One-Tier Boards: One job, two hats
André de Voss speaks to Geraldine Leegwater and Paulien Siegman about how the one-tier board structures are working in practice
At a glance
• Some Dutch pension funds are remaining true to their existing model of equal representation while others are opting for an Anglo-Saxon one-tier board.
• ABN Amro is one of those acting for the top-down mixed model.
• Internal supervision is crucial for this new model.
• A recent study recommended that non-executive trustees improve accountability for their supervisory work.
A few pension funds have chosen the new option of a top-down mixed board model – one of them being the ABN Amro Pensioenfonds. Geraldine Leegwater, chief executive of the €23.5bn ABN Amro Pensioenfonds and Paulien Siegman, independent pensions adviser, have examined how this model works in practice.
Since the introduction of the Governance Improvement Act in 2014, most pension funds have maintained their existing model of equal representation. Some schemes, however, have opted for a new top-down mixed model – based on the Anglo-Saxon one-tier board – of executive and non-executive trustees making a board together.
“In our opinion, the parity-based model did not fit in with a modern pensions scheme,” says Leegwater. “A pension fund is a complex financial enterprise that requires full-time guidance from the board. We wanted an independent board, albeit it one with closely involved social partners.”
The top-down mixed board comprises executive trustees as well as non-executive board members. The latter are nominated by the employer, workers and pensioners. The former, including the chair, are independent. As the executive trustees are independent, while their non-executive colleagues represent the social partners, the model is referred to as the top-down mixed board model. In the traditional mixed model, the social partners are part of the executive board.
Internal supervision – carried out by the non-executive trustees – is crucial in the top-down mixed model. By being board member and internal supervisor at the same time, they have a double role. Leegwater and Siegman wanted to know how pension funds deal with this tricky dilemma. After all, the non-executives are expected to supervise executive colleagues and the entire board, including themselves. “In such a position, you are the butcher who tests his own meat,” says Leegwater.
The same tasks apply to all kinds of internal supervision: supervising board policy as well as the daily business at a fund. In addition, internal supervisors are tasked with monitoring risk management as well as a balanced approach towards all participants. The internal supervisors are answerable to the scheme’s accountability council, the sponsor and stakeholders. They must also make a statement in the annual report.
Leegwater and Siegman found that the Pensions Act does not address the top-down mixed board model. An audit committee is mandatory, but the DNB supervisor can grant exemptions. Four of the nine examined schemes did not have a separate audit committee. “Because of lack of legal clarity, pension funds must very specifically shape supervision in this board design themselves,” says Siegman.
Looking at annual reports, Leegwater and Siegman assessed how pension funds dealt with the new board model. They looked at practical matters, such as frequency and timing of meetings of the internal supervisors. “It matters, whether the supervisory meeting is scheduled separately or in connection with the general board meeting,” says Leegwater. “Combining meetings is more practical, but blurs the separation of roles. At ABN Amro Pensioenfonds we have opted for separate meetings.”
Siegman and Leegwater also looked at the agenda and supervisory reporting. They examined to what extent the internal supervision followed up on previous findings and how trustees were geared to their new tasks. “In particular, if board members had worked in the old model of equal representation, they needed to be trained for this new role,” says Siegman.
Where possible, they made a qualitative judgement. They looked, for example, at the depth of the findings of the internal supervisors, how critical they were and how the executive trustees dealt with the supervisors’ verdict. Although, they acknowledged that passing judgement solely on annual reports as well as a short period had its limitations, they found substantial differences between the nine pension funds. Half of the surveyed funds with the top-down mixed board model had explicitly filled in the supervisory tasks, but were brief on reporting and accounting.
The remarkable finding, however, was that the verdict of the non-executive members was not always in the annual report. The dilemmas resulting from the double role of board member and internal supervisor were hardly mentioned.
As a consequence, Siegman and Leegwater said that the annual reports did not provide sufficient insight into whether the countervailing power of internal supervision – the potentially weak element of this board model – had been properly organised.
Siegman says that she was surprised by the lack of reporting. “We had expected more information about the role of the non-executive board members. In particular because the transition to such a new board model is a revolutionary choice, extensive reporting and accounting is crucial for the support among the stakeholders.”
They said they suspect that the boards of the surveyed pension funds were fully occupied by setting up the new governance system but the functioning needs fine-tuning. They also wondered whether the shortcomings are worse than those at other board models. “Until recently, a pension fund was being assessed by a visitation committee once every three years. This is not a really perfect situation either,” says Siegman
Based on their findings, Leegwater and Siegman recommended that non-executive trustees improve accountability for their supervisory work in the annual report and to the accountability council. In their opinion, supervisors must be more explicit about organisational aspects, such as the number of meetings, how they carry out their task, the support they get and the role of an audit committee. To prevent disputes about the position of non-executive trustees as supervisors they should also monitor how previous findings are being followed up.
The ABN Amro Pensioenfonds is satisfied with its new board model. “It makes the burden of governance bearable and increases the effectiveness of the board despite the reduced number of meetings,” says Leegwater. “Although the model is still a learning curve for us as well, but on balance we feel very comfortable with it.”
Findings from Leegwater and Siegman’s analysis
• Reporting: The most remarkable finding was that a pension fund’s annual report did not always contain the verdict of the internal supervisors.
• Diversity: Boards of pension funds with the top-down board model are lacking diversity: four schemes comprised purely of men.
• Subjects internal supervision: Four out of the nine reports did not mention the number of issues assessed by the internal supervision. Four other schemes referred to the mandatory tasks.
• Difference between trustees: Four out of the nine pension funds did not explain how they differentiate between the board, executive trustees and non-executive board members.
• Audit committee: Only five out of the nine schemes have a separate audit committee, apparently tasked with overall internal supervision in three cases rather than an advisory role for the board.
• Previous years: Eight out of the nine pension funds did not mention previous supervisory conclusions.
• Coaching: Four pension funds did not report how non-executive trustees have been educated or trained. Three schemes indicated that their non-executives had been trained for internal supervision.
• Standardised judgement: Most examined pension funds lacked a normative framework. This is at odds with the opinion of the DNB, which prefers supervisory reports to be standardised.