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Roundtable: effective governance in uncertain times

From separating the strategic and the operational, to establishing the right culture. David Blackman reports.

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Risk has never been higher on the agenda for housing associations.

Along with government policy changes and pressure to build more housing, the focus is on boards to deliver better value for money. Capsticks and Social Housing brought together a range of sector figures for a roundtable debate, focusing on the impact these changes will have on how associations are governed.

Adapting to change

Mike Kirk, chair of First Wessex Housing Association, plays down the social and affordable housing rent cut, arguing that the policy changes are a lot less swingeing than those already introduced in the utilities sector.

‘If I compare the one per cent reduction to those imposed in various utilities at five year reviews, they are not that significant. We have to get used to this sort of change: it’s going to be a permanent part of the landscape,’ he says.

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Broadland Housing Group chair Alison Inman, who held the same post at an arms-length management organisation for five years, says associations are seen by government as having had a relatively easy ride compared to local government.

‘I think we’d be naïve to think we’re going to go back to business as usual in four years,’ she says.

Paul Phillips, group finance director of Notting Hill Housing, says the loss of grant and s106 is the bigger story, but points out that the government’s recently introduced rent curbs would undermine stock valuations.

Austen Reid, chief operating officer of Circle Housing Group, agrees that the loss of grant has for some time been the key driver to significant change and more commercial-type activities. He stresses that the commercial activity is an investment to support the core purpose, adding that sometimes the debate around changing culture forgets that the organisation is still a housing association first.

Notting Hill’s Mr Phillips agrees: ‘We will carry on doing more of the build for sale stuff but that has its own risks. We see our core purpose as building homes for low income Londoners.’

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That statement is welcomed by Jon-Paul Phillips, assistant portfolio manager at BAE Systems Pension Funds Investment Management.

While the investor base can deal with increased commercial activities, the aerospace giant’s pension fund wants the associations it invests in to remain focused on their core social purpose rather than diversifying too much.

But he says the investor bases recognises that risk has increased and that doing the commercial activities itself is not a problem, as long as it is managed properly.

Many board members have wrestled with the direction of travel.

Richard Petty, lead director, affordable housing at JLL, says that when he was chair of the Richmond Housing Partnership, there was ‘a real tension’ over the ‘the commercially right way of working as an organisation’.

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Jennifer Bennett, partner at Capsticks, says commercial activity continues to raise questions about which entity does what, and requires an understanding and protection of the asset base to know which liabilities are attached.

Mr Petty says it is likely to take some time before the sector realises what its asset base is really worth, and thereby embrace new freedoms.

Wake up call

‘A crisis focus peoples’ minds,’ says Bruce Moore, chief executive officer of Housing & Care 21.

He talks of the variations between community-based organisations, the delivery agents of government and commercial building-type groups.

‘The important thing is that each organisation’s board is really clear what it’s trying to be and do and then adapt accordingly,’ he says.

‘There are many valid routes we can go down, but each board needs to be really clear which trajectory it’s on, then you open up the questions about how best to do that.’

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The process he describes is a familiar one to Hattie Llewelyn-Davies, who took over as chair at Viridian when the London HA was under supervision.

‘Over the last nine years we’ve done an enormous amount of change and I hope we are a much stronger and better organisation - we’re certainly clear on what we’re good at and not good at.

‘But then you need to get your culture across the organisation,’ she says.

A ‘wake up shock’ can help organisations pull together, Mr Moore adds.

‘Having a crisis focuses people on what they are there for, so you don’t have the development team drifting off in one direction and another somewhere else,’ he says.

‘Clarity of expectations and purpose is at the heart of good governance,’ says Mr Moore, who is currently completing a PhD on the topic.

This clarity can bring boards back together, but also applies when considering merger, adds Mr Moore, whose group is currently in discussions to join Sanctuary Group.

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Tom Miskell, vice-chair of the Johnnie Johnson Housing Trust says his association had got into trouble as a result of branching out beyond its core remit of providing elderly peoples accommodation.

