New research from Mercer into structural independence on superannuation trustee boards reveals an increasing international trend towards mandating independent directors, but questions whether independence alone is sufficient for good decision-making.
The new report from Mercer, released publically today, precedes an imminent response from the Government to the recommendation from the Financial System Inquiry (FSI) to mandate a majority of independent directors on superannuation boards.
The research reveals global trends towards prescription of minimum qualifications for directors, based on an in-depth analysis of the extent to which pension funds around the world require structural independence on their boards. It provides a comparison with Australian superannuation funds, which are often more complex businesses, operating in regulatory settings that devolve broader decision-making responsibility to trustee directors than their counterparts in many OECD countries.
Mercer’s research concludes the boards of Australian super funds should include a number of independent directors but not at the expense of member representation in the fund's governance structure.
Internationally, both independence and member representation are recognised as important features for pension fund boards. However, many OECD countries are either mandating independent directors or have been considering elevating competency levels to a professional standard where independent directors would be almost inevitable in order to meet the standards. The EU is proposing further tightening of its ‘fit and proper’ requirements, which may impact board composition.
Pam McAlister, Partner in Mercer’s Governance Practice Solutions business, said, “Structural board independence alone doesn’t bring about better decision-making, but adding independent directors will enhance diversity of opinion and allow for a broader range of skills and experience on trustee boards.”
“It’s a different world today for trustee boards in Australia, they are held to a professional standard of care and diligence and need expertise in investment, governance, risk management, remuneration, insurance and marketing, along with interpersonal skills to enable a diverse group of people to work seamlessly and collaboratively.
“We believe mandating independent directors on super funds in Australia will add value. However, in our experience, the collective skill set, objective judgment and dynamics of a trustee board are just as important to effective decision-making as structural independence.
“The challenge for super funds will be to source independent directors that complement their existing board culture, without growing them to an unwieldy size,” Ms McAlister said.
Mercer’s report also examines the definition of ‘independence’. Mercer recommends a principle-based definition to ‘independence’ that enhances objectivity and ‘distance’ from management, service providers and stakeholders, but that would allow an independent director to be a member of the fund.
“We believe this research adds a depth of analysis to the debate around structural independence on superannuation boards,” said Ms McAlister.
Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people. Mercer’s more than 20,000 employees are based in more than 40 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global professional services firm offering clients advice and solutions in the areas of risk, strategy and people. With 57,000 employees worldwide and annual revenue exceeding $13 billion, Marsh & McLennan Companies is also the parent company of Marsh, a leader in insurance broking and risk management; Guy Carpenter, a leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a leader in management consulting. Follow Mercer on Twitter @MercerAu