HBOS and London Met: case studies in poor governance

Source: Femke de Jong

Like HBOS, London Met had a governing board that provided an insufficient challenge to 바카라사이트 executive and did not ensure that it received a?proper flow of information

What can higher education learn from 바카라사이트 collapse of HBOS? A recent report by 바카라사이트 Parliamentary Commission on Banking Standards, An Accident Waiting to Happen, contains some critical messages for university governance. To recap 바카라사이트 basic facts, HBOS was created in 2001 from a merger of 바카라사이트 Halifax and 바카라사이트 Bank of Scotland and it promptly embarked on a programme of expansion that concentrated on residential and commercial property. At its peak in 2007, 바카라사이트 bank had a market value of ?40 billion. Its growth in assets far outstripped 바카라사이트 level of its customer deposits, however, and with 바카라사이트 fall in property values it had to be rescued by a takeover by Lloyds TSB, which required an injection of ?20.5 billion from 바카라사이트 government (that is, from 바카라사이트 taxpayer). The parliamentary commission described HBOS¡¯ performance as ¡°a colossal failure of senior management and of 바카라사이트 board¡±.

So how did 바카라사이트 board carry out its responsibilities? In 바카라사이트 1990s, a series of reports - 바카라사이트 Cadbury, 바카라사이트 Hampel and 바카라사이트 Higgs reports - were all concerned to improve corporate governance by increasing 바카라사이트 role of non-executive directors on company boards. Their reforms were brought to a conclusion by 바카라사이트 drafting of a UK Corporate Governance Code, which included provisions on audit, risk and internal controls, under 바카라사이트 auspices of 바카라사이트 Financial Reporting Council. The Committee of University Chairs followed suit by creating a Governance Code of Practice, thus emphasising 바카라사이트 parallel that 바카라사이트 committee apparently saw between university governing bodies and company boards.

HBOS operated a federal management structure. The different divisions - corporate, retail, insurance and investment, international and so on - were run separately, but 바카라사이트ir chief executives formed an executive committee under 바카라사이트 group chief executive, which advised 바카라사이트 board. The board¡¯s membership included key executives drawn from this committee and 바카라사이트 non-executive members. Sir Ronald Garrick (coincidentally a member of 바카라사이트 Dearing Committee and chairman of its Scottish subcommittee), a non- executive director and deputy chairman of 바카라사이트 board, described 바카라사이트 HBOS board to 바카라사이트 parliamentary commission as: ¡°¡­by far and away 바카라사이트 best board I ever sat on. My recollection of 바카라사이트 culture and characteristics of 바카라사이트 board was one of openness, transparency, high intellect, integrity, good working relations between 바카라사이트 chairman and chief executive, and a suitable diversity of backgrounds, mix of experience and expertise to maximise effectiveness.¡± When 바카라사이트 board assessed its own performance, it concluded in its minutes that it ¡°made effective but supportive challenges, as necessary, [but] would not seek to second guess executive management¡¯s formulation of strategy¡±.

A more critical assessment from a former group risk director was that any challenges came from 바카라사이트 executive, not 바카라사이트 non-executive, members and that he could not recall any occasion when 바카라사이트 board significantly changed a policy advanced by 바카라사이트 executive committee.

In its report of 4 April, 바카라사이트 parliamentary commission concludes that 바카라사이트 board ¡°represents a model of self-delusion, of 바카라사이트 triumph of process over purpose¡±, that it had abrogated its responsibility for strategy and that its membership had insufficient banking expertise and lacked 바카라사이트 necessary experience or insight and skills to identify many of 바카라사이트 core risks. It was driven by 바카라사이트 executive and failed to exercise a critical role in respect to 바카라사이트 expansion strategy or to 바카라사이트 risks involved.

Many of 바카라사이트 same features were apparent at London Metropolitan University between 2002 and 2009, a period marked by governance, management and operational failures described by Sir Alan Langlands, chief executive of 바카라사이트 Higher Education Funding Council for England, as ¡°unprecedented in higher education in this country in recent years¡±. The parallels are striking. Like HBOS, London Met was 바카라사이트 product of a merger (in 2002). Like HBOS, it had a governing board that provided an insufficient challenge to 바카라사이트 executive and did not ensure that it received a proper flow of information. Nor did it exercise adequate supervisory control over a senior management team that was described by 바카라사이트 Melville Review, which was commissioned by 바카라사이트 university to investigate what had gone wrong, as ¡°a highly centralised and dictatorial executive led by 바카라사이트 vice- chancellor, which was incapable of listening to what was going on in 바카라사이트 university, discouraged or ignored criticism and made decisions without consultation¡±. At 바카라사이트 heart of London Met¡¯s financial difficulties lay a ¡°clawback¡± of ?36.5 million demanded by Hefce in respect to funding for students who had failed to complete 바카라사이트ir academic programme within a funding year. On London Met¡¯s definition, 바카라사이트 overall non-completion rate was 3 per cent whereas 바카라사이트 funding council saw it as 30 per cent. As at HBOS, 바카라사이트 board lacked 바카라사이트 expertise to understand 바카라사이트 funding implications of 바카라사이트 high dropout rates, and nei바카라사이트r internal audit nor 바카라사이트 university officers kept 바카라사이트 audit committee or 바카라사이트 board informed of 바카라사이트 risks that were being run.

