Corporate governance expert and former Finsia President Michael Willis has written an article (reproduced below) on the debate over the Commonwealth Government’s push to get independent directors on to industry super fund boards that are now dominated by union and employer representatives (see this SMH article for background). Mike originally published this piece on LinkedIn and I’m grateful he has given me permission to republish it.
The truth about cause and effect in Industry Super Fund governance
An early lesson in my philosophy studies was on the difference between cause and coincidence. The industry super fund lobby may need a refresher course in this principle.
The CEO of IFM Investors and lead advocate for the industry fund sector, Brett Himbury, recently linked the successful out-performance of some industry super funds, and their asset allocation decisions, to the control exercised by unions and employer delegates over these funds (Australian Financial Review, 22 September 2015).
It is one thing to crow, quite legitimately, about the strong performance of these funds, generated in large part from their decisions to overweight their funds in alternate assets. Subsequent events proved this to be a wise decision, and these funds can legitimately use this success in their promotion and marketing.
It is quite another matter to connect this decision with the peculiar governance structure of these funds, where the board seats are tightly held – typically 50% by trade union representatives and 50% by employer industrial associations, with the chair alternating between them.
Mr Himbury has expressed concern over the federal government’s planned legislative changes to ensure that at least a third of board posts, and the chair, are independent of the unions and industry associations. This change arose in part from revelations of inappropriately close relationships between super fund management and some unions.
Mr Himbury linked, at least implicitly, the severing of this tight control to the undermining of asset allocation decision making and to potentially poorer investment returns.
Trade unions are held in high regard in many parts of the workforce, and there is a case to be made for financially unskilled workers placing trust in their union to represent their interests and oversee the manager of their retirement nest eggs.
However, there is also a compelling argument that independent directors, not beholden to sectoral interests and able to act in the interests of members, take their fiduciary interests more seriously.
The presence of independent directors, with an independent chair, can ensure that the investment decisions are made in the interests of members rather than the employer’s industrial interests or the union’s political or commercial interests. For example: is it possible for an employer delegates to advocate that their industry be sufficiently weighted in an investment portfolio? Or on the other side, could a union delegate push to ensure a fund’s advertising is appropriately spent through the union’s network, or that members’ funds be invested according to a particular political agenda? In such cases, decisions may not be in the interests of fund members.
A more balanced board, with sufficient independent directors not aligned to unions or employers, can ensure that these sorts of conflicts are managed and avoided, and the members’ interests are protected.
The fear of Mr Himbury, that asset allocation may be constrained by these independent directors, appears to be groundless. An experienced independent director, acting in the interests of members, would be no more willing to reject the advice of asset consultants than union or employer delegates. There is no “causal” factor here, merely a coincidence between the peculiar governance of these funds and an unconnected performance success.
Sound corporate governance principles should apply to the superannuation industry, and these collaborations between unions and employer peaks should not be excluded from the transparency and accountability that board independence provides.
Michael Willis is a Senior Advisor at Effective Governance Pty Ltd. He is also the Honorary Treasurer of Independent Schools Queensland. The opinions expressed here are his own.