APRA has highlighted board composition and board performance assessment as areas requiring improvement following a thematic review into superannuation fund practices.
In December 2016, APRA expanded Prudential Standard SPS 510 Governance (See HERE) requiring RSE licensee boards to formalise their governance framework. The thematic review (of 29 RSE licensees) was intended to assess responses to this expansion.
APRA summarised its findings in a letter (See HERE) sent to all RSE licensees on 17th May. It expects all RSE licensee boards to review their existing governance arrangements against its recommended practices and address any identified areas for improvement.
APRA made the following recommendations to RSE licensees:
- Regularly review the board and committee composition in the context of its business operations and strategic plan.
Few boards had documented their optimal board and committee composition and how this might change in the future given strategy.
- Target size
- Optimal skills mix for the board as a whole
- Ideal number of independent directors
- Workload considerations
- And the link between director skills and experience and the business plan
- Minimum skill requirements for board committees (e.g. at least one director with an advanced level of x skill, or an intermediate level of a particular skill across the committee as a whole)
As potential elements for consideration or documentation.
- Rather than using independent expert advisors, consider appointing a director with the requisite skills and experience.
APRA noted that, on some boards, the appointment of independent experts to board committees indicated a skills deficiency on the board.
- Boards create collaborative relationships with nominating organisations that have the power to veto an appointment to ensure appointments are made based on strategic board skill and experience requirements.
APRA reported feedback that appointing directors with appropriate skills could be difficult due to this power of nomination organisations.
- Tenure limits and reappointment policies should ensure a balance between continuity and board diversity/fresh perspectives
APRA often observed weaknesses in tenure policy, or its implementation, with overly long tenure limits or delayed board renewal. Better practice included staggered appointment terms.
Boards should also have a renewal planning process that considers the skills and experience that will be required as each directors’ term is likely to end, rather than at the point the vacancy arises.
- Board assessments should be more objective and independent, and consider the performance of the board as a whole as well as individual director performance
APRA noted that assessment of board performance was a weaker area of governance practice, with director self-assessments being commonplace. Better practice involved a more in-depth analysis, including assessment of board performance and functioning as a whole.
Almost half of APRA’s sample of respondents did not consider assessment of performance against the overall RSE licensee’s strategy.
APRA expected board assessments to be based on clearly articulated objectives and key performance indicator metrics or measures.
APRA concluded that effective assessments involved:
- The use of external consultants, as they are usually much broader in scope
- Input from senior management
It recommends that board performance should be carried out internally at least annually, with an external assessment at least every 3 years.
The focus on performance assessments echoes changes to the ASX Corporate Governance Principles and Recommendations encouraging listed boards to review their assessment of director skills (see our article HERE), and was a key focus of the recent Productivity Commission draft report on Superannuation: Assessing Efficiency and Productivity Commission Competitiveness. (See Recommendation 5 HERE.)
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