees
(AIST), and who is a member of the ASX governance council, was blunt in his
opposition to the bill:
We oppose both its reach and its drafting. We absolutely
oppose the abolition of equal representation and see it as a retrograde step
for our superannuation system. Further, we dispute the stated objectives and
question if in fact this bill will achieve them.[10]
1.17
In their submission response to the exposure draft of the bill , AIST draws
a clear distinction between the two models of governance:
In a listed company context, independent directors are there
to protect minority shareholders and to ensure independence from management. In
the not-for-profit superannuation sector these protections are neither relevant
nor necessary - minority shareholders don't exist and superannuation funds are
required by law to act in the best interests of all beneficiaries. A trustee is
not a listed company in function or in form, and these changes fail to
recognise that fundamental difference.[11]
1.18
This government's insistence
on conflating the two forms of governance is alarming.
Definition of Independence
1.19
A majority of submissions expressed concerns at the ambiguous and
prescriptive definition of 'independence' contained in the bill (including some
submissions expressing 'in-principle support' the bill).
1.20
The Chair has kindly included some of these concerns in sections 2.17 to
2.20 of this report:
-
(2.17) The Governance Institute of Australia (“set out the
principle of independence, but not prescribe a definition”)
-
(2.18) Mercer Consulting (would prefer a “principles based”
definition)
-
(2.19) Australian Institute of Company Directors (“could be
broader”)
-
(2.20) Australian Industry Group (“overly restrictive”).
1.21
In their submission to the inquiry, the Association of Superannuation
Funds of Australia (ASFA) offer a considered critique of the definition of 'independence',
which is a critical component of this bill:
ASFA recommends that the definition of 'independent' in the
legislation be amended to enable organisations to retain the ability to have
common independent directors on the boards of RSEs under the same financial
conglomerate group, rather than having to rely on APRA to make a determination
on a case-by-case basis.
We believe that, on balance, this is an appropriate exclusion
given that there are no limitations proposed in the revised draft legislation
on an individual holding office as director on multiple unrelated RSE
licensees.
In our view, allowing directors to sit on multiple unrelated
RSE licensees where the RSEs are in competition with each other but not sit on
multiple related RSE licensees within the same financial conglomerate group as
an independent director would be a poor policy outcome.[12]
1.22
ASFA continues to criticise the governments definition of independence,
noting that it could exclude otherwise entirely well qualified directors from
consideration:
ASFA recommends that the definition of 'independent' in the
legislation be amended so that recent executive officers and directors of firms
that are suppliers to the RSE licensee, but who themselves have had no previous
dealings with the RSE licensee, should be allowed to be appointed as an
independent director.
For example, a former tax partner (within the last three
years) of a firm that currently provides audit services to the fund, but who
has never themself had any dealings with the fund, should not be precluded from
being appointed as an independent director.
ASFA recommends that the legislation be amended to clarify
that the mere fact of being a director on the trustee board does not result in
the individual being deemed to have a material business relationship that
precludes them from being considered 'independent'(Ibid).
Poor data
1.23
This inquiry has revealed supporters of the bill demonstrating a
troubling pattern of cherry picking favourable data, attempting to present
unrelated data, and failing to present quantitative evidence to support many of
their assertions.
1.24
The Association of Superannuation Funds of Australia (ASFA) acknowledge
that evidence tendered to the inquiry about the correlation between director
independence and strong governance is ambiguous at best:
Some have argued that having independent directors has the
potential to add significant value to the decision making process and improve
the overall performance of the trustee board. However, others have argued that
forcing boards to have a certain number or proportion of independent directors
could, if anything, result in less discursive boards and, ultimately,
potentially inferior decision-making.1
1.25
The Australian Institute of Superannuation Trustees (AIST) submission provides
a list of claims made in support of this bill that are not backed by evidence
(and again also emphasizing the distinction between trustee governance and
shareholder governance):
To date no evidence has been presented that:
- The current representative trustee model of governance is
broken;
- The proposed model will improve member outcomes;
- The proposed model will not result in less favourable
member outcomes;
- Explains why a mandated number of independents must be
applied to equal representation models of governance when the concept of
independents – and therefore the need for them - arose where structural
conflicts exist in companies acting as trustees of for-profit 'retail'
superannuation funds. These structural conflicts – which exist between the
duties of executives as directors and their duties to the shareholders to
maximise profit - simply do not exist in not-for-profit superannuation funds.
1.26
The Financial Systems Inquiry also
concedes that there is little evidence to support imposing these changes by
legislation:
Although there is little
empirical evidence about the relationship between quality of governance in
Australian superannuation funds and their performance, high-quality governance
is essential to organisational performance.[13]
1.27
The most concerning example of this lack of diligence was the
unprecedented political intervention of APRA member Helen Rowell, who delivered
a speech ironically titled Facts, Fallacies, and the Future, at the AIST
Governance Ideas Exchange Forum in Melbourne on Tuesday 20 October, 2015, but
under direct questioning at this inquiry, was forced to concede that 'it is
very difficult to put any quantitative measure' on the benefits that she was
asserting.
Recommendation 1
Labor Senators recommend that the
bill not proceed.
Senator Chris Ketter
Deputy Chair
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