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"( ) A majority of the board is to comprise the directors referred to in sub-paragraph (1)(b)."

The noble Baroness said: The amendment adds a new sub-paragraph to Paragraph 15. That would ensure that the board of directors would contain a majority of non-executive directors. At present,

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Paragraph 15 merely states that there are to be executive and non-executive directors—there is no reference to numbers or proportions.

At paragraph 2.39 of the Government's A Guide to Foundation Trusts issued last year, it was stated that non-executives, including the chairman, would amount to at least one third of the positions on the management board, now termed the board of directors. The Bill is silent on the matter, as is A Guide to Developing Governance Arrangements. That is a little odd, because the Government are ignoring their own views on governance elsewhere.

Governance in the private sector has been placed under the magnifying glass during the past year at the Government's behest. They asked Mr Derek Higgs to carry out a review of corporate governance and have subsequently backed his findings. In respect of companies, Mr Higgs's review has now been reflected in The Combined Code on Corporate Governance issued by the Financial Reporting Council this summer. Indeed, A Guide to Developing Governance Arrangements praised the Higgs report and said that it represented useful guidance.

The NHS Confederation, which probably knows more about NHS boards than any other organisation, endorses the amendment. It believes that there should be a majority of non-executive directors on the board.

At least half the boards of listed companies in the private sector will have to comprise independent non-executive directors. Mr Higgs said in his report:

    "I agree that a board is significantly strengthened by having a strong group of non-executive directors with no other connection with the company. These individuals bring objectivity".

The Government's ideas about governance within foundation trusts may be based not on objectivity but instead on some rather shakier notions.

The Minister has today supported conflicts of interest arising through boards of governors and boards of directors. Ms Blears, the Minister who handled the issue in another place, said in another place that non-executives were,

    "partners in the enterprise".—[Official Report, Commons Standing Committee E; 15/5/03; col. 182.],

whatever that means. She saw them as workhorses, handling complaints or doing other tasks in the trust. She had no concept of independence, objectivity, dispassionate judgment or the contribution of external perspective. Is that what the Government really want in NHS foundation trusts? If so, they are flying in the face of received wisdom and have embarked on a dangerous path that we do not support. I beg to move.

4.30 p.m.

Lord Lipsey: In most cases, I can support the general case that the noble Baroness makes for a majority of non-executives. However, she and I have been battling on the same side to say what a poor means we have in the Bill of choosing non-executive directors. They will be elected by the board of governors by a system which, as she demonstrated this morning, could have been specifically designed to ensure the maximum

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chance that quite a few of them are fascists, extremists or represent single-issue pressure groups. In those circumstances, we should be much better off if they did not constitute a majority than if they did.

Lord Blackwell: The amendment exposes a confusion in the currently proposed role for the board of directors answering to the board of governors, which I hope the Minister will explain. If the board of directors were truly supposed to be the managing board of the hospital and the board of governors were in effect the place where non-executives should sit, I could have sympathy with the view that we would want a majority of executives on it, with a few non-executives to bring outside influence, but that it remained essentially an executive role. But in that case, our previous discussion would have been pertinent: one would have expected it to include the primary medical heads.

On the other hand, if it is supposed to be largely a governance rather than a management board, the argument made by my noble friend Lady Noakes must surely apply: it must surely contain a majority of non-executives if it is to play an analogous role to the board of a company. However, I am then left wondering what the board of governors is doing as another layer above it. It is either one or the other and I should be grateful to the Minister if he would explain that, so that we can take a proper view on whether the majority of the board should comprise executives or non-executives.

Lord Warner: I shall resist the temptation again to go over the ground of the role of the boards of governors and directors. In response to some of the points made, and given that the word "flexibility" did not pass my lips when discussing the previous amendment, we are providing flexibility here so that we do not try to lay down one size to fit all.

Perhaps I may remind the Committee of our debate on the previous amendment. We are not being prescriptive about the number of people from clinical backgrounds who will be on the board of directors. It will be for local people who are applying for foundation trust status to make a proposition that fits their needs; it will be for the Secretary of State to agree or disagree with that proposition, taking account of the categorical assurances that I gave on the previous amendment.

If non-executive directors are always to outnumber the board of directors, we will have always to provide for that. It is worth bearing in mind that the Higgs proposals arose from concern about management in private sector companies, not public sector organisations. Some commentators have commented unkindly about the processes by which non-executives get selected in some private companies. So I am not sure that we want to push the analogy with Higgs quite so far as did the noble Baroness. I make no slanderous remarks about any particular companies, but I merely echo some points made by some commentators in that debate.

The Bill does not exclude any specific requirements about the balance between executives and non-executives on the board of directors. That is entirely deliberate. We consider it important that foundation

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trusts should be able to implement the most appropriate balance within the new model of governance being set up. That means that nothing in the provisions prevents them having a majority of non-executives on the board of management, if that fits their needs.

We have touched several times during our debates on the question of a review. I am sure that the regulator will want to issue guidance on that in due course. We accept the need to review the governance arrangements in the light of the experience of the first wave of trusts. We are not in a position to say categorically that in all circumstances, we want non-executive directors to outnumber executive directors on the boards of directors for foundation trusts. I suggest that we leave things as they are rather than pursue the amendment.

Baroness Noakes: I thank the Minister for that reply and thank other Members of the Committee for speaking. I was not surprised to hear the return of our friend "flexibility" on the amendment. The noble Lord, Lord Lipsey, made the extremely important point that if we were to have political non-executive members, we would not want them to be in a majority. I fully subscribe to that. Under the next amendment, we shall consider how non-executives are chosen—to deal with the points that I think that he had in mind.

