Union's woes force Shorten's hand on super

The timing of the draft legislation and the leaks in the lead up to its announcement are no coincidence.

One of the two HSU East reports is scheduled to be sent to members of the union's governing council this week and the expectation is that its explosive contents will end up in the public arena. The NSW police's Strike Force Carnarvon is examining claims the union's president, Michael Williamson, who is also a trustee of First State Super, and federal MP Craig Thomson took secret commissions from a graphic designer who has an annual publishing contract with HSU East.

The police are also investigating a $1 million-plus contract HSU East has with United Edge, an IT company of which Williamson is a shareholder and director.

All allegations of fraud and conflicts of interest have been vigorously denied by parties including Williamson and Thomson.

In a surprise move yesterday, Thomson quit his membership of the ALP and announced he would sit on the crossbenches while the allegations against him when he was a union official drag on.

Nevertheless, it has intensified concerns about the close connection between unions and the $1.3 trillion super industry. It has also highlighted some of the lax corporate governance standards allowed to run rampant in the super industry standards to which the government has turned a blind eye.

One is the inability of a super board to sack a trustee. In the case of First State Super, the chairman, Tom Parry, brought this issue to the fore two weeks ago in an interview with Sally Patten of The Australian Financial Review when he said "it gets at the heart of good governance" and added that "as a matter of principle" it was frustrating that his board was powerless to remove Williamson.

In the following days, Jeremy Cooper, who had called for an overhaul of corporate governance standards in his review 18 months ago, the shadow assistant treasurer, Mathias Cormann, the Australian Institute of Superannuation Trustees and the Association of Superannuation Funds of Australia all backed Parry's call for legislative changes to give super boards a greater say in the firing of directors.

In most cases, trustees are appointed to the boards of industry funds and therefore cannot be sacked, no matter how incompetent. If a super fund merges with another, it does not have to get permission from members. In terms of board composition, trustees on industry fund boards represent employer groups and unions in equal numbers.

However, the Cooper review recommended that industry fund boards be restructured so that one-third of directors are independent. The Financial Services Council, which is the lobby group for retail and wholesale funds, put pressure on industry funds last month when it announced it would start requiring super fund boards to appoint an independent chairman and have a majority of independent directors.

This widespread call for change in industry funds, coupled with the release of a potentially embarrassing report, forced Shorten to revisit some of the shortcomings raised in Cooper's report, which the Gillard government had buried.

While Shorten's draft legislation fails to tackle the more substantial corporate governance issues - such as board composition, the inability of members to vote out a dud director or conflicts of interest - it has lifted the veil on the remuneration of trustees and executives. It also backs the Australian Prudential Regulation Authority's proposal to force super funds to disclose their assets, including details of investment returns and how these compare with target returns, investment risks and fees.

It is a big step for Shorten and the Gillard government to get to this point, as both have their roots in the industrial relations movement, where many sit on the boards as trustees. The talk around the traps is that some of the more powerful unions and trustees made a tacit agreement to accept MySuper in exchange for a continuation of the status quo and staying silent on Cooper's recommendations relating to radical corporate governance change.

Whatever the case, what is known is that even after some scandals erupted with super fund MTAA, the government failed to address corporate governance issues. Indeed, the recent Stronger Super reform package was not allowed to touch on the composition of super boards because it was excluded from the government's terms of reference.

With super funds making decisions on the fourth-largest pool of managed money in the world, largely built from compulsory savings, it became apparent that the current system will no longer be tolerated, particularly if the Coalition wins office.

To this end, Shorten has been trying to convince the funds to make the changes themselves rather than have them imposed. It is starting to work.

Last week, the Australian Institute of Superannuation Trustees informed the government that it wants boards to stop appointing directors who sit on more than one fund. It also wants to stop trustees from sitting on the boards of companies that provide outsourced services to the funds. The problem is it wants to be able do it in its own time with any existing positions "grandfathered" so that boards are not forced to drop good directors.

It is a long shot because a Coalition victory will bring with it a sledgehammer to some of the cosy union and industry fund relationships and make the necessary changes quickly. Let's hope that another scandal doesn't erupt between now and then.