Industry funds governance debate

July 11, 2015

There has been a lively Crikey debate on industry fund governance in recent weeks which has unfolded as follows.

Crikey, June 26

Government proposes independence fiddle while industry burns

By Bernard Keane and Glenn Dyer

What's the biggest challenge in financial services regulation currently? Systematic problems in financial services offered by the big banks that rip off tens of thousands of Australians? A continuing series of financial scandals among the banks and other major financial institutions costing hundreds of millions? The Australian Securities and Investments Commission's inability, or more correctly unwillingness, to upset the top end of town, let alone regulate it? The high price Australians pay for super funds management? The growing dead weight of a super system that's now significantly bigger than our actual economy?

No – the urgent issue, apparently, is getting more independent directors onto industry super fund boards, which the government will announce today, having backgrounded journalists to that effect at its favoured outlets, the Financial Review and The Australian, yesterday. (And, interestingly, before we see the government's response to the final report of Murray inquiry into the financial sector.)

Industry super fund boards are currently run – with some exceptions – by union and employer-nominated representatives (although it's only "corrupt" trade union reps that ever get mentioned by the government and the media). Industry super, year in and year out, significantly outperforms retail super (which had supposedly "independent" boards); indeed, the industry fund attacked as "corrupt" by the trade union royal commission, CBUS, massively outperforms all but a couple of hundreds of retail super funds. Nonetheless, the government's priority in financial services reform is not a royal commission into the scandal-plagued industry, or strengthening ASIC, but "improving governance" in the industry super sector.

But what's the problem with a little more independence on such boards? How can that hurt, even if there are other, (much) bigger problems the government should be dealing with?

Well, it's not the repeal of FOFA, another Coalition "reform" that would have restored some of the worst excesses of the old days. But how having independent directors on the boards of industry funds will lift their performance to even higher levels over those of retail funds has yet to be explained by the government (or its media cheerleaders). Having a majority of independent directors on the boards of the Commonwealth Bank, AMP, NAB, ANZ and Macquarie has not prevented the planning and funds management scandals we have seen emerge in the past two years. In the past, AMP, in a different corporate set-up, was almost crippled on two occasions by dud investments – despite having a majority of independent directors. And Westpac Bank almost collapsed in the early 1990s recession (it was saved, irony of ironies, by AMP), despite having a majority independent directors on the board.

In all cases where such companies have gotten into trouble, it's because independent directors, supposedly more sceptical and untainted by connections with management, have not done their jobs – they've failed to stand up to managements or go public with serious concerns, and they've been just as slow in admitting inappropriate or illegal behaviour that has cost customers and investors. How many independent directors have resigned in protest over the scandals that have plagued some of our biggest companies? Where were the independent directors of the Commonwealth and ANZ on the criminality that has been revealed at those two major banks in just the last 12 months?

If independent directors are so good in the financial services industry, why is there a consensus among regulators – even ASIC – that banking culture is seriously flawed and needs to be addressed? The RBA and APRA have gone out of their way to target bank culture in recent months. In the words of the Reserve Bank, "Australian banks are required to maintain a sound operational risk framework that ensures the proper functioning and behaviour of systems, processes and people; complex and diversified banks should have a more robust framework in place. Banks are also expected to understand their ‘risk culture', which can be thought of as the way the management of risk is viewed in practice across the institution. Conduct-related events in one area of a banking group may be a signal of broader governance, cultural and risk management deficiencies, and could give rise to entity-wide reputational risks.”

But apparently introducing the framework that produced a steady stream of such deficiencies is a priority for the government.

Meantime, the latest major scandal rolls on. This week National Party Senator John Williams, Parliament's most dogged pursuer of financial scandals, got stuck into Fairfax's revelations about breaches of governance and worse at IOOF – which controls $150 billion in investment funds, mostly super money. Six of the seven-person IOOF board, including the chairman, are non executives and classed as independent. The CEO, Chris Kelaher, is the sole executive on the board.

Williams had earlier crossed the floor to vote with the Greens on their motion for a royal commission into the industry, which was defeated by the government and Labor, and then delivered his speech. The further revelations in his speech contrasted with the bland assurances from IOOF on Monday to the market, which omitted the vital fact that that the IOOF's head of advice research, Peter Hilton, one of the central figures in the allegations from Fairfax and Williams, was “on leave until further notice”. That was revealed in a note from the company's CEO to financial planners and others, which was leaked to the media.

IOOF yesterday said it had hired accounting firm, PwC to carry out an independent review of its operations. PwC will review the group's regulatory breach reporting policy and procedures within its research division, apparently. “This will be a thorough review and it is our intention to inform ASIC and APRA of the outcomes,” IOOF said. Except, PwC has been used by IOOF on a number of occasions previously. Indeed, one board member used to be a PwC partner in a previous business life.

