ISN BRIEFING NOTE FSC SUPERANNUATION GOVERNANCE POLICY FSC SUPERANNUATION GOVERNANCE POLICY September 2012 CB1226
Introduction The Financial Services Council (FSC) has recently released a draft Standard on Superannuation Governance Policy. The FSC announced that the objective of this Policy was to ensure the retail super funds which are FSC members meet the highest standards of transparency and governance in the way they operate their superannuation funds standards that go above and beyond what is required by law. The policy will enhance consumer trust and confidence that the superannuation system is managed safely and in line with contemporary expectations. (FSC Press Release 3 June 2012) However, the Policy fails to achieve this objective, especially having regard to the key governance challenge in retail super funds- that is, the significant potential conflict of interest which exists for a director between their duty to shareholders and their duty to fund beneficiaries. While it mandates that super funds who are FSC Members should have a majority of independent directors on their trustee boards, the Policy introduces a novel definition of independent director which would allow in-house directors who hold positions on multiple boards within the corporate group. The policy also fails to create appropriate disclosure requirements in relation to related party transactions. Summary of Policy The Policy is voluntary from 1 July 2013 and mandatory from 1 July 2014. The Policy imposes obligations on FSC members which operate superannuation funds in relation to having a majority of independent directors, disclosure of proxy voting and requiring disclosure of ESG. The policy creates a definition of independent director which would accommodate the appointment of inhouse directors who hold multiple positions within the group including sitting on the board of the parent company and/or sitting on the board of entities which are service providers to the super fund. The Policy only requires disclosure of director remuneration received directly from the super fund, rather than requiring full transparency of all remuneration earned by directors from parent or related entities. The Policy also fails to impose any transparency requirements on the retail super funds which are FSC members in relation to related party transactions. Assessment of Policy The Standard fails to establish a tenable policy framework for the definition of independent directors on the boards of super funds, seeking instead to replace executives from the bank or insurer with in-house or related party directors from the bank, insurer or related parties. Such directors cannot claim to be independent where they have such a significant conflict of interest (in the form of non-disclosed related party transactions) and conflict of duty (in their requirement to act in the best interests of members on one hand and shareholders on the other). Within retail funds, many primary service providers to the RSE Licensee are related party entities (administration, funds management, insurance, financial planning etc.) It should be noted that an Australian Prudential Regulation Authority (APRA) working paper has questioned whether these commercial arrangements are consistent with the fiduciary obligations as trustees, having observed they are on average two times the market rates. FSC SUPERANNUATION GOVERNANCE POLICY 11 September 2012 www.industrysupernetwork.com 1
On this basis, the Standard should be redrafted to reflect a more conventional and community accepted definition of independence. ISN believes that all related party transactions entered into by an RSE Licensee should be legally required to be at market rates and fully disclosed to members annually. ISN believes that all directors who are employed by or are officers of (including independent directors) the parent company and/or related entities should disclose all remuneration earned from these activities. The following examines the policy in detail and raises a number of questions regarding the operation of the policy. FSC SUPERANNUATION GOVERNANCE POLICY 11 September 2012 www.industrysupernetwork.com 2
Clause no Name of clause Clause Content Comment 1 Title 2 Date of Issue (and history) 3 Effective Date 1 July 2013 and mandatory from 1 July 2014 4 Application Applies to FSC members who are trustees holding a public offer or extended RSE licence. 5 Summary of Standard Outlines the governance arrangements which ensure that (a) i. the Chair of the entity s board be independent; ii. The majority of directors be independent; and that a quorum for board meeting only be satisfied if independent directors constitute a majority. (b) directors should not hold multiple and competing positions on RSE Boards; and (c) licensees publically disclose voting policy and proxy voting record. Definition of independent is in question and discussed at below at 8.2, 8.3, 8.7 and elsewhere. The requirement that directors not hold multiple positions on RSE Boards appears only to apply to those boards that are in direct competition in the market place. 6 Statement of purpose 6.1 General To implement governance processes consistent with the FSC s policy of 6 March 2012 6.2 Transition Policy will require many of Australia s largest companies to undertake significant changes to their superannuation governance structures and a transition period is therefore required. FSC SUPERANNUATION GOVERNANCE POLICY 11 September 2012 www.industrysupernetwork.com 3
6.3 There is a recognition that many of the governance changes will be directly imposed by MySuper and will be effective from 1 July 2013. APRA requirements, MySuper, Superstream & FoFA reforms 6.4 The transition process recognises that some FSC members will be introducing independent directors for the first time and that this process will take some time. 6.5 (a) By 1 July 2014 the majority of directors must be independent. (b) A voting policy and disclosure policy must be formulated prior to 1 July 2014 and implemented as near that date as possible. (c) After 1 July 2015 within 3 months of the end of the financial year the RSE must disclose its voting record. October 2015 would be the first mandatory voting disclosure period. 6.6 Presentation templates An attempt to provide information in a consistent and easy to understand format. 6.7 Templates developed for (a) Director Independence and related disclosures; (b) Proxy voting records; and (c) ESG reporting. APRA reporting and disclosure requirements relating to MySuper may have an impact on these templates. Only the statutory minimum disclosure requirements will be adopted. The standard will not cover disclosure of director & senior management remuneration. This will be left to legislation. FSC SUPERANNUATION GOVERNANCE POLICY 11 September 2012 www.industrysupernetwork.com 4
6.8 A model governance disclosure reporting pro forma is provided at Appendix A (see below). A licensee may change the model to suit its own needs provided the standard is followed. A remuneration reporting section is included on the understanding that MySuper tranche 3 legislation & associated regulations are likely to include remuneration reporting in similar terms to s300 of the Corporations Act. The Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Bill 2012 [Tranche 3 of MySuper] requires the disclosure of the remuneration of directors and executive officers. See Schedule 3, item 40, paragraph 29QB91)(d) The FSC pro-forma lists the remuneration of senior executives in bands of 100,000 and the amounts paid to Directors. 6.9 Licensee can provide more information if it wishes to do so. 6.10 Subject to legislation, an operator may choose to disclose information available on a website or in a specific governance section of the annual-report. APRA s standardised reporting standards and the strict liability offences associated with non-compliance (enforced by ASIC) will impact on these matters. 7.1 General principles and comments Standard applies to relevant RSE s (see clause 4) 7.2 The standard has been developed by reference to(a) IFA Guidance Note 2, Corporate Governance: A Guide for Fund Managers and Corporations, 2004, re-issued 2009 (the Blue Book); (b) the ASX Corporate Governance Council s Corporate Governance Principles and Recommendations, 2 nd edition, issued June 30 210, effective 1 January 2011; and (c) Draft APRA prudential standards SPS and CPS 510 FSC SUPERANNUATION GOVERNANCE POLICY 11 September 2012 www.industrysupernetwork.com 5
Governance. 7.3 SPS 510 will be operative by 1 July 2013 and CPS 510 for other APRA regulated entities will commence prior to the mandatory policy implementation. 7.4 Where there is a conflict between the standard and legislation the requirements of the standard should be modified accordingly. Where the standard exceeds regulation i.e. SPS 510 regarding board composition, the standard will apply. 7.5 Where there is a conflict between the standard and the constitution of the member, it is envisaged that steps will be taken to amend the constitution. 8.1 The Independence Criterion Requirement: the key elements The key elements are (a) majority of board independent directors; (b) only quorum if majority present independent directors and (c) the board of the licensee must be chaired by an independent director. 8.2.1 Independent Director: Differing formulations There are a number of different definitions of independent directors flowing from CPS 510, the Blue Book and ASX Guidelines. Clause 8.2.4 defines independent and further qualifies the definition contained in the IFSA/FSC Blue Book. See 8.2.4 FSC SUPERANNUATION GOVERNANCE POLICY 11 September 2012 www.industrysupernetwork.com 6
8.2.2 Independent Directors: Minimum Number 8.2.3 The Test of Independence under this Standard The minimum number of independent directors is best addressed by each licensee and its parent where a subsidiary member of a corporate group. Members may be subject to various governance requirements, particularly where they are part of a corporate group which operates in different sectors of the finance industry. 8.2.4 A director will qualify as an independent director where they are not an employee of the RSE or a related body corporate or related entity* (as per s9 of the Corps Act) of either and who: *An entity is a subsidiary of another company that (i) controls the composition of its board, (ii) can cast or control the casting of more than ½ of the maximum votes that might be cast at a general meeting, or (iii) holds more than ½ of the voting share capital. (s46) The notion of control above requires an evaluation of the practical influence and any pattern of behaviour indicating the capacity to influence. (s50aa). 8.2.4(a) Does not have a substantial holding (as per s9 of the Corps Act) # in the RSE licensee or any of its related bodies corporate (relevant entity) or, (except as an independent director), is not an officer of such a relevant entity, or otherwise associated directly or indirectly with, a The clause draws from the Corps Act, but with a qualification. 8.2.4(a) permits an independent director of the parent company or related entity to be defined as independent for the purposes of their Standard. #A substantial holding is 5% of the company or is in the process of bidding for a takeover of the comp. This clause in the policy places a clear FSC SUPERANNUATION GOVERNANCE POLICY 11 September 2012 www.industrysupernetwork.com 7
person having a substantial shareholding in the relevant entity; qualification on Guideline 3 Composition of the Board of Directors: Independence in the IFSA/FSC Blue Book by explicitly excluding independent directors from the definition of those who associated with the company. Clause 11.4 of the Blue Book states that: An independent director is a director who is not a member of management (a nonexecutive director) and who: - is not a substantial shareholder of the company or an officer of, or otherwise associated directly or indirectly with a substantial shareholder of the company. The FSC standard is also at odds with Principle 2 Structure the board to add value of the ASX Guidelines, which pointedly does not provide that an independent director of a related entity be automatically deemed an independent director of the relevant Board. Rather Principle 2 at page 16 of the ASX guidelines more strictly defines an independent director when it states: FSC SUPERANNUATION GOVERNANCE POLICY 11 September 2012 www.industrysupernetwork.com 8
An independent director is a nonexecutive director who is not a member of the management and who is free of any business or other relationship that could materially interfere with or reasonably be perceived to materially interfere with the independent exercise of their judgement. The ASX guidelines then quote examples of independence from the Blue Book which does not make the exclusion sought in the FSC standard. Under the FSC draft Standard, it appears that a director who is also an independent director of a substantial shareholder of the relevant entity is considered to be an independent director of the relevant entity. This interpretation goes beyond what the ASX believes is appropriate in its guidelines. At page 17 of the ASX guidelines the ASX states: Family ties and cross-directorships may be relevant in considering interests and relationships which may affect independence, and should be disclosed by directors to the board. It is arguable that such an interpretation of independence could be acceptable with disclosure and monitoring in the context of FSC SUPERANNUATION GOVERNANCE POLICY 11 September 2012 www.industrysupernetwork.com 9
listed companies. It is suggested it is inconsistent with the fiduciary duties upon directors in the superannuation It is difficult to conceive of a Board composed of Directors of the parent company and/or related entities who are appointed to the board of the RSE Licensee because of this relationship meeting a definition of independent. 8.2.4(b) has not within the last three years been employed in an executive capacity by the relevant entity or been a director after ceasing to hold any such employment; 8.2.4(c) has not within the last three years been a principal or employee of a material professional adviser or a material consultant to a relevant entity; 8.2.4(d) is not a material supplier or customer of a relevant entity, or an officer of a relevant entity, (other than an independent director), or otherwise associated directly or indirectly with, a material supplier or customer of any relevant entity; Parent company and/or related entities are excluded from the definition of material supplier or customer to enable directors appointed by the parent to be classified under the FSC standards as independent. FSC SUPERANNUATION GOVERNANCE POLICY 11 September 2012 www.industrysupernetwork.com 10
