Case Study 1 | HBT Advisory

Case Study 1: UK Housing Association

At the board meeting today the exasperated Vice Chairman said :

‘I look forward to the day when we are not spending hours pouring over all these documents and can actually look at what’s going on.’

This essay discusses the corporate governance challenges of a hybrid third sector/ commercial housing group. Originally a housing association, it was created following a housing stock transfer from the local authority; the organisation is registered society under the Co-operative and Community Benefit Societies Act 2014. It is regulated by Homes England whose Governance and Financial viability standard aims to ensure that the organisation delivers objectives and intended outcomes for tenants and potential tenants in effective transparent and accountable manner. Any surplus revenue is reinvested in building homes or community services. In 2017, two commercial property companies were incorporated and added to the group, one responsible for design and build and one for marketing and project management.

The commercial imperative for housing associations has evolved as a result of thirty years of inconsistent and inadequate social housing government policy, culminating in 2015 with the Cameron coalition denouncing the sector as not fit for purpose. In addition, austerity measures have created gaps in community social care which the association has a fiduciary duty to fill.

There are two substantial contemporary corporate governance issues for the organisation:

Balancing commercial and community priorities, as recognised by Raelin and Bondy (2013 Double Layer Agency Theory).
Corporate consolidation and the importance of ensuring form follows function.

The last ten years have been very difficult for social housing. Government policy has frequently changed (see Appendix 1), ; this is a key factor in the current housing shortage. Ideally an effective regional strategy for housing provision should consider at least one generation ahead rather than the three years that separate the disparate policies highlighted in appendix 1.

The volatility of government policy has driven social housing builders to consider commercial opportunities enabling them to build a long term strategy for property development which is not reliant on government support. The duality of purpose, commercial and charitable, has had profound implications on the governance of housing associations, the issues include:

Stakeholder engagement
Oversight
Board recruitment and development
Regulatory complexity

Stakeholder engagement and Double layer agency theory

Raelin and Bondy (2013) described Double Layer Agency theory of corporate governance as comprising:

shareholder–manager interests
society interests

In the case of the housing association the proxy shareholders are stakeholders with a substantial financial interest in organisational success- the finance houses to whom they owe over £200m and the local council who provided the collateral (ex council houses). A community benefit organisation has, by definition, a large, broad stakeholder group. In this particular case the stakeholder group includes tenants, community groups, local and national political representatives, Homes England, finance houses, contractors, other housing providers .... the list goes on.

Shifts in the economic and political environment continually introduces new stakeholder groups, changing the rules and emphasis of the stakeholder engagement strategy . It is important to regularly reappraise the make up stakeholders group for changes demographic trends and tenant needs; it is an important part of the boardroom schedule . Here are some aspects of current stakeholder priorities :

Safer Neighbourhoods is a joint initiative with the police, council and community organisations to deliver a service that is visible, accessible and responsive, setting up a network of safer neighbourhood teams covering both rural and urban areas.
PlaceShapers is a national group of more than 100 community based housing associations, they came together as a lobby group. Good housing is the bedrock for a decent life, this group is conscious of their pivotal role as change agents. Unemployment, crime, poor health and low educational achievement are all linked to what housing organisations do to help residents, local government and other agencies work together and can make a huge difference to lives.
Tenants forum is chaired by a former Vice Chair of the housing association who is a long term tenant. The Forum provides a view on a broad range of subjects including policy changes, specifications for kitchens and bathrooms and other contracts, it also discusses Government changes and a wide range of other issues. It is a consultative body reporting to the operations committee.

Years of austerity have thickened the societal interest layer of stakeholder engagement. The gaps exposed in social care had have a direct impact on the community work of the organisation , for example the board has just approved the recruitment of a tenancy sustainment officer who will support clients through the process of claiming universal credit and help them with strategies to maintain their tenancy. This benefits both the community and the organisation reducing rent arrears and eviction notices. As a board we make substantial investment of time and money on community engagement to demonstrate what Raelin and Bondy describe as the positive externalities of the organisation’s actions both to the community but also to facilitate cultural change at board level and create a bond between the directors from a local authority background and those from a commercial background.

