some default text...
Select Committee on Public Accounts Twenty-Sixth Report


OVERSEAS OPERATIONS, GOVERNANCE AND MANAGEMENT AT SOUTHAMPTON INSTITUTE

EVENTS AT SOUTHAMPTON INSTITUTE

5. During the 1990s, Southampton Institute developed eight overseas links through which they provided degree and other courses in countries outside the United Kingdom. Most of these overseas operations were franchise arrangements, although the Institute also developed other types of overseas venture (Figure 1).[2]

Figure 1: Southampton Institute's overseas operations

Overseas operationPeriod of
operation
Type of operation

Newman College,
Dublin
1992-93
and 1993-94
academic years
Franchise provision of a BA Business Administration degree.
Centre for
Management and
Administration
(CMA), Athens
July 1994-
July 1995
Franchise provision of a BSc Maritime Studies degree, a Foundation Certificate in Business and Social Studies and a Bridging Certificate in Law.
Barcelona Business
University
June 1995-
October 1995
Franchise provision of a BA Business Administration degree.
Instituto Maritimo
Internacional
Alicante
Southampton SL
(IMIAS)
July 1995-
July 2000
Joint venture with the University of Alicante for provision of a BA Maritime Leisure Management degree, an MA in Port Operations, short courses for the maritime industry and the establishment of a maritime operations centre.
Iniciativa de
Formacion
Empressarial (IFE),
Murcia, Spain
July 1995-
October 1998
Franchise provision of BA Business Administration and BA Marketing and Promotion degrees (students were recruited to BA Business Administration only).
Dr DY Patil
Institute, Bombay
August 1995-
July 1996
A collaborative link for providing the first stage of an MBA course, with the second and third stages to be delivered in Southampton.
Southampton Solent
Campus in Athens
September 1995-
October 1996
A Greek company wholly owned by the Institute. Courses provided were BA Business Administration, BSc Maritime Studies and BA Business and Law degrees, an MBA and a Bridging Certificate in Law.
Griffith College,
Dublin
September 1995- A collaborative link which developed into a formal franchise in September 1996 for provision of a BA Business and Law degree.

Source: National Audit Office analysis of Southampton Institute data

6. In 1996, a number of parties, including a member of the Committee of Public Accounts, raised allegations about some of these overseas activities with the National Audit Office and with the Funding Council. Building on work undertaken by the Funding Council, the National Audit Office focussed their examination on the Institute's Athens campus and its Alicante joint venture because of the financial risks and losses associated with these non-franchise arrangements.[3] We looked at five main issues:

  • losses on the Institute's overseas operations;
  • contravention of financial regulations;
  • problems with governance and management at the Institute;
  • handling grievances and complaints; and
  • severance payments to senior staff at the Institute.

      (a)  Losses on the Institute's overseas operations

7. At the time of the National Audit Office's examination, the Institute did not know the full cost of their overseas operations. The National Audit Office calculated that the Institute had made deficits on these operations in each year between 1994-95 and 1996-97, followed by a small surplus in 1997-98 (Figure 2). These losses arose mainly from the Athens campus and Alicante joint venture where the total losses were some £941,000 (Figure 3).[4] They also found that the Institute were unable to demonstrate that they had not used public funds intended for the support of teaching and research activities within the United Kingdom to finance their overseas operations, or to offset related losses.[5]

Figure 2: The Institute's net in-year surplus or deficit on overseas operations, 1992-93 to 1997-98





Source: National Audit Office analysis of Southampton Institute data

Note: Figures are based on the Institute's published accounts for 1995-96 and 1996-97, and on the Institute's management accounts for 1992-93 to 1997-98.

Figure 2 shows that the Institute's Athens campus and Alicante joint venture contributed losses in excess of the surpluses produced by other overseas ventures.