‘As part of reinventing itself, the organisation went through a process of being really clear about what we wanted to do and what we didn’t want to do. It is quite noticeable when we talk to others that they hadn’t necessarilygone through that process so they were trying to be all things to all people.

‘If some of the policy pushes people to having that conversation, I think that’s a positive.’

Understanding risk

Mr Moore says the sector has entered new sectors without really focusing on the core area of expertise.

Housing associations run risks by such ‘dabbling’, warns Ms Inman.

‘Sometimes we can be distracted by opportunities that come along, which have nothing to do with our core strategy,’ she says, adding that it can be ‘destructive’ if it gets in the way of achieving the organisation’s main objectives.

Nick Abbey, who became chair of Tower Hamlets Community Housing less than a year ago, says boards can sometimes find it difficult to rein in ambitious chief executives or development teams, who may want to enter into new and more commercial areas of development activity.

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‘We’ve probably all seen cases in the past where executives have been keen to do something, but there is a world of difference between building properties for rent where you have a guaranteed waiting list of people to fill them and building something where you need to find a willing buyer to take it off your hands.

‘One measure of a board is how often you say no and don’t mind upsetting the executives. Boards don’t like to rock the boat with chief executives.’

During his previous career as an investment banker, Mr Kirk always got nervous when management started doing things because they were ‘more exciting than what they are doing now’.

Notting Hill’s Mr Phillips countered that by saying HAs sometimes had to dabble to test out new areas of activity.

‘You have to experiment to see if it works. Dabbling is part of being cautious,’ he says, noting how Notting Hill’s extensive market rent and sale programmes had kicked off with the acquisition of 17 homes.

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Brigadier James Richardson, chief executive officer of Haig Housing Trust - which is non-registered - agrees that it is important to roadtest new ideas.

‘There is a need to experiment. Bringing something new to market, you have to check that it works before committing. It’s different from dabbling. If you do it with a purpose, experimentation is good.

‘We want to get into products that are not just rented housing because we want to help in a myriad number of ways that recognise the expectations of the people that benefit from our services have changed since 1916 when the charity was set up.’

First Wessex’s Mr Kirk says that when entering fresh areas of activity, boards needed to consider carefully what they are embarking on.

‘You should have a very clear purpose about what you want to achieve and a very considered way of delivering that,’ he says.

Often the problem is not diversifying into new areas but lacking the skills to do so successfully.

‘With some of the activities that caused real issues for housing associations in the past, it’s not what they did but how they did it. It’s about going into areas where they didn’t have the management skills to do a good job,’ he adds.

JLL’s Mr Petty agrees, saying: ‘Catastrophes in performance and governance haven’t been a result of dabbling, it’s been a result of going full tilt into something that you didn’t really understand.’

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This problem of lack of skills and understanding at board level was thrown into sharp relief by the collapse of Cosmopolitan Housing Association in 2012. Mr Miskell, who was co-opted onto the Cosmopolitan board after failures emerged, says he has been ‘quite disappointed’ that people have not talked more about lessons that can be learned.

‘It’s easy to criticise the board and there were skills gaps…but how do you know reports you’re getting are correct?’

He says there should always be questions around professional advice that boards are being given. He adds: ‘The other bit about Cosmopolitan that I think the sector completely lost the point to sell, was that although it got into trouble, in terms of its asset base, Sanctuary actually benefited from taking it over - and that message to lenders just did not get out.’

Board culture

Mr Moore says that not many board members get removed on the basis they do not have the skills to match new challenges, adding they are more likely to ‘serve their time’

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BAE pension fund’s Mr Phillips says the quality of boards is a ‘mixed bag’, particularly in terms of holding executive teams to account.

‘The improvement we have seen in management teams hasn’t been followed through as much on the board side of things,’ he adds.

It would be a mistake for boards to over-react though by getting too involved in their organisations’ day to day activities or trying to be operational, argues Mr Kirk.

