Why we should be paying fund trustees $200,000 pa

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A series of ASFA panels in which we are currently participating have discussed where key Coalition policies are likely to land, including the contentious topic of fund governance, the equal representation board model, and independent directors.

Changing the status quo has major implications for power and control.  Some stakeholders no doubt see independents as a not-so-subtle lever the Coalition government will use to loosen their influence over super funds they were instrumental in creating.

Fair enough.  But we see even bigger questions around the longer term implications for the overall role of the trustee director.  In particular, there is a growing sense that the roles, skills, and expectations of trustee directors, and the overall capability of boards, must be substantially upgraded as the system matures.

For those unfamiliar with the equal representation model, it consists of an equal number of directors representing a fund’s sponsoring employer and employee organisations – typically industry associations and unions.  Sometimes there are also 1 or 2 independents, but often there are none.

Given the Coalition’s stance, it’s hard to see how equal representation survives in its current form.  The main alternatives appear to be:

– The ASX public company model, featuring a majority of independents.  Large retail competitors funds which are FSC members have already adopted this model, but it would be a tectonic change for many not-for-profits.

– Something like the HOSTPLUS model – a 3:3:3 mix of employer, member, and independents.

At this point in time. we prefer 3:3:3 over either the status quo or majority independent:

– We don’t see equal representation as optimal as super funds become major participants in the financial system.  Boards need experts in investments, IT, operations, marketing, financial advice, and other competencies, which will generally need to be drawn from external sources.

– That said, majority independent could be argued as going too far – as a first step anyway.  Equal representation funds would not exist other than for the efforts of their sponsoring organisations.   Although they need to evolve, maintaining a strong connection with their original purpose is a valid objective.  

The introduction of independents should prompt a debate on the role of trustee directors more generally.  Being appointed to a fund board is a big deal, and appointments to major super funds should be seen as worthy of public and industry discussion as appointments to the board of CBA. That’s not what happens now.  Most appointments are made quietly, with little external attention let alone serious scrutiny.  Some appointees are clearly underqualified beyond their sponsoring organization connections.   A brighter light should be shone on all appointments, and the presence of quality independents would help do that.

The role of trustee director cannot be a sinecure.  Expectations – from members, APRA, government, and other stakeholders – are going to rise dramatically, regardless of which stakeholder group a director represents.  As funds grow into significant financial institutions, it is increasingly important that boards effectively hold management to account.  Trustee directors need to be professional, they should be leading experts, they need to be of impeccable reputation, and funds need them to be focused.

So we are going to have to pay them properly.  The days of part-time generalists, paid ~$50,000 pa, often remitted to their sponsor, are coming to an end.  This is not something to be sad about.  Super funds are now huge, complex  enterprises, and they need directors who will spend a serious amount of time on fund governance.

In short, we should be paying trustee directors something closer to what bank directors get paid.

A director of a big 4 bank makes $200,000+ pa; a state-based bank around $150,000.   Say an average of 8 directors, and you’re talking $1.5-$2.5m pa in board fees and expenses. This is a lot of money, but to put it into context, that’s only ~1bp for a $20bn fund – not a bad investment for decent governance.

For any CEOs reading this with horror, let’s deal with the objections:

– My directors don’t justify that sort of remuneration – time to change the job description.  Or if they’re not adding that much value, maybe you need some new directors who can.

– Given the size of our board, we couldn’t afford it – time to make some hard decisions and shrink the board.

– It’s a bad look for a not-for-profit – not nearly as bad as ineffective oversight resulting in millions lost as a result of poor decisions.  

The confronting aspect for CEOs is that boards will in time become more active in holding management teams to account and challenging their recommendations.  For trustee directors, the good news is that they should be paid a lot more.  The bad news is that they’re going to have to earn it – and some won’t make the grade.

Posted In: Trialogue