SPG 510 Governance Guidance for RSE Licensees

SPG 510 Governance provides guidance to RSE licensees on SPS 510 Governance.

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About this guide

Prudential Practice Guides (PPGs) provide guidance on APRA’s view of sound practice in particular areas. PPGs frequently discuss legal requirements from legislation, regulations or APRA’s prudential standards, but do not themselves create enforceable requirements. Prudential Standard SPS 510 Governance ( SPS 510 ) sets out APRA’s requirements in relation to the governance of a registrable superannuation entity (RSE) licensee’s (RSE licensee’s) business operations. This PPG aims to assist an RSE licensee in complying with those requirements and, more generally, to outline prudent practices in relation to certain governance matters. For the purposes of this guide, and consistent with the application of SPS 510 , ‘RSE licensee’ has the meaning given in the Superannuation Industry (Supervision) Act 1993 . Subject to the requirements of SPS 510 , an RSE licensee has the flexibility to structure its governance framework in the way most suited to achieving its business objectives. Not all practices outlined in this PPG will be relevant for every RSE licensee and some aspects may vary depending upon the size, business mix and complexity of the RSE licensee’s business operations.

Disclaimer and copyright

This prudential practice guide is not legal advice and users are encouraged to obtain professional advice about the application of any legislation or prudential standard relevant to their particular circumstances and to exercise their own skill and care in relation to any material contained in this guide. APRA disclaims any liability for any loss or damage arising out of any use of this prudential practice guide. © Australian Prudential Regulation Authority (APRA) This work is licensed under the Creative Commons Attribution 3.0 Australia Licence (CCBY 3.0). This licence allows you to copy, distribute and adapt this work, provided you attribute the work and do not suggest that APRA endorses you or your work. To view a full copy of the terms of this licence, visit www.creativecommons.org/licenses/ by/3.0/au/.

Principles

A number of principles underpin a sound and effective governance framework for an RSE licensee. These include:

responsibility — the board of directors (the Board) is ultimately responsible and accountable for the decisions and actions taken by an RSE licensee [1] ; [1] For the purposes of this prudential practice guide (PPG), a reference to ‘a director’ is a reference to a director of an RSE licensee which has a Board of directors or, in the case of a group of individual trustees, an individual trustee and ‘group of individual trustees’ has the meaning given in section 10(1) of the Superannuation Industry (Supervision) Act 1993 (SIS Act).

independence — demonstrated by a Board that discharges its review and oversight role effectively and independent of the interests of dominant shareholders, management, and competing or conflicting business interests;

renewal — a policy of renewal provides for fresh insight and general reinvigoration of a Board while also ensuring ongoing effective oversight and understanding of the business of the RSE licensee by the Board;

expertise — demonstrated by a Board with the necessary expertise to fulfil its role and functions, and access to independent expertise not readily available amongst the current directors;

diligence — demonstrated by a Board that discharges its duties and responsibilities carefully and conscientiously;

prudence — demonstrated by a Board with a clear focus on the prudent management of the RSE licensee’s business operations [2] ; [2] .For the purposes of this PPG, an ‘RSE licensee’s business operations’ includes all activities as an RSE licensee (including the activities of each RSE of which it is the licensee), and all other activities of the RSE licensee to the extent that they are relevant to, or may impact on, its activities as an RSE licensee.

transparency — demonstrated by a Board that is open and honest in its dealings on behalf of the RSE licensee; and

oversight — demonstrated by a Board that is able to satisfy itself that the management and operation of the RSE conforms to its strategy, direction and policies.

Governance framework

An effective governance framework includes the oversight of systems, structures, policies, processes and people that underpin accountability within the RSE licensee’s business operations. It supports an RSE licensee to make objective business decisions in the best interests of beneficiaries.

APRA expects that a Board would establish a process to ensure that governance risks are properly and regularly evaluated and managed by the Board. Governance risks include, but are not limited to, risks associated with:

accountability and transparency of decision-making processes;

delegation of roles and responsibilities;

remuneration arrangements;

fitness and propriety; and

the management of conflicts of interest.
[3]
[3]
Refer to
Prudential Standard SPS 220 Risk Management for guidance relating to governance risk and Prudential Practice Guide SPG 520 Fit and Proper and Prudential Practice Guide SPG 521 Conflicts of Interest ( SPG 521 ) for further guidance relating to assessments of fitness and propriety and the management of conflicts.

