In the fourth part of our series on contract management pitfalls, we look at the risks arising out of varying the terms of construction contracts.
This was reflected within the Regulator’s consultation on the Regulatory Framework last May and in particular within the proposed new Governance and Financial Viability Standard (the “Standard”). The proposals contained within the consultation were largely reproduced in the Regulator’s Decision Statement and the new Standard will take effect from 1 April. The Standard is also accompanied by a Code of Practice, which the Regulator has stated will be akin to guidance, designed to amplify the requirements of the Standard. However, it should be noted that the Code may also be used by the Regulator as an indicator of non-compliance.
The Standard applies lessons learned from recent events and encourages RPs to plug the gaps in their governance arrangements that could lead to risks being missed, misunderstood or ignored.
First, individual RP Boards must be populated appropriately to ensure they ‘manage their affairs with an appropriate degree of skill, independence, diligence, effectiveness, prudence and foresight’. Board members must be able to make effective, informed decisions on the issues facing them. The Regulator has been keen to stress that organisations seeking to embark on new (particularly diversified) activities should not do so without the appropriate skills on the Board to govern these activities appropriately.
The Cosmopolitan review findings highlighted the need for Boards to be able to challenge executives effectively, and this is less likely where Boards lack appropriate skills, but also where there are significant overlaps between group Boards, which can lead to inefficient and unhealthy relationships. Boards must not be hampered by their connections from making appropriate judgements on risk; therefore independence of Board members must be at a suitable level.
Boards will therefore need to have a clear idea of the skills, qualities and experiences required to run their organisations effectively, linked to a clear view of how the organisation is going to look and what its drivers and aims are. This ‘skills strategy’ will need to be kept under review as activities change and diversify.
In some cases, Board compositions may be affected by other influences; for example, cross-group representation or constituency based Board models (as seen in traditional stock transfer governance models). We are already working with a number of RPs who are seeking to move towards skills-based Board compositions; however, this is not always possible to achieve. Where it is not, organisations will need to look at ways to build capacity amongst their Board Members and Boards in order to ensure the role of effective risk assurance does not rest unfairly on a minority of Board members.
Even where Boards seek to move towards skills-based compositions, there will need to be a consideration of how stakeholders will continue to feed into governance arrangements appropriately and how such arrangements will remain accountable to tenants and other stakeholders. This may involve up-skilling tenants on Boards to ensure they are empowered to deliver effective governance; for others, a meaningful supporting committee structure may be more appropriate.
Second, governance structures will need to be streamlined and fit for purpose to ensure both clarity over the flow of risk around groups and efficiency of decision-making. Gaps in accountability need to be addressed through clear terms of reference for Boards and committees so there is no duplication of role and remit between Boards and committees and there is clarity over who is responsible for what, and where and how business-critical decisions are made.
Group Boards sitting at the top of complex group structures are particularly likely to come under increased scrutiny by the Regulator. This is in light of the requirements for RPs to deliver meaningful value for money (“VFM”) and the new requirement within the Standard that parents within group structures should support or assist other RPs within the group (which may include the provision of financial assistance) to ensure their compliance with the Standard.
Many RPs have already had to adopt unnecessarily complex corporate and funding structures to carry out their activities (particularly non-social housing ones), to address a variety of influencers and other drivers such as procurement, tax, charity law, employment and pensions issues, local authority involvement and Regulatory and funding implications. The Regulator is likely to encourage RPs to review such complex structures. We are already seeing greater challenge from the Regulator in relation to clients seeking to establish new group structures where there is no clear and overriding VFM outcome.
A key factor in ensuring ownership of risk in group structures is the role of the parent Board. The Regulator is keen to see that the parent Board is ultimately in control of the Group and that there is both consistency and efficiency across groups. This expectation is mirrored in the new National Housing Federation Code of Governance, Promoting board excellence for housing associations, which contains new, more detailed, provisions on the role of parent Boards.
RPs are expected (as under the current Governance and Financial Viability Standard) to assess the effectiveness of their governance arrangements at least once a year, and the new NHF Code suggests a more formal, in-depth review should take place at least every three years.
The requirements of the Standard offer an exciting chance for RPs to review stale Board memberships and release capacity through reviewing governance arrangements. However, there is no “one size fits all” or “formula” that RPs can apply to ensure their governance is compliant, and the Regulator is showing no propensity to indulge non-compliance. We can expect a swathe of downgrades on governance grounds even for RPs that meet the viability elements of the Standard, as the Regulator uses the big stick on overly-complacent Boards that it feels are not challenging themselves – or their Executives – sufficiently.
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