Figure 3: Total losses arising from the operation of the Institute's campus in Athens and the joint venture in Alicante

AthensAlicante

Losses 1995-96 to 1996-97477,000 80,000
Losses 1997-981,000 -
Opportunity costs of Institute staff1 150,50058,000
Additional legal expenses11,000 7,400
Other costs relating to the joint venture
in Alicante
-76,000
Provision for cost of withdrawal from
the joint venture in Alicante
-80,000

639,500301,400

Source: National Audit Office analysis of Southampton Institute data

Note 1: Opportunity costs are based on an estimate of staff time spent in Southampton, Athens and Alicante relating to the campus and the joint venture respectively.


8. The Committee asked the Institute how much of their resources came from income-generating activities, and what level of surplus they made from them. They told us that they generated income of £18 million a year from privately-funded operations, and they acknowledged that they should aim to make a surplus on all activities outside their primary function. Over the four-year period concerned, taking into account losses on overseas operations, they had made a cumulative surplus of £671,000 (Figure 4).[6]

9. The National Audit Office found that the Institute had decided to proceed with a number of their overseas ventures without undertaking careful planning, including market research, investment appraisal and sensitivity analysis. We put it to the Institute that their adventures overseas had been pretty disastrous. They accepted that the outcomes were very far from what they expected to happen and that there were problems at three levels. First, there was the question of whether the Institute should have been active overseas at that particular stage in its development. Second, some very poor choices had been made of the particular ventures with which to associate. Third, management of the ventures left a good deal to be desired.[7]

10. We asked the Institute how they would ensure that proper business planning was undertaken for future overseas and other income-generating activities. They told us that the starting point was an effective strategic plan. While the Institute did have a strategic plan in 1995, not all the ventures were in accordance with it. The Institute were now developing a proper corporate plan, with proper objectives and proper business plans for individual services and faculties. New ventures had to be consistent with the plan, fulfil its objectives and have a proper risk assessment attached to them. That risk assessment was reviewed regularly by a monitoring committee of senior members of the management team, and by a new Policy and Resources Committee which would advise the Board of Governors on how the strategic plan was being implemented. Within this new planning structure, the Institute believed that their control systems provided a degree of reassurance that any publicly-funded institution might reasonably expect.[8]

    (b)  Contravention of financial regulations

11. The Institute received two payments of cash in brown envelopes from their former franchise partner in Athens, the first of £1,000, and the second of £12,690.[9] We asked whether these payments were one-off, and why it was felt necessary to transfer cash as opposed to more traceable ways of paying.[10] The Institute assured us that although it sounded suspicious, both were legitimate payments, that they were owed the money, and that they had checked with their bank that they were not breaking any rules before accepting the second payment. They did not know why the businessman had decided to pay in that way.[11] Both envelopes were opened in the presence of two members of the Institute's staff, in one case including the person to whom the envelope was addressed.[12]

    (c)  Problems with governance and management at the Institute

12. The National Audit Office found that the Institute's governors were not always kept sufficiently informed about developments in the Institute's overseas operations. In their interviews with 19 of the Institute's governors, the Funding Council's Audit Service found that 12 were not satisfied with the information they received on overseas operations, and 13 were not satisfied that at Board meetings to discuss overseas operations they had been able to express their views.[13]

13. The Institute's expenditure on legal fees increased more than five-fold between 1993-94 and 1995-96 (Figure 5).[14] In addition, under the Institute's financial regulations at the time, governor approval was not required for Institute expenditure, with the exception of capital items costing £250,000 or over.[15] The National Audit Office drew particular attention to legal actions against newspapers, which put over £200,000 of Institute funds at risk, and where the governors had not been informed about the potential financial liability before the writs were issued.[16]

Figure 5: Institute expenditure on legal fees, 1993-94 to 1997-98



Source: National Audit Office analysis of Southampton Institute data

Figure 5 shows that the Institute's expenditure on legal fees increased more than five-fold between 1993-94 and 1995-96, although spending was reduced in 1996-97 and 1997-98

14. The Committee therefore asked the Institute what action they had taken to ensure that governors were sufficiently involved in strategic decision-making, and were adequately informed about material matters. The Principal of the Institute told us that both he and the Chairman of Governors were determined that the Board of Governors would be fully involved in determining the overall strategic direction of the institution, and that they would monitor performance against the strategy. As part of this, and following a consultative process involving setting up a joint committee between the Board of Governors and the Academic Board, the Board of Governors had approved new objectives for the Institute for the period 1999-2004. The Institute were now developing plans to give effect to these overall objectives. The joint committee had met twice so far, and virtually every governor had been to both meetings.[17]

