Good governance: the do’s and don’ts explained
Governance has historically been a backroom issue in the social housing sector. That was until 2007 when it the sector was left shell-shocked after Ujima became the first housing association to collapse amid financial mismanagement. Since then, the turbulent economic climate has focused minds on good governance, making risk management and board accountability paramount. Recent scandals involving A4e, and in Wales, AWEMA, have further highlighted the importance of good governance.
In this article, Fflur Jones and Donald Gray, partners at Darwin Gray LLP solicitors in Cardiff, take readers through some of the pitfalls to watch out for when addressing good governance within housing associations. They start with an illustrative piece outlining issues facing an imaginary housing association which could be operating somewhere near you….
Tai Tidy’s good governance issues
Tai Tidy is a Welsh housing association based in Cardiff with around 100 employees. It has a turnover of circa £15 million and provides social housing to people who are in need, particularly older people and young low income families.
Tai Tidy has a management board which consists of 8 members including Derek Williams, Stephanie Rees, and Brian Moss. Many of the board members are qualified chartered accountant and have been involved with social housing for around 3-5 years. Derek Williams acts as the board’s Chairman and has done so for the past 2 years, whilst the other Board members do not have defined roles. Following recent discussions amongst the board members about increasing the board’s numbers, Derek Williams has asked a friend of his, Paul Jacobs, to join the association’s board. It is very likely therefore that, within the next couple of weeks, the number of board members will increase to 9.
Brian Moss recently suggested that the board should perhaps hold an appraisal of its activities and of its members given that no such action has been undertaken during the previous 2 years. Derek Williams has suggested that the issue be discussed at the next board meeting.
Stephanie Rees had also recently raised concerns in private with Derek Williams about Brian Moss’ poor attendance at board meetings. Stephanie had suggested to Derek that the association should look to remove Brian from the board. However, in response, Derek pointed out that there was no formal mechanism available to the association for removing a board member.
In an attempt to reward staff for their hard work over the past year, Derek Williams has decided that the association will purchase 25 match tickets for one of the upcoming Wales Six Nations rugby games and offer those tickets for free to staff on a first come first served basis.
Over the past few months, a number of Tai Tidy’s tenants wanted to complain formally to Tai Tidy about the level of service that they have received from certain staff members. However, given that their policy which sets out the procedure for complaining is not contained on Tai Tidy’s website, many of those tenants have been left with no option but to complain to their local Assembly Member about the service provided by the association. As a result of these complaints, tensions have arisen in the relationship between Tai Tidy and the Welsh Government.
Next week, Tai Tidy is due to be audited by Annabelle Williams Accountants, an accountancy firm owned and managed by Derek Williams’ sister, Annabelle Williams.
Before we analyse some of the Good Governance issues faced by Tai Tidy, it is worth reminding ourselves of some of the most important principles of Good Governance which are included in Community Housing Cymru (CHC)’s Charter for Good Governance:
- Have in place practical mechanisms to achieve accountability to tenants, residents, potential tenants and residents, shareholders and all relevant stakeholders
- Develop and maintain positive and constructive relationships with key stakeholders, including funders and regulators
- Be clear about the roles and responsibilities of the board, the audit committee, any sub committees, boards of any subsidiaries of group structures where relevant, and the Chief Executive and document these
- Support board members through the provision of a job description, information, training and appraisal
- Have in place mechanisms for regular board review and recruitment
- Have in place practical ways to effectively manage risk
- Develop and demonstrate effective means of financial management
- Practically demonstrate a commitment to equality and diversity
How would your housing association go about ensuring Good Governance?
Below we have focused on some of the key provisions of CHC’s supporting guidance on Good Governance together with our guidance on applying those provisions to your organisation.
1 – Constitution and composition of the board
Each housing association board has ultimate responsibility for the governance of the organisation. It must be effective in leading and controlling the organisation. Board members must ensure that the interests of the organisation are placed before/above any personal interests. The board as a whole should have, or acquire, a diverse range of skills, experience and knowledge. It should also be of an appropriate size for the organisation to carry out its business effectively. Each board member should have a clearly defined role and know his or her obligations.
2 – Role and functions of the board
The board must be clear about its duties and responsibilities. The essential functions should be formally recorded in the organisation’s constitutional documents, terms of reference, standing orders or financial regulations. The board should ensure that the organisation develops positive and constructive relationships with its key stakeholders, as well as setting strategic direction, defining policies and ensuring there are effective systems in place for evaluating the work of the organisation.