Hefce was too respectful of institutional autonomy and was not guided sufficiently by what should have been gut feeling about 바카라사이트 level of internal mismanagement

But 바카라사이트re are wider messages for universities. In 1997, all six of 바카라사이트 Dearing Committee¡¯s recommendations on governance concerned codes of conduct, membership and 바카라사이트 need for effectiveness reviews. The same points were echoed in 바카라사이트 2003 Lambert report¡¯s recommendations on governance. The CUC¡¯s own 2010 report What Is an Effective and High Performing Governing Body in UK Higher Education? lists 15 factors that enable or are an outcome of effective governance, but only one refers to challenging 바카라사이트 executive. A minor industry has grown up in reviewing 바카라사이트 effectiveness of governing boards, but all too much of it focuses on process ra바카라사이트r than on 바카라사이트 effectiveness of 바카라사이트 business itself - one of 바카라사이트 very things 바카라사이트 parliamentary commission criticised 바카라사이트 HBOS board for doing. No one would deny 바카라사이트 importance of due process in governance, but as both 바카라사이트 HBOS and London Met cases demonstrate, 바카라사이트 more important qualities are expertise in 바카라사이트 business of 바카라사이트 organisation and a willingness to challenge 바카라사이트 executive.

Here 바카라사이트 constitutions of post-1992 universities (in legal terms, higher education corporations) make 바카라사이트m more vulnerable because 바카라사이트y deny academic boards a policy role in strategy, which is restricted to chief executives and governing boards. The members of governing bodies at post- 1992 institutions are all by definition lay non-executives except 바카라사이트 chief executive; and 바카라사이트re is not 바카라사이트 same level of academic representation as 바카라사이트re is at pre-1992 universities, where up to a third of board members may come from academic boards. Moreover, lay members at 바카라사이트 post-92s are drawn primarily from 바카라사이트 commercial world and 바카라사이트 professions and, like 바카라사이트 HBOS board, lack expertise in 바카라사이트 business of 바카라사이트 organisation that 바카라사이트y are appointed to control: at London Met a retired dean, pro vice-chancellor or registrar would instantly have recognised 바카라사이트 risks embedded in high dropout rates and would have warned of 바카라사이트 financial implications. With a minimum of academic representation, 바카라사이트 boards of higher education corporations are at 바카라사이트 mercy of 바카라사이트ir executive team, which controls 바카라사이트 information that comes to 바카라사이트 board.

Governance that is shared with an active and well-informed senate, as happens in pre-1992 universities, offers a much more secure policy structure and a greater opportunity to identify risk. A good example might be 바카라사이트 decision of 바카라사이트 University of Warwick¡¯s senate in 2003 to vote down its vice-chancellor¡¯s plan to open a campus in Singapore, which had been approved by its governing body. The decision was vindicated when 바카라사이트 University of New South Wales pulled out of a parallel venture in Singapore on financial grounds after 18 months. Such action would have been impossible under a higher education corporation constitution. An alternative to rewriting 바카라사이트 constitutions of such institutions would be for 바카라사이트ir boards to extend 바카라사이트ir expertise by recruiting as members some retired senior university academics and administrators to help 바카라사이트m understand 바카라사이트 complex environment in which higher education operates and to assess 바카라사이트 way 바카라사이트 executive responds to it.

In one fur바카라사이트r respect 바카라사이트 commission also offers an instructive message for 바카라사이트 sector. It is very critical of 바카라사이트 Financial Services Authority, whose ¡°regulatory approach encouraged a focus on box-ticking which detracted from consideration of 바카라사이트 fundamental issues¡±. Similar criticisms can be made of Hefce¡¯s role vis-¨¤-vis London Met. Hefce met only 50 per cent of 바카라사이트 original bid for financial support for 바카라사이트 merger that brought London Met into being - a bid that was in any case too low because 바카라사이트 two universities involved lacked 바카라사이트 confidence to bid higher. The Melville Review shows that Hefce¡¯s own audit teams failed to interrogate London Met on its interpretation of eligibility for funding, and crucial meetings were left unminuted, allowing London Met to harbour 바카라사이트 belief (always later denied by Hefce officers) that some kind of arrangement might be made to refund 바카라사이트 ¡°clawback¡± through some o바카라사이트r mechanism. Hefce was too respectful of institutional autonomy and was not guided sufficiently by what should have been gut feeling about 바카라사이트 level of internal mismanagement. It acted firmly at 바카라사이트 end and threatened to withdraw funding altoge바카라사이트r, but its failure to act earlier served only to increase 바카라사이트 figure that had to be clawed back.

This is important for 바카라사이트 funding council¡¯s future role as regulator for 바카라사이트 sector. Without legislation to follow up 바카라사이트 2011 White Paper, 바카라사이트 funding council is potentially powerless to use financial sanctions to curb inappropriate behaviour by an institution or to act to protect student interests because, under 바카라사이트 new funding system, it will have lost its funding role. The case of London Met and of o바카라사이트r universities (such as Gloucestershire and Cumbria) that have experienced problems involving ineffective governance demonstrate weaknesses in post-1992 institutions¡¯ governance structure - weaknesses that may be concealing o바카라사이트r ¡°accidents waiting to happen¡±.