Independence? That's one word for it.

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Crikey, June 29

Independent directors are needed on industry funds

By Stephen Mayne

When the ASX Corporate Governance guidelines demand an “if not, why not” explanation from listed companies that don't have a majority of independent directors, it should not be controversial for legislation requiring industry super funds to have one-third independent directors, including an independent chair.

However, the battle will be on in earnest over the coming weeks after Assistant Treasurer Josh Frydenberg on Friday unveiled his legislative reforms for super fund governance.

At the moment, industry funds have gerrymandered boards where control is shared 50-50 between unions and employer groups.

But there is no one representing businesses or employees who are not members of said union or employer group, and many funds still have no independent directors at all.

Returns to members from industry funds have indeed been better than the for-profit retail funds largely controlled by the banks, but this has mainly come from the no- or low-fee model in the not-for-profit sector.

That is a completely different issue to super fund governance and board composition, and you certainly aren't breaking a successful model by mandating an independent chair.

Paul Keating's biggest mistake in setting up compulsory super was not having a giant scaled and professionally run default scheme that would today be one of the biggest non-government super funds in the world.

Instead, we got hundreds of sub-scale funds and created a gravy train of board fees pocketed by every last union powerbroker.

There have been far too many governance snafus at industry funds. Pay disclosure is all over the place, there's too much nepotism, and for many years it wasn't even standard practice to publicly release audited financial statements in a comprehensive annual report.

Many funds, including Vision Super, which looks after local government workers in Victoria, don't even have a basic skill requirement for directors in their constitutions.

Ultimately, if the Greens and Labor vote against having one-third independent directors in the Senate, they will be supporting a gerrymandered system and look captured by their union pay-masters. This issue is a perfect opportunity for Richard Di Natale to wedge Shorten again by taking the governance high ground. Di Natale is right to argue that excessive tax breaks for millionaires in the super system is the most important issue needing attention.

Tony Windsor was spot-on in The Saturday Paper with his column about Tony Abbott's obsession with conflict politics.

Governance reform of super boards should be straightforward, but when you leak it to The Australian for a splash in Friday's paper headlined “New super fund laws to rile unions”, of course there will be a negative reaction from the likes of former union official Garry Weaven.

Leaving Murdoch governance atrocities to one side, The Australian's John Durie has covered corporate governance better than any other mainstream business journalist over the past 15 years. He came out in favour of the reforms on Friday when he declared “there are no valid arguments against a rule that says the board should be ruled by a majority of independents and have an independent chair”.

Given that Frydenberg is only going for a one-third independent quota, rather than a majority, success in the Senate wouldn't be a problem were it not for the outsized union influence over that chamber.

One challenge with the reform will be the question of who selects the independent directors.

Billionaires like Frank Lowy, Kerry Stokes, Rupert Murdoch and Gerry Harvey all claim they work with independent directors, but ultimately anyone who serves on their boards is hand-picked by the said Rich Lister.

If a majority of the incumbent directors have to select the independents, each of the existing union and employer group factions would effectively have a right of veto over candidates.

This will risk creating a system where “don't rock the boat” candidates get nominated and the gravy train rolls on. Having members elect independent directors is a tempting possibility, but this would play in favour of union-backed people who are familiar with running popular election campaigns, and professional directors would shy away from risking the embarrassment of losing.

Ultimately, super fund boards should be forced to have skill-based requirements and use professional head hunters with a highly sensitive red-flag system for “associates” or non-independent traits.

For instance, no former paid union official should be able to qualify as an independent director, and you could even run an argument that current members of political parties need not apply as well.

With unions still having the right to appoint three out of nine directors on dozens of industry funds, there will still be plenty of jobs for the boys and girls to go around.

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June 30, Crikey comments section

On Mayne and industry super

Andrew Whiley writes: Re. “Mayne: Keane is wrong, independent directors are needed on industry fund boards” (yesterday). Stephen Mayne's flustered piece contains many unfounded assertions and errors. To address but a few amongst the many:

Mayne claims that no one on an industry fund board represents those members who are not in a union or employers that do not belong to an association. Putting aside the well established and long standing legal and fiduciary obligations in a trust fund for trustees/directors to act in all fund members' interests, since the establishment of industry funds in the late 1980s/early 1990s there have been hundreds of thousands of fund members and employers from the very first day who were not members of a union or an employer association. This artificial division only exists in the mind of conservative politicians and their ideological soul brothers. In 30+ years of operation they have yet to forward any examples on this alleged “non representation” or any disadvantage suffered by said “non represented” fund member or employer. Use of emotive terms like “gerrymander” just doesn't cut it.