For the avoidance of doubt, where an RSE licensee already has in place a policy that satisfies requirements set out in SPS 510 , the RSE licensee may incorporate such policies by reference into the governance framework. That is, the materials do not have to be duplicated for the purposes of complying with the requirements of SPS 510 .

APRA’s view is that a prudent Board would determine a target size for the Board and its committees and reflect in the Board’s renewal policy an outline of how the Board intends to achieve and maintain this target size.

APRA’s view is that board size influences a Board’s capacity to operate effectively. APRA considers it would be prudent practice for an RSE licensee to periodically review the total number of directors on the Board and assess whether the size of the Board supports the effective functioning and decision-making of the Board. The size of the Board is ultimately a matter for the RSE licensee to set in light of the size, business mix and complexity of their business operations. APRA’s view, however, is that there are likely to be very limited circumstances where an RSE licensee would need a Board of more than 12 directors.

APRA’s view is that, when determining the overall composition of the Board, an RSE licensee would ordinarily take into account the RSE licensee’s business and strategic plans and the skills and capabilities required to effectively oversee the implementation of that strategy.

APRA expects that an RSE licensee would establish policies and procedures relating to voting rights which support effective decision- making by the Board. This would be expected to include procedures which ensure that the views of all directors are adequately reflected in all decisions made by the Board.

It would be prudent practice for the Board to consider using relevant board committees to provide appropriate oversight of key governance matters. Such committees may include a dedicated nomination committee or another appropriate board committee, such as the board risk committee.

The responsibilities of a dedicated nomination committee might include:

overseeing the nomination, appointment, reappointment and removal processes for directors of the Board [4] ; [4] For the purposes of this PPG, ‘appointment’ encompasses both the appointment of new directors and reappointment of existing or past directors to the Board or board committees.

recommending candidates for appointment to the Board; and

overseeing remuneration and performance assessment policies and processes (if these roles are not otherwise performed by the Board Remuneration Committee).

The Board and senior management

As stated in
SPS 510
, the Board has ultimate responsibility for the sound and prudent management of an RSE licensee’s business operations. A well-functioning Board will review and approve business strategies and significant policies of the RSE licensee. It will also satisfy itself that an effective system of risk management and internal control is established and maintained, and that senior management monitors the effectiveness of the risk management framework.

Senior management has responsibility for day- to-day management of an RSE licensee’s business operations. This includes the implementation and monitoring of systems, structures, policies, processes, information and oversight arrangements used in managing the RSE licensee.

Composition of the Board

Section 10(1) of the SIS Act contains a definition of ‘independent director’, a term that is used in Part 9 of the SIS Act, which deals with equal representation of employers and members in relation to standard employer-sponsored funds. APRA’s view is that a prudent equal representation Board would consider the benefits of the appointment of at least one independent director.

A non-equal representation Board might similarly consider the benefits of the appointment of one or more directors who are free from any business or other association that could materially interfere with the exercise of their independent judgement. Such directors broaden the skills and capabilities that can be brought to the board table, and improve decision-making by bringing an objective perspective to issues the board considers. They are also well placed to hold other directors accountable for their conduct, particularly in relation to conflicts of interest.

For the purposes of this PPG, a director who is free from these other associations is referred to as ‘a non-affiliated director’.

Further, APRA’s view is that a prudent RSE licensee would consider whether the appointment of an independent or non- affiliated director, as relevant, as chairperson of the Board would benefit the Board’s fulfilment of its duties.

When assessing whether a director is a non- affiliated director, the Board may have regard to whether the director:

is a substantial shareholder of the RSE licensee or an officer of, or otherwise associated directly with, a substantial shareholder of the RSE licensee [5] ; [5] Refer to s. 12 of the SIS Act for the definition of ‘associate’

is employed, or has previously been employed, in an executive capacity by the RSE licensee, another group member or a standard employer sponsor and there has not been a period of at least three years between ceasing such employment and serving on the Board;

has within the last three years been a director of a standard employer sponsor, a principal of a material professional adviser or a material consultant to the RSE licensee or another group member, or an employee materially associated with the service provided;

is a material supplier of the RSE licensee’s business operations or another group member, or an officer of or otherwise associated directly or indirectly with a material supplier;

has a material contractual relationship with the RSE licensee or another group member other than as a director;

is eligible to be a member representative or employer representative on the Board [6] ; or [6] Refer to s. 10(1) of the SIS Act for the meaning of ‘member representative’ and ‘employer representative’.

has served as a member representative or employer representative at any time in the last three years.

