The Australian Prudential Regulation Authority (APRA) has written to registrable superannuation entities (RSEs) outlining the findings its thematic review of superannuation board governance practices.  APRA urges superannuation trustees to 'examine whether their board has the optimum mix of skills, capabilities and experience needed to effectively carry out its responsibilities'.

The review examined how well registrable superannuation entities (RSEs) were meeting the requirements of Prudential Standard SPS 510 Governance (SPS 510) with particular focus on board composition, board appointment and renewal, and approaches to board performance assessments. APRA makes observations and recommendations as to how these practices could be strengthened and specifically urges superannuation trustees to 'examine whether their board has the optimum mix of skills, capabilities and experience needed to effectively carry out its responsibilities'. APRA states that it expects all RSE licensee boards to review their existing governance arrangements against the practices outlined and to address any identified areas for improvement.

Scope of the Review

The review was undertaken over the period 2016-2017 and covered 29 licensees of various types, sizes, ownership models and board structures.

Key Points

The report includes the following 5 recommendations.

  • Consider the optimal composition of their boards in the context of their business and strategic plans:

  • 'That RSE licensees consider, determine, document and regularly review the optimal composition for the board and board committees in the context of the RSE licensee’s business operations and strategic plan'.

  • Consider the extent to which the use of independent experts signals a skills deficiency their boards:

    • 'That RSE licensee boards consider the extent to which the use of independent experts signals a skills deficiency on the board that would be more appropriately addressed through appointment of a director with the requisite skills and experience.'

  • Consider whether board renewal and succession planning processes 'strike an appropriate balance between ensuring continuity and bringing in diversity and fresh perspectives':

    • 'That RSE licensees have a director selection process that provides a clear role for the board (and not just nominating bodies) in the appointment of candidates, with a view to ensuring that candidates with the necessary skills and capabilities are appointed.

    • 'That RSE licensees have sound renewal and succession planning processes that include policies in relation to tenure limits and reappointment that strike an appropriate balance between ensuring continuity and bringing diversity and fresh perspectives, where the criteria for any exceptions to tenure policy are clear and limited, and the policy is demonstrably implemented in practice.'

  • Consider whether board assessment processes are sufficiently objective and robust and measure the capability of the board as a whole as well as the individual:

    • 'That RSE licensees have a robust and objective board assessment process that considers the performance of the board as a whole, as well as performance of individual directors, and identifies recommendations to improve performance that are effectively implemented'.

APRA Deputy Chairman Helen Rowell said 'The standard of RSE governance is improving, but boards have more work to do. The recommendations in this review provide a clear guide to industry better practice that licensees can review their governance arrangements against, and identify areas for improvement…Meeting the minimum requirements of APRA's prudential framework is not enough. APRA continues to encourage RSE licensees to change their mindset from one of legal compliance to aiming to deliver the best possible outcomes for their members'.

Further Detail: Overview of Key Observations

Board composition

  • Weaknesses in board composition policy: APRA observed that very few boards had formally documented, or were able to articulate, what their optimal board (and committee) composition should be, and how this might change in the future in light of their strategic plan and objectives. In particular, APRA found there was limited documentation of aspects of board composition such as the target size, optimal skills mix, ideal number of independent directors, workload considerations, or the connection between director skills and experience and the RSE licensee's strategy and business plan.

  • Better practice is to take a holistic view of board skills and to link this to strategic planning: APRA observed that better practice demonstrated by some boards was ensuring that the board as a whole (rather than individuals) possessed the requisite skills, capability and experience as part of their strategic planning process. 'This approach also provided these boards with appropriate diversity of perspectives, which APRA considers important to support better quality decision-making through appropriate review and challenge' APRA observes.

  • Weaknesses in committee composition policy: ARPA observed 'a lack of clear criteria in both training and fit and proper policies in respect of the skill levels needed on committees' and more particularly that minimum collective skill requirements were often not present. APRA adds that examples of better practices included RSE licensees taking steps to ensure the 'alignment of skills of individual directors to the committee that best suited their expertise and also setting tenure limits for terms on committees, in addition to board tenure limits'.

  • Considerable use of independent experts may suggest a skills deficiency on the board: APRA observed that over one third of the sample engaged at least one independent expert to support board committees. APRA states that 'Whilst the appointment of independent experts is standard practice across industry, APRA has observed through its supervisory activities that, in some situations, the appointment of independent experts to board committees has indicated a skills deficiency on the board'.

Board Appointment and Renewal

  • 'Challenges in appointing quality candidates': APRA writes that the 'thematic review indicated that some boards had experienced challenges in appointing quality candidates with the necessary capabilities (particularly superannuation and financial expertise), in part due to the limitations imposed by constitutions'. APRA adds that better practice included boards 'developing strong collaborative relationships with their nominating bodies to ensure that these organisations had a good understanding of the board’s strategic direction and plan, and the skills, capabilities and experience needed of potential candidates to effectively execute it.'

  • Weaknesses in tenure policy: APRA observed that as required by SPS 510, boards across the sample included a tenure policy in their governance frameworks. However, APRA observed that 'the effectiveness of the policy was undermined in many cases by weaknesses in aspects of the policy, or in its implementation' for example by including overly long tenure limits; 'transition arrangements that appeared to unduly delay steps towards board renewal' and 'enabled exceptions which appeared designed to enshrine the current composition of the Board or enable some directors with long tenure to continue' and 'inconsistency between the constitution and the policy which impeded the policy’s implementation'.

  • Ongoing board renewal: APRA writes some boards were observed to recognise the importance of carefully considered succession planning as part of their tenure policy, and had in place an ongoing renewal planning process that considers the skills and experience that will be required as each director’s term is likely to end. APRA welcomed the recent addition of cyber and digital skills to some boards as examples of this.

Board Assessment

  • Lack of objectivity in board assessment processes: APRA observed that a number of assessments focused 'primarily or solely on relatively subjective assessment' of the skills and capabilities of individualdirectors with self assessment often the sole method for assessing board performance. Some weaker assessment processes involved collating individual director self-assessments while stronger assessment processes were observed to include greater depth of analysis eg interviews of individual directors by the chair and input from senior management. Better practice also included the use of external independent consultants to undertake external review of director performance. APRA adds that 'consideration of how to achieve sufficient objectivity in board performance assessments, as suggested in paragraph 47(b) of SPG 510, was not addressed by many of the sample population'.

  • Better practice is more frequent, external assessment: APRA states that boards that demonstrated better practice undertook external assessments of the board and individual directors more often than the timeframes recommended as better practice in SPG 510.

Next Steps

  • APRA states that it expects all RSE licensee boards to review their existing governance arrangements against the practices outlined and address any identified areas for improvement.

  • As part of its post-implementation review of the superannuation prudential framework, APRA intends to review and amend the framework where appropriate to reflect the findings of this thematic review.