Executive Remuneration and Board Governance

Board members to repay sums out of own pocket?

A recent report in Inside Housing suggested that the Board Members of Gallions Housing Association could be liable to pay back up to £250,000 to the housing association on the basis that their decision to award a severance package to their departing Chief Executive may have been in breach of charity law.

It was reported that the Board approved discretionary payments of £199,000 by way of an additional redundancy payment, a non-contractual redundancy payment of £33,000 and wrote off £24,000 of pension money which the Chief Executive owed to the organisation.

A report by the Regulator concluded that the Board had failed to safeguard the reputation of the sector, had not taken timely legal advice and had then not followed advice that the Regulator should be notified. Gallions’ governance rating was downgraded from G1 to G3 as a result and the Board stepped down.

The risk that the Board Members may have to repay some of the severance package to the association is explained by the fact that Gallions, like many housing associations, is a charity. The Board Members were therefore charity trustees and bound by the principles of charity law.

Trustees need to ensure they both have the power to make the payments they are proposing and also such payments are prudent and in the best interests of the charity. Failure to do so will result in the trustees being in breach of trust and could result in personal liability. This means that trustees will need to consider the business case for making the payments in the first place but also to ensure that this consideration also extends to the level of the payments proposed. A wide range of factors can be taken into account which will obviously depend on the circumstances in which the payment is being proposed. Conflicts of interest should also be carefully managed with relevant executive team members being excluded from discussions and decision-making in relation to their own remuneration package.

For instance, where a payment is being made on termination of employment, matters to be taken into account may include:

• the organisation’s contractual obligations to the executive;
• the circumstances surrounding the termination, including whether there are any performance or conduct issues;
• the Value for Money Standard and requirements in the NHF’s Code of Governance 2010 and the NHF’s Code of Conduct 2012;
• the need to protect the reputation of the organisation and the sector;
• any relevant policies which the organisation has in place, which should be shown to apply equally to all employees, including executive team members;
• the financial resources of the organisation; and
• the risk of legal claims and the impact of those on the time, money and other resources of the organisation.

Where there is a review of existing remuneration packages, matters to be considered may include:

• the need to recruit and retain appropriately skilled staff;
• the organisation’s existing contractual terms with the executive;
• the financial resources of the organisation;
• the remuneration package in its entirety, including all potential bonuses and benefits, in comparison to the sector;
• the need to protect the reputation of the organisation and the sector; and
• the approach to remuneration taken by other similar organisations.

The Regulator’s view

In the wake of the issue with Gallions, the chair of the Regulation Committee, Julian Ashby, made it clear in a column in Inside Housing that payments should be reasonable, not give rise to reputational damage and should represent value for money. Whilst the responsibility for executive remuneration is a matter for boards to decide, he said this is an area that the Regulator will continue to scrutinise. He also commented that signs of excess were particularly damaging for the sector at the current time, with both the government and others questioning the rationale for large payments by not for profit organisations that have benefited from public funding and which are focused on helping the poorest in society.

Particular areas of risk

There are a number of areas which give rise to particular risks, including merger discussions and redundancy programmes or business re-organisations. These can often give rise to substantial redundancy payments as well as triggering additional contributions to the Local Government Pension Scheme in some circumstances. Another area of risk is terminations arising out of poor performance or misconduct where there is often a conflict between the need to remove the employee quickly to avoid further damage to the business and the desire to avoid significant payments. More recently, some organisations have been reviewing executive remuneration and considering the introduction of flexible retirement in light of the reduction in the annual and lifetime allowances which have the effect of restricting the availability of tax relief on pensions for higher earning employees. Bonus schemes can also result in embarrassing publicity if not properly thought through, with executives being awarded large bonuses even though significant issues have emerged.

Practical tips for managing risks around executive remuneration

• Ensure that payments made are in the best interests of the organisation and they are prudent;
• Consider reputational risk when setting remuneration terms or agreeing severance packages;
• Consider remuneration packages in their entirety and in relation to comparable organisations in the sector – take independent advice if necessary to obtain this information;
• Periodically review contractual terms for senior executives to ensure excessive payments are avoided;
• Ensure that reviews take place in advance of events, such as mergers, redundancies or restructuring, that are likely to trigger large payments;
• Where unusually large payments are contemplated, take independent legal advice in good time;
• Where non-contractual or discretionary payments are made, ensure there is a strong business case for doing so;
• Manage conflicts of interest carefully;
• Ensure that bonus payments are linked not only to appropriate targets but that safeguards in bonus schemes ensure that bonuses are not payable where there are significant problems with an organisation; and
• Discuss proposed payments with your HCA account manager where there is a risk of adverse publicity.

For more information contact Doug Mullen on 0121 212 7432 or douglas.mullen@anthonycollins.com.

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