Super connected directors not helping super fund performance

Superannuation regulator APRA has thrown its weight behind calls for more independent directors on super fund boards, arguing they improve board governance.

Despite a number of improvements in the area, including disclosure and the management of conflicts of interest, some issues have not received as much attention, in spite of their importance. For example, the practice of multiple directorships.

The fact that super fund board members can hold appointments on other super fund boards is unique. It sometimes happens when an external professional trustee company acts as the super fund’s board. In the corporate setting, directors rarely serve on the boards of competing companies due to anti-competitive concerns.

Multiple directorships exacerbate the already complex governance framework of super funds, and according to my research can impact fund performance.

Boards play a unique role in super

The external mechanisms that keep corporations in check are not always adequate in the case of the superannuation sector. Research conducted by the World Bank argues that within the super industry, external market mechanisms are weak.

There is no product market for some fund members (i.e. defined benefit plan members who cannot transfer benefits to another fund while they are employees of its sponsor), there is no equivalent market for corporate control, as there is in the listed company setting and there are no block shareholders who help to increase monitoring capacity.

This means super fund boards play a vital role and must be effective enough to address the imbalance. Practices such as multiple directorships are likely to impact on the board’s efficacy and consequently affect fund performance.

The impact on performance

In my study I examined the trustee directors of 249 superannuation fund boards, and found when a super fund experiences a reduction in the number of directorships its trustee directors hold, overall fund returns increase and fund expense ratios decrease.

At the same time, different types of multiple directorships were found to have differing detrimental effects on fund performance. That is, while both types decrease fund performance, individual directors who hold multiple directorships appear to be more problematic than professional trustee company directors. These directors’ access to networking, expertise and resources etc. may in fact alleviate some of the negative effect.

Overall the results of the study suggest that trustee directors’ time and effort is constrained when they hold multiple board appointments and as a result, fund performance suffers.

While the issue of multiple directorships was briefly highlighted in the Cooper Review, future regulatory reform should pay closer attention to the issue. As the industry continues to consolidate and the pool of trustee directors becomes smaller, it is likely that specific regulation of multiple directorships will become necessary.

Rather than placing a ban on multiple directorships, a more flexible approach which considers the different types of multiple directorships and their varying effects on fund performance may be appropriate.

Continued governance reform of the super industry is vital in order to safeguard our superannuation savings. While Australian regulators and policymakers should be commended for their actions to date, there is still work to do.

Superannuation assets in Australia now total almost A$2 trillion. That’s more than Australia’s gross domestic product and makes our super industry the fourth largest pension market in the world. The considerable growth of superannuation assets over time is largely attributable to the compulsory flow of money into super funds each year. In fact it is estimated that the industry will be larger than the Australian banking sector within the next two decades. The effective governance of these funds is therefore paramount.

Elizabeth Ooi does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.