Australian Financial Review 7 December 2017
The stalling of the proposed reforms to superannuation governance laws has exposed the brute but concealed force of union power. It has also reinforced the need for the banking royal commission to cover super.
After a decade of reports to governments of all colours arguing for independent directors on super fund boards, this was supposed to be the week the Senate would deliver the importantce governance reform.
Every listed company and prudentially regulated company must already have a majority of independent directors on their boards.
The proposed change was designed to ensure one-third of directors would represent members – not unions or banks. The result would be more transparency and fewer conflicts on boards where the interests of savers would be protected against directors seeking to advantage a union or bank.
It is the standard that every investor on the ASX Corporate Governance Council, including industry super, demands of Australian companies.
It is arguably more important in superannuation, where Australians do not choose but are compelled to pay 9.5 per cent of their salaries and wages over to super funds.
Independent directors crucial for consumers
The 2010 Cooper Review recommended it but was rejected by the government of the day. The 2014 Financial System Inquiry went further, recommending half the boards be independent.
Yet on Monday, the Turnbull government suddenly pulled the legislation.
The Senate crossbench, most notably One Nation and the Nick Xenophon Team had indicated support for these changes. Over the weekend that support suddenly and strangely evaporated.
As I have written this year, the campaign capacity of the union movement is truly incredible.
Their campaign against independent directors has been and is being waged because unions have collected over $50 million from industry super funds in the past decade.
Without reforms to stop payments of retirement savings to unions, this will reach $22 million per year in a decade.
The union campaign against reforms
Making one-third of directors independent from unions, industry associations and banks loosens the financial control of unions that which are dying elsewhere. Unions now represent only 10 per cent of the entire Australian workforce.
This latest campaign has had three elements:
The first was to flood the crossbench with threats that unions would campaign in upcoming state elections – South Australia in particular – against parties that which backed the changes.
This is a threat that would put thousands of union officials, organisers and members on the street corners to campaign against parties such as NXT. This is a problem a fledgling party doesn't need.
The second was to lean on the industry body most likely to campaign for change.
In this case, my former employer, the Financial Services Council, has been the champion of this reform for years.
In Back in 2010, as the representative body of wealth management in Australia, we knew the Cooper recommendation on directors was right. Even though it cost the FSC members and caused a lot of restructuring and pain, we implemented the Cooper recommendation through a compulsory industry standard.
FSC fought members for independent directors
The government had decided not to implement the best-practice recommendation, so we did it.
It was not tenable for every director on our members' super fund boards to be all bank or insurance company representatives. Some directors needed to be there solely for the consumer.
We believed in the standard we had implemented and the FSC proudly advocated the changes so that all superannuation members could benefit.
Sadly, the unions have found a way to muffle the FSC's and the wider industry's public advocacy during the current debate.
Why? Because wealth management is intermediated and industry funds can threaten their suppliers (insurers and asset managers and their industry bodies such as the FSC.
The threat goes something like this: "if you don't shut up or cannot get the FSC to shut up about independent directors, and you remain a member of the FSC, we will pull our business and move it to a life insurer or asset management company that is not an FSC member.'
With $500 billion in assets behind the threat, it largely worked).
A number of FSC members have encouraged the FSC to stay quiet or they would resign their membership. Equally, financial institutions have run dead in the current debate despite previous support for the reforms.
Unable to win on the merits of the argument, the unions resorted to threats. These threats worked and resulted in less public advocacy.
Royal commission right to cover super
The third element has been an advertising blitz using members' retirement savings.
Industry super spent $37 million on advertising in the past year to bolster their market position.
In addition, another $9.4 million was spent by the lobby group Industry Super Australia on advertising – predominantly on political advertising. For example, Industry Super Australia ran adverts during the AFL grand final under its own brand even though consumers can't invest in "industry super", but specific funds such as HostPlus or REST.
Many of these adverts – "Don't let bank foxes into the super hen house" – were designed to collect information from the community by harvesting data and drive peer-to-peer sharing of the anti-reform message.
Once people start sharing the message, it provides the appearance of a grassroots campaign, even through it is funded and created by unions.
The trifecta of threats to senators, infiltrating their opponents and spending millions of retirement savings to protect a union's income stream worked.
In the immediate term, it means the banking royal commission terms of reference are right to look at super.
The Hayne Commission should examine the threats and bullying that which has neutered key advocates of this reform.
Justice Hayne should also ask why it is appropriate that a single dollar – let alone $50 million in retirements savings – has been paid to unions.
Andrew Bragg is a former director of policy and global markets at the Financial Services Council (2013-2016) and was senior policy manager for superannuation (2010-2013) responsible for introducing the superannuation governance standard for the FSC. Twitter: @ajamesbragg