New Governance Rules - Independent Directors

On 26 June 2015 the Government released exposure draft legislation that would impose on all APRA regulated funds a requirement to have a minimum of one-third independent directors/trustees and an independent chair.

The aim, however, is clearly to encourage funds to move towards a majority of independent directors. This was a recommendation of the Financial System Inquiry, but the Government has opted (at least for now) for the less onerous requirement.  However, in a clear sign of the Government’s longer term objectives, the draft legislation will adopt the ASX approach by requiring funds to report on whether they have a majority of independent directors on an “if not, why not” basis.  Perhaps the Government expects that members will put pressure on the funds to have a majority of independent directors.

The “if not, why not” principle is seen as fundamental by the ASX Corporate Governance Council because it facilitates an informed market and:

• encourages a “meaningful dialogue with the board”; and
• enables security holders to factor the independence of the board into their decisions on specific resolutions and whether to invest in the entity.

However, fund members cannot be equated with investors in listed companies.  Members invest in “funds” rather than the trustee and they are less active.  Trustees must find ways to get members engaged in their own superannuation benefits.  It is difficult to see members becoming engaged in governance issues.

As for the requirement to have one-third independent directors, the devil (as always) will be in the detail.  And we don’t have the detail because much of the important detail has been left for APRA to address in prudential standards.

For example, the question of what constitutes “independent” for these purposes will not be answered definitively until APRA amends SPS 510 (Governance) to fill in the detail.

APRA proposes to amend SPS 510 in a number of ways including to require that a majority of both the Board Audit Committee and Board Remuneration Committee be independent directors and that the chairs of those committees also be independent.

Boards may want to start planning soon for the transition

Whilst the proposed new requirements are not expected to commence until 1 July 2016, with a three year transition period, boards may want to commence planning soon.

APRA will later this year release a new Prudential Standard SPS 512 that will deal with the transitional requirements.  Amongst other things, APRA proposes to require a transition plan to be prepared and approved by the board no later than 1 July 2016.  The plan would be submitted to APRA.  The transition plan would document how the RSE licensee intends to effect the transition. This would include:

• an assessment of the status of each current director (e.g. are they independent?)
• what changes need to be made to the board membership to meet the new requirements
• what steps need to be taken to ensure compliance by the end of the transition period
• when the term of each current director expires
• the board’s target for the number of directors under the new regime (to determine how many independents are required)
• the board’s plans for each director throughout the transition period (e.g. whether they are to be replaced and, if so, when)

We have only proposals at this stage.  However, 1 July 2016 is not far away and boards should at least be coming to grips with what will be required if the proposals proceed.  Amongst other things, boards might want to consider shortening the terms of any appointments made between now and 1 July 2016 to provide the board with maximum flexibility for transitioning to a new structure.

Trustees could also start identifying any changes that may need to be made to:

• the trust deed
• the trustee's constitution
• the current election rules
• any arrangements currently in place with parties who have a right to nominate directors

APRA expects to release drafts of amended SPS 510 and new SPS 512 for consultation later this year, with a view to releasing the final prudential standards before the end of 2015.

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Download the draft legislation

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Download the APRA letter to RSE licensees