What the new Code of Governance means for housing associations with diversified structures

Sarah Greenhalgh
Sarah Greenhalgh

Sarah Greenhalgh, 15 December 2020

Since the 2015 Code of Governance was published, the nature of group structures in the sector has changed substantially. It is now commonplace for housing associations to have multiple subsidiaries, perhaps of several tiers, as well as being part of corporate joint ventures.

Whereas, historically, such entities may not have had a significant ‘life of their own’, they are now also likely to be carrying out material activities in their own right. A code of governance is therefore a vital tool to manage the complexity that comes with such structures, and ensures all aspects of the group are guided by consistent principles of good governance.

With this in mind, one objective set by the advisory board at the beginning of the process of reviewing the Code of Governance was that the new code should bridge the governance gap between housing associations and their diversified structures. Ensuring that it was flexible and adaptable for this purpose was identified as a key priority within the consultation too.

What does the new code say about this?

The new code still provides flexibility for the board of the group parent to determine whether and how it should apply to its subsidiaries, but if organisations decide not to adopt the code they must explain why in their financial statements.

In assessing the code here, I would urge organisations not to simply tick a box – this should be a meaningful exercise which considers the detail of the code and how its principles can be adjusted to the organisation’s wider structure.

Key themes within the new Code of Governance

Clarity of purpose

Group structures should support social purpose, delivery and oversight of the group’s strategy. Subsidiaries and joint ventures should be established to support and enhance delivery of the group parent’s mission. It is fundamental to be clear about what the role of each entity is in contributing to the overarching vision, values and strategic objectives of the group – and that the board can also articulate this.

Roles and responsibilities

The requirement for constitutional relationships within the group (including oversight and control) to be formally recorded has been extended to joint ventures. The group parent must also actively consider the relationships within the group when establishing new subsidiaries and throughout their life. A clear, documented delegations framework must be set.

It is vital that each board and committee knows their role in this process and how this fits into the rest of the group. Common issues arise around how subsidiary boards and committees interrelate in decision-making. Layers of complexity are added where joint ventures are introduced; even where the governance of the joint venture is dealt with by the joint venture partner, organisations need to consider how its role and governance will be integrated into the group. In my experience, governance frameworks are not always clear in this respect.

Conflicts of interest

Clarity of purpose and role is also important to enable you to effectively manage conflicts of interest. The new code reflects that most subsidiary boards will include executive team members or board members from elsewhere in the structure – and that some entities may have entirely common membership with others. Organisations must adopt guidance to enable individuals to serve in their various capacities effectively. This is likely to be in the form of enhanced provisions in the Code of Conduct and/or a common board policy.

Accountability and control

These are key. The parent has responsibility to hold its subsidiary boards to account for exercise of any delegated powers. This is vital to ensure that risks are managed and that the boards are acting appropriately. This does not necessarily mean the group parent – reflecting that there may be layers of management of activities in structures – but ultimately this will lead back to the group parent. The group parent must have the responsibility and reserve power to direct,  or intervene in, the governance of its subsidiaries. This should be enshrined within the group’s constitutions and, where there are several tiers, should also be included within the underlying intragroup agreement.

Risk and reward

The Code requires the board to regularly review the risks associated with subsidiary and joint venture activities. This will evolve over time and the underlying documents (e.g. intragroup agreements, services agreements, banking documents) are key to accurately identifying and assessing risk flows and mitigation planning.  

Review

The Code requires regular assessment of structures to reflect that the activities and risk profile of the entities within it will change over time. This dovetails with the requirements within the Value for Money Standard to ensure that you are regularly assessing the efficiency of your structures.

Challenging governance

The new code is also an opportunity to drive change in your corporate structures beyond functionality. For example, the requirement to adopt meaningful strategies aimed at equality, diversity and inclusion, environmental sustainability and carbon neutrality may look different through the lens of the diversified aspects of the group. This can only serve to enhance the effectiveness of the group’s strategies in these areas.

In addition, the code’s requirements around customer focus, and ensuring that lived experience forms part of governance structures, will look different depending on the customer base in question. Although most organisations will seek feedback from their customers to inform strategy, how such feedback is integrated into the structure may vary depending on its source. Adopting this in a more consistent way to individuals who receive commercial services from the group or who have bought properties may provide a new perspective.

Code of Governance 2020

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