My noble friend Lord Blackwell again raised the confusion that is at the heart of Schedule 1. There is so much flexibility that we do not know what kind of organisation is intended. Doubtless those out in the field do not know either. The point about having guidance, which we want included in the schedule, is that people know with which norms they should be complying. That is what happens in the commercial sector and it is generally regarded as valuable.

That is why the NHS Confederation supports the amendment. It understands that it is helpful to the NHS to have clear guidelines. What we find accumulating in the Bill gives absolutely no help. I cannot think of anything more retrograde than this whole series of flexibilities. We could end up with organisations that bore almost no relation to each other.

Today is not the day to pursue that. I shall read carefully what the Minister has said, but I suspect that we shall return to the issue. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 49 not moved.]

Baroness Noakes moved Amendment No. 50:

    Page 110, line 37, at end insert—

"(1) The board of directors shall establish a nominations committee with the function of recommending the appointment or removal of the chairman and non-executive directors.
(2) The nominations committee shall ensure that selection procedures used to arrive at recommendations for the appointment of the chairman and non-executive directors are in accordance with best practice for such appointments.
(3) The nominations committee shall make its recommendations to the board of governors."

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The noble Baroness said: I shall speak also to Amendments Nos. 52 and 59, which concern governance arrangements in foundation trusts. They pick up a point raised by the noble Lord, Lord Lipsey, in our previous debate.

Amendment No. 50 would insert a new paragraph after paragraph 15 of Schedule 1 to set up a nominations committee for the appointment of non-executive directors and the chairman of the board of directors.

The scheme under the Bill is that the board of governors will appoint or remove the chairman and non-executive directors. That is fine up to a point, but it does not deal with how those individuals will be chosen. In the commercial world it is now accepted practice for a nominations committee of the board to make recommendations for new non-executive appointments and for the appointment of the chairman. That practice is also followed in several parts of the public and not-for-profit sectors. It is now set out in the combined code that I referred to following Mr Higgs's review.

In the private sector the nominations committee makes its recommendations to the board, which then recommends appointments to the shareholders. But, mindful of the Government's experiment with two-tier governance, we have drafted Amendment No. 52 to have the recommendations made directly to the governors rather than the board, as they make the formal decisions.

I am quite clear that the best place to carry out the process is at the level of the board of directors. Under Higgs, for example, the nominations committee must evaluate what kind of person is needed. The combined code states:

    "the nominations committee should evaluate the balance of skills, knowledge and experience on the board and in the light of this evaluation prepare a description of the role and capabilities required for a particular appointment".

That exercise needs to be carried out on the basis of an intimate knowledge of the trust, the directors and the detailed workings of the board of directors. It cannot sensibly be carried out at one remove; for example, by the board of governors.

Sub-paragraph (2) of the amendment would require best practice to be followed in the selection procedures. They certainly change over time, but the important point is that objective processes are in place to select the right people for the foundation trust. Those are the sorts of processes that NHS trusts use at present for the selection of their non-executives. There is a danger in the Government's proposals that non-executives will be selected by boards of governors, not for their contribution to the corporate agenda of the foundation trust, but because of their acceptability to whatever factions are developing within the board of governors.

In another place, Ms Blears, the Minister then responsible for this part of the Bill, told Standing Committee E that the governors,

    "exercise influence in the day to day management through their powers to appoint the chair and non-executive directors of the NHS foundation trust".

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She added:

    "The structure is representative and democratic, with the members electing the governors, who in turn elect the directors".—[Official Report, Commons Standing Committee E, 15/5/03; col. 183.]

That is a very dangerous approach to the management of the complex organisations seeking foundation trust status. Directors, especially non-executive directors, should be selected for what they bring to the party and not for their political acceptability in these micro-political communities that the Bill will create.

I shall deal briefly with Amendment No. 59. It builds on the welcome requirement in paragraph 17 to have a remuneration committee. In the corporate sector it has been a requirement for some time for that committee to make a report each year in the annual report. Indeed, the DTI has recently significantly increased the information requirements of the items to be included in that report. Our amendment does not go anything like as far as that. But reporting publicly is an essential component of contemporary corporate governance. I hope that the Government will embrace it for foundation trusts. I beg to move.

4.45 p.m.

Lord Warner: I have followed the noble Baroness's arguments. I wish to put on record that we are not setting up NHS foundation trusts by reference to Higgs. Higgs is a set of propositions that relate to private companies as a result of problems that arose in a number of private companies. Their proposals have not even been accepted by large numbers of chairmen and chief executives in private companies.

We are not trying to design the arrangements appropriate for NHS foundation trusts simply by reference to the Higgs proposals. We may want to take account of good thinking in those proposals, as we take account of good thinking in other organisations. I do not think that we are trying to see that as the benchmark by which we judge whether the governance arrangements in NHS foundation trusts are the most appropriate.

The principle behind the amendments is to set up effectively two committees to advise on the appointment of chairs and non-executive directors, and to appoint a remuneration committee to report to the board of governors. I shall not cover all the ground again. We do not believe that it is necessary to specify that. We have set out what would be the processes for making those appointments. It will be an open and transparent process. We expect the independent regulator to issue guidance on that and other issues related to the role of the chair and non-executive directors and their appointment, similar to that issued by the Office of the Commissioner for Public Appointments.

I have already explained that the governance arrangements for foundation trusts are designed as a minimum framework within which those trusts have flexibility to tailor their own arrangements. If they want to have a nominations committee, there is

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nothing to stop them having one, but we do not think that that kind of thing should be prescribed in the primary legislation.

We agree with the principle of Amendment No. 59 that the committee responsible for determining the remuneration and terms and conditions of executive directors must keep the board of governors informed about its activities. But the committee should do that as a matter of course. We do not believe that it is necessary to put the amendment in primary legislation.

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