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.

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.

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.

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.

Not-for-profits, strategy and finance: what they do teach you in Harvard Business Review

Almost anyone who has done a course related to business will have come across some fancy matrix for distinguishing different products in terms of market share, growth and/or profitability. Sadly many of those boxes don’t appear that helpful for the chief execs and boards of charities and others whose business is not-for-profit.

Last month’s Harvard Business Review had an article on Delivering on the Promise of Nonprofits by Jeffrey L Bradach, Thomas J Tierney and Nan Stone. It included the matrix above for developing financial and strategic clarity. It’s not rocket science but it does conceptualise the issues for organisations thinking about new developments as well as existing portfolios.

Three million homes – or not?

On this blog I encouraged people to sign up to the epetition on the Downing Street website urging a re-statement of the three million homes by 2020 target. Does the response do this? I don’t think so. Look at it here.

It’s a pity that the epetition only clocked up just over 2000 signatures. Building affordable homes in sustainable communities and sustaining the flagging construction industry (with new home starts halving last year) are now more important than ever.

Welcome to short notice inspection?

This year lots of providers of social housing (as we will soon be calling housing associations, ALMOs and council housing departments) will be getting a call from the inspectors. With the completion of the Short Notice Inspection pilots, its time for the real thing.

As SNI involve only a couple of inspectors on site for about three days, inspectors go a lot further. However, the good news from those that have been inspected is that SNI appear to be a step forward. For a start, there isn’t the months of inspection preparation (and distraction). The short, sharp shock of SNI would certainly appear to reduce compliance costs.

Perhaps there might be some more good examples of regulatory reform in 2009. I certainly hope so.

Decisions, risks and Chief Executives

McKinsey have just published the results of a survey of over 2000 executives into decision-making - and what practices are associated with good results.

The survey conformed the value of:

1) Performing sensitivity analysis and creating financial-risk models
2) Including comparable situations from one’s own or the firm’s experience
3) Examining the risks of a project combined with the risks of other projects in the firm’s portfolio
4) Creating a detailed financial model of the decision

This accords with my experience. Far too often I have seen risk analyses that look at each risk in isolation or are hurriedly undertaken as little more than a ritual. (I also think that exit strategies and other contingency planning is even more neglected.)

Interestingly it appears that Chief Executives play a large role in instigating both the most and the least successful decisions. The report suggests that Chief Execs may be more likely than others to gamble on bets with big upsides and downsides - or may be better able to secure approval for such bets. It certainly demonstrates the need for boards to act as an effective challenge to Chief Execs.

Public libraries as “recession sanctuaries”

As someone with pessimistic tendencies, I do try to look for a bright side. In the case of the credit crunch and recession, it is more challenging. One interesting possibility may be public libraries.

I read on the Freakonomics website that there are signs of a startling revival in the fortunes of libraries in America. Libraries are becoming “recession sanctuaries”. Will we see the same here?

My understanding is that libraries in the UK have been showing a declining trend (in books at least) in recent times. (And tightening public finances will pose a threat to their survival in the near future.)

As public space promoting knowledge and understanding as well as building civil society, any revival of public libraries would be welcome good news.

Roof on the financial health of on housing associations

It seems only yesterday there was all the Housing Corporation talk of housing associations "sweating their assets". Now the Tenant Services Authority has a watch list of half dozen or so housing associations in worryingly poor financial health.

The latest issue of the re-vamped Roof magazine brings more festive cheer (not). In its article on housing associations “On the edge” it sets out how 24 of the largest associations fared in 2007/8: 13 of them had interest payable greater than their operating surplus.

In the financial year 2008/9, things will be even harder. If associations breach loan covenants, lenders will play hard ball in negotiating new terms that reflect the new post-crunch world.

Merry Christmas.

How to survive the credit crunch

While the newspapers are full of advice on cutting household bills and more generally responding to the recession. There have been fewer handy hints for managers delivering public services. However, Public Finance recently carried a useful article by Roger Latham on How to survive the credit crunch. Here are some extracts:

1) prepare for the long haul.

2) watch out for the secondary effects … Existing contractual arrangements around the Private Finance Initiative are already showing signs of pressure. In the long term, the implications on the pension fund will show up in increased employer contributions. Will these still stand, or would there be further changes?

3) efficiency is more than a priority, it’s a necessity.

4) look out for displacement of policy objectives. Existing policy priorities at central and local level are going to change and with them the existing funding arrangements…

5) place shaping on hold? Some of the proposals currently being considered by planners and proposed by developers are going to come to a grinding halt. The value of assets and the cost of borrowing might suspend some long treasured plans. The community facilities promised through Section 106 agreements and the like might not come to fruition…

6) a collapsing capital programme? Valuable parts of your capital programme might be underpinned by capital receipts based on assumptions of land and property values that are now unachievable…

7) check the pattern and flexibility of service demand … You need to think now where your budget flexibility lies.

8) tax base losses.

9) propping up the local economy … Establish immediately what you will and won’t do in discussion with the business community to avoid raising unrealistic expectations.

10) don’t forget the people. The morale of your organisation might take a real hammering…

While some of these are issues specific to local government, other parts of the public and third sectors will often have similar issues – or be affected by how local government responds to the credit crunch and recession.

It’s definitely a good time for revisiting risk registers.

House prices bears, bulls and the National Housing Federation

A good place to read about the property crash is the website Housepricecrash.co.uk. An addition to that site is the inclusion of house price predictions. They vary from housing market bears suggesting falls of 50% from the market peak to bulls like the National Housing Federation who predict a 25% rise over the next five years.

