The legal environment for governance

For what are the Principal Officer and Chairman responsible?

The intention is not, in this workbook, to set out all the duties and responsibilities of a PO¹. What we wish to highlight here is that as governance is a board responsibility, anything that is not a PO’s statutory duty yet is a duty that he performs for the fund (as the PO) must, in our view,  be a duty that has been assigned or delegated to him/her by the board of the fund. Thus, the board retains responsibility for the functions and should monitor them.

Similarly, with the Chairman’s duties and responsibilities, there may be functions that the board wishes to assign to the Chairman of the Fund that would be in line with King III recommendations. These should be set out in the rules or in a mandate from the Board. Some of these may include:

• Proactively lead the board without bias and within the ethical framework of the fund;
• Confirming agendas for board meetings and reviewing draft minutes of board meetings;
• Presiding over board meetings and ensuring that time is used productively;
• Ensuring that all board members are given an opportunity to contribute;
• Ensuring that no single board member or group of board members is allowed to dominate discussion or decision-making;
• Ensuring timeous and full disclosure and management of board members’ conflicts of interest; and
• Managing and contributing to the assessment of board members.

Who is responsible for the governance of the fund and what is the Board’s leadership role?

It is the board of the fund’s responsibility to ensure governance. What are the board’s responsibilities? While we do not intend to spell out all of the board’s responsibilities in this workbook, as they will no doubt be set out in the Board Notice (in addition to what is already in the Pension Funds Act and Regulations) it is interesting to note that while provider, advisor and agent responsibilities are usually clearly delineated and spelt out, often trustee duties are not. This may change going forward, with trustee duties being required to be set out in some detail and, thus, creating an understood benchmark against which Trustees may be assessed.

However, it should be said that the board’s most important responsibility is to lead the fund. Will writing governance into law mean that retirement funds are more compliant when it comes to governance? Yes, it probably will, especially if the FSB monitor and enforce compliance with the law. But, is this the reason why retirement funds should put proper governance processes into place? And would the upcoming legislation move funds from a tick-the-box (let’s get it over with) approach to a more strategic governance approach?

Leadership and the board’s vision?
King III provides that “the board shall provide effective leadership…”. The board plays an important leadership role in the fund and in order to provide effective leadership it will need a vision of where they want to go. In the context of retirement funds, governance should be aimed at supporting the strategic vision and goals of the board. The simplest and most effective vision for the board of a fund may be a vision to get members to retirement with decent benefits (although withdrawal and risk benefits may broaden this vision to some extent). This may require the board to refocus and take the lead on issues that will influence the attainment of this vision for example replacement ratios at retirement, adequacy of contributions, effective investments and tactics to encourage preservation.

Governance needs to work for the vision and cannot operate in a vacuum. That is, governance is not an end in itself. We hope that the move to establishing governance principles in legislation will lead board members to more critically analyse why they should establish good governance principles in the first place and inspire the board to lead the way towards achieving the vision.

What does the FSB intend to do with PF130, which is the Circular that deals with governance?

The FSB intends to write parts of Circular PF 130 (the FSB Circular that deals with Governance) into law by way of  a Board Notice. This means that those pieces of PF 130 that are converted into a Board Notice become law and not just good practice or policy.

In addition, the FSB will be considering where it will be appropriate to include certain governance principles from King III into the Board Notice.

What does the “apply or explain” approach mean?

King III is based on a voluntary basis of governance compliance. Practically, what this means is that the board can decide on whether to apply a principle (as will be set out in the Board Notice) or to explain why they have not done so. It is possible that the FSB may decide to follow a similar approach with regard to the intended Board Notice.

It is important, though, that any explanation must be based on an understanding that the board is legally required to act in the best interests of the fund. Thus, any explanation as to why a principle has not been complied with must start from a base that it is not, in the particular circumstances, in the best interests of the fund to comply with the principle and then include an explanation as to why this is the case.

King III explains that the board may decide to apply the principles differently or apply another practice and still achieve the objective of the overarching governance principles of fairness, accountability, responsibility and transparency. Explaining how the principles and recommendations were applied, or if not applied, the reasons, results in compliance. This may mean that the FSB introduce reporting requirements so that compliance (whether through applying the principles or explaining why not) may be monitored.

What does it mean to be independent?

As we know, case law confirms that board members are required to be independent. To give us guidance on what this means, let’s have a look at what King III says about board independence.

Board members should be independent in fact and in the perceptions of a reasonably informed outsider.

King III requires that the board has actual independence of mind and that this is an essential element of what is required of board members. In addition, King III provides that stakeholder perceptions of the independence of a board member are important. The board is required to act independently, free from bias and undue influence and in the best interests of the fund.

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.

References

1 The Financial Services Board have issued draft Directive 4, dealing with the PO’s appointment and his duties. Directive 4 covers the following:

• In appointing a PO, Trustees must ensure the appointee is fit and proper, has relevant experience and knows what his responsibilities are.
• The Directive includes an application form to be completed and submitted to the FSB when applying for approval of the appointment of the PO.

• Funds must provide ongoing information regarding the fitness and propriety of the PO.
• The PO has a duty to report irregularities and the reasons for the termination of his appointment.