3 – Board recruitment, renewal and review
Recruitment to board vacancies must be transparent, with new board members selected on a systematic basis. The Board must regularly appraise its own performance and that of its members, including the Chair. Boards should publicise and implement board renewal and succession planning arrangements.
4 – Conduct of the board’s business
The board must act effectively, and in an open and transparent manner, making clear decisions based on timely and accurate information. Decisions should, where possible, be based on full agendas and documents circulated to members well in advance of meetings. Decisions and the main reasons for them should also be recorded in minutes of board meetings.
5 – Openness, transparency and conduct
Boards must operate in an open and transparent manner and have satisfactory dialogue with key stakeholders including tenants. Boards must demonstrate accountability to shareholders and other key stakeholders. All organisations should adopt and publish information about their conduct, and an organisation’s complaints policy should be transparent and readily available to stakeholders.
6 – Audit and risk
There must be formal and transparent arrangements for ensuring financial viability and a sound system of internal controls. External auditors who are independent should be appointed and an audit committee established, where appropriate to play a role in linking considerations of risk with areas identified for internal scrutiny.
What does this mean for Tai Tidy?
Returning to the imaginary Tai Tidy scenario outlined above, and its potential issues, being mindful of the principles of Good Governance, here’s a summary of the issues we have identified which may cause Tai Tidy some real concerns in the near future:
- Tai Tidy’s board is not made up of a diverse range of skills, experience and knowledge. Many of the individuals currently on the board have a background in accountancy and roughly the same number of years’ experience in the social housing sector. Boards should be made up of a diverse range of skills, experience and knowledge. Potential breach of Principles 6 and 14 of CHC’s Charter.
- Derek Williams acts as Chairman but the other 7 board members do not have clearly defined roles. Potential breach of Principle 6 and 7 of CHC’s Principles. Each board member should have a clearly defined role and know his or her obligations.
- The Chairman has simply ‘asked’ his friend to become a member of the board. The recruitment of board members should be transparent, and selected on a systematic basis in accordance with published policies. Another breach of Principle 8.
- The board has not and does not annually appraise its own performance, or that of its members. A board should annually appraise its own performance and that of its members, including the Chair. Breach of Principles 7, 8 and 10 of the Charter.
- The association doesn’t have a procedure in place for the removal of a board member. There should be clear procedures for the removal of board members. Breach of Principles 7 and 8.
- The Chairman has taken the decision that the association will purchase 25 match tickets for a Wales Six Nations rugby game and that those shall be offered to staff. In times of financial austerity, organisations should exercise an element of financial prudence and should be careful not to waste funds. Also, decisions should not be made by individuals but by boards, based on timely and accurate information so that accountability can be demonstrated to key stakeholders. Such decisions, and discussions regarding such decisions, should also be documented in minutes of meetings. Potential breach of Principles 11, 12 and 13 of the Charter.
- The association’s complaints policy is not available on its website. Organisations should publish key policies, such as complaints policies, in a way that is accessible to the public or any stakeholders, in order to achieve accountability. Potential breach of Principle 2.
- Tensions have developed in the relationship between the association and the Welsh Government. Potential breach of Principle 3 of CHC’s Charter. Boards should ensure that an organisation develops positive and constructive relationships with its key stakeholders. We anticipate that the Welsh Government will introduce more stringent measures in order to monitor and audit Good Governance in the near future, in order to avoid scandals such as Awema happening again.
- The association’s audit is carried out by a firm that is owned and managed by the Chairman’s sister. Organisations should use external auditors who are independent. it may also be prudent for Tai Tidy to establish a separate and internal committee. Potential breach of Principle 12.
Many of Tai Tidy’s board’s current practices and procedures therefore fail to satisfy principles of good governance, even on the most basic issues. One practical way to address situations such as these is to ask your lawyers or accountants to conduct an audit of your current practices, in order to identify any shortcomings before they become big issues, which could ultimately attract both unhelpful attention from the Welsh Government and/or the local media.
Good governance can only benefit your organisation, including ensuring you have the breadth of skills needed on the board and making sure the right checks and balances are in place to stop any potential fraudulent or negligent wrongdoing in its tracks.
This Legal Update was compiled by Fflur Jones, Employment Partner and Donald Gray, Commercial Partner at Darwin Gray LLP, www.darwingray.com