15. In relation to legal actions, the Institute told us that the Board of Governors were about to agree a recommendation from the Principal that, where a legal action involved more than £15,000 potential exposure of funds, this would be subject to approval by the full Board.[18] Below £15,000, the Principal had authority to incur the expenditure. The proposed limit had already been approved by the Institute's Resources, Remuneration and Audit Committees, and had been operated as a de facto rule in the Institute since the Comptroller and Auditor General's report had been published.[19]

16. It appeared to the Committee that problems had arisen because the Institute had been dominated by a small cabal of people. We asked the Institute how they could be sure that such a situation could never occur again. They told us that the narrow answer was that they had made new rules. These provided, for example, that all governors must serve on at least one committee and none could serve on two, that the Chairman and Vice-Chairman could not sit on the same committee, and that there were limits to the number of terms that governors could serve. The broad answer was that the new Principal had tried to develop a much more collective style of management to avoid that type of concentration taking place ever again.[20]

17. The Funding Council's survey of governors at the Institute had found problems with the identification, induction and training of, and succession planning for, governors.[21] On identifying new governors, the Institute told us that they now advertised first, and then took nominations and people nominated themselves. They had a set of criteria for determining the composition of the Board of Governors, and there were various categories such as age, gender and professional employment. The Institute tried to get a balance of representatives from many different constituencies, including one representative of higher education. It was very important for the credibility of the Board that they were not seen to come from any particular cabal or grouping and that that was one reason why they advertised. There was a lengthy interviewing selection process, where the potential governor met the Chairman of Governors and one other governor, and possibly the Chairman of the Audit Committee. On that basis a name was put to the Governance Committee, which would make a recommendation to the Board. The Institute had a waiting list of people who it had been agreed in principle would join the Board when a vacancy occurred.[22]

18. We asked whether there was anyone sitting on the interview board who was independent of the organisation and of the Board of Governors. The Institute told us that they did not currently have such an independent representative, but that the Chairman of the Governance Committee, who was also the Vice-Chairman of the Board, did attempt to provide that kind of impartial role. The Governance Committee was there specifically to help maintain and improve the governance of the Institute.[23]

19. As regards training, we asked the Institute whether any guidelines were laid down for how governors were trained. They told us that the Committee of University Chairmen had issued guidance. And that the Institute had an annual governors' training day where they explained to governors the background to a number of major issues in higher education, and indicated how they expected governors to respond to what was coming forward.[24]

20. The Department added that one of the depressing aspects of reading the Comptroller and Auditor General's report was that the governors themselves did not blow the whistle, even though many of them later expressed dissatisfaction with the information given to the Board of Governors and the way Board meetings were run. In their view, this made it extremely important that more energy was put into recruiting the right governors, training them and ensuring that they were not just aware of their role but also their responsibilities.[25]

    (d)  Handling grievances and complaints

21. The Funding Council found that procedures for dealing with concerns involving the Institute Director were inadequate. The decision of the Institute Director was final in all cases, including where the cases involved himself.[26] This had led some individuals to use outside channels such as the press, the National Audit Office and the Funding Council to air their concerns. Some individuals had raised issues with the former Chairman of the Board of Governors, but were not confident that their cases had been considered fully and acted upon, and they were concerned that the issues had been referred to the Institute Director.[27]

22. In December 1997 the Institute's Board of Governors approved a revised grievance procedure. This allows for the convening of a special panel drawn from the Board in cases where concerns raised by senior post-holders have not been answered satisfactorily by the Institute Principal or the Chairman of the Board.[28]

23. We asked the Funding Council whether it was acceptable that the Institute Director could draw up his own rules, even where decisions affected himself. They agreed that it was not. There should have been a proper mechanism for dealing with complaints against the former Director, and it was for the Board of Governors to make arrangements for oversight of the executive. The question of appeals by staff was dealt with in guidance from the Committee of University Chairmen.[29]

