Standards of governance and financial management

Standards of governance and financial management
By EVH, GWSF & SHARE (Extract section 2)
October 2011

Too much detail, too much prescription.

SHR’s six high level Regulatory Standards on governance and financial management are sensible and clear. But the guidance accompanying the standards is in many respects too detailed and too prescriptive. 

This applies particularly to the proposal to set detailed Constitutional Standards.  The present SHR does not set these types of standards for existing RSLs, and the Housing (Scotland) Act 2010 contains no references to the new SHR doing this. 

This is one of a number of areas where the SHR’s proposals risk becoming far too intrusive.  Other examples include SHR’s intention to produce model clauses for RSL constitutions and a uniform code of conduct for governing bodies.   

Each of these proposals is at odds with the statement in the Introduction to the Consultation Document, that “RSLs are independent housing associations and co-operatives … responsible for their own performance and management”.

Comply or explain …

One of the hallmarks of effective governance codes and guidance is that they are based on the principles of “comply or explain”, rather than setting absolute and mandatory requirements. 

These principles apply to all three governance codes quoted by SHR as having informed its approach – and to the present SHR’s Regulatory Code of Governance and the accompanying supporting guidance.  SHR departs from this approach by stating that all RSLs must meet all aspects of the guidance set out in the Consultation Document.

Comply or explain principles generally restrict mandatory requirements to areas where there are specific legal obligations.  They also allow for choice and flexibility in how good governance standards are applied.

The need to avoid too much prescription is obvious in the case of Scottish RSLs.  There is great diversity among RSLs in terms of their values, organisational purpose, democratic accountability, operating context, and approach to appointing governing body members.

Time’s up?  Mandatory fixed terms for voluntary committee members

Predictably, SHR’s proposals have created huge concerns among housing associations.  Community-controlled housing associations (CCHAs), for example, have a stakeholder governance model based on democratic elections, tenants and local residents being governing body members, and volunteering for the good of the community.

We think mandatory limits on service are fine for organisations that pay board members – for example Quangos and the banks.  But they are completely unsuited to the stakeholder governance model we have described, and they will weaken rather strengthen the governance of many RSLs.

SHR quotes the UK Corporate Governance Code (UKCGC) for private sector listed companies as the justification for its proposals.  This is an odd choice, when there are comparable codes for the voluntary, community and public sectors.  The references to the UKCGC are in any event inaccurate:

• The first paragraph of the UKCGC says that it is a “comply or explain” code
• The UKCGC does not set mandatory limits on service of either six or nine years. 

Instead, the UKCGC recommends that nonexecutive directors with more than nine years service should be subject to re-election by shareholders.  In the vast majority of Scottish RSLs, committee members are subject to open elections from day one.

Mandatory limits on service will destabilise the governance of many housing associations.  It would lead to large numbers of experienced voluntary committee members having to step down simply to satisfy a regulatory requirement.  And it would diminish the longterm investment that housing associations make in developing the skills of tenants and other residents to be effective committee members.

Money, Money, Money Payment of committee and board members

SHR suggests that the removal of previous statutory restrictions (Schedule 7) is the main reason for adopting a permissive policy on payment of committee and board members. 

We do not accept this argument. Following a detailed review of housing association governance, the present SHR considered
permitting payment by introducing a Special Exception to Schedule 7 but chose not to do this. 

The new SHR also has choices on this matter. 

There is nothing to prevent it setting regulatory standards to maintain the status quo on payment.  But it has made the opposite choice, by describing payment as “… a mechanism to enable RSLs to have the right people with the right skills on the governing body”.

Committee members regard this statement as diminishing the contribution that voluntarism makes to ensuring the success, credibility and sustainability of housing associations in communities throughout Scotland.  They also find it hard to see how the SHR’s payment policy will contribute to its statutory objective of promoting the interests of tenants and service users.

Elsewhere in the Document, SHR states that its role includes “upholding the good reputation of individual RSLs and the RSL sector”, with tenants, taxpayers, the public etc. 

We think there will be even less appetite for payment among tenants than committee members, and that tenants might expect SHR itself to have a direct role in approving any proposals to pay in individual RSLs.

Payment will be a matter of choice for individual RSLs.  But the change in policy that is proposed is at odds with the values and ethos of the vast majority of Scottish housing associations, most of which are charities. Very few Scottish charities in other sectors pay trustees. 

Those who do pay face a practical dilemma, since the Charity Regulator stipulates that a charity may never pay a majority of its trustees. 

In other words, charitable housing associations wishing to pay their board or committee members will have to create a two-tier system, made up of some members who are volunteers and some who are paid.

Who’s in charge? Paid employees as governing body members

This aspect of the SHR’s proposals is inconsistent with statements elsewhere in the Consultation Document that the role of governing bodies is to “exercise independent control”. 

While this is common practice in the private sector, employment contracts and accountability arrangements are very different in the housing association sector.

Overall, we are struggling to see why the SHR thinks RSL governance should be more like the private sector.

To see the full document see here