A board member should be independent in character and judgment and there should be no relationships or circumstances which are likely to affect, or could appear to affect, independence. Independence is the absence of undue influence and bias.
As an example, independence includes being free from relationships that could be seen to interfere with the board member’s capacity to act, for example being a director of a provider company. If a board member cannot attain independence of mind he could possibly take the providers (for example) interests into account over and above the fund’s and members’. If we bring this back to our concept of strategic governance, we can see that not achieving the governance principle of independent board members could have a financial impact on the fund and the members’ end benefits and the board’s vision could be compromised.
Unfortunately, we have a number of case law examples where the courts or the Adjudicator has had to deal with boards or board members that appear to be less than independent. Some examples of these appear below.
City of Johannesburg (Metropolitan Municipality) v National Fund for Municipal Workers and others. 2008 High Court case.
In this case, the court made it clear that the employer Trustees are not the employer
Hossack – Adjudicator case 2005
This case concerned a resolution (not a rule) passed by the complainant and 1 other senior executive in their capacity as Trustees to grant greater benefits to executives. The Adjudicator stated that the case “…highlights the problem of “puppet Trustees” who do not have the interests of the membership as a whole at heart, or act independently in the interests of the fund, but rather respond unquestioningly to directions from the employer, which effectively controls the fund and its resources”. In this case, the Adjudicator referred the matter to the Registrar of Pension Funds for investigation.
PPAWU National provident Fund vs CEPPWAWU. 2009 High Court case.
In this case, the union sought to have the Trustees implement its decisions. The Court held that the Trustees owed a duty to the fund, its members and beneficiaries and that the primary objective of the Fund is to pay benefits to members/beneficiaries. The Pension Funds Act made it clear that the board had a duty to direct, control and oversee the fund’s operations. The Court found that each board member had to exercise an independent judgment as to what was in the best interests of the fund regardless of the influence of a third party, such as a union, and that they had similar duties to those of a company director. Board members do not represent the union and are required to make decisions independently of the union.
Note: it is also important to remember that in a couple of cases, board members have been found personally liable to complainants for loss caused to them as a result of non compliance by board members with their fiduciary duties (for example Mes v Art Medical Equipment Pension Fund).
What does the board need to do if it wants to delegate a function?
The board should provide effective direction, control and oversight of the operation of the fund. However, especially for the larger funds, it is true that boards cannot do everything themselves. There will be times where the board feels it necessary to delegate some of its duties and responsibilities to a sub-committee.
A proper delegation requires that the trustees are specific about the duties they want to delegate and the powers that they are giving to the sub-committee. This sub-committee could be made up of some of the board members themselves or from third parties or a mix of the two. It is possible to delegate either the decision-making functions itself or to require the sub-committee to come back to the board for decision or for ratification of their decision. It should be clear from the start which of these options has been chosen. Examples of delegation could include functions or decisions related to the following: death benefits, investments, communication and risk benefits.
The board may delegate certain functions to well-structured committees but may not abdicate its own responsibilities. The fund is required to delegate responsibly in the first place and to put in place a mechanism to monitor the functions it has delegated on a regular basis and to review the delegation where necessary.
It may be useful that the chairman of the sub-committees give at least a verbal summary of their committees’ deliberations at the board meeting following the sub-committee meeting or that they find another mechanism of feeding back to the board. The minutes of committee meeting proceedings could be included in the board’s agenda pack for the board’s information as soon as they have been approved. (In the case of a death benefit sub-committee, the minutes could be constituted by the board resolution related to each death benefit decision or a summary thereof.)
The sub-committee may not further delegate functions to another committee/person that have been delegated to them.
The rules of the fund must allow for the delegation.
What should be included in a delegation document?
Any delegation should be reduced to writing and, in or view, should contain at least the following:
- A note regarding the meeting at which the decision to delegate was made by the trustees;
- A note regarding the rules in terms of which the delegation is permitted (it is preferable that the actual rule is set out in the delegation document);
- The composition of the sub-committee and their tenure;
- What the quorum for the sub-committee will be and meeting procedures;
- Whether the sub-committee members will be paid (and if they will be paid, what they will be paid) and what expenses will be reimbursed;
- Specify the purpose and specific functions of the sub-committee;
- Specify what has been delegated to the committees, for example is it a decision making power or is it a function without a decision making power, is ratification by the trustee board of decision made by the sub-committee required?;
- How the sub-committee will report back to the board;
- What fund information will be available to the sub-committee and require the sub-committee to maintain confidentiality related to the information;
- Whether the sub-committee can obtain expert advice and whether it must get the board’s approval to do so first;
- Whether any members of the sub-committee will be required to be present at board meetings;
- Specify that the committee member is required to have and maintain the relevant experience and knowledge (what that is depends on the type of sub-committee); and
- Specify that they ensure that they comply with the law, the rules and any board code of conduct and ethics
What if I don’t have the requisite training, experience, expertise and knowledge?
In the retirement funds context (which is different to the company context) because of the way boards are structured in law, it is not always necessarily so that a board member arrives on the board fully equipped with the right knowledge and experience. This does not excuse the board from putting into place a formal programme or process either in order to better equip the relevant trustee/trustees in the areas they lack expertise or experience or to otherwise deal with this lack of expertise in the short term (such as sub-committees, external providers, advisors and expert advice). This programme/process needs to be discussed, written down and implemented and reassessed from time-to-time. This is important to the strategic goals of the fund.