Health and Social Care Bill

Memorandum submitted by the Institute of Chartered Secretaries and Administrators (ICSA) (HS 134)

1 About ICSA

1.1 The Institute of Chartered Secretaries and Administrators (ICSA) is the professional body qualifying and supporting company secretaries and corporate administrators in all sectors of the UK economy, including the NHS. Members are educated in a range of topics including finance, HR, company law, administration and governance, which enable them to add value to any organisation.

1.2 ICSA is the leading international voice on corporate governance and delivers a professional education that gains its strength in the breadth of the syllabus; designed to assist boards and work with senior managers to identify and maximise opportunities within relevant legal frameworks and established best practice.

1.3 In order to provide new evidence to the committee, ICSA contacted Members and non-members involved in the senior management of a range of NHS entities in England. This approach enables our submission to combine the strengths of the ICSA’s knowledge of corporate governance and compliance issues with the practical understanding of how the proposed NHS framework could impact on the day-to-day administration of an NHS body. We therefore feel that our evidence is distilled from a good understanding of the practical issues involved.

2 Foundation trust governance freedoms

2.1 The proposed package of freedoms for foundation trusts are perceived as practical and broadly welcomed by those closely involved in their governance. Whether or not governance, as a whole, will be improved as a consequence is questionable. Foundation trusts that use the changes as an opportunity to review their governance structures and work with their governors to establish more robust processes are likely to be better governed as a result. Those that do not may be very vulnerable to failure.

2.2 Regardless of the freedoms proposed in the Bill, foundation trusts still have to operate a governance framework unique within the UK economy and one that presents its own challenges and costs. The additional layer of governance inherent within the dynamic between the council of governors and the board of directors will impact on financial and non-financial resources. The dual nature of the decision-making process on specific areas of business development disadvantages foundation trusts as their governance and accountability framework is more cumbersome operating an almost two-tier board approach. Foundation trusts will have to closely define ‘significant transactions’ in order not to prevent unduly having to seek governor approval on more minor or less significant proposals, and governors will need to remain alert to the accumulative effect of insignificant transactions snowballing into something more significant. 

2.3 In addition to the role governors play in voting to approve significant transactions proposed by the board of directors, foundation trusts will, by necessity, be required to spend resources duplicating information and meetings with both the board of directors and the council of governors. In addition, the relationship between members and the foundation trust is also going to require ongoing development and strengthening. Foundation trusts will be required to hold annual members’ meetings, at some cost, but private and charitable competitors may not be under a similar requirement. Heavy governance structures and reporting requirements may prove bureaucratic and expensive and hinder the speed with which foundation trusts can respond to opportunities or threats.

3 Governor capability

3.1 In order for the proposed freedoms to be effective and successful, governors will have to be willing and supported in adapting to an enhanced role. Current governors of foundation trusts have already expressed concerns with the proposals, namely: that the new role is not one they signed up for; current governors do not necessarily possess the skills and knowledge required to hold the board to account; and governors would not be working with the same market intelligence and information that Monitor has access to, as the current regulator.  Significant resources will have to be made available to governors in order to hold the board of directors to account and understand the competitive market when asked to vote on significant transactions.

3.2 The requirements on governors are going to be onerous, and councils of governors will require at least some, if not all, of their number to have the financial and commercial skills to evaluate foundation trust proposals in relation to mergers, acquisitions and other significant transactions. The new role could also limit the pool of people available who are willing to stand as governors and thus have a real impact on the diversity of the board, and weaken the accountability of the organisation to the wider community.

3.3 There is also concern as to how governors can reconcile their role as representatives of the membership and play a significant part in the strategic decision making process. One issue that is currently unclear is how the members will hold a failing council of governors to account. Governors will require ongoing support to assist in recognising the danger signs; in both financial and quality matters.  It is recognised that new markets will appear aimed at training and developing governors, but there is little acknowledgement of the additional costs this will incur for foundation trusts as they will also be seeking to train and develop their non-executive directors.

