Lessons Learned in Banking and Housing

Subsequent to this, Lord Myners was also commissioned by the Board at the Co-operative Group Limited to conduct a comprehensive review of their governance. It is good practice to do a spot check on the organisations that we govern by systematically and diligently working through reports like these to ensure that we learn from them. As such, we will take a look at some of the recommendations from these reports later on.

All of these reports come post Walker’s review of Corporate Governance in UK banks and other financial industry entities as a response to the banking crisis and the simultaneous Financial Reporting Council (FRC) consultation on the combined Code. For the private sector, we already have a ‘lessons learned’ report in the form of the UK Corporate Governance Code, (UKCGC) in 2010 (revised in 2012).

In the housing sector, the report on Cosmopolitan comes subsequent to the inquiry into the insolvency of Ujima Housing Association in 2007. We have since seen the introduction of the Housing and Regeneration Act 2008 and the Cave Review’s recommendation of establishing a new regulator for housing. The Home and Communities Agency (HCA)stablishing on Cosmopolitan itt some of the reccommendations  took over the investment functions of the Housing Corporation in December 2008. The housing sector’s own governance code, Excellence in Governance was revised in 2010.

As I review the recommendations of the reports from Kelly, Myners and Altair more of the same comes to mind. Not meaning to undermine in any way the substance of these reports, I cannot help but think that if one were to examine the level of compliance to the UKCGC by the FTSE 350 (Grant Thornton FTSE 350 Governance Review 2013) and extrapolate that to companies falling outside of that reporting regime we may find that there are some recurring themes that need to be addressed. The biggest area of non-compliance in the Grant Thornton review relates to incorrect board composition and one specific example is companies lacking sufficient independent directors.

If we are to avoid these catastrophes and near collapses, companies will have to take heed. the governance forum’s strapline is; “Governance is more than compliance.” This was echoed by Chris Hodge, Executive Director of Strategy the Financial Reporting Council when he said that; “To keep up the momentum of good governance, UK businesses need to move beyond compliance.”

Every organisation needs to go back to the basics where governance is concerned, get the governance structures right, get board composition right and take responsibility for its decisions. In the final analysis, it boils down to competency and behaviour. Boards need to ensure they have the right composition of non-executives with the right skills and experience who scrutinise, challenge and hold the executive to account.

The UK Corporate Governance Code sums up the responsibilities of the board and non-executives succinctly and a structured and reflective review of compliance in line with the two extracts below is recommended.

• The Board and committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively. (Main Principle Section B, UKCGC)

• Non-executive directors should scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance. They should satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible. (Supporting principle A4 UKCGC)

The following key recommendations from the more recent reports from Myners, Kelly and Altair serve to reinforce the importance of the two key principles of the UKCGC identified above:

1.     Cosmopolitan Group Recommendation 1

“Governing bodies must analyse the skills they require to meet current and future business needs and refresh skills at board level if necessary – even if length of service has not been completed.

When organisations enter into transactions (which may include those that involve taking on debt), boards must: ensure that expert advice is called upon in a timely manner and that there is a good understanding of what the organisation is trying to achieve, carry out rigorous due diligence on investors, actively monitor covenant compliance.

The board should ensure there is a strong second tier of management and a good succession plan so that the organisation will continue to operate effectively should the executive team be focused on other urgent issues such as mergers, service failure or other significant issues.” (Altair paragraphs 8.1.1 – 8.1.3)

Karl George says:

• Refresh skills of the board in the light of current and future needs.
• Look at your succession strategy for renewal and refresh of the board.
• Get expert advice in a timely manner when entering into complex transactions.
• Ensure there is a strong executive team and a second tier of management.

 

2.     Myners Recommendation

“It has to produce a highly competent and qualified Group Board with independent non-executive directors who possess the skills and experience needed to exercise leadership and effective oversight of Executive management running a business of massive scale and complexity, quite unlike any other co-operative business in the UK. Unless the Group takes urgent steps to reform its governance and generate sustainable economic value, it will run out of capital to support its business. Value creation is the prerequisite for the organisation’s survival, for value distribution to members and for the furtherance of desired social goals.” (Myners paragraph 1.14)

 

Karl George says:

• Ensure non-executives are skilled enough to lead the executive management running massive and complex business.

 3.     Kelly Observation

“Failures in board oversight are inevitable if the criteria used to elect its members do not require those elected to have the necessary skills… Sustained success requires effective governance. Effective governance requires a high performing board. The composition of the Co-operative Board, and the limited pool from which its members were drawn, made a serious governance failure almost inevitable.” (Kelly Review (paragraphs 14.10-14,11)

 

Karl George says:

• The criteria and process for selection of non-executives identifies and ensures necessary skills

 

 4.     Myners – The major governance weaknesses

“These include four particular weaknesses of the current board structure: (a) inadequate collective capabilities and experience; (b) a widespread failure to understand the distinctive governance role of the board, and a tendency for lay directors to act as delegates more than independent representatives; (c) a lack of unified perspectives and shared purpose, given the frequent divergence of Regional concerns and pre-occupations; and (d) an excessively complicated structure with an unwieldy board size combined with gaps and overlaps in accountability with Subsidiary Boards and committees.” (Myners paragraph 1.11, page 17)

Karl George says:

• The board must have adequate collective capabilities with specialist expertise in key areas.
• The board should share a shared vision and collective values.
• All members of the board should understand their duty to promote the success of the company and not the individual stakeholder groups that they may have been elected by.
• The board and governance structure should be uncomplicated and of sufficient size to embrace diversity but small enough to be effective and cohesive.

Is it time to take an objective overview of your board, its composition, skills, experience and its collective capabilities in the light of the changing external environment? Is your board capable to undertake an overseeing role that is in line with the complexity and scale of the organisation that you lead? Have you scheduled a comprehensive review of the Myners Report and the Cosmopolitan Group Report to ensure that you can document an organisational response to the recommendations raised? I have identified for you 10 areas to help you and your board to consider when reviewing your governance in light of the lessons learned. Are you ready to avoid failure?

Until next time…