The troubleshooters

The Housing and Planning Act has ushered in a new era of lighter-touch regulation for the social housing sector. Yet housing associations are becoming ever larger and more complex organisations. It could be that the role of watchdog is passing from the external regulator to landlords’ own boards.

So what do boards need to be wary of to ensure that social landlords don’t put the family silver at risk in their increasing efforts to embrace commerciality? And are there any unseen dangers lurking in this new environment?

Inside Housing has gathered together three ‘troubleshooters’, each of whom has held a number of interim director roles at failing organisations, to test the water.

What are the warning signs that an organisation is heading for regulatory or financial trouble?

Peter Cleland: I think that the term ‘trouble’ extends beyond financial and regulatory, which are of themselves the consequence of something more fundamentally troubling about an organisation. The regulatory and financial issues are a consequence of a series of poor decisions, which generally come from a combination of the following factors.

First, a lack of clear and agreed-upon purpose and focus for the organisation. Second, having a clear purpose, but not sticking to it.

Third, complexity. The organisation loses the plot of where it is going, either through having very complex commercial arrangements and/or equally complex bureaucratic systems.

Fourth, personal agenda. This very much links with the lack of an agreed-upon vision. In the absence of an agreed agenda, personal agenda and territorial behaviour come into play. Some of the most spectacular near misses have come about because of the personal agenda of a CEO, a board member, or a director.

And fifth, hubris. This is an overrating of the understanding of an organisation’s or person’s strength, and ability to beat the market.

In my experience, all failings have originated as a result of collective and individual behaviour and not bad luck or the economy at large.

Kay Vowles: Regulatory trouble doesn’t usually come out of the blue - it’s usually a culmination of a number of small alarm bells.

It’s important to understand that from the regulator’s point of view, the whole is always more than the sum of the parts. There are any number of associations who had two contemporaneous problems, neither of which on their own would have been enough to bring down serious regulatory trouble, but in conjunction were enough to push the Homes and Communities Agency or its predecessors into action.

It is also often the case that the regulator will start to look at one issue - perhaps a covenant breach, or a large severance payment to an executive – and in the course of their investigation, other issues will arise. Once one stitch has been picked, the knitting can unravel spectacularly quickly.

Are there circumstances common to organisations that find themselves in regulatory difficulty?

David Hucker: Problems usually start at the top with weak governance leading to poor operational performance. Typically, in my experience, this stems from a weak chair, weak chief executive or – in the worst case scenarios – a combination of both.

Failure to lead and focus on the key performance areas of the business will inevitably lead to a lack of strategic direction, falling service standards and poor financial management.

PC: The common factor is to disregard the legitimate role of the regulator. While there will always be reason to challenge the place, role and conduct of the regulator, it is an absolute truth that the regulator is part of the system, and not an optional add-on.

“All failings are a result of collective and individual behaviour, not bad luck or the economy at large.”

Peter Cleland

The art of not getting into regulatory difficulty is to play the game of business in a regulated sector both professionally and smartly. This means separating the challenge of regulation itself from complying with the expectations of the regulator.

What are the most important things a board needs to know about an organisation’s finances?

DH: Financial covenants imposed by lenders are a good tool for the board to monitor the financial health of the business. Coupled with a robust business plan, cash flow monitoring and risk assessment, the board will have a suite of indicators to monitor financial health.

To what extent do complex funding packages pose a threat to housing associations?

KV: The key threat from complex funding is that board members (and sometimes executives, too) may struggle to understand it. If you introduce something that makes individual members feel stupid, then they tend to just keep quiet rather than ask for an explanation, which – as they see it – exposes their stupidity.

PC: At the root of all apparently complex transactions is a simple set of trades between risk and return. The threat comes from starting the analysis from the complex legal and economic analysis, rather than asking who is really taking the risk, and who is getting paid and how much.

“Where there is a very charismatic CEO, the board is almost in thrall to him/her.”

