Industry superannuation funds are increasingly seeking board representation. 

    When former Prime Minister Paul Keating ignited a debate about superannuation funds nominating directors to the boards of companies they own, it took me back to my earliest days in finance journalism writing about the Australian Mutual Provident Society.

    At that time, in the 1980s, AMP was one of the largest mutuals in the world. It was the most powerful institutional investor in the country with double-digit stakes in virtually every major Australian listed company.

    Its influence was felt in two ways — through behind-the-scenes conversations between AMP representatives and non-executive directors of public companies it owned a stake in, and through the seamless transition of chief executives from full-time careers as CEOs to the board of AMP and its satellite businesses such as Stanbroke Pastoral Company.

    It was extremely rare for AMP to nominate directors to a board because chairs (and yes, they were all men) knew it did not make sense to upset the AMP — a sentiment that perpetuated (what was) an elite directors’ club.

    Director reaction

    A range of company directors have issued warnings or urged super funds to be cautious following Keating’s statement in an interview in The Australian Financial Review in February that “big funds will take positions of substance inside 10 or 12 companies, of which in some cases they might have board representation”.

    NAB chair Philip Chronican GAICD told the AFR that boards are “collectively accountable for pursuing the best interests of the corporation”, which means a director “who represents a special interest, they have a potential conflict because they’re representing one party on that board”.

    This position was rejected by Aware Super chair Sam Mostyn AO, since appointed Australia’s next Governor-General (starting on 1 July). She told the AFR, “The fiduciary duties to any director on a board is to the company and shareholders, not to be our representative at all times.” Mostyn cut to the heart of the issue.

    In essence, she was repeating what every company director worth their salt knows — they have obligations under Sections 180–184 of the Corporations Act 2001 to act in good faith and in the interests of the organisation. As we were reminded by the banking Royal Commission, directors are not obliged to act solely in the short- term interests of shareholders.

    The Crown Resorts governance debacle was a timely reminder that directors should not share company information with any one shareholder. Also, by law, directors must declare conflicts and not use corporate information for personal gain.

    One leading industry super fund director, who spoke anonymously because of concerns of a backlash, told this columnist the concerns about nominating directors were misplaced.

    “I fail to see the problems some are raising,” says the director. “If a super fund wants to recommend a director for a board, they understand the governance requirements and their duties.”

    Former ASIC deputy chair Jeremy Cooper MAICD, who chaired the 2009–10 Super System Review, says that not all nominee directors are the same.

    “Some nominees advocate for the nominator’s stance or interests in general, and on particular matters before the board, and report to their nominator regularly and in some detail,” he says. “...Some have a lower level of consultation with and commitment to their nominators. In some cases, apart from the manner of their appointment, nominees differ in no way from any other director. They could be nominated simply for their expertise.”

    It will continue to grow

    Cooper adds that it seems to be forgotten that super funds have been investing in and governing significant unlisted and private equity assets for two decades in many cases. “It would be hard to imagine that such funds wouldn’t be able to identify people with suitable skills and experience to take on similar roles in the ASX-listed space,” he says. “It would be startling to think that a fund would, for example, appoint one of its own employees with little or no relevant industry or corporate governance experience.”

    When the AMP was the dominant financial institution in Australia, the country’s total retirement savings were a relatively small proportion of GDP. We live in a very different world. The $3.6 trillion in superannuation assets now amount to about 140 per cent of Australia’s GDP.

    The power and influence of big super funds will grow as compulsory savings expand. In its recent Shaping Super report, Mercer predicted that super assets as a proportion of GDP will grow to 185 per cent of GDP by 2048, positioning Australia as one of the largest global pension systems in the world on a relative (to GDP) basis.

    A super system dominated by a handful of mega-funds will inevitably mean much greater ownership of publicly listed companies and a much greater propensity for super funds to want board representation. Double-digit shareholdings in companies by super funds will be the norm, given the incentives for ownership of Australian equities.

    Australia’s savings are more exposed to equities than any other country aside from the US, according to analysis of global pension assets by the Thinking Ahead Institute. The reason is the tax advantages offered by dividend imputation.

    Climate change

    One of the factors likely to drive much greater direct involvement of super funds in the governance of companies is climate change. Younger members of super funds, who have been found to be more acutely aware of the dire consequences of climate change, will surely push for an increased level of stewardship given that half of the greenhouse gases in the atmosphere were generated in the 30 or so years since compulsory super started in 1992.

    Tony Boyd is an AFR contributing editor and former Chanticleer columnist.

    This article first appeared under the headline 'Permission to come aboard’ in the May 2024 issue of Company Director magazine.

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