'Sound governance, leadership and culture are essential in the delivery of high quality and safe aged care.'

This view, espoused by the Royal Commission into Aged Care Quality and Safety (Royal Commission) in its final report released earlier this year, included several recommendations that will reshape the boardrooms of Australian aged care providers. Aged care provider governance emerged as a significant issue in the Royal Commission. Several recommendations were made by the Royal Commission which were accepted by Commonwealth in responding to the Final Report.

Aged Care and Other Legislation Amendment (Royal Commission Response No. 2) Bill 2021

On 1 September 2021, the government introduced the Aged Care and Other Legislation Amendment (Royal Commission Response No. 2) Bill 2021 (Bill) into the Parliament, which includes, amongst other things, various governance requirements for aged care providers.

The Bill requires aged care providers to have:

• a majority of members of the governing body as independent non-executive directors; and
• at least one member of the governing body of the provider with experience in the provision of clinical care (the Independence Requirement).

The Independence Requirement is set to commence on 1 March 2022, although existing providers will have until 1 March 2023 to satisfy the Independence Requirement. However, as the Bill is currently before the Senate and Parliament has risen for the year, there is some uncertainty as to whether the Bill will pass prior to the 2022 federal election. The Bill was introduced to the Senate on 22 November 2022, with bipartisan support.

So why has passage of the Bill been delayed?

At a hearing of the Community Affairs Legislation Committee on 9 November 2021, which examined the Bill, some concerns were raised about the need to balance the desire to progress the Bill quickly against the need to ensure that the Senators had adequate information to appropriately assess the Bill. It is therefore unlikely that the Independence Requirement will pass into law on 1 March 2022, as intended.

Why mandate an Independence Requirement?

The Royal Commission closely scrutinised the internal governance of aged care providers.

The Royal Commission recognised that 'deficiencies in the governance and leadership of some approved providers [that] have resulted in shortfalls in the quality and safety of care… [s]ome boards and governing bodies lack professional knowledge about the delivery of aged care, including clinical expertise...[t]here is a risk [aged care providers] may focus on financial risks and performance, without a commensurate focus on the quality and safety of care.'

In the view of the Royal Commission, the Independence Requirement is a key measure to combat these issues.

In the Royal Commission's calculation, independent members of a board bring 'objectivity and independence to act in the best interests of the organisation'. The Royal Commission argued, in the context of the aged care system, this must extend to the best interests of people receiving aged care services. The Explanatory Memorandum for the Bill reflects these sentiments as well.

A leaf from the financial services playbook?

Mandating and regulating board composition requirements is not new. APRA-regulated institutions are required to comply with Prudential Standard CPS 510 which mandates certain requirements with respect to board composition and requires a majority of independent directors at all times.

In complex organisations such as aged care providers, there are a number of clear benefits in having independent directors in the boardroom. Anecdotally, independent directors bring a fresh perspective and can represent and protect the interests of significant groups that may be unrepresented or not heard in the boardroom from directors representing shareholder interests. Independent directors can also bring specialist skills, diversifying the skillset of the collective board.

However, in the aged care context, exactly what definition of 'independent director' will be used?

How independent should the 'independent director' be?

No definition of 'independent' is provided in the Bill. However, the Royal Commission defined independent directors as members of an organisation’s governing body who are 'free of any interest or relationship that might influence, or might reasonably be perceived to influence, their capacity to bring an independent judgment to bear on issues before the governing body and to act in the best interests of the organisation as a whole'.

The Royal Commission introduces a higher standard here of 'might reasonably be perceived to influence', compared with the Australian Institute of Company Director's formulation of 'could reasonably be perceived to materially interfere'. At this stage, it appears unlikely that this higher standard proposed by the Royal Commission will make it into law as it is not specified in the Bill, nor is it proposed to be imbedded in subordinate legislation such as the Accountability Principles 2014 (Cth).

Brave new world?

For many in the sector with few or no independent directors in their boardroom, when the Independence Requirement becomes law, a recalibration of their approach to governance will follow.

This will not simply be a matter of new faces in the boardroom.

Many providers are taking this opportunity to comprehensively review their governance frameworks, and embed their purpose and value – rather than merely appointing new directors in order to comply with the Independence Requirement.

While these changes will bring with them more disruption for aged care providers, they will also usher in a new sector-wide approach to governance that will improve clinical outcomes for those in their care.

Introducing the new independence requirements

As the 1 March 2023 deadline approaches, many organisations will have already introduced measures to ensure their board composition is aligned to the requirements. There are several steps an organisation might take.

To make the required changes, organisations need to take practical steps – for example:

• Considering how their board composition may need to adapt to ensure a majority of independent directors are appointed;
• Examining their existing constitution and determining what they need to change – and how they can do it. For example, will an AGM be required or a special resolution? Can board members be added or do they need to replace existing directors?
• Considering reporting requirements and timing so that the right steps are taken early and recorded appropriately.

Contact us to help you with your governance framework and the steps you can take to meet the new Independence Requirements.