The Federal government has unveiled plans to require super funds (excluding SMSFs) to appoint an independent chair and have at least one-third of board seats filled by independent directors.
The proposed changes will primarily impact industry super funds (and some corporate funds) as they tend to have employer group and union representation split equally.
Unlike listed companies, super funds aren’t subject to the disciplines of the market. Management and the board aren’t at risk of being fired should their company be acquired after a period of underperformance so the changes are a step in the right direction.
But the new rules are also a good example of regulators emphasising form over substance. That’s because the independent chair and directors – assuming they’re actually experts at monitoring the funds entrusted to their care (which is unlikely, in my view) – can always be overridden by the majority of non-independent directors on the board.
The same applies to the ASX’s (and ASIC’s) recommendation that there are to be a majority of independent directors on listed company boards. What’s the point of having ‘independent’ directors if they know nothing about the business and don’t have an appreciable stake in the company?
When we’re analysing companies, we prefer senior management and board members to have material amounts of their wealth invested in the company. That way, their incentives are aligned with outside shareholders – regardless of whether they’re deemed ‘independent’ or not. Such people are far less likely to enter into cosy deals that benefit themselves or their mates at the expense of outside shareholders.
The irrelevancy of director independence was eloquently stated by Warren Buffett in his 2002 Chairman’s letter:
‘Over a span of 40 years, I have been on 19 public-company boards (excluding Berkshire's) and have interacted with perhaps 250 directors. Most of them were 'independent' as defined by today's rules [i.e. American rules in 2003]. These people, decent and intelligent though they were, simply did not know enough about business and/or care enough about shareholders to question foolish acquisitions or egregious compensation.’
It’s hard to argue with that, which makes one wonder why we’re spending all this time and energy developing regulations that are unlikely to have a large and positive impact.
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