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Culture and governance in superannuation

Super Outcomes: How should funds respond to the Hayne Royal Commission and APRA’s CBA report?

Risk & Analytics|Pensions Risk Solutions

By David McNeice | May 27, 2019

The implications of the two significant investigations into financial services within Australia in the last year, APRA’s prudential inquiry into the Commonwealth Bank of Australia (CBA) and the Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, are still evolving.

Superannuation funds possibly attracted less criticism than insurers and banks in the Royal Commission and the CBA report did not consider superannuation explicitly. It is conceivable that some trustee boards could conclude that limited action is needed in response. Specifically they may feel that to the extent recommendations relevant to superannuation were made, they were aimed at operational, rather than strategic, matters.

But would such a conclusion be valid? A reading of both reports shows a number of common themes and those of strategic relevance to superannuation were culture, governance, accountability, risk management and remuneration.

Theme In practice
Culture Collective values and behaviours; how people interact and respond to challenges, especially under stress.
Governance The entirety of structures and processes by which an entity is run.
Accountability Clarity on who is accountable for what is done and for what is not done. How are those who are accountable, held to account? What are the consequences of failure?
Risk management Continuous identification of risks, likelihood of occurrence, consequences and mitigation strategies.
Remuneration Remuneration design, components, use of incentives vs fixed, effect on behaviour, alignment with strategic objectives set by the board.

A reasonable assessment is that all incidents of undisclosed conflicts of interest, misconduct, unconscionable behaviour and potential illegality arose because of failings in one or more of these themes. It is rare for the findings to be specifically related to a class of financial product such as banking deposits, loans, insurance, wealth accumulation or superannuation, but while these specific classes gave rise to examples of bad behaviour, weaknesses in the operation of the business at a much higher level allowed such behaviour to emerge in the first place. Weaknesses in these areas would likely lead to potential problems in any financial institution, including superannuation funds as well as banks and insurers.

Boards responsible for financial products, including superannuation, should review their operations to assess the effectiveness of their overall management of these key themes.

They are not matters for the executive to assess and report to the board, they are matters for the board to assess and hold the executive accountable to implement.

Whether this represents a significant change for superannuation funds will depend on their individual circumstances. However, the stakes are now higher and community expectations have increased. Australian regulators have not been exempt from criticism by the Commissioner and will toughen their supervision attitude accordingly. All funds should anticipate greater scrutiny.

Focus on strategic matters

There can be a tendency for boards and committees to be presented with meeting papers that contain an ever-increasing amount of material and reporting from the executive concerning operational, comparative investment analysis and compliance matters. Meeting packs can run to hundreds of pages. Technology has been an enabler of excess; as meeting papers are delivered to an iPad or similar device, they have become bigger.

But this may have contributed to the cding out of director focus on strategic matters. Superannuation, perhaps more so than other financial products, is prone to commingling the management and monitoring roles of executives and directors. Commissioner Hayne wrote in his report that "The task of the board is overall superintendence of the company, not its day-to-day management." Further, "…boards must have the right information in order to challenge management…when I refer to boards having the right information, I am not referring to boards having more information…it is the quality, not the quantity, of information that must increase. Often, improving the quality of information …will require giving directors less material and more information."1

Boards that get their fund's culture and governance structure correct, such that misconduct cannot easily arise, are adding long-term strategic value to their fund. It is just as important, possibly more so, to spend time protecting and nurturing the right behaviours in the executive than spending time analysing quarterly investment performance or administration service standards.

The questions remain though: how should that culture and governance be defined and developed? How should management decisions be made and by whom, and under what circumstances, checks and delegations? What should the executive be held accountable for? How should remuneration be set to reward the desired culture? How, when and under what circumstances should the board challenge management? What is the board's risk management framework and how should it differ from the risk management activities of the executive? Are they aligned? These are some of the questions that should be considered as a priority by directors.


1 Final Report: Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Volume 1, p400


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