Hundreds of directors sitting on more than 50 of the country's superannuation funds could find themselves out on their ears if proposals canvassed in a soon-to-be-released Treasury discussion paper are adopted.
The paper, which is expected to be released within the next two weeks, will address corporate governance on super boards, including some controversial issues such as board composition, the number of independent directors on boards, the definition of an independent director and the role of default funds in the modern award system.
Board composition on super funds was first addressed in a review of the entire superannuation sector by Jeremy Cooper in 2010, which recommended government and industry fund boards move from the current 50:50 split between union-backed directors and employer-backed directors to one-third being independent directors and the remainder split between union-backed directors and employer-backed directors.
The former Labor government adopted some of the Cooper recommendations, including making remuneration more transparent, but it steered away from the thorny issue of board composition, arguably to keep the unions on side.
If the Cooper review had been adopted, requiring one-third of directors to be independent, it would have resulted in more than 200 new independent directors being required.
The Coalition government has made it clear it wants to bring the superannuation industry into the 21st century and that means making some tough decisions.
More recently, the Assistant Treasurer, Arthur Sinodinos, said he was committed to aligning superannuation governance more closely with the corporate governance principles applicable to ASX-listed companies.
Australia's super is expected to balloon from $1.7 trillion to an estimated $8 trillion by 2039-40, so it is imperative that people trust the system. That means ditching some of the sector's archaic practices, including lack of transparency and conflicts of interest.
The Financial Services Council, which represents retail funds including BT, Colonial, ANZ Wealth, Challenger and AMP, pre-empted some likely changes in March last year and unveiled a set of mandatory standards to be adopted by all members from July 1, 2014. These include superannuation funds having an independent chair and a majority of independent directors. Other standards include ending conflicts of interest by stopping directors holding multiple and competing superannuation fund board positions and defining an independent director as someone who has not been an employee or had a related party interest or relationship with a relevant entity for at least three years.
The government is committed to a level of mandatory independence on super boards, which the industry expects it to deliver. The two issues it needs to work out are how many independents would be needed and how to define independence.
Retail super funds subject to the FSC standard have already started to transition to a majority independent board with a high watermark independence test by July 2014. This has involved significant time and expense to find independent directors.
If the government decides to go down the route of the FSC, which goes further than the Cooper recommendations, directors with multiple board seats would be under the gun to resign one or more boards. For instance, HostPlus and Australian Super, which are in competition with one another, share at least one director, Brian Daley, according to their websites.
Conflicts of interest, no matter how well-managed, need to be resolved, particularly given the number of super board directors appearing on more than one super board. A director of a bank would never be allowed to take up a position on the board of another bank, including the RBA.
Depending on how many independent directors the government selects in its final policy, the 56 industry funds may have to find hundreds of directors.
But it is a fundamental issue that needs to be resolved as most industry and government fund trustees are appointed to the boards in equal numbers by unions and employer groups and are difficult to remove, no matter how incompetent.
People need to trust the system.