    (e)  Severance payments to senior staff at the Institute

24. The former Institute Director took early retirement on 31 August 1997. His severance settlement of £157,966 included payment for legal advice costing £7,212 and professional fees of £5,460 (Figure 6).[30]

Figure 6: The former Institute Director's early retirement settlement

Element of settlement £

Termination pay22,500
Pension enhancement 122,794
Legal fees7,212
Professional fees5,460

Total costs 157,966

Source: Southampton Institute

25. The Committee asked the Institute why, in view of the problems at the Institute, they had offered the former Director early retirement. The Institute told us that no grounds were found for dismissing him. The Institute had looked into the matter, and believed that the Funding Council had done so as well.[31]

26. Following discussions between the Chief Executive of the Funding Council and the Chairman of the Board of Governors, the governors had come to the view that the Institute's interests would be best served by offering the former Director the opportunity to retire early. His continued employment would almost certainly have meant continuing difficulties with many staff, some governors and the press.[32] Discussions then took place between the former Director and members of the Board, following which the Institute offered him the possibility of early retirement and he accepted it.[33]

27. The Institute added that the former Director had been very energetic, very dynamic and possibly in some respects autocratic.[34] That style of management had been necessary in the first ten years of the Institute's life, to take them from where they were when they broke away from Hampshire County Council to become a major college. In that period, they had needed a great deal of energy and speed and not so much consultation in trying to grow at the speed that they did. When they got to the point where it was necessary to slow down and consolidate, then things became difficult and a less aggressive, less forceful style of management was needed.[35] The Funding Council added that, although this was an unfortunate incident, the Institute had been very successful during the eight or nine year period when the former Director had been in post.[36]

28. The professional fees covered by the severance package for the former Institute Director included outplacement services and financial advice associated with the early retirement, together with solicitor's fees of £2,350 to renegotiate the former Director's divorce settlement as a result of his retirement.[37] We asked the Institute why this £2,350 had been included. They told us that the agreement provided for the Institute to pay 'the costs of the provision to the employee until 31 July 1998 of out-placement services and other professional services, including financial advice, associated with the employee's early retirement subject to a maximum of £5,000 plus VAT thereon'. The view was taken that the costs of having to renegotiate the divorce settlement consequent upon his early retirement came within that rubric.[38] However, the Institute added that their proposed early retirement policy for senior post-holders, which would have covered this situation had it been in place at the time, did not include any provision for professional fees.[39]

29. The National Audit Office noted that the advice of the Institute's legal advisers, Paris Smith and Randall, was that 'the settlement (for the former Institute Director) was reasonable in the context of other alternatives'. The Institute told us that the other alternative had been to pay him according to his contract.[40] Their Remuneration Committee had been advised that the cost of the proposed agreement was cheaper than the costs of dismissal and subsequent litigation for unfair dismissal (Figure 7), although the difference was not great.[41] The Department added that they thought that the settlement was good value for money, given that the former Director was entitled to more, although the inclusion of sums related to re-negotiation of his divorce settlement had been rather unusual.[42]

Figure 7: Costs of the former Institute Director's early retirement in the absence of agreement

Element of settlement
£
Salary for 13 months97,500
Estimated 3½ % cost of living rise as from August 1997 3,400
Employer's costs covering national insurance, superannuation etc at 18% 18,200
Loss of use of vehicle7,000

Loss of other benefits such as BUPA, Health Check and Subscriptions etc 1,300

Sub Total127,400

Estimate of litigation costs

Unfair dismissal claim - compensation14,135

Administration, management and legal costs of dealing with such a claim* 20,000

Total costs161,535

*These figures ignore the costs of possible defamation proceedings which could be substantial

