APRA Deputy Chair Margaret Cole - Opening remarks to the AIST Chairs Forum
Thank you to the AIST for inviting me to participate today.
With more than 20 super fund chairs in the room, I can’t pass up the opportunity to discuss board governance, an area of ongoing and increasingly sharp focus for APRA… and, I am sure, for you as well.
Leading a board in the superannuation industry has never been more demanding - or more important.
Superannuation funds are getting larger, the operating environment is more complex, and there is heightened scrutiny from government, regulators, competitors and customers on fund performance and member outcomes.
To navigate these challenges – and deliver the best outcomes for your members – the challenge is high. Boards have to be robust, diverse and high performing.
What do we mean by high performing boards? A high performing board will set itself apart from simply functional boards by looking outwards and forwards. It creates resilience by being open to challenge, open to new ideas, and open to change. A Chair who wants to create a high performing board will set agendas that scan the environment for new threats and new possibilities, will set an effective board renewal strategy to bring in fresh thinking and skills and will build a culture in which directors are actively encouraged to question and challenge management and each other to drive good decision-making.
APRA has been working with trustees to improve the quality of governance across the superannuation industry.
We want to see boards of trustees take greater accountability and oversight of the risks and opportunities that their organisations face. This includes areas such as investment governance as well as new and emerging risks such as cyber and climate.
Through our supervisory work, we see material scope for improvement in board renewal strategies, including more robust self-policing of tenure limits, systematic identification and recruitment of skills and experience needed around the board table not only for today but also for tomorrow, rigorous reviews of board effectiveness and director performance, and proactive succession planning. All these components are important and should inform and connect with each other.
One example is director tenure. APRA’s published prudential guidance on board tenure is that organisations should enshrine maximum tenure limits in their board renewal policies. We recommend a maximum of 12 years.
Long tenures erode the capacity of directors to exercise independent judgement. Long-term directors can become too closely aligned to management and are less likely to challenge decisions. Even in the best organisations, long tenure can block openness to new ideas and different ways of doing things. It is often a barrier to an unvarnished assessment of culture.
So, over the past year, our supervisory teams have been engaging closely with super boards where there has been a lack of focus on board tenure.
We’ve made considerable progress to date, with many trustees having resolved their tenure issues. However, there is still more to be done.
Of course, tenure is just one element of board renewal.
The composition of a high performing board will reflect the skills and experience needed to understand and respond to the risks and opportunities that their organisation faces. That includes having a diversity of perspectives and the skills to adapt as the business environment evolves.
Getting the right mix on the board isn’t always as easy as it could be. This I want to make very clear isn’t an attack on the equal representation model. We see high performing boards in this model. But existing constitutions and board renewal policies may be restrictive. Or the board itself might not be empowered to appoint new directors.
These are challenges but they can be overcome… and we are seeing boards led by their Chairs, thinking deeply about these issues, having conversations with their stakeholders to identify changes needed, so they can set clear expectations about the skills needed for their boards.
High performing boards will also have a well-considered succession plan to maintain stability and confidence in the board as directors’ tenures expire or in the, hopefully rare, event of sudden departures.
Finally, a tell-tale characteristic of a highly functioning board is the ability to make your boardroom a safe place for directors to challenge the status quo or voice contrarian views, without fear. This “psychological safety” is critical to robust decision-making.
I challenge Chairs and boards across the spectrum of business models to think about how you operate as a board, how self-reflective the board really is of its own performance. You can be “functional” and tick all the compliance boxes. Or you can take your trusteeship to another level by building a high performing board that puts the best financial interests of your fund members at the centre of everything you do.
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The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $7.9 trillion in assets for Australian depositors, policyholders and superannuation fund members.