Saturday, February 28, 2009

(Very) lean years for public services: it’s official

There has been lots of media coverage of the Times article by the Audit Commission chief executive Steve Bundred about public debt Armageddon. This sentence effectively summarises his warning to the public and third sectors

Any managers of a public service who are not planning now on the basis that they will have substantially less money to spend in two years time are living in cloud-cuckoo-land.

Interestingly Bundred gets his history wrong when he says Mrs Thatcher secured an opt-out from the Maastricht Treaty on public debt levels. (She had retired to he House of Lords by 1992 and indeed attacked the Treaty.) However, he is right to ring the alarm on the implications of public debt levels for public services – whoever wins the election. The inevitability of the forthcoming lean years were clear to those who looked but the implications of the credit crunch and recession upon public borrowing have been less foreseeable twists.

Friday, February 27, 2009

College websites: in the eye of the beholder

I’m spending my morning collating information off college websites. Its interesting to see that some colleges are doing new things such as welcome videos. I know it’s not revolutionary but it’s a start.

What I find less hopeful is the way that so many colleges do not have a welcome from the principal. (Some even have a “Principal’s statement” without either a name or a face.) I am no fan of the cult of the individual but a college principal should be the human face of a college – so why not show her or him?

Even more perplexing is the fact that some colleges do not seem to bother with search engine optimisation. It’s not hard to promote yourself through google and other search engines. Yet some colleges do not appear to be seeking make their website top of google rankings – even letting pretty bad publicity sit at the top of the list. It’s as if these colleges are oblivious to the reputational damage which may be ongoing.

Thursday, February 26, 2009

Less than zero: housing association business plans, rents and deflation

Earlier this month I mentioned that the new social housing regulator was urging housing associations to check that their business plans were robust in the face of a negative RPI measure of inflation impacting on the rent-setting formula. This week there has been the example of the train operators who have their regulated prices set in relation to RPI too.

I do wonder if housing associations (and, indeed, other social landlords) have realised that things are pretty serious. While CPI inflation is now around 3%, the RPI measure is close to zero – tugged down by falling housing costs. IDS have calculated that the average expectation of seven leading forecasters is RPI inflation reaching as low as minus 2.7% in September 2009 – the month when rents for 2010/11 will be set.

(Of course this will be good news for the tenants who have just been told that their rents in 2009/10 will be rising at an inflation-busting rate as a consequence of the RPI peaking in September 2008.)

How will housing associations cope with that squeeze on their rental revenues? They had better start thinking about it now.

Wednesday, February 25, 2009

Housing market: crash, bang, wallop, and more decline?

With a rush of house price statistics due over the next couple of days, its worth having a look at the latest issue of Roof with its depressing Housing market healthcheck. The article by Julian Birch includes a depressing graph from Nationwide which features on the website. The graph shows the four cycles of boom and bust in the UK housing market since 1970. Basically the graph shows that house prices remain above their trend – for now…

House price falls are likely to be given a shove by the on-going credit drought. I was cheered up to hear one commentator refer to the end of the banking crisis. But then we had last weekend’s twitchiness in the USA about Bank of America and Citigroup.

Earlier this month The Economist made reference to Alt-A mortgages in the USA. After sub-prime this may trigger a sense of déjà vu. These mortgages have what might have once been called “innovative” features such as payments that are less than interest – so the debt grows for several years. Financial institutions have been digesting these rather toxic assets. As American borrowers come to the end of their not-even-interest-only periods, I suspect that even more misery will result. (House prices in the USA have fallen 25% already.)

Back to the latest issue of Roof … I would recommend you buy it if you want to read several articles on how the credit crunch is affecting the housing market and policy. However, it’s not an uplifting read when it looks like in 2009 the number of repossessions may be greater than the number of house-building starts.

Friday, February 13, 2009

Learning from the credit crunch: a series of unfortunate incidents (and examples of bad governance)

There’s lots of food for thought around risk, governance and regulation in the revelations from the former chief risk manager at HBOS, Paul Moore.

For people looking for some analysis about the lessons for governance arising from the credit crunch, I would particularly recommend a couple of documents.

There was an interesting article about Flaws at the top in the December issue of the Institute of Directors’ magazine The Director. The article quotes one observer as noting:

Corporate governance itself hasn't failed—the banks have failed corporate governance by not complying with it.

There certainly appears to have been a lack of challenge (and maybe understanding) of the risks that some of the banks were running.

A fuller survey of governance, regulation and the credit crunch was published by the Association of Chartered Certified Accountants (ACCA) in November. While a lot of the analysis was of an accounting technical nature and sometimes banking-specific, Corporate Governance and the Credit Crunch (pdf available) made points of wider relevance to boards in all sectors.

The ACCA made the general observation:

Many of the causal factors seem to be inextricably linked to a failure in corporate governance. Regulatory boxes may have been ticked but fundamental principles of good governance were breached. There should be more emphasis in the performance of corporate governance than with its regulatory compliance.

My personal view is there can be a sense that governance can become ritualistic as an unforeseen effect of rigid and poor regulation.

On the issue of risk management, the report noted:

Risk should have been more fully taken into account when making decisions about strategy or operations. Risk management tools have not always been fit for purpose.... More use should have been made of scenario planning as a risk tool. The risk management function needs to earn, and be accorded, higher status.

I would concur although it is worth remembering that the best sensitivity analysis and scenario modelling would not have necessarily factored in some of the arguably unforeseeable events that have come to pass.

