In adapting to the changes the sector faces, the way that housing associations operate is changing rapidly. In this environment, the role of the board is pivotal, and increasingly complex and challenging.
Whether you’re a small charitable housing association or one of the biggest housing groups, good governance begins and ends with the board.
Housing association boards should give direction, provide a different perspective and constructive challenge to the executive, and hold the organisation to account.
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In adapting to the changes the sector faces, the way housing associations operate is changing rapidly. Group structures, which have become a common feature, are in many cases being simplified and slimmed down.
Increasingly, more organisations are moving into more commercial territory that requires different legal structures and entities. As the sector continues to evolve, so does the need for the guidance on good corporate governance to recognise that there is no one-size-fits-all solution.
The constitution and composition of the board is critical. The directors and board members must at all times act in the best interests of the business. But, unlike the corporate business world, most housing associations don’t have dividend-receiving shareholders – instead they have a much more complex accountability framework. There is a broad stakeholder community they interact with, plus the sector is regulated by the RSH, with some associations having other regulators and regulations they may need to comply with.
In governance terms, this makes the role of the board pivotal, and increasingly complex and challenging. It was evident from the failures in the financial sector during the global financial crisis that boards either didn’t fully understand the risks they took, or failed to monitor their risk profiles effectively. The same is evident in the learning emanating from the RSH leading to the review of the regulatory framework published in January 2015.
The board’s central function is to ensure that the governance framework for their organisation is effective. To do that there are a number of broad issues they need to address:
Whether you are a small charitable housing association or one of the biggest housing groups, good governance begins and ends with the board. It’s critical that associations learn from and respond appropriately to good and poor practice in public, private and third sector governance.
The role of the board should be formally established with clear terms of reference, delegation of responsibilities and a code of conduct, all of which should be reviewed regularly. Housing association boards should give direction, provide a different perspective and constructive challenge to the executive, and hold the organisation to account.
The board of directors of an association must be clear about their role collectively and individually. Non-executive directors should be constantly mindful about their role ensuring they do not step into the operational zone that is the responsibility of the executive or senior management of an organisation.
There are five key responsibilities of the board:
The board may choose to establish other committees to support and enhance its ability to effectively deliver these key responsibilities. For example, a large housing association with a large debt portfolio may choose to establish a specific treasury committee. An association that provides significant personal care services may think it appropriate to establish a specific health and safety committee.
The UK Corporate Governance Code and Stock Exchange Listing Rules oblige companies to have three committees: audit, remuneration and nominations. The Federation’s own Code of Governance also refers to these committees. The code requires all but the smallest non-developing organisations to have an audit committee and all organisations to have a remuneration committee to set the remuneration of the chief executive. Nominations committees are not prescribed by the code but an organisations should be mindful of the content of its corporate document which may have specific nominations requirements. The RSH requires all registered providers to be compliant with their chosen code.
It is the board’s decision to establish the structure it considers necessary to support its business strategy and activities and delegate appropriate powers to it. While the board can and should establish such committees and delegate powers and responsibilities, it cannot abdicate accountability.
The housing association’s rules, or articles of association, prescribe the way that non-executive directors can be appointed to the board.
This may set out a requirement for a local authority to nominate a council member to the board (large scale voluntary transfer associations) or the number of tenants that can be on the board. They should also stipulate the number or percentage of executive directors that can be on the board.
The UK Corporate Code of Governance suggests that at least 50% of the board should be non-executive.
Historically, the housing association sector has not universally adopted a policy of appointing executive directors to the board, unlike most commercial businesses. In larger and more complex organisations this approach is changing, with often the executive responsible for the financial wellbeing of the organisation appointed to the board alongside the chief executive.
Whatever the decision is, it’s important that there should be a balance of skills and experience needed for the business and its strategic direction of travel. It’s likely that the board will work best if there is a variety of experience, skill and backgrounds. A diverse board is likely to add most value to the debate and decisions.
Determining the composition of the board it is important to take the following into account:
The role of chair is paramount to the effective governance of the organisation. Good boards are created by a good chair. The chair creates the conditions for board effectiveness and is responsible for the overall leadership of the board.
