Skills based superannuation boards

Of course, with enhanced regulation comes greater scrutiny from the prudential regulator, Australian Prudential Regulation Authority (APRA), leading to boards facing ever increasing challenges, particularly in respect to the standards of competence currently required of directors under the 'fitness and propriety' test. Ensuring boards have skilled and dedicated directors in place to meet these challenges is the key to driving leading practice governance and providing quality management of funds for members. The question of independence is a natural consequence of this enhanced regulation.

In fact, section 10 of the Superannuation Industry (Supervision) Act 1993 (Cth) contains a definition of independent director and APRA provides guidance on the benefits of independent directors for super fund boards. In its Prudential Practice Guide SPG 510 -Governance (July 2013) supporting its Prudential Standard SPS 510 (November 2012) on governance, APRA suggests super boards might consider independent directors, or 'non-affiliated directors' for the board, for the chair and for relevant committees. So, with the regulator providing guidance on independence; with APRA-regulated institutions (other than super funds) having a requirement of an independent chair and a majority of independent directors at all times; and with the Australian Government providing its position on independent directors for your board; it is prudent in my view to review policy and consider how you might ensure 'gap-free' boards in terms of both skills and independence.

However, why am I not surprised by the negative responses from the industry funds to enhanced governance and an attempt to harmonise prudential regulation across the financial services sector? With the reform of the industry still fresh in our minds, I am reminded of APRA's belief at the time as pointed out by the then Deputy Chairman, Ross Jones who said, 'historically, there has been a resistance in this industry...to regulation. I must say, the government's approach is also difficult to reject, other than on an emotional and self-interest basis, and how do you argue with Assistant Treasurer Josh Frydenberg who points out, 'If independent directors are good enough for listed companies, for general insurers, for life insurers, for banks, then they should be good enough for super funds.

Super boards, like all boards in the financial services sector, are required to have a board charter setting out the roles and responsibilities of the board, ensure that directors have the requisite skills, conduct board performance reviews annually and have a formal policy on board renewal. Assessing the independence of directors will now be added to this list of responsibilities.

How then do boards achieve this level of competence, skill and independence and deliver 'gap-free' boards? The answer is simple; undertaking a board skills analysis, which can be specifically tailored to ensure it is constructive and meaningful for the requirements of the board to identify any gaps in skills and independence and to develop strategies to deliver a diversity of skills and the requisite level of independence.

It is recognised (as regulators, industry bodies and academics continually point it out to us) that a diversity of skills, knowledge and experience (collectively referred to as competencies) around the boardroom table has a positive impact on the governance of an organisation-this is true of any governing body. A board comprises individuals who can contribute much needed skills, experience, perspective, time and other resources to the organisation. Because no one person can provide all of the qualities required for a successful board, and because the needs of the organisation will continually change, a board should have a well-conceived method to identify the competencies it requires to serve on the board.

Typically, a board skills analysis is designed and managed by an independent governance expert using a number of techniques including surveys specifically designed for the needs of individual boards. Leading practice survey tools will asks directors to assess their own competencies and those of their peers, across areas of technical, industry, governance, director behaviour and independence. The survey also collects data on the maximum number of directors with particular skills and competencies and the number of directors required to possess level of skills into the future. All responses and data are analysed and ultimately reported to the board for discussion, review and action by the board.

We all know that no two boards are the same and it is difficult to assess board performance against individual boards, unless of course boards have common directors. We also know that specific skills and competencies required by boards will differ across industry, but the fundamental skills required by directors remain the same. For example, technical competencies may include legal, accounting, engineering experience and/or knowledge. Clearly, directors will not be strong in all the areas. Although the courts have made it clear that financial literacy is a given, specific technical skills, such as accounting or legal qualifications, are generally not a requirement for a majority of board members. However, industry-specific competencies including experience and/or knowledge of the specific industry sector will always be relevant to the organisation.

Governance competencies are different from technical competencies in that the specific competency refers to developing it in a governance setting. For example, a director may have no formal experiences or training as an accountant, but having served on some other boards, attending director training and then joining the audit and risk committee of the board, the person may feel that they have developed a 'strong' governance competency in accounting. In other words, they feel through governance experience and training that they have developed a competency in the area of financial literacy as required of members of the board.