The report links matters of risk to the ever-present fact of life whether we are talking about multi-national banks or community groups: the information imbalance between executives and non-executives. It usefully re-states the obvious:

There is a temptation for managers to make sure that information prepared for non-executive directors does not raise too many difficult questions. A partial explanation for boards not understanding their organisations’ risks is that information is sanitised by the time it reaches them.

It may not be much of a silver lining but hopefully board members will learn some lessons from what lay behind the current financial crisis.

Sunday, February 08, 2009

Challenging boards: responding to the credit crisis with fresh thinking

I’ve spent most of my weekend at the National Housing Federation Board Members’ Conference hearing about the credit crunch and change (in the case of social housing, there is a transformed regulatory and investment landscape). Therefore, it was particularly timely to read in the McKinsey Quarterly an article by Andrew Campbell and Stuart Sinclair on Mobilising boards for change. (The article can be read and/or downloaded after registering.)

The article made the case for shaking up the natural rhythms of boards and challenging directors to re-examine their thinking. More than that it gave chairs some ideas about how to do it. For example, it argues:

Mobilizing the board to tackle the economic crisis requires a fundamental overhaul of how its members interact. The only solution is to force change. The chairman needs to underline the gravity and urgency of the situation by summoning the board to extraordinary “credit crunch” meetings, “survival” meetings, “does our plan still make sense” meetings, and “how can we turn this pain into an opportunity” meetings. Without disrupting the rhythm, anchored thinking will continue to dominate.

The housing association board that I sit on as vice chair had a credit crunch breakfast which was useful in terms of thinking afresh at the implications of events.

The article suggests the use of outsiders in challenging assumptions and facilitating a change in style. (I think this is a good idea and I charge very reasonable rates!) The authors refer to how one board was assisted by an outsider:

In one board, the work involved identifying the six to ten premises of the company’s plan for 2009. The outsider then interviewed each director and asked them to offer their opinions on each premise confidentially. When shown to the group, the results demonstrated that most of the board no longer believed the premises were valid.

Groupthink is unhelpful at any time. At exceptional and fast-changing times like this it is particularly dangerous.

Saturday, February 07, 2009

Words of warning and wisdom from the TSA for housing association boards

I am attending the National Housing Federation's Board Members' Conference. Yesterday's opening speaker was Anthony Mayer, the Chair of the new housing regulator, the Tenant Services Authority (TSA).

Anthony Mayer repeated TSA themes about the importance of boards. He stated that the TSA would be relating to both execs and non-execs. The TSA see boards as directing strategy and scrutinising executives. (Of course this is the theory of good governance – but sometimes the practice of being a rubber-stamp is far too common.)

Mayer warned of up-coming issues arising from the recession and credit crunch:

1) Re-financing: housing associations need to check on how much finance they have as banks are expecting significant re-pricing of interest when re-financing is necessary.

2) Impairment: with declining asset values there may be some collateral damage (my pun – not his) on association balance sheets.

3) Negative inflation: as rents are set in relation to RPI, budgeting and financial forecasting could be complicated if/when inflation turns negative.

Mayer told board members to ask about these issues. They are potentially ticking bombs in need of defusing – or, as part of robust risk management, at least contingency arrangements if they explode.

Thursday, February 05, 2009

Size doesn’t matter: evidence on college size and organisation performance

As someone interested in how size and mergers affect organisational performance in the public sector – particularly FE and housing – I was pleased to stumble across a study published by the Department for Innovation, Universities and Skills last year.

The study entitled The Evidence Base on College Size and Mergers in the Further Education Sector reviews the subject of college mergers including some economic theory. Laura Payne of DIUS observes:

Economic theory suggests that there may be potential for larger colleges to be more efficient.

The review certainly sets out the potential benefits of merger and the economies of scale. There is also some reference to diseconomies.

The most interesting aspect of the report is a statistical analysis of the performance of General FE colleges. It finds:

There is no evidence of a relationship between college size and success rates. There is some correlation between size and average OfSTED inspection grade, but the correlation coefficient is small and does not suggest a strong relationship.
...There is no relationship between college size and financial health.

The good news is that mergers do not on average do any harm:

There is no evidence to suggest that merged institutions perform any better or worse than institutions that have not been involved in a merger.

Monday, February 02, 2009

Ten (or eleven) things for audit committees to do in 2009

The KPMG-sponsored Audit Committee Institute has re-issued and up-dated its Ten To-Do’s for Audit Committees. Compared with the 2008 version, the 2009 edition reflects the issues of the credit crunch and recession weighing on corporates (and assumes the absence of the kind of finance committee seen in several sectors like FE and HE) so some of the content is less salient to not-for-profits. Nevertheless, the document is very useful in giving audit committee’s things to think and talk about.

I would recommend that all audit committee members download the document and regularly look at the Audit Committee Institute website.

Some issues raised in the document are worth reiterating here. The Ten Do’s urges audit committees to thoroughly review risk management processes:

With the benefit of hindsight and possible “lessons” from the financial crisis, consider the adequacy and effectiveness of the company’s processes for managing risk (management’s processes and the board’s.)

The document also reminds audit committees to do things that they often forget such a rigorously appraising their own performance and monitoring organisational culture and “tone from leadership”.

One thing that I would add as an eleventh thing to do is for audit committees to meet their auditors at least once a year without executive management being present. This may only take five minutes of a meeting but it is a vital way to get assurance.