It would be prudent practice for an RSE licensee to consider the current and past associations of candidates when seeking to appoint new directors. Where a current or past association could impact a director’s ability to effectively carry out their role, APRA expects that the Board would consider whether that appointment is appropriate and in the best interest of members.

APRA’s view is that membership of an RSE within the RSE licensee’s business operations does not preclude a director from being considered to be non-affiliated.

APRA considers it prudent practice for a Board to also closely consider whether it would be appropriate to include independent and/or non-affiliated directors, as relevant, within the membership of its Board Audit Committee.

Residency

As a guide, a person might be considered ‘ordinarily resident’, as referred to in SPS 510 , if they are likely to be in Australia for a majority of days in any 12-month period.

RSE licensees that are part of a corporate group

Where an RSE licensee is part of a corporate group, APRA expects that the Board would consider the potential impact on the RSE licensee of the operations, including but not limited to, the policies and procedures of representative’ and ‘employer representative’.other entities in the group. If the RSE licensee is the head of the group, APRA expects the Board would consider the impact of the operations of member entities of the group on all RSE licensees within the group.

A person may act as a director of more than one APRA-regulated entity within a corporate group. Where an RSE licensee is part of a corporate group, a person who is a director of the RSE licensee and is also an independent director elsewhere in the group, within the meaning given in Prudential Standard CPS 510 Governance , would not ordinarily be considered a non-affiliated director of the RSE licensee.

Board renewal

APRA expects a Board renewal policy would document the maximum tenure period for each director, including the circumstances where the RSE licensee may deviate from the terms of its tenure policy.
[7]
APRA’s view is that long periods of tenure can affect a person’s capacity to exercise independent judgement. APRA expects that the length of each director’s tenure would be examined shortly before the end of each term served and that there would be limited circumstances in which maximum tenure limits exceeding 12 years would be appropriate. [7] For the purpose of this PPG, a reference to ‘tenure’ is a reference to the total length of service of an individual director on the Board (including non-continuous service).

APRA expects that an RSE licensee would develop and implement a considered approach for assessing each director on the cessation of their term, and at the end of the RSE licensee’s maximum tenure period, to determine whether it is appropriate for the individual to be reappointed. This includes having regard to periods of time served on the Board of a predecessor RSE licensee where the individual is appointed to, for example, the board of the merged or successor entity.

APRA expects that circumstances where a person is reappointed as a director at the end of the RSE licensee’s maximum tenure period would be exceptional. APRA also expects that, in the absence of exceptional circumstances, a director would serve on the Board for at least the term for which the director was appointed. Decisions about the appointment and removal of individual directors would ordinarily be considered by the Board of the RSE licensee. An appropriate length of term of appointment for directors would ordinarily be in the vicinity of three to four years.

Board nomination, appointment and removal

Achieving overall Board composition which is appropriate for an RSE licensee’s business operations provides the foundation for sound governance. The nomination, appointment and removal processes of the Board are crucial to achieving appropriate Board composition.

APRA’s view is that the Board would be expected to have in place robust processes to support the nomination of appropriate candidates for appointment to the Board. This would include processes to support open and effective communication and consultation with organisations with a right to nominate directors for appointment to the Board. APRA considers that it would be appropriate for the Board to have processes in place to respond to the situation where a sponsoring organisation nominates or appoints a director that the Board considers unsuitable for appointment.

The Board’s policy for nominating and appointing directors would be expected to ensure that terms of tenure are staggered to support continuity and the appropriate transfer of knowledge and skills to new directors.

When considering potential candidates and appointing new directors, APRA’s view is that an RSE licensee would assess:

the current and past associations of candidates;

the appropriateness of other directorships held by the candidate director, especially directorships of other RSE licensees [8] ; [8] Refer to SPG 521 .

the skills and capabilities of nominated candidates against the role and responsibilities of the vacancy and the Board as a whole, including consideration of committee vacancies; and

the fitness and propriety of nominated candidates.

