Morgan Hunt looks at the need for change and regeneration

Housing Association mega mergers have been gathering pace for a while now.

Since the merger talks of social housing landlords L&Q, Hyde Group & East Thames to create the fourth largest house builder, questions have been raised as to whether mega mergers will mean the loss of social purpose in housing.

The L&Q, Hyde Group & East Thames merger will have a turnover of £1.1bn, a book value of more than £30bn and own 135,000 homes, more than 5% of the English housing association sector’s stock. And they’ve pledged to build 100,000 new homes, 35,000 more than they could have achieved alone.

We’ve also just witnessed a breakdown in talks between Sanctuary and Housing and Care 21. When it was all looking so good their differences in the end could not be resolved, causing the withdrawal of one party, and culture was the reason reported.

Social purpose and culture; two strong drivers, difficult to negotiate and hard to compromