2.4 Governance

2.4.1Board composition

Proper governance of superannuation funds is of critical importance. Directors of the trustee of an RSE have important responsibilities. Debates about the desirable composition of the boards of trustees often proceed by seeking to differentiate between directors according to their association with a shareholder or a nominating organisation of the trustee. Distinctions of that kind may distract attention from what I consider to be the central issue: the need for the board of a trustee to be skilled and efficient in the proper supervision of the fund in the best interests of members.

Superannuation can no longer be seen only as a compact between employees and one or more employers or only as a compact between organised labour and capital. There are two reasons. First, as explained at the start of this chapter, superannuation is important to the whole nation. Superannuation arrangements are more than private bargains. Second, the central principles governing superannuation arrangements are, and must remain, the best interests of members and the sole purpose test. Neither of those principles refers to the interests of those who stood behind the establishment of the fund or those who continue to stand behind it. Neither of those principles permits pursuit of any objective other than the best interests of members.

Notions of ‘representative’ directors, as distinct from ‘independent’ directors do not sit easily with these basic principles. All directors of the trustee of an RSE owe the same duties, including, to perform their duties and exercise their powers as directors of the trustee in the best interests of the beneficiaries: the members.[1] Whatever may be the processes for the nomination or selection of directors, all directors must meet the best interests obligation. And in meeting that obligation all directors must give priority to the interests of members over the interests of any other person (including whatever person or body may have nominated the director to serve in that office).

As superannuation funds become larger and more complicated, the greater the need also grows for a skilled and efficient board of directors. The greater the need for board skills, the more pressing it is for nomination and appointment processes to recognise those needs expressly. And the more pressing it is for boards to make effective provision for regular and orderly board renewal and replacement.[2]

I do not consider that these matters are best dealt with by prescriptive rules about board numbers or composition or prescriptive rules about nomination or selection processes. Rules of that kind have sometimes sought to use the notion of ‘independence’ as the relevant criterion. But rules prescribing board numbers or composition or prescribing particular forms of nomination or selection processes distract attention from the basic requirement of ensuring that the board is, as far as possible, constituted, at all times, by directors who, together, will form a skilled and efficient board.

The reference to the board being constituted in such a way at all times, is important. Board change and renewal is essential but must be managed properly. The unexpected or wholesale turnover of trustee directors is to be avoided. Equally, term limits are a critical part of the proper management of board change and renewal. Change and renewal will bring fresh eyes to bear upon the direction of the trust and bring fresh interrogation of, and challenge to, management of the trust. Many funds now have term limits for board members but some have applied those limits only prospectively, leaving some board members in place for too long.

I do not think that the matters I have mentioned about board composition and appointment are best dealt with by legislative change. More particularly, they point firmly away from trying to develop some system of board appointment analogous to the processes applied in a publicly listed company. But they are matters to which funds seeking to apply sound governance principles need to give attention.

All the matters I have mentioned concern the proper governance of the fund. Proper governance is, in my view, a matter for the prudential regulator APRA to supervise. I will return to the subjects of governance and supervision later in this chapter in the course of considering whether the Banking Executive Accountability Regime (BEAR) regime should be extended to the superannuation sector.

Before doing so, however, there is one other aspect of governance of the trustees of RSEs that should be examined: mergers.

2.4.2Mergers

Trustees of RSEs that offer a MySuper product must determine annually that there is sufficient scale, in terms of assets and beneficiaries, such that the financial interests of beneficiaries are not disadvantaged relative to the financial interests of beneficiaries in MySuper products of other RSEs.[3] Proper application of the annual scale assessment should invite the attention of some trustees to whether their members would benefit from merging the fund with another to create a fund of larger scale, with more assets and more beneficiaries.

In its report about superannuation the Productivity Commission proposed a number of other steps designed to encourage mergers.[4]

The case studies examined in evidence pointed towards some recurring issues arising in consideration of possible mergers. In particular, the evidence pointed to processes related to board composition of the merged funds as being important to the success or failure of some merger proposals. Of course those examining a possible merger of funds must consider how the merger will be effected and how the merged fund will be both managed and governed. Who will constitute the board of the new entity? Who will decide who is to be the CEO of the new entity? Who will decide how the new entity will be administered and who will manage investments? All these, and more, may be proper questions for those considering a possible merger.

But the determining question must be what is in the best interests of members. The determining question cannot be whether one or more of those who are directors before the merger will have a place on the new board.

Likewise, care must be taken when considering whether proposals about board nomination and selection procedures for the board of the new entity are assessed according to the interests of members, or the interests of shareholders or nominating organisations of the merging trustees. On what basis can it be said that an external entity retaining control of a number of seats on the board of the trustee of the merged funds is in the interests of members? The moment the argument is framed in terms of ‘control’ it must be apparent that the interests of the controller are being considered above the interests of the members. And that is not consistent with the duties of the directors of the funds that are contemplating a merger. It is to fail to give priority to the interests of members over all other interests. As stated above, the formation of a new board is to be guided by the objective of constituting a board comprising directors who, together, will form a skilled and efficient board.

Having discussed matters of governance related to board composition and mergers, the question then arises of what should be done if a trustee does not act in accordance with the principles that have been laid out. At the time of writing, a Bill to make a number of changes to the SIS Act, including giving APRA a power to issue directions to RSE licensees, had been introduced into the Parliament but had not yet been passed.[5] It may be that, in particular circumstances, addressing a stalled merger would be an appropriate use of such a power.

Finally, it is possible that in the circumstances of a particular proposed merger, a shareholder or nominating organisation could interfere despite the best efforts of the trustee (such as by refusing some consent required under the trustee’s constitution). It is to be hoped that such extreme situations will be rare. Should such a situation occur, it would be for the trustee to take the necessary steps to ensure that its shareholders did not cause it, the trustee, to be in breach of its obligations.


[1] SIS Act s 52A(2)(c).

[2] Cf Financial Reporting Council, The UK Corporate Governance Code, July 2018, 8, Principles J, K and L.

[3] SIS Act s 29VN(b).

[4] Productivity Commission, Report 91, Superannuation: Assessing Efficiency and Competitiveness, 21 December 2018, 453-4.

[5] Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 1) Bill 2017 (Cth).