Source: Southampton Institute

30. On his early retirement, the Institute made a separate agreement with the former Institute Director in relation to the outcome of outstanding legal actions against newspapers, to which he was a named party. The Institute made a similar agreement with their former Director of Academic Operations when he took voluntary redundancy at the same time. The agreements indemnified the individuals fully against any costs incurred or awarded against them, but entitled these individuals to a share of any settlement monies received by the Institute on their behalf.[43] In the event, following further legal advice, the Institute discontinued these actions.[44] The Institute told us that shortly the Board of Governors would be asked to agree that if the Institute ever again involved itself in libel action any individual would have to give over all the benefits, and accept that the Institute would take the full share of the costs and benefits.[45]

31. We also noted that the separate agreement with the Institute's former Director of Academic Operations had not been passed to the Institute's Remuneration Committee when they were trying to make important decisions on severance payments. The Institute assured us that this situation would not occur again, because the Remuneration Committee's terms of reference now provided that they had to approve all aspects of severance settlements. All such agreements now had to be signed by the Chairman of the Board, and by the Principal in the case of another senior post-holder or the Chairman or the Clerk to the Board of Governors.[46]

32. A further separate agreement with the former Institute Director, provided that '¼ no announcement or statement concerning the termination of the former Institute Director's employment should be made by or on behalf of the former Institute Director or the Institute, except on the lines of their agreed respective press releases'. We asked the Institute why such a "gagging" clause had been agreed. They told us that this agreement was initiated by the former Institute Director, presumably to prevent or minimise adverse comments about the termination of his employment. It was an agreement freely entered into between the parties, who felt this to be in the best interests of the institution at that particular time.[47]

Conclusions

33. Over the four year period August 1994 to July 1998, the Institute made a net surplus of £671,000 on their income-generating activities. This sum would have been much higher if the Institute had not incurred substantial deficits on their overseas operations, including losses of £941,000 on two ventures in Athens and Alicante.

34. Income-generating activities make an important contribution to the funding of higher education institutions, but involve risks that need to be managed carefully and professionally. We are therefore concerned that the Institute decided to proceed with a number of their overseas ventures without undertaking careful business planning including market research, investment appraisal and sensitivity analysis. As they now recognise, this led to some very poor choices of ventures, which were in turn poorly managed.

35. We note that the Institute are now developing a proper corporate plan, together with arrangements for effective risk assessment and monitoring of income-generating activities, including overseas ventures. We look to the Funding Council to pay particular attention to the operation of these new arrangements in their next cyclical audit review of the Institute.

36. During the period concerned, the Institute did not know the full cost of their overseas operations. Nor could they demonstrate that they had not used public funds intended for the support of teaching and research activities within the United Kingdom to finance their overseas operations, or to offset related losses. We are astonished that a body with an annual turnover exceeding £49 million a year, and with public funding of £34.2 million in 1996-97, does not have the internal costing systems necessary to manage their operations properly and ensure the appropriate use of public money. We look to the Institute to improve their costing systems in order to provide adequate management information and assurance about the use of public funds. And as part of their cyclical audit review, we look to the Funding Council to satisfy themselves about the effectiveness of these systems.

37. The cornerstone of effective oversight and management of higher education institutions is effective governance. We are therefore dismayed that the Institute's governors were not always kept sufficiently informed about investments and losses in their overseas operations, nor about key financial matters such as decisions to initiate legal actions against newspapers which put over £200,000 of Institute funds at risk.

38. At Southampton Institute, there was strong evidence that problems arose partly because undue control rested with a small cabal of governors and senior staff. And a survey of governors by the Funding Council found problems with the identification, induction and training of governors. We therefore welcome the steps taken by the Institute to improve the appointment of governors, including emphasising the key role of their Governance Committee in making recommendations to the Board of Governors.

39. As regards training, we note that the Committee of University Chairmen has issued guidance, and that Southampton Institute ran an annual training day for governors to explain the background to major issues in higher education. However, we agree with the Department that events at Southampton Institute make it extremely important that more energy is put into recruiting the right governors, training them and ensuring that they are not just aware of their role but also their responsibilities. We are not convinced even now that the level of training at the Institute is sufficient, and we look to the Institute to further review and strengthen their training arrangements for governors.

