In a further indication of APRA’s increasing focus on governance and culture in entities that it regulates, APRA Chairman, Wayne Byres, told the Senate Estimates Committee on 10 February (see HERE) that:

• A key focus for this year will be on superannuation entities, with a particular emphasis on how well superannuation boards, trustees and management are addressing key strategic, governance and operational areas while meeting their obligation in respect of members’ best interests;

• The superannuation industry’s practices around board appointment, renewal and performance assessment processes could be improved. In 2016 APRA proposes to highlight better practices, as well as areas where it considers there should be improvements to meet accepted principles for sound governance; and

• Inappropriate behaviour can arise in entities when the compensation structures are heavily based on revenues. APRA considers it worth taking a further look at the incentive structures and remuneration frameworks across those entities.

It is evident from Mr Byres remarks to the Committee and response to Senators’ questions that APRA and ASIC are expecting company boards and senior management to take more ownership of, and drive, improvements in culture and governance within their organisations. In response to the Committee’s question on culture and behaviour in organisations (and perhaps differing from ASIC’s perspective), Mr Byres said that changes in these areas cannot be regulated into existence. He maintains that:

“……As well as continual lecturing from me and others it does require leadership from executives within the industry to improve standards of behaviour.”

These comments follow soon after Mr Byres’ comments that heralded APRA’s increasing focus on culture and governance. In his speech to FINSIA’S ‘The Regulators Panel’ in Sydney on 5 November 2015 (see HERE), Mr Byres said:

“…….Therefore, our first step will be to undertake a stocktake of practices that Boards are employing to fulfil (their) obligation (to have a well-informed and reliable view of their firm’s risk culture). This stocktake will not only help us to refine and hone our supervisory approach to assessing risk culture, but will also hopefully help firms benchmark their own practices and understand a little better how they stack up against their peers……”

APRA’s approach to this increased supervision in 2016 is likely to be along the lines of thematic reviews it has previously undertaken. This would involve a review of policies, procedures and arrangements in these areas at a range of institutions across the industry. It would also include on-site review work.

At the Senate Committee hearing, APRA indicated it is likely to review the governance, oversight and monitoring of superannuation fund related party arrangements, and the processes in place to justify the arrangements being in the best interests of members. It is expected that the trustees would be actually monitoring the value and outcomes of the related party arrangements.

APRA confirmed for the Committee that it will be reviewing all types of superannuation funds, not just those that have union involvement. Its review work will be across the board and looking at retail, industry, corporate and public superannuation funds, their trustees and management.

The message for Boards, in particular, is to understand the remuneration practices, their linkage with potential risks and what culture the organisation is seeking to achieve. These issues are often well below the financial metrics on the agenda, yet can be the drivers of those metrics. Boards will be asking more questions of management along the lines of:

• How would you define the company’s culture?
• What are the drivers of that culture?
• What behaviours evidence that culture?
• What are the metrics for variable pay in the sales force?
• What level of review and oversight does the Board have of remuneration below executive level?

Directors may be interested in the Panel discussion on risk and culture at our upcoming Remuneration and Governance Forum in March (see HERE).

We have highlighted APRA’s and ASIC’s focus on culture and risk before (see HERE and HERE and HERE and HERE).

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