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
Figure 1: Southampton Institute's overseas
|Overseas operation||Period of|
|Type of operation|
|Franchise provision of a BA Business Administration degree.
|Franchise provision of a BSc Maritime Studies degree, a Foundation Certificate in Business and Social Studies and a Bridging Certificate in Law.
|Franchise provision of a BA Business Administration degree.
|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.
|Franchise provision of BA Business Administration and BA Marketing and Promotion degrees (students were recruited to BA Business Administration only).
|Dr DY Patil|
|A collaborative link for providing the first stage of an MBA course, with the second and third stages to be delivered in Southampton.
Campus in Athens
|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.
||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
We looked at five main issues:
- losses on the Institute's overseas operations;
- contravention of financial regulations;
- problems with governance and management at the
- handling grievances and complaints; and
- severance payments to senior staff at the Institute.
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
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.
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
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
|Losses 1995-96 to 1996-97||477,000
|Opportunity costs of Institute staff1
|Additional legal expenses||11,000
|Other costs relating to the joint venture
|Provision for cost of withdrawal from|
the joint venture in Alicante
|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).
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.
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.
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.
We asked whether these payments were one-off, and why it was felt
necessary to transfer cash as opposed to more traceable ways of
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.
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.
(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. The Institute's expenditure on legal fees increased
more than five-fold between 1993-94 and 1995-96 (Figure 5).
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.
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.
Figure 5: Institute expenditure on legal
fees, 1993-94 to 1997-98
Source: National Audit Office analysis of Southampton
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
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.
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.
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.
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.
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.
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.
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.
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
(d) Handling grievances
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.
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
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.
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.
(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).
|Figure 6: The former Institute Director's early retirement settlement
|Element of settlement
|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.
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.
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.
27. The Institute added that the former Director
had been very energetic, very dynamic and possibly in some respects
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.
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.
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.
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
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.
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.
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.
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.
|Figure 7: Costs of the former Institute Director's early retirement in the absence of agreement
|Element of settlement||£
|Salary for 13 months||97,500
|Estimated 3½ % cost of living rise as from August 1997
|Employer's costs covering national insurance, superannuation etc at 18%
|Loss of use of vehicle||7,000
|Loss of other benefits such as BUPA, Health Check and Subscriptions etc
|Estimate of litigation costs||
|Unfair dismissal claim - compensation||14,135
|Administration, management and legal costs of dealing with such a claim*
|*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.
In the event, following further legal advice, the Institute discontinued
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.
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.
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.
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
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
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
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
C&AG's report (HC 23 of Session 1998-99), paras 1, 2.7 Back
ibid, paras 2.6, 2.19 Back
C&AG's report (HC 23 of Session 1998-99), para 2.16 Back
Qs 4-7 and Evidence, Appendix 3, p23 Back
Qs 129-130 Back
Qs 2-3 Back
C&AG's Report (HC
23 of Session 1998-99), Appendix 4, para 1 Back
10 Q69 Back
Appendix 1, p20 Back
13 Q112 Back
Report (HC 23 of Session 1998-99), para 3.18 Back
15 Q161 Back
Report (HC 23 of Session 1998-99), para 3.23 Back
Qs 117-125 Back
Qs 93, 142 Back
C&AG's report (HC 23 of Session 1998-99), para 3.7 Back
Qs 144, 148 Back
Qs 154-155 Back
C&AG's Report (HC 23 of Session 1998-99), para 3.9 Back
ibid, para 3.10 Back
Qs 94-101 Back
C&AG's Report (HC 23 of Session 1998-99), paras 4.6, 4.8 Back
Qs 60-61, 136 Back
Evidence, Appendix 1, p20 Back
C&AG's Report (HC 23 of Session 1998-99), para 4.8 Back
Qs 139-140 Back
Qs 203-206 Back
Evidence, Appendix 1, p20 Back
C&AG's Report (HC 23 of Session 1998-99), paras 4.9, 4.14 Back
ibid, para 3.22 Back
Qs 51-58 and Evidence, Appendix 1, p20 Back
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