Mayne also posits that the higher returns of industry funds is purely due to a “no fee or low fee model'. The out-performance of industry funds over some decades is now an accepted feature of Australia's funds management landscape. Fees are only one part of the success story — and no industry fund charges “no fees” but let's not have that spoil the party. Industry fund critics in trying to explain away the consistency of higher returns advance various (mostly wrong) reasons for it. But they are always in furious agreement that the existing model of board membership and governance structures are not, not, in any way a relevant factor to be considered in analysing why industry funds remain clustered at the top of the league ladder season after season.

If we accept this proposition that boards are irrelevant to performance then why is Minister Frydenberg justifying his proposed changes by repeatedly claiming (as late as his last interview on ABC 730) that changing board composition will inevitably lead to better returns for industry fund members? You can't have it both ways.

Time does not allow me to address other aspects of the Mayne piece, particularly the core definitions of independence, sufficed to say his view that union nominees are not by definition ”independent” does not accord with practice in a multitude of well governed, competitive multi-billion $ pension and retirement funds across the UK, EU and US.

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Crikey, July 3

Time for a citizen jury to sort out industry fund governance

By Stephen Mayne

It was good to hear from pension fund consultant Andrew Whiley in Crikey on Tuesday, colourfully explaining the reasons why Australian industry funds absolutely do not need to have any independent directors.

However, in responding to this Crikey piece on Monday supporting Assistant Treasurer Josh Frydenberg's proposed reforms, it would have been nice to have Whiley's PR position disclosed along with the membership and consulting fees that flow from Australia's $430 billion worth of industry funds to his London-based group, Pensions and Investment Research Consultants (PIRC).

Rather than having the unions, associated industry fund directors and the large ecosystem they support run the campaign against the modest governance reforms proposed by the Assistant Treasurer, why doesn't anyone ask the members themselves?

After the success of City of Melbourne's People's Panel to advise on the council's first 10-year financial plan, I'm a big fan of citizen juries for the way they strip away the vested interests, squeaky wheels and partisan players to allow an affected community to do a deep a dive on an issue and come up with some truly independent recommendations.

If presented with all the facts and evidence, I'd be very surprised if industry fund members did not agree with the proposition that a minority of independent directors along with an independent chairman is a good thing.

This simple and modest governance reform would reduce the prospect of scandals such as the recent CBUS privacy breaches and also lead to better disclosure of related party transactions and less nepotism in the industry.

Rather than orchestrating a predictable partisan campaign against these reforms, perhaps it is time for the godfather of Australia's industry funds, union warrior Garry Weaven, to retire. Weaven, 67, has created a lot of value over the years, but it is now almost 40 years since he first joined the board of Victoria's Local Authorities Superannuation Board in 1977.

The LASB is a good example of why governance reforms are needed. It is now part of Vision Super, which is effectively controlled by the Australian Services Union and the Municipal Association of Victoria. The MAV was recently given a severe towelling over governance shortfalls by Victoria's Auditor General, but is yet to respond decisively with any meaningful personnel changes.

Similarly, because of the ASU influence at Vision Super, the fund failed to warn Victorian councils about the impact of ongoing above-CPI wage settlements secured by the ASU.

This led to a shock cash call of almost $500 million three years ago to cover the unfunded liability of some of those generous life-time pension deals that were closed off by the Kennett government in 1993.

An independent chair of Vision Super might have been out and about to councils explaining the compounding impact of big wage rises on defined benefit liabilities.

There are is only one independent director out of nine on the board of Vision Super, which doesn't have any skill-based requirements for board members in its constitution and still hasn't even screened out tobacco investments, unlike its far more progressive counterparts running local government super in NSW.

Does Whiley really think adding two more independent directors and removing an ASU veteran as chair is such a bad thing? Unless this legislation is passed, Vision Super could be chaired for many more years by Brian Parkinson, a greyhound trainer and owner by profession, who finally retired from the ASU as Victorian and Tasmanian branch secretary in July last year after 42 years of involvement.

In light of the Whiley intervention on behalf of PIRC, it will also be interesting to see how powerful Melbourne-based proxy adviser Ownership Matters plays the debate.

The two main drivers at Ownership Matters — Dean Paatsch and Martin Lawrence — have done more than anyone else in Australia to improve public company governance through their voting recommendations to institutional clients over the past 15 years.

They routinely recommend against non-independent directors and were pivotal in getting Cabcharge director Rodney Gilmour to resign from the board at last year's AGM because he was a mate of chairman Russell Balding and a former PR consultant to the company.

