The Australian Prudential Regulation Authority (APRA) has released a consultation paper on 8 proposals to strengthen its prudential governance framework for banks, insurers and superannuation trustees.

This is APRA’s first significant update to its board governance standards in more than a decade. APRA says the proposals are focussed on existing areas of poor practice and intended to ensure its regulated entities have directors with the skills, experience and character for today’s complex risk environment.

APRA considers heightened risk to be a situation where a disruption could significantly impact a business’s ability to meet its obligations. APRA says that 78% of companies subject to heightened APRA supervision have underlying governance problems.

In summary, APRA is proposing changes that will:

• Lift requirements for boards to ensure they have the right mix of skills and experience to deliver the entity’s strategy.
• Raise minimum standards around the fitness and propriety of responsible persons, and require significant financial institutions to engage with APRA on succession planning and potential appointments.
• Extend existing requirements for superannuation trustees in relation to managing conflicts of interest to banking and insurance.
• Strengthen board independence, especially in relation to managing the number of directors that serve on the boards of entities that are part of a group.
• Mandate that significant financial institutions (SFIs) have independent external assessment of board, committees and individual directors.
• Require separate audit and risk committees (SFIs only).
• Clarify APRA’s expectations around the roles of boards, the chair and senior management.
• Introduce a lifetime tenure limit of 10 years for NEDs at an APRA-regulated entity.

These may look no different to what many boards would say they are currently doing, other than perhaps the 10-year limit. APRA’s prescriptions suggest otherwise.

An example of APRA’s concerns is that, while most entities would say they have addressed board skills and capability requirements, APRA observed shortcomings including many entities:

• Adopting a vague or narrow view of necessary skills and capabilities, including a failure to specify expected experience, qualifications or behavioural capabilities – and failing to consider how these can be measured;
• Failing to specify minimum skills and capabilities that individual directors need to fulfil their role;
• Not verifying skills or capabilities, often relying heavily on self-assessments; and
• Failing to take steps to address gaps and weaknesses through professional development and succession planning.

Another significant area of concern is director tenure. APRA says well managed turnover of directors facilitates stability, continuity and expertise – while also promoting fresh ideas and renewal. Overly long tenure is likely to erode a director’s capacity to exercise impartial judgement and to challenge management. It can limit openness to new ideas and different approaches and be a barrier to an unvarnished assessment of an entity’s culture.

It is, therefore, looking to limit tenure to 10 years.

APRA requires submissions by no later than 6 June 2025.

See the full discussion paper HERE.

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