Ten years is enough: Regulator puts long-serving directors on notice

Long-serving, incompetent and conflicted company directors are in the sights of the financial regulator, which has embarked upon a major shake-up of standards at the boards of banks, insurers and superannuation funds following a string of governance scandals in the past few years.

The Australian Prudential and Regulation Authority (APRA) is proposing term limits of 10 years for non-executive directors. It also called for an independent triennial review of the performance of boards, and wants to raise minimum standards around the fit and proper test for board members and require institutions to engage with it at the outset of their succession plans.

APRA chairman John Lonsdale has put the boards of banks, insurers and superannuation funds on notice. Credit: Louise Kennerley

“Well-governed institutions are likely to be more resilient in times of stress, while poor governance can create weakness that leads to misconduct, losses and failures,” APRA chair John Lonsdale said on Thursday.

“And when you look at the 1500 entities that APRA regulates, if you look at the ones under intensified supervision, the ones under enforcement action, and you ask yourself, ‘Well, how many of those entities actually have governance issues at the core?’ and the answer is around 80 per cent - that’s far too many.”

In the past five years, APRA has entered into an enforceable undertaking with Westpac and the Bank of Queensland over their deficient compliance with anti-money laundering laws, with AMP Super following issues that arose out of the banking royal commission; Allianz for its “persistent and serious” weakness in risk management; and construction industry superannuation fund Cbus for not making decisions in the best financial interest of its members.

Under the proposed changes, larger companies will need to engage the regulator at the outset of succession planning instead of just notifying them once key appointments are made. The plan comes after ANZ, which is under investigation for alleged market manipulation, announced in December that former HSBC banker Nuno Matos would succeed Shayne Elliott as chief executive.

Directors would also have to step down from boards after 10 years, APRA said, pointing to long tenures as eroding independence and impartiality. The regulator has identified 200 directors who have been on their company boards for more than a decade, about 150 who have served for more than 12 years, and about 30 with tenures of more than 20 years.

Across the major banks, directors who could be required to leave under the proposed standards, if implemented immediately, include Mary Padbury from the Commonwealth Bank, National Australia Bank chair Phil Chronican, and Jane Halton from ANZ, who were all appointed in 2016.

“We’re trying to draw a balance between having a good set of skills on a board, but actually, after a period of time, having that independence eroded,” Lonsdale said. “We’ve got a view that 10 years is the right number, and we’re consulting on that. But we’ve got a recognition that in some cases, 10 years might not be the right number.”

APRA will spend the next three months consulting the financial services industry, with the changes not coming into effect until 2028.

Lonsdale would not be drawn on the equal representation model mandated for industry superannuation funds, which requires fund boards to have an equal number of directors from unions and employer groups.

However, he said APRA would focus on the skills of board members on super funds and whether they were sufficiently managing their actual and perceived conflicts of interest.

The regulator’s proposal follows litigation it launched against First Super director and CFMEU national secretary Michael O’Connor, alleging he misused his position on the super fund to benefit the union, as well as the investigation it has conducted into Cbus’ cosy relationship with the construction union. O’Connor denies any wrongdoing.

“The law might govern how you get on a board in the case of super, but what we’re saying very clearly [is that] when you are on a board, there are expectations you have to meet, and they go to the skills and capability, fitness to be on a board, conflicts of interest and independence,” Lonsdale said.

An independent review that APRA ordered Cbus to conduct found the self-assessment process for board members placed too much emphasis on time served, “posing a risk that the assessment is not rigorous enough” and the board was “over- or underestimating its collective competence”.

Swinburne University senior lecturer in corporate law Helen Bird said APRA’s proposed changes were a step in the right direction.

“I think you’ve lost your independence long before 10 years,” Bird said. “The reason why [APRA] is possibly extending to 10 is because of the loss of corporate knowledge. But if you want to keep them independent and truly robust, two terms is enough, and maybe slightly longer for the chair.”

Australian Institute of Company Directors chief executive Mark Rigotti welcomed APRA’s consultation paper but warned against further red tape burdening boards.

“While there are many sensible proposals, such as reinforcing the board/management distinction and strengthening fit and proper person requirements, we have concerns about rigid rules on topics such as board tenure and independence, which might have unintended outcomes,” Rigotti said.

“On such issues, boards must be ultimately accountable for the approaches taken, with flexibility to explain to APRA why recommended approaches are not needed. Seeking APRA approval to exceed a proposed tenure limit would be regulatory overreach, especially given directors of listed entities are elected by shareholders.”

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