Select Committee on Constitution Sixth Report


CHAPTER 6:IMPROVING THE REGULATORY STRUCTURE - THE DEVELOPMENT OF BOARDS

104.  The direction of Government policy in recent years has been to replace those regulators with powers vested in the individual (for example, the Director Generals covering the utility and network industries) with regulatory Authorities, comprising a board. The board is generally to be structured on lines consistent with the Code of Practice on Corporate Governance applying to companies: this includes the separation of the role of chairman and chief executive and the appointment of a majority of independent non-executive directors.[91]

105.  We received considerable evidence on the reasons for the move from individual regulators to boards. The move in many respects mirrors practice in most companies, which have a Chairman, Board and Chief Executive Officer. The move has been generally welcomed,[92] though there were caveats expressed by some who had served as individual regulators.[93] The argument for an individual regulator is that such an appointment enables the regulator to take the initiative and move quickly - not being held back by collective decision making - and to represent a clear and consistent face of regulation. A body such as a board may be slow and able to avoid some of the rigours of accountability faced by individual director generals.[94] The move towards boards has been motivated by the need to bring in a greater range of skills - even individual regulators variously appointed a body or board of experienced people to advise them - and to avoid the pitfalls that may occur from relying on the judgement of a single regulator.

106.  The creation of boards also facilitates a more efficient use of resources, with a clear division between chairman and chief executive, rather than combining the responsibilities in a single post. The board structure also enables the burdens of regulation to be borne by several people, especially valuable in those sectors where the regulatory responsibility is broad and heavy, as for example with the newly created Ofcom framework.

107.  Boards, like individual regulators, work within a clearly stipulated statutory framework. Experience has enabled that framework to be refined and enhanced. The requirement on a regulator to apply the principles of good regulation in their decision-making, and to be accountable for that, applies equally whether it is a board or an individual Director General. Sir Howard Davies told us in respect of the FSA that "any proposal [to the board] for a regulation or a rule change has to have attached to it a checklist which explains how each of the principles of good regulation have been met …".[95]

108.  We recognise that individual regulators were important in the initial stages of establishing a regulatory framework. They enabled a regulatory regime to be brought into being relatively quickly and for decisions to be made with some expedition. The regulators who were appointed tended to be able and experienced individuals, who often demonstrated an innovative approach. However, we take a developmental view. We believe that it is appropriate on the whole that regulators appointed as individuals give way to the appointment of boards. Once a regulatory framework is in place, boards can offer not only an efficient structure but also the potential for greater stability than may be possible with an individual. By drawing on the expertise of the different members, they can test propositions and take a wider view than is possible with a single individual. We believe that a board is better placed than an individual regulator to avoid some of the pitfalls identified in the previous chapter, and to manage risk better.

109.  We therefore welcome the move towards boards. We acknowledge the argument that a board may be a brake on innovation, but are satisfied that this objection is outweighed by the advantages. Regulated bodies may well not welcome extensive innovation anyway, especially if it gives rise to regulatory uncertainty. We also recognise the issue of representation: who provides the public face of the regulator? With an individual regulator, the answer is obvious; it is less so with boards.[96] Given the corporate board structure, there is a need for a public face. The Minister of State at the DTI, Mr Stephen Timms, whilst recognising the role of the chairman, suggested that some spreading of the role of regulatory spokesman might be helpful, stating "I guess it is likely to be the case that the chairman will have a particularly prominent role in the mind of the public at least, but that need not give rise to difficulty. In a sense it is helpful to emphasise the more corporate nature of the regulator, that there are perhaps one or two or more individuals who are associated with its decisions in the public mind".[97] It is our judgement that, in addition to fulfilling their normal duties, the Chairman or Chief Executive should normally be the authoritative spokesman on regulatory decisions and related matters, although we would not wish to be over-prescriptive. The essential point is that each board should designate one of its number to be the principal face of the regulator. The role could be shared, but we believe that the balance is in favour of a single individual.

110.  We welcome the move towards more collective board structures, rather than sole regulators, as one of the principal mechanisms for improving the quality and consistency of regulatory decision-making, and urge that this should be the norm for regulatory regimes. To ensure that there is no loss of accountability we recommend that boards designate one of their number as the public face of the regulator in order not to lose engagement with the public and to perform the role of building confidence and understanding. Normally this should be the Chairman or Chief Executive. Where appropriate open meetings should be held as a means of increasing public understanding and confidence.


91   See in particular Sir Adrian Cadbury, Report of the Committee on the Financial Aspects of Corporate Governance (London: Gee & Co Ltd, 1992); Sir Ronnie Hampel, Committee on Corporate Governance: Final Report (London: Gee & Co. Ltd., 1998); D. Higgs, Review of the Role and Effectiveness of Non-Executive Directors (London: Department of Trade & Industry, 2003); and The Combined Code on Corporate Governance (London: Financial Reporting Council, 2003). Back

92   See, for example, Q554 (Vol.II p194) and Vol.II p61, reply to q3 Back

93   Vol.II p23; Vol.II p138, para 12 Back

94   Q530, Vol.II p177; see also Vol.II p 166, para. 37 Back

95   Q857, Vol.II p302 Back

96   An HM Treasury view is set out in the Model Management Statement and Financial Memorandum for Executive NDPB's, stating at paragraph 3.4.3 that "the chairman has a particular leadership responsibility on", inter alia, "representing the views of the Board to the general public", p. 7, Model scheme for Accounting Officers, 27 March 2003. Back

97   Q1124, Vol.II p399 Back


 
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