40. The former Institute Director was able to draw up his own rules for handling grievances or complaints, even for complaints involving himself. As a result, some individuals had to use outside channels such as the press, the National Audit Office and the Funding Council to air their concerns. And where individuals had raised issues with the former Chairman of the Board of Governors, they were not confident that their cases had been considered fully and acted upon, and they were concerned that the issues had been referred to the former Institute Director. This was a totally unacceptable way to deal with the legitimate concerns of staff about the management of the Institute and its governance.

41. We note that the Institute introduced revised grievance procedures in December 1997, which allow the Board of Governors to convene a special panel where concerns raised by senior post-holders have not been answered satisfactorily by the Institute Principal or the Chairman of the Board of Governors. We look to the Funding Council to review how effectively these arrangements operate in practice.

42. The former Institute Director received a severance settlement of £158,000 on early retirement, and this included payment of professional and legal fees totalling £12,670, of which £2,350 was for solicitors' fees to renegotiate his divorce settlement. We consider it inappropriate that severance settlements should include increased benefits to reflect the personal circumstances of individuals, but note that the Institute's proposed early retirement policy for senior post-holders will not include provision for payment of such benefits.

43. The Institute made separate agreements with the former Institute Director and the former Director of Academic Operations under which these individuals were indemnified against the costs of legal actions, but could have benefited from any damages received. In our view this was wholly inappropriate, and we note that the Institute are about to introduce new procedures which provide for the Institute to take the full share of any costs and benefits in the event of any future legal actions.

44. The Institute also completed a separate agreement with the former Institute Director, at his request, restricting comment on his early retirement settlement to the wording of their agreed respective press releases. This Committee's predecessors have said[48] that issues concerning the use of public money must be seen to be open and openly accountable, and that such confidentiality agreements are inappropriate. We look to the Institute to ensure that they do not in future make any confidentiality agreements in relation to matters arising from the use of public funds.


2   C&AG's Report (HC 23 of Session 1998-99), para 2.4 Back

3   C&AG's report (HC 23 of Session 1998-99), paras 1, 2.7 Back

4   ibid, paras 2.6, 2.19 Back

5   C&AG's report (HC 23 of Session 1998-99), para 2.16 Back

6   Qs 4-7 and Evidence, Appendix 3, p23 Back

7   Qs 129-130 Back

8   Qs 2-3 Back

9   C&AG's Report (HC 23 of Session 1998-99), Appendix 4, para 1 Back

10  Q69 Back

11  Qs 71-75 Back

12  Evidence, Appendix 1, p20 Back

13  Q112 Back

14  C&AG's Report (HC 23 of Session 1998-99), para 3.18 Back

15  Q161 Back

16  C&AG's Report (HC 23 of Session 1998-99), para 3.23 Back

17   Q13 Back

18   Q13 Back

19   Qs 117-125 Back

20   Qs 93, 142 Back

21   C&AG's report (HC 23 of Session 1998-99), para 3.7 Back

22   Qs 144, 148 Back

23   Qs 154-155 Back

24   Q145 Back

25   Q173 Back

26   Q94 Back

27   C&AG's Report (HC 23 of Session 1998-99), para 3.9 Back

28   ibid, para 3.10 Back

29   Qs 94-101  Back

30   C&AG's Report (HC 23 of Session 1998-99), paras 4.6, 4.8 Back

31   Qs 60-61, 136 Back

32   Evidence, Appendix 1, p20 Back

33   Q48 Back

34   Q63 Back

35   Q67 Back

36   Q141 Back

37   C&AG's Report (HC 23 of Session 1998-99), para 4.8 Back

38   Qs 139-140  Back

39   Q18  Back

40   Qs 203-206 Back

41   Evidence, Appendix 1, p20 Back

42   Q213 Back

43   C&AG's Report (HC 23 of Session 1998-99), paras 4.9, 4.14 Back

44   ibid, para 3.22 Back

45   Q16 Back

46   Q92 Back

47   Qs 51-58 and Evidence, Appendix 1, p20 Back

48   Severance Payments to Senior Staff in the Publicly Funded Education Sector (Committee of Public Accounts 28th Report of Session 1994-95) (HC (94-95) 242) Back


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries

© Parliamentary copyright 1999
Prepared 21 July 1999