However, the industry funds, through their umbrella organisation the Australian Council of Superannuation Investors, are also a vital paying clients of Ownership Matters. If ACSI campaigns against the reforms, it will be hard for Ownership Matters to publicly go the other way.

At least they haven't yet come out swinging like a dunny door in the style of Andrew Whiley, who seems to think a majority of independent directors is a good thing at public companies, but not for the people who pay for his services.

*Stephen Mayne is chair of the Finance and Governance committee at City of Melbourne and was not paid for this item.

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July 8, Crikey comments section

On superannuation and independence

Andrew Whiley writes: Re. "Mayne: time for a citizen jury to sort out industry fund governance" (July 3). Regrettably Stephen Mayne has decided to throw red herrings left and right rather than respond to the thrust of my comments. Just to net some of those lively fish and tag them with some facts: In his first piece Mayne states, "we got hundreds of sub-scale funds and created a gravy train of board fees pocketed by every last union powerbroker." The latest figures from Australian Prudential Regulatory Authority as of February 2015 record at total of 42 Industry Funds. Not quite the "gravy train" as portrayed.

Mayne also raises what he sees as deficiencies in a fund constitution in regard to the skill levels of the Board. I note that the Boards of all Responsible Superannuation Entities must meet the rigorous "fit and proper" standards determined by APRA. It's here, it's detailed and the Regulator has an active stance on it. Mayne makes lots of mentions of "independent directors" but fails to acknowledge that directors on industry fund boards already meet the same Corporate Governance ASX definitions of "independence" that he cites in the in his first article. The very same standard that applies to "independent" directors on listed companies.

Mayne advocates in his second article "asking the members" what they think of fund governance, yet in his first article he floats, then discounts giving fund members a vote on Board representatives on the basis that the "professional directors" won't be able to win. So member opinion can be trusted on governance … but only a little, in case those same union officials and employers who have outperformed the "professionals" on investment returns for twenty years repeat the dose on member trust in overseeing their retirement savings.

Mayne plays the man and mischaracterises my comments as being on behalf of my UK employer. He demands to be told who is or isn't a client in Australia. He repeatedly imputes my comments are being influenced by financial or other considerations. The biggest red herring of all. For the record, the governance changes proposed by Josh Frydenberg are not relevant to any Australian clients. Secondly, my views to Crikey are personal, born of more than twenty years involvement in superannuation including board and management roles, all of which is on the public record.

And lastly, Stephen, as most who know me will attest, I take no bidding as to any views I express and require no imprimatur except my own. Your inferences have been met with much laughter amongst friends and ex-colleagues in Australia who read Crikey. Loud enough to be heard in London.

Stephen Mayne replies: Full marks to the former CBUS man in London for his vigorous engagement on this issue. He makes lots of good points, knows the industry well and his straight-talking and passion is to be admired. A few quick points: There may only be 42 industry funds left but that is after dozens of mergers. This is still too many and lacks scale. A "fit and proper" test goes to issues of criminality, bankruptcy and regulatory sanction, not qualifications or skills. For instance, Vision Super has had a home care worker from the City of Greater Dandenong on its board as one of the 4 ASU nominees since 1998. There are no tenure limits and no skills requirements and this is the board that mugged Victoria's council's with a circa $500 million defined benefit cash call three years ago. Where's the accountability?

Vision Super signed a merger deal with Equip Super a couple of years back, but this then fell apart, partly due to issues involving the structurally conflicted ASU. Equip Super does have a skill-based requirement in its constitution, as you can see with these director profiles. What's wrong with making this a requirement for all super fund directors in Australia? Equip also has some member elected directors which has delivered a stronger board than what we see at Vision Super which is an ASU-ALP stronghold.

Member votes are not ideal with something as sensitive and conservative as superannuation, but a bit more of it would be an improvement on the current board duopoly between unions and certain employer association. A better option would be genuinely independent directors whose tenure is not reliant on the whims of union secretaries and employer group as sponsors.

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July 9, Crikey comments section

Mayne gets it wrong on who should be on super fund boards

Geoff Lake writes: Re. "On superannuation and independence" (yesterday). I have followed with some interest the exchange of articles in Crikey between Stephen Mayne and Andrew Whiley over the past week about the Abbott government's proposed changes to superannuation governance. Mayne has focused each of his contributions on Vision Super, presumably given his own connection to local government. While many of the things he has highlighted about Vision Super have been disparaging and ill-informed, I have tried to resist the urge I have felt after reading each one to respond.