The chair should set clear expectations concerning the company’s culture, values and behaviours, and the style and tone of board discussions. With the help of the executive directors and the company secretary, he or she should set the agenda for the board’s deliberations.
The most fundamental part of the role is to ensure board meetings and any special meeting of directors are effectively and efficiently run. The chair must devote the necessary time to the role, supporting and enabling the executive to provide the business direction and leadership.
It’s vital that the chair has sufficient insight and intelligence of the business and its operating environment to be aware of trends and issues early on. Much will rely on the trust and relationship between the chair and the chief executive to enable the chair to take a close interest in the business without usurping the authority of the chief executive.
The chair has the same legal duties as the other non-executive directors on the board. They will be appointed by the board but it’s increasingly important that the board chooses the right person following a search process led by the nominations committee or similar.
An effective chair should have the following qualities:
The chair’s role includes:
The Higgs review, published in 2003, recommended that boards of publicly-listed companies should appoint a senior independent director (SID) from among their independent non-executives. To qualify as ‘independent’, non-executives need to have the necessary independence of character and judgement but also be free of any connections that may lead to a conflict of interest.
Higgs felt that the role of the SID was important in the relationship between major shareholders and the board, stating that ‘the senior independent director should be available to shareholders, if they have reason for concern that contact through the normal channels of chairman or chief executive has failed to resolve’.
SIDs have not been widely appointed on the boards of housing associations but they are more common in the commercial sector. In the housing sector this is a role that may have been incorporated or implied for the role of vice or deputy chair.
In a commercial setting the ‘SID’ acts as an alternative point of contact for major shareholders who may have made little headway in discussions with the chairman, chief executive or finance director.
SIDs may also serve as a sounding board for the chair and act as an intermediary for the other directors. The SID also takes the lead in annual appraisals of the chair and may lead the recruitment process for the selection of a new chair as chair of the nominations committee.
The SID should provide support for the chair in the delivery of his or her objectives, and lead their evaluation on behalf of the other directors. The SID might also take responsibility for an orderly succession process for the chair.
When the board is undergoing a period of stress, the SID’s role can be critically important. He or she is expected to work with the chair and other directors, and/or shareholders, to resolve significant issues.
Boards should have a clear understanding of when the SID might intervene in order to maintain board and company stability. Examples might include where:
These issues should be considered when defining the role of the SID, which should be set out in writing.
There are six general duties of all directors. This is enshrined in company law and is common with community benefit society (formerly I&P) law.
Non-executive directors who serve on the board of a housing association have a complex role often required to balance competing or conflicting demands. For example:
As part of their role as members of a board, non-executive directors should constructively challenge and help develop proposals on strategy.
Whilst board members can expect their organisation to properly insure them against a liability claim they must be able to demonstrate the use of reasonable skill care and diligence in carrying out their duties to avoid any liability for negligence. Directors will be held to a higher standard by law if they possess specific knowledge or skills. For example, a chartered accountant will be held to a higher standard in respect of financial matters than another non-executive without such specific training expertise or qualification.
Effective non-executives should be adequately informed about the issues, take the necessary time to build their knowledge and skills, build networks and keep up with key developments in the organisation. They must be able to stand back and look at the big picture of the business rather than immerse themselves in the operational management detail.
Non-executive directors should possess the following personal attributes:
All non-executive board members should be submitted for re-election at regular intervals, subject to continued satisfactory performance. The governance code adopted will stipulate a maximum term that individuals should serve on the board. Currently our code of governance proposes that individuals should serve no more than three three-year terms.
Board members will need to make sufficient time available to discharge their responsibilities effectively. The letter of appointment should state the minimum time that the non‐executive director will be required to spend on the company’s business, and seek the individual’s confirmation that he or she can devote that amount of time to the role, consistent with other commitments. The letter should also indicate the possibility of additional time commitment when the association is undergoing a period of particularly increased activity, such as a merger or takeover, or as a result of some major difficulty with one or more of its operations.