3.4 Assuming foundation trusts have invested in governor training and development (and sufficient governors have attended), there are few details as to what steps and freedoms foundation trusts and their members have to remove those governors not deemed to be capable of meeting the new challenges of holding the board to account. It is assumed the council of governors will be performance evaluated collectively and individually periodically, but the framework as to who has ultimate responsibility for removing underperforming governors is unclear. As governors are elected by members, it would be natural for the members to remove governors. However, the sensitive nature of sharing performance data of individual governors does not sit comfortably within this arrangement. Similarly, if it is the board of directors that has the power to remove governors, where is the check to ensure that directors do not simply remove those governors that ask the awkward questions and challenge the board of directors in a manner the directors do not feel comfortable with?

3.5 Furthermore, as the chair of the board of directors is also the chair of the council of governors, s/he will be regularly exposed to conflicts of interest. Such situations will require deft and diplomatic management if there is to be an ongoing and constructive relationship between the two decision-making bodies. The comments from colleagues working with foundation trust boards and governors felt the new role of the governor had the potential for more conflict and adversarial relationships between directors and governors; though the greater accountability placed on the board of directors is welcomed.

4 Accountability

4.1 With legal responsibility comes accountability, and many potential governors will be unwilling to commit to acting as governors until there is a clearer understanding of the role and any potential liabilities. In particular, where governors vote in favour of a significant transaction that consequently triggers insolvency action, would they too be liable under the Insolvency Act for their actions? The proposed freedoms for foundation trusts on their own will not improve governance; suitable accountability arrangements will need to be established for both governors and members. Unfortunately, the Bill does not presently provide sufficient assurance that accountability will be meaningful and proportionate.

4.2 The new duty to hold the board to account is placed on governors and each foundation trust will have to think very carefully about how robust processes can be developed to ensure governors are able to do this. It is expected that best practice in this area will evolve, but it is not guaranteed that unfortunate and avoidable mistakes may be made in the process. Further details either in legislation or supporting guidance would be welcomed by foundation trusts. In addition, positive activities such as the ICSA/Hermes Transparency in Governance Awards could be extended to foundation trusts to benchmark the performance of trusts with regard to disclosure and accountability arrangements.

4.3 Information flows and reporting lines will need to be clarified for specific agenda items and functions, with a balance to be struck between operational detail and commercially sensitive data and the context required for governors to make informed decisions and not act as rubber stamps for the board of directors. Both governors and directors will need to negotiate on the specific information required, along with a review of whether holding governor meetings in public continues to be appropriate given the details likely to be provided to them.

4.4 In addition, consideration needs to be given to what powers governors might be able to exercise within a foundation trust prior to escalating an issue to the advisory governor panel, or other third party, before removing a non-executive director. Without specific guidance, there is likely to be a varied approach by foundation trusts to dealing with conflict between governors and directors; not all of which will represent best practice.

4.5 The foundation trust membership issue has been problematic from the start, and it is hard to see how the proposals will improve and enhance greater member engagement. A lot of work has been done so far, but most of it unsuccessful in terms of developing meaningful membership activities and engagement. Members’ ability to elect governors will be of greater significance when the governors play a more active role in holding the board to account. As mentioned previously however, the accountability framework which members can use to inform governor thinking does not exist and the role and purpose of members continues to be vague.

5 Director’s duties and insolvency

5.1 The key changes for directors are the new duties and the potential for personal liability in insolvency situations. We welcome the new directors’ duties, as it makes explicit the step change from being a senior manager to being an executive director, and brings the duties of foundation trust directors in line with the private sector.

5.2 However, more clarity is needed as to how insolvency legislation will be applied, and how public assets will be protected. Greater clarification is required to inform governors of their role, and potential liability, in those situations where a foundation trust may be heading towards insolvency. Governors will also need to be aware of the powers they have available to prevent a course of action by directors they believe to be financially threatening to the long term existence of the foundation trust, which does not sit within the definition of a ‘significant transaction’.

It is hoped that the above information provides some assistance to the committee in its scrutiny of foundation trust governance arrangements as proposed under the Health and Social Care Bill. Should you require any further clarification regarding any aspect of ICSA’s evidence, please do not hesitate to contact me directly.

March 2011