However, that was until reading his surprisingly offensive contribution yesterday. I say surprisingly because I have always respected the way that Stephen Mayne has been a loud and fearless champion of increased diversity in boardrooms, councils and parliaments throughout Australia. Yet in asserting (incorrectly I might add) that the APRA enforced "fit and proper" requirements of super fund directors are merely perfunctory, he went on to illustrate this point by highlighting that one particular Vision Super director was "a home care worker from the City of Greater Dandenong." That was it. He didn't mention anything else about her. It wasn't that she had done something improper or failed to act in a certain way when required. It was just that she is a mere "home care worker". In one sentence, he flippantly dismissed this person – someone who possesses 17 years of superannuation experience as well as broader non-executive organisational governance experience – as possessing no possible qualification or skill to warrant her place around a superannuation board table.

And there lies the very thing at the heart of the equal representation trustee director superannuation model which he and Josh Frydenberg simply do not understand and so eagerly seek to tear down. It is the connection of this director to the industry and workforce which she serves. She might not hold several corporate directorships or lunch regularly at Flower Drum but she understands more about her fellow members – the pressures they face, the financial anxiety of appropriating retirement, the way some spivs look down on what they do – than Stephen Mayne or Josh Frydenberg ever will. Stephen Mayne highlights her occupation as the thing which makes it inappropriate for her to sit on a super board, but I see it as the very thing which makes her so appropriate to be there. Indeed, she works day in and day out in an area of her local council – home care – which accounts for more of Vision's 100,000 members than any other area.

I have been her colleague on the board of Vision Super for six years and have closely observed the careful and diligent way that she contributes to and shapes debate around our board table, always focused on what is in members' best interests. Her contribution is no less than our other directors which Stephen chose not to highlight, including one who was previously a secretary of a state government department and another who led the Victorian Employers' Chamber of Commerce and Industry (VECCI) and was a partner in an international law firm.

Millions of Australians are today many thousands of dollars better off than their peers because they have had their super in a not-for-profit fund rather than in a retail fund. This is an incontrovertible fact that not even the retail funds challenge. The representative trustee model lies at the core of the reason for this difference in fortunes.

This model has worked so effectively and stood the test of time for the very reason that it places the governance of not-for-profit funds in the hands of directors who are not interested in anything more than maximising the retirement outcomes of their fund's members. This is because they typically are members themselves, represent members industrially or employ members. In each case they are motivated to pursue the best interests of members because of their direct and deep connection to them.

The proposition implicit in the current debate that this makes them non-independent and needing to be reined in, is utterly flawed and misconceived. These representative directors are in fact the very essence of independence – possessing completely aligned interests to the members which they serve. It is a refreshing point of difference from directors in the rest of corporate Australia, but one which is now sadly very much under threat.

Geoff Lake is the Deputy Chair and an employer nominated director of Vision Super – a not-for-profit fund managing approximately $8 billion on behalf of 100,000 members who predominately work in the local government and water sectors. He is also a member of the ALP. The views expressed in this article are his own.

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Crikey comments, July 10

Superannuation and conflicts of interest

Crikey Founder Stephen Mayne writes: Re. “Mayne gets it wrong on who should be on super fund boards” (yesterday). Isn't it interesting seeing who is lining up against governance reforms at industry funds?

ALP warrior Geoff Lake should know that I've long campaigned against entrenched long serving directors, especially where there has been poor performance, such as with the circa $500 million cash call Victorian councils received from Vision Super three years ago. My fundamental criticism of Vision Super relates to the Australian Services Union (ASU) and the inherent conflict of interest it has managing defined benefit superannuation liabilities at the same time as trying to maximise local government wage claims. You just can't do both when one directly undermines the other.

Lake's lively missive yesterday also fails to disclose that he is pocketing $70,000 a year from his Vision Super board seat as one of two representatives of the Municipal Association of Victoria. He wouldn't be getting this much as deputy chair without the voting support of the four ASU directors and broader support from Labor councillors in Victoria. At City of Melbourne, we have a policy that councillors appointed to board seats return any fees paid to council. This is just one of many governance issues at the MAV which Lake, as a former President and the longest serving director, needs to sort out following this damning report by the Victorian Auditor General earlier this year.

Surely, it is now apparent for all to see after Bill Shorten's evidence to the Royal Commission that there are just too many dubious side deals between employers and unions. Cash payments from companies to unions are illegal in many countries and this needs to happen in Australia as well. Allowing the two camps to get cosy inside industry super fund board rooms without a single independent director to keep them honest and help manage the conflicts is now clearly untenable from a governance point of view. Here's hoping the Greens can see the logic of this and support a sensible reform to inject independent chairs and a mandated one-third minority of independent directors into every industry fund board room.