‘There’s a distinction between knowing what’s going on in the business and trying to second guess the executive,’ he adds.

Ms Inman says, however, that it is not always straight forward to separate strategy and operations, and that sometimes members find themselves in between the two. She says it is important that boards don’t become swamped in repots and paperwork.

The forum heard that overloading with papers can make it more difficult to get to the crux of the issue, while non-executives do not need to see every document going.

Mr Abbey stresses that it is ‘all about risk and assurance’ and having board members that can ask the right questions, including whether the executive itself have the right skills.

But it is not sufficient to cram the board with too many of the same or white collar professionals, says Mr Moore, arguing that there is a risk of ‘groupthink’ if they became too narrowly based.

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Ms Llewelyn-Davies argues that while the focus is on ‘skills’, it is as much about culture and the chair pushing debate, question and challenge.

Mr Petty adds that he does not think commerciality and social conscience are mutually exclusive.

Payment is often seen as one route to improve association boards’ skills bases.

Mr Richardson says his group paid to go through the process of getting the right balance.

Mr Kirk adds that payment could increase board diversity by giving people an added incentive to get involved in the association’s work.

But Mr Moore says the opposite had proved to be the case. ‘Since we’ve started paying as a sector, boards have become less diversified. There aren’t community people and they have become more professionalised,’ he says.

As groups streamline and collapse structures, it is important that decisions are not made ‘in a vacuum’ and that committee members see the big picture, points out Ms Bennett.

That raises questions about processes at the committee level, what information they have had and who is on the scrutiny panels.

Mr Reid adds that mergers and the streamlining and tighter control of structures - including numbers on boards and committees - will mean a diminishing opportunities.

BAE pension fund’s Mr Phillips says he was ‘not convinced’ either about the benefits of having tenants, and local authority members, on boards.

Mr Moore says he was ‘not sure’ whether having tenants on boards is the best way of ensuring their voice is heard.

‘The way to really understand what the resident community thinks is…to engage with the mass of tenants and not just the usual suspects.’

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He argues that it was more important to ensure that boards contained members who have the tenants’ best interests at heart.

While he says he was very satisfied with his tenant board’s contribution, Mr Kirk says ‘having people on as residents just because they are residents is not appropriate’.

Viridian’s Ms Llewelyn-Davies adds that a key problem is that tenants had often not received adequate training or support to perform the role.

‘Where we have put tenants on boards we have very badly supported them to fulfil that role,’ she says, adding that the sector ran the same risk with scrutiny committees.

Regulation

Mr Moore says in-depth assessments (IDAs) are an improvement, but it is almost an ‘impossible job’ considering the resource they need, adding that the idea the regulator is going to protect the sector is ‘not realistic anymore’.

Notting Hill’s Mr Phillips says there is professionalism around the approach, but he doubts whether the new regime would have uncovered a Cosmopolitan- type situation.

‘It’s called deep but it’s not actually that deep. It’s deeper than a rating agency, but probably not as deep as an external audit,’ he says.

BAE pension fund’s Mr Phillips agrees, saying the regulatory communication with investors has improved, but adding: ‘It’s a deeper dive but I don’t think we will get to the point where they can find out about some hidden leases.

‘The regulator does a good job but it will need to be better resourced. Is fees the right answer? I’m not sure - more people and better qualified.’

Mr Kirk took a relaxed view of the IDA exercise.

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He says: ‘If we are doing our job well, we’ll have nothing to fear from an in depth assessment: it’s a free audit of our business.’

Mr Reid - whose groups is merging with Affinity Sutton - adds that the term ‘deregulation’ is somewhat misleading, saying that the regulator has the ability to act after the event, and suggesting it is more of a ‘resetting’ of regulation. The removal of merger consents is also a ‘bit of a red herring’.

There were also questions around approaches on value for money, and where the lines are drawn, particularly around downgrades to V2.

However, Mr Miskell suggests the housing regulator may need to move with the times and ask: ‘how many people do they downgrade for not using their assets?’

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