Kay Vowles

The skill is to unpick the complexity and make it understandable and useable. Avoiding complexity will kill growth opportunities for housing associations.

How do you ensure the commercial activities carried out by a provider’s unregistered arm do not negatively impact on the registered

part of the business? What kind of thing would you advise landlords to do to ensure social assets are not put at risk?

DH: Publicly funded assets should not be put at risk supporting commercial activities, which means avoiding guarantees of any kind.

PC: This is a tricky question and assumes that only unregistered activities can negatively impact on registered activities. This is simply not true. Many commercial activities are equally or less risky than traditional social housing activities.

The second assumption is that by placing the unregistered activity in a separate legal entity, then the registered activity is protected. This also is not true, and the Cosmopolitan case made that falsehood clear. When the rubber hits the road of failure, the whole business is on the line.

My advice is to treat the whole business as a single business and manage risk accordingly. Managing risk, in my world, does not mean avoiding taking the risk, but knowing what action you will take when things do not go to plan.

What are the biggest challenges facing housing association boards today?

PC: The biggest challenge is working out the real role of housing associations. This is in the context of political animosity to the sector, low public appeal, a push towards further homeownership and financial institutions/banks/ratings agencies increasingly calling the shots over what registered providers should and should not do.

DH: The push for growth can easily overshadow the need to maintain performance in other aspects of the business. Associations are, at their core, service providers and must keep their focus on delivery and customer satisfaction. It is easy to be blinded by indicators of growth and take your eye off the ball.

Are boards too close to management at some housing associations?

KV: Yes, this does happen. One example I recall is an association in which the CEO and chair had both been in post a very long time – the chair well beyond his designated term. The chair was a very forceful character and the rest of the board seemed powerless to resist the annual renewal of his chairmanship “for exceptional reasons”.

It suited the CEO and chair to work in tandem and together they engineered inappropriate decisions – like an increase in the CEO’s salary without it going through the normal board approval process.

Another common situation is where there is a very charismatic CEO and the board is almost in thrall to him/her. It’s not so much that they are too close, but that the board is a bit starstruck and so fails to question and challenge.

DH: Over the past 20 years there has been a significant shift in the make-up of boards, with large associations in particular opting for experienced non-executives whose backgrounds may lie in other fields.

“The push for growth can easily overshadow the need to maintain performance in other aspects of the business.”

David Hucker

Arguably this may be positive, as it can lead to a less close relationship than is the case with smaller, more local associations which will draw their board members from their areas of operations.

Are boards still able to effectively challenge management teams in increasingly complex organisations?

KV: They can, but it’s increasingly difficult as things become more complex. Board members must be brave enough to ask what may seem to be the ‘idiot question’. The reality is if you don’t understand it, then probably neither do most of the other people in the room.

DH: Yes, but only if properly informed and able to make judgements independently of what the management team is saying.

Is there any danger for the housing association sector as a result of the regulator’s lighter-touch approach?

PC: Yes, there are real dangers. The danger comes from the fact that the sector has come to rely on regulation as a way of managing risk.

It is not dissimilar to the banking sector’s ‘too big to fail’ attitude to speculative banking. Our sector is ‘too nationally/socially important to fail’ and the approach to regulation and compliance with regulation follows that pattern.

DH: Less regulation is the means by which associations are avoiding classification as public bodies for debt purposes, but is there a cost to the customer? Historically, funders have said that they value the regulatory regime and that, by reducing risk, associations benefit directly through lower borrowing costs. More recent evidence, however, suggests that, even with the regulatory regime changing, associations have been able to borrow at low cost and for long periods.

But what is happening to customer service in the new environment? Where do boards and customers go now to find out how their association is performing - and how bad do things have to get before the regulator steps in? With tenants and leaseholders unable to change landlord and shop around if dissatisfied, housing associations are, in effect, monopoly suppliers in affordable housing, but who protects the customer?