APRA clarifies governance prudential standards changes

Tenure limit: APRA has extended this from 10 to 12 years on each regulated entity board with short extensions permissible in limited circumstances.

Grant Thornton guidance: Review current director tenure and identify which directors will need to exit the board and by when. For the stability of the Board, it is better that departures are staggered. The Board should also consider the tenure pattern they will adopt going forward. For example, 3 times 4-year terms or 4 times 3-year terms or shorter tenure periods. 

Independence: APRA has dropped the requirement to have at least two independent directors (including the Chair) on a regulated entity board that are not members of any other boards.

Grant Thornton guidance: APRA has indicated that the ‘presumption of independence’ for directors on multiple group Boards (paragraph 39 of CPS 510) will be removed. Boards will therefore need to review their conflict-of-interest frameworks, processes and registers to ensure that conflicts of this nature are considered and conflict management plans are in place. 

Early engagement on appointments: APRA will not require early engagements on appointments in prudential standards.

Grant Thornton guidance: Boards should still consider whether circumstances exist where early consultation with APRA would be beneficial. An example may be a director-nominee with relevant experience but not in the Australian market.

Individual director skills: While APRA requires entities to identify and document the skills and capabilities necessary for the board overall and for each director, APRA has clarified that these skills do not need to be specific to each director role.

Grant Thornton guidance: Boards should have a view of the experience, skills, knowledge and attributes that are necessary for to be effective. This should be captured in a skills matrix that is reviewed regularly to ensure that it remains current. At least annually, boards should review their coverage of the matrix and appointments should close any gaps in the matrix. 

Other considerations include:

• Is it better for individual directors to be ‘strong generalists’ or ‘subject matter experts’ or a combination of both?
• If the Board has a knowledge gap, how is this best filled – appointment of a director, independent board committee members or appointment of an independent advisor to the board?
• What weighting is given to knowledge gained through experience versus knowledge gained through education?
• Does the board have the required skills and experience to support the achievement of the strategic objectives? If the entity is targeting inorganic growth, are there existing directors with executive experience integrating acquired entities? If the entity is implementing a new core system, are their existing directors with executive experience managing this?

Perceived conflicts: While APRA expects entities to consider actual or potential conflicts, APRA has clarified that consideration of perceived conflicts is guidance only.

Grant Thornton guidance: It is best practice for boards to consider perceived conflicts in the same way as actual or potential conflicts.

Register of interests and duties: While APRA’s intention is that all regulated entities will maintain this register, bank and insurers will not be required to publish their register.

Grant Thornton guidance: We would expect at a minimum, a register of interests and duties is maintained for each director that they are required to confirm at least annually. Declaration of any conflicts of interest should be a standing agenda item at all board and board committee meetings.

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