The Financial Services Council's (FSC) draft Standard of Superannuation Governance Policy compounds the weaknesses in the standards on board independence by the Australian Prudential Regulation Authority, a corporate governance academic has said.
University of Technology Sydney (UTS) director of UTS Centre for Corporate Governance Professor Thomas Clarke said section 18 of APRA's Prudential Standard SPS 510 Governance "does not set out clearly the requirements for directorial independence" in contrast to section 58 on the independence of auditors.
The FSC draft Standard of Superannuation Governance Policy then "compounds these weaknesses ... by allowing a bank or an insurer to appoint directors to the board of RSE (Registrable Superannuation Entity) licensees who may be members of the board of the listed bank or insurer", Clarke said.
Australian Institute of Superannuation Trustees (AIST) chief executive Fiona Reynolds said that "while we applaud the FSC on making governance improvements, they still have a long way to go before they match governance of not-for-profit funds".
Reynolds said that "all directors on not-for-profit boards are non-executive of management whereas under the FSC's new policy, only a majority of directors will be independent of the parent company".
"There remains a smokescreen over the complex web of related parties and cross-ownership which are where the real and damaging conflicts lie. Until these are addressed, members of retail funds will continue to have their retirement savings eroded."
An APRA spokesperson said they would not be commenting on this, and directed InvestorDaily to a discussion paper on proposed prudential standards for superannuation.
The paper outlines, in section 3.4.1 Independence of Directors, APRA's view: "Stronger Super confirms that, beyond the existing regulatory framework, board composition is a matter that should be left to the discretion of the RSE licensee.
Accordingly, APRA does not propose to include a requirement in SPS 510 that RSE licensees have a minimum number of independent directors on its board. However, APRA does consider it appropriate to encourage a higher standard of governance through guidance.
"This guidance would apply equally to all RSE licensees to the extent that it is consistent with the equal representation requirements in the SIS Act."
Questioned about the difference between standards versus guidance, the spokesperson said draft prudential standards were not "guidelines or issued as guidance, they are mandatory requirements".
FSC chief executive John Brogden said the council's draft standard went further than the APRA prudential standards for super as the majority of directors must be independent.
"The definition of independence in our draft governance policy is consistent with ASX Corporate Governance principles and APRA standards for banks and insurers," Brogden said.
"It uses the highest standard available in defining independence of a director from a super entity. There is no higher alternative."
Clarke said the FSC's proposals in its draft standard "do not meet the standards of governance, transparency or accountability that the beneficiaries of superannuation funds demand".
"The independence of directors under the proposals is not assured. The inevitable conflicts of interest and duties could damage the integrity and reputation of the industry."
He said that replacing executives from the bank or insurer, with non-executive directors from the bank or insurer did not satisfy acceptable criteria of independence, since non-executive directors from the board of the bank or insurer were related parties who would encounter significant conflicts of interest, and conflicts in duty.
Conflicts of interest and conflicts of duty would "inevitably and consistently occur" if directors of superannuation funds were also non-executive directors of parent banks and insurance companies, he said.
"Inevitable and continuous related-party transactions" would be "prevalent in the provision of all primary services to the superannuation fund if the directors of the fund were also directors of the parent bank or insurance companies", Clarke said.
Brogden said that under the FSC's policy, a person could not become an independent director where they held a substantial holding in the super entity, had been employed in an executive capacity in the past three years; and were a material supplier or contractor to the super entity.
