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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