In brief
Treasury today released what appears to be an extract from an Exposure Draft Bill that will remove the equal representation rules in the Superannuation Industry (Supervision) Act 1993 (Cth) and require at least a third of the directors of superannuation trustee boards to be 'independent'. If passed, the Bill will also redefine who can be an independent director. It has been a long time coming and is pretty much as expected. The main focus of lobbying is going to be around the definition of independent director. Partners Michelle Levy and Geoff Sanders report.
Equal representation rules to be repealed
If passed, the Superannuation Legislation Amendment (Governance) Bill 2015 (Cth) will repeal the equal representation rules that have required employer-sponsored superannuation fund trustee boards to have an equal number of employer representative members and member representative directors. Funds with 'independent trustees' did not have to comply.
These rules have divided funds between industry and corporate funds with equal representation boards, and retail funds with independent trustees. An independent trustee has not been required to have independent directors, although the Financial Services Council has adopted a standard that requires its members to have some independent directors on their trustee boards.
If passed, the Bill will change this – all funds (other than SMSFs) will need to have Boards that comprise at least a third of 'independent' directors (regardless of how the other two-thirds of the directors are appointed). All trustees will also be required to have an independent chair.
The Bill will override any inconsistent provisions in trustee constitutions and trust deeds. This means that an industry fund can keep its employer representative and member representative directors so long as they do not comprise more than a third of the board each, and provided the remaining directors are independent. This is going to be the area of lobbying and debate. Who should be an independent director?
Independent directors – new definition
The SIS Act's definition of independent director will be replaced. Under the proposed rules, an independent director will need to be 'independent from the RSE licensee'. This will require that the person, in summary:
- is not directly associated with a person who has a substantial holding in the RSE licensee, or with a member of the RSE licensee's group;
- does not have a 'material relationship' (which is not a defined term but seems to be broadly intended to cover service provider arrangements) with, and is not employed by, an entity that has a material relationship with the RSE licensee; or
- has not, in the past three years, been an executive officer or director of a company that has a material relationship with the RSE licensee.
The proposed definition would mean that an employee or director of a substantial shareholder in the trustee could not be an independent director, and that an employee or director of a service provider could not be an independent director. It is less clear whether an employee of a related body corporate (that isn't also a shareholder or service provider) could be. This is because the concepts of 'directly associated with' and 'material relationship' are themselves imprecise. But the Bill will give APRA the power to make standards about the meaning of both.
What isn't caught by the definition are multiple directorships. But the Exposure Draft also provides APRA with the power to determine that a person is not independent from an RSE licensee if it is 'reasonably satisfied that the person is unlikely to be able to exercise independent judgement in performing the role of a director of the licensee'. There are lots of things that might make it unlikely that a person will exercise independent judgement on a board, including other very dominant directors. The power to determine whether individual directors are independent or not may well create a heavy burden for APRA, as well as uncertainty for Boards.
Next steps
There will be a three-year transition period for existing funds starting on 1 July 2016.
Submissions are due by 23 July 2014.