Raelin and Bondy ask ‘is it important to maximise firm value’? The housing association aims to maximise firm value, but not at a social cost, for example deterioration in community stability, damaging long term relationships with local or central government or damage to reputational risk that results in losing contracts . Raelin and Bondy mention the problem of measuring social benefit as society is an amorphous concept . The association has made progress on building build feedback mechanisms for key stakeholders to board through various stakeholder forums, in addition community benefit metrics such as crime figures, fly tipping removal and void rates are regular agenda items. From a commercial perspective consultation with tenants can delay plans resulting in missed opportunities. The balance between expedition and engagement is a source of debate.

Oversight

Board structure Heritage structure o the organisation endure, there is a substantial local government representation overseeing the group, traditionally they are wary of commercial projects; their trust in agency is low. I joined the strategic board as a non executive director with commercial experience; I had to win hearts and minds of the operations board, demonstrating I am socially responsible and not a cold blooded capitalist.

There is regular board observation by stakeholders such as tenant members, local authority, Homes England, governance advisors and members of other boards / committees/ staff. In addition there is a bi-annual review of process and procedure by external consultants on:

governance structure
reporting and assurance
board skills and succession planning
committee performance
resident involvement

A report of recommendations is discussed at a dedicated strategic board workshop and appropriate changes are made to governance .The largest change currently being implemented is the move from dual to single board, changing the operations board to a committee. An additional board (called the strategic board) was created to oversee the operations board and facilitate the introduction of commercial activities. This maintained , the operational board, a structure familiar to existing and founder stakeholders groups. In hindsight this rather cumbersome structure helped the transition from local authority control to a more commercial approach, but the dual structure now hampers board collaboration creating board overlap and a unified strategic board will be more effective and responsive.

Use of committees. The creation of new committees requires careful consideration- are you adding a cumbersome extra layer of oversight to patch up a flaw in existing internal controls or competencies? The board are currently considering the creation of a development committee to oversee our construction projects. There have been a couple of substantial errors recently and the external governance advisers recommended the formation of a new committee.

Of course I will go with board consensus, however, I wonder if this additional committee is necessary. The commercial operation corporate structure has been set up to be tax efficient, changes to the governance, internal control and reporting structure to accommodate commercial operation have been rebuffed by the board for fear of creating shadow directors and negating tax benefits. Perhaps as a board we should have been more innovative in creating checks and balances required for the commercial operation whilst maintaining our tax position ? Does this expose a board skills gap ? Perhaps the tax breaks are not worth the risks to the group ? These and other questions could be addressed by fixed term task and finish group with the remit to review operational mistakes, learn from them and ensure all internal checks and balances for developments are in place. I believe this would be preferable to setting up another committee requiring the assistance of already stretched co opted company members.

‘ Joining the dots’. As the organisational structure matures we need to consider a matrix approach to governance, that is, the ability to read across a project and appraisal all aspects of governance associated with that project as well as being able to appraisal a governance theme such as risk management for the group as a whole. In his webinar on The Cadbury review, Sir Adrian Cadbury seemed surprised that non Accountants would be appointed to chair the audit and risk committee. In my experience is non accountants make better chairs of the audit and risk committee, they do not obsess about the numbers, take a broader approach to application of the work of the committee and often naturally adopt a matrix style approach to governance. They ask obvious questions that accountants dismiss and can precipitate a valuable deep dive session on a business focused theme; regular deep dives should be a regular agenda item of the audit and risk committee. A recent example from this organisation was the review of a major contractor default, its ramifications for the supply chain and other potential stakeholder risks, this review provided recommendations for change in the due procurement diligence process and recommending new board skills. There is a danger the Audit and risk committee focusses on audit, there are numbers to scrutinise whilst missing the bigger picture.

Agenda structure Agendas are often bulky, it is difficulty to keep engaged and fresh in such a long meeting. Some items get lost in long agenda, there is a trade off between more meetings and long agenda, this is relatively poorly paid work and experienced directors always have a full portfolio. At the beginning of each meeting re-emphasise board purpose is important to set the scene especially for portfolio non executive directors.

To ensure maximum attendance the meeting schedule is drawn up before strategic issues manifest. It is tempting to bolt on board development sessions before meeting so that by the time the board meeting starts the attendees are tired. Less important items need to move to online approval freeing up time on board days for horizon scanning and strategic discussions.