8.2.4(e) has no material contractual relationship with a relevant entity, other than as a director of the relevant entity, and See clause 8. 8.2.4(f) is free from any interest and any business or other relationship which could, or reasonably could be perceived to materially interfere with the directors ability to act in the best interests of the relevant RSE s beneficiaries. A general over-arching provision which (unless multiple and cross directorships are not considered to interfere with independence) appear to be inconsistent with the director exclusions. The clear and intended interpretation is that holding a directorship in the parent company, a related entity or more than one business relationship within a group (see 9.6) is not considered to materially interfere with the directors ability to act in the interests of relevant RSE s beneficiaries. Also see 8.2.6 8.2.4(f) ignores the fundamental conflict of duty held to shareholders and fund members. See also qualification in 8.2.4(a). 8.2.5 The Test for Independence and Structural issues Standard adopts similar (but not identical) approaches to (a) RSE licensees who are a subsidiary of another APRA regulated institution or overseas equivalents; (b)an RSE licensee which is a subsidiary of a non-prudentially regulated parent; and (c) joint ventures. 8.2.6 RSE licensee a subsidiary of prudentially regulated parent Notwithstanding the lesser obligation in CPS 510 that where the RSE licensee is a subsidiary of another APRA regulated institution or an overseas equivalent must have a majority of non-executive directors, the standard imposes an obligation that they also qualify as The standard is clear at this point. It is noted that at paragraph 31 CPS 510 the following applies: FSC SUPERANNUATION GOVERNANCE POLICY 11 September 2012 www.industrysupernetwork.com 11
independent directors. The FSC accepts that independent directors of the Board of the parent regulated institution or its other subsidiaries may sit as independent directors of the RSE licensee. 31. For the purposes of meeting the requirements in paragraph 30, the independent directors on the Board of the parent company or its other subsidiaries may also sit as independent directors on the Board of the regulated institution. 8.2.6 explicitly ignores the conflict of duty to shareholders and fund beneficiaries (members) and the other obligations imposed (or soon to be imposed) on directors by the s52 covenants the SIS Act. Also see clause 9.6 & 9.7 8.2.7 Subsidiaries of a nonregulated parent. 8.2.8 Joint ventures Restates position that directors of the parent and/or related entities can be defined as independent for the purposes of the FSC Standard. Restates position that directors of the parent and/or related entities can be defined as independent for the purposes of the FSC Standard. 8.2.9 Other structural matters CPS and SPS 510 deal with other board related issues such as tenure and renewal, board assessment and audit and remuneration committees. MySuper legislation also requires disclosure of proxy voting policy and records. Therefore the FSC standard only contains FSC SUPERANNUATION GOVERNANCE POLICY 11 September 2012 www.industrysupernetwork.com 12
additional obligations to the extent considered necessary to achieve consistency with the objectives of the standard. Therefore the relevant Committees referred to in CPS and SPS 510 should be chaired by an independent director who is not the chair of the RSE licensee Board. 8.3 Independent Director to be Chair of RSE Licensee Board The Chair of the RSE licensee Board is to be an independent director as per standard 7.2.6 For clarity, a director may be an independent director and thus be able to act as Chair even though that director is a director of another group entity (see paragraph 16 of SPS 510), provided the director qualifies as an independent director under this standard in relation to that other group entity. Restates position that directors of the parent and/or related entities can be defined as independent for the purposes of the FSC Standard. 8.4 Proceeding of Directors A quorum for a Board meeting must comprise of independent directors. This may require a change to some company constitutions. 8.5 Vacancies in office of Director, etc. Where a Board vacancy occurs and the standard is subsequently not met, the member will have 120 days to comply with the standard. 8.6 Where there is a vacancy of the Chair, the interim Chair may be an executive officer, provided this does not extend beyond 120 days. 8.7 Materiality and the concept of independence Members should carefully consider various relationships and contractual arrangements and take their own advice on whether the relationship is such that is material. Materiality is used at clause 8.2 and elsewhere. This clause states that Accounting Standard AASB 1031 Materiality may be a useful starting point to define a material interest. The standard defines a material interest as one that is equal to or greater than 10 per cent of the FSC SUPERANNUATION GOVERNANCE POLICY 11 September 2012 www.industrysupernetwork.com 13