I must say that I lean towards the bears. Capital Economics – who now forecast a fall of up to 35% over the next three years – had long warned that a house price crash was on the way. (Their voices should not have been so lonely. Ultimately house prices and incomes had to be brought back into line. Buy-to-let investors and permissive lending could only stretch the elastic so long.)

It is good to see that the NHF have moderated their predictions – last year the NHF was suggesting that house prices would continue to spiral with a 40% rise from 2007 to 2012. While the NHF was right to draw attention to the need for new homes and the problem of affordability, I still feel a bit uncomfortable. I have seen the suggestion on the blogosphere that the NHF was inadvertently helping to ramp up house prices.

It is worth noting some of the NHF’s members are painfully learning the reality of a market correction hitting property sales and land values.

Change and strategy – the perils of success

For some thought provoking blog posts on strategy and change I would recommend the Random Rantings of Freek Vermeulen of the London Business School. This week he flags up some research coming out of the States that indicates that Chief Executives from high-performing firms were significantly more likely to interpret changes in their business environment as a threat than the their peers at poor-performers, who tend to interpret change as a positive thing.

Vermeulen suggests that this may be the cause of the “success trap” about which he writes:

ample research and statistics show, for a variety of industries, that especially very successful firms have trouble staying successful, and adapt to fundamental changes in their business environments (such as new competitors, different customer demand, radical new technologies or business models, etc.). Over the years, they focused on the thing that made them successful (a particular product, service, production method, etc.) and as a result became even better at it.

The times are certainly a-changing. We live in manic macro-economic environment. For the public and thirds sectors a bracing funding regime looks set to be even tighter. On top of that there is major institutional change in many areas such as the end of the LSC in further education and the de-merger of the Housing Corporation in social housing. It all makes an interesting laboratory for success, change and strategy.

The third sector – the new rulers?

Yesterday I attended the National Council for Voluntary Organisation’s 10th Hinton Lecture. This year’s lecturer was the Guardian columnist Simon Jenkins. The central argument made was that a vibrant, self-governing democracy needs strong local government.

In order to avoid (almost) everyone in the room agreeing with him, Simon Jenkins threw in a grenade when he suggested that the organisations of the Third Sector were “the new rulers of Britain”. I think this was a little distracting. However, when he said that the “new localism” seemed to be all about “consulting stakeholders” he had a point. How many people know what local strategic partnerships are? What they do? Do they contribute to accountability and transparency?

Diversity, boards and the financial crisis

While the public and third sectors are (rightly) keen to become businesslike, it is worth noting that they can sometimes be ahead of the private sector. Diversity on boards is one area. For example, a third of FE college governors are women. Colleges and housing associations have been addressing the issue of having boards that have people from a mix of backgrounds. (Of course, they can do better.)

This week a report from Cranfield University School of Management found progress – albeit slow - in women getting onto corporate boards.

One of the authors made an interesting argument for more diverse boards: "We might not be in quite such a dire situation if there had been more females on the boards of banks. The evidence is that women are not more risk averse, but they are more risk aware."

More diverse boards were "less likely to fall into group-think or to accept the status quo," Ruth Sealy commented. "Decisions can take longer to reach, but they will be better."

Light touch or better regulation in social housing and beyond

This week in Inside Housing the new Chief Executive of the Tenant Services Authority tells us that he does not talk about “light touch regulation”.

It’s an excellent sound bite but I was wondering what the opposite of that is: heavy handed regulation? (To be fair, the TSA does not appear to plan to bring a big, clunking fist to social housing.)

It’s a pity that the term “better regulation” has gone out of fashion.

I had a certain fondness for the five principles of better regulation:

1) Proportionality
2) Accountability
3) Consistency
4) Transparency
5) Targeting

There is a real risk that the lack of regulation in the financial sector (or perhaps more accurately problems with what regulation there was) will lead to the rehabilitation of red tape.

Craig Dearden-Phillips wrote in the Guardian recently of his big worry that:

the main message of the credit crunch - that "markets don't work, we need more regulation" - is read across into other arenas like health, welfare reform, education. All areas where, pre-crunch, we were witnessing a rapid shift from 1970s statism to a more nuanced approach in which markets, competition and a diversity of providers are used to drive up standards

On the continent some thinkers used to talk about the “social market” as: the market where possible, the state where necessary. It would be good if in social housing (and public services generally) the regulators used the slogan: competition where possible, regulation where necessary.

I know it’s not snappy. But it is what is needed.

Read this before you sack anyone

It may not be Christmas present and it’s not out yet, but if you have some tricky HR issues you may be interested in The Employers' Guide to Grievance and Discipline Procedures. It was written by freelance consultant Mike Parkin. I used to work with Mike so I can vouch that he knows his stuff. (I also proof-read some chapters of the book so know that it is a clear and useful guide for managers.)

Arguments at CityWest: finding a silver lining

It is disappointing to read about the boardroom problems at CityWest Homes (the arm’s length management organisation that manages council housing for Westminster Council). While I do not know enough to take sides (even if I wanted to), events there do demonstrate that ALMOs are not an example of “privatisation”. For good or ill, ALMOs have close links with and accountability to their parent local authorities.

Resuming posts soon

I'll be resuming posts when I am back in the UK.

Lloyds of London, emerging risks and pandemics: be prepared

Lloyds of London have launched a website to "drive the debate on emerging risk". One of the emerging risks is that of pandemic flu.

Lloyds have just published a report on the pandemic scenarios. The report suggests that society should not over-focus on any particular scenario. The report's author notes that much has been said of the 1918 Spanish Flu epidemic, which killed over 100 million people worldwide. While Avian Flu is seen as the most likely next pandemic, they suggest that other types of pandemics may require different responses. The writer notes that some of these may have higher rates of mortality than flu.