Board recruitment and development

It is difficult to find potential directors who have the specialist knowledge of complex, ever changing housing association regulations alongside commercial experience, good communication skills for stakeholder engagement and are willing to work hard for a small fee! Maintaining a balanced board so that people could be removed with no notice with little or no risk to the direction of the organisation is always a challenge . I think that overboarding could be a sector risk; I certainly couldn’t manage four non executive directorship of this type.

Adrian Cadbury said it was hard to get across the extent of directors responsibilities, I believe there is inadequate training for board roles. I completed IoD Chartered Directors programme fifteen years ago, CPD I have to instigate myself . In his interview Cadbury said at the time of his report that it was early for board performance appraisal. At the housing group, Peer/360 board appraisal are performed annually, taken very seriously and used produce development plan for board as a whole and individuals within it. We still need to add one of Cadbury’s recommendations which is a post mortem of board decisions , I think this would be very useful in appraising how we have incorporated commercial activity within the association.

Regulatory complexity

Cadbury recommended that governance is implemented in organisation ‘in ways that make sense in your particular situation’. The housing regulator should take note of this advice, due to history/culture /geography et cetera, all housing associations are different and face different community challenges; the current regulation doesn’t allow for this, however, there are areas such as health and safety where no flexibility is appropriate.

Mitnick (1981 cited Bradley et al. 2008) said that strong business in chaotic environments will create the ground rules, these are voluntary at first then regulated by the government. In the social housing sector, commercial activity is allowed but not facilitated by the regulator. It is as though they are watching for success/failure; once the hybrid organisations are established they will step in and introduce regulation.

The regulator is considering introducing customer satisfaction rating for housing which will focus on tenant empowerment and neighbourhood management. This is a direct response to the Hackitt review and the ground swell of support for greater stakeholder engagement coming from Elizabeth Warren in the US.In the UK several financial scandal have precipitated the recent abolition of Financial Reporting Council. Sir John Kingsman, head of the 2018 FRC review believes the engagement between stakeholders and the FRC was not “as deep or as strong as it should be”.

Form follows function

Strategic consideration of partnership working and best fit for merger will be a major governance concern over the next year. Appendix 2 shows the six key principles for partnership evaluation.The Housing Quality network has developed a toolkit for associations developing a strategy for partners mergers and acquisitions contains :

Suggested legal structures
‘A ready reckoner ‘ added value assessment for partnership working
Tenant engagement strategy

Conclusion

I found some hand written notes by Cadbury in 1990 which some up the corporate governance aspiration for the social housing sector. I summarise :

‘Ground rules - the company has to maintain the ethical /moral standards of the community concerned.

Openness- determine what kind of company you are and how you behave.

The State should regulate but not hamper creativity /initiative/enterprise.

Communication - a company must assert its beliefs not fudge them.

There is the strongest business argument for the highest standards as reputation is important and you will attract the best people.’

That should be simple and a compelling argument , but in reality…

The balance of commercial and charitable priorities is difficult to manage; the procedures, processes and competencies required to ensure effective governance are still work in progress. The organisation has improved oversight but we need to work on diversity of skills, experience and background and continue to build on boardroom performance appraisal. Austerity has expanded fiduciary duty to the community. Contraction of sector providers and greater partnership working will deliver value for money for stakeholders but will require careful management to ensure alignment of corporate values and responsive scrutiny from already stretched boards.

Appendices

1) Social housing policy volatility

2) Form follows function - Key principles

References:

Raelin, J.D., Bondy, K., (2013) Putting the Good Back in Good Corporate Governance: The Presence and Problems of Double-Layered Agency Theory,Corporate Governance: An International Review, 2013, 21(5): 420–435

Bradley, R.A.,Donaldson,T. R., Freeman, E., Jensen, M.C., Mitchell R.K., and Wood, D.R.,(2008)Dialogue: Toward Superior Stakeholder Theory, Business Ethics Quarterly, Vol. 18, No. 2 pp. 153-190 Cambridge University Press

Letters from Marcy Murninghan of the John W McCormick Institute of Public Affairs, November, December 1990, January 1991 about an interview for Harvard ( Business Review and hand written notes.The Cadbury Archive JBS Cambridge

https://economia.icaew.com/news/january-2019/get-on-with-abolishing-frc-kingman-tells-mps

Form follows function toolkit 2018 Housing Quality Network

https://hqnetwork.co.uk/download.cfm?doc=docm93jijm4n1558.pdf&ver=21167