appropriate base amount within a 12 month period. The FSC standard leaves open the possibility of an interest not being deemed material even if it exceeds the 10 per cent threshold where there is evidence or convincing argument to the contrary. One can only presume the evidence is self-assessed. In any event, 8.2.4(d) excludes directors of parent company and/or related entities as being material suppliers or customers for the purposes of the FSC Standard. It appears the FSC is unaware that in February 2012 the AASB issued an exposure draft proposing to withdraw AASB 1031 in line with a policy to follow International Financial Reporting Standards on such matters. 8.8 Disclosure to Members Members are to disclose to members their compliance with the standard each financial year. 9.1 Multiple Directorships etc. of RSE Licensees Directors of RSE licensee s are fiduciaries in relation to the licensee and fiduciary obligations to beneficiaries of the superannuation entity, in addition to other statutory obligations. Whilst there are fiduciary duties owed to both licensees and ultimately relevant shareholders and fund beneficiaries, the FSC SUPERANNUATION GOVERNANCE POLICY 11 September 2012 www.industrysupernetwork.com 14
additional duties imposed on directors by the MySuper Trustee Obligations and Prudential Standards Bill recognises that conflicts can occur, but provides that the duties of beneficiaries prevail where there is a conflict. The additional duties for MySuper trustees include the critical requirement that they promote the financial interests of MySuper beneficiaries, in particular net returns to those beneficiaries and that they give priority to the interests of beneficiaries where conflicts arise. The new section 52A covenants introduced in the Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Bill clearly provide that where there is a conflict it is the duty of the director to give priority to the duties to and interests of the beneficiaries over the duties to and interests of other persons and to ensure that the duties to beneficiaries are met despite any conflict. Section 52A(3) provides that any conflicting duty imposed by Part 2D. 1 of the (Corporations Act 2001 or Division 4 of Part 3 of the Commonwealth Authorities and Companies Act 1997 is overridden by the duties to beneficiaries. FSC SUPERANNUATION GOVERNANCE POLICY 11 September 2012 www.industrysupernetwork.com 15
9.2 The FSC Standard states that an issue may arise where a person holds multiple directorships in RSE s that operate in an identical or same market. Such an outcome is inconsistent with the openness and transparency members are entitled to expect in the superannuation industry. 9.3 The FSC Standard states that conflicts are in some case impossible for a fiduciary to resolve in these circumstances, good governance requires that it is better to avoid conflicts of this kind entirely. 9.4 It is a requirement of the standard that a relevant licensee take such steps that are reasonable and practicable in the circumstances to ensure that none of its directors holds a directorship or any other position with another relevant licensee where the licensees objectively, reasonably and sensibly can be seen to be competing to attract the same membership. The example given allows for multiple directorships where the relevant directorships are part of the same corporate group. It is unclear what an objective, reasonable and sensible determination if funds are competing against each other means in the context of public offer funds. 9.5 9.6 An independent director may sit on the board of a number of group entities (for example one or subsidiaries of a parent entity whether or not the parent is an APRA-regulated entity). That is, in the normal course, there mere fact that there are directors in a corporate group who sit on a number of group boards, will not be seen to be a breach of the principle set out in paragraph 9.3 [independence]. This would include entities, whilst not likely to be directly competing with each other, are likely to have commercial arrangements. Explicitly ignores the conflict of duty to shareholders and fund beneficiaries FSC SUPERANNUATION GOVERNANCE POLICY 11 September 2012 www.industrysupernetwork.com 16
(members) and the other obligations imposed (or soon to be imposed) on directors by the s52 covenants in the SIS Act. See also 8.2.6. 9.7 Whilst the provision in 8.2.4(f) that directors should be free from other relationships that may affect their ability to act independently, the following should be kept in mind: That said, it is unlikely that the holding of more than one directorship or the existence of more than one business relationship within a group, would infringe the principle set out in paragraph 9.3. It appears that multiple business relationships and well as directorships within the group, are unlikely to interfere with independent judgement. Explicitly ignores the conflict of duty to shareholders and fund beneficiaries (members) and the other obligations imposed (or soon to be imposed) on directors by the s52 covenants the SIS Act. See also 8.2.6. FSC SUPERANNUATION GOVERNANCE POLICY 11 September 2012 www.industrysupernetwork.com 17