Board renewal and equal representation requirements

APRA considers that it is important that formal procedures are in place to support the nomination and appointment of member and employer representatives in an equal representation environment. This includes ensuring that all eligible potential representatives can submit nominations and that the duties, requirements and expected skills and experience of a director are clearly communicated to potential representatives. In circumstances where nominating bodies select directors for appointment, it is prudent practice for the RSE licensee to communicate to the nominating body the manner in which its nomination process can support the board renewal policy.

Member and employer representatives are subject to the requirements of SPS 510 as well as those contained in Prudential Standard SPS 520 Fit and Proper (SPS 520) . APRA expects an RSE licensee would carefully consider the requirements of both SPS 510 and SPS 520 when appointing new directors noting that the equal representation requirements do not absolve an RSE licensee from the obligation to determine whether an individual is appropriate to act as a trustee or director of a corporate trustee.

Board committees

SPS 510 sets out the minimum requirements for the Board Audit Committee.

A well-functioning Board will typically consider whether there may be merit in establishing board committees for the purpose of overseeing critical functions. Whilst SPS 510 only requires the establishment of a Board Audit Committee, [9] the Board may find the establishment of other committees beneficial for certain functions and for strengthening the overall governance arrangements of the RSE licensee. [9]

Prudential Standard CPS 511 Remuneration separately requires establishment of a Board Remuneration Committee.

While some functions and responsibilities of directors may be delegated to board committees where appropriate, the Board retains ultimate responsibility for ensuring that those duties are performed.

In establishing committees, a well-functioning Board will have regard to the risk profile of the RSE licensee and the complexity of its business, as well as the experience and expertise of the directors.

Where board committees are established, it would be prudent practice for these committees to have clearly defined charters that set out their role and objectives, responsibilities, authorities and tenure, and for the charters of these committees to be regularly reviewed. It would also be prudent practice that board committees report regularly to the Board.

Board Audit Committee

APRA expects that, in addition to the requirements in SPS 510 , the Board Audit Committee would, from time to time, meet separately with the internal auditor and RSE auditor without other parties being present.

Board Risk Committee

SPS 510 does not require an RSE licensee to establish a dedicated Board Risk Committee. However, APRA expects that the Board would have considered the necessity of such a committee and the suitability of arrangements for dealing with risk issues at the Board level. Typically, APRA expects larger and more complex RSE licensees would have a separate Board Risk Committee.

A Board Risk Committee would be responsible for reviewing the risk management framework of the RSE licensee, for determining policies that ensure the risk management framework is adhered to and for monitoring adherence to those policies.

It would be prudent practice for the Board Risk Committee to allow those responsible for risk management functions to meet with it, without other parties being present.

Internal audit

While
SPS 510 requires the internal audit function to have a reporting line and unfettered access to the Board Audit Committee, this does not preclude the internal auditor from having a reporting line to management, provided that this does not undermine the independence of the internal audit function, either in appearance or in fact.

Board performance assessment

SPS 510 requires the Board to assess its performance and that of individual directors relative to its objectives. In undertaking this assessment, a well-functioning Board would typically consider and document the objectives that it sets for the Board collectively and for individual directors.

Objectives for the Board could include:

establishing the overall strategy for the RSE licensee and ensuring reporting against this strategy;

assessing operating and financial conditions against forecasts;

assessing senior management performance against agreed criteria, which would include, for relevant senior management, the effectiveness of risk controls; and

making key decisions in a timely manner.

Objectives for individual directors may include:

demonstrating the required expertise for their role;

attendance and participation at Board meetings; and

contributing to Board deliberations and the overall direction of the RSE licensee.

APRA expects the Board to consider whether its annual Board assessment would be best undertaken by a party who is free from connection to the RSE licensee or its associates. At a minimum, APRA expects the Board assessment would be undertaken by an external party at least every three years.

APRA expects that a Board would have in place a documented policy on Board performance assessments which includes:

the timeframe within which assessments will be conducted;

how sufficient objectivity in performance assessments will be achieved;

how the Board will manage the outcomes of performance assessments and recommended courses of action in the event of performance that is below expectations; and

a reasonable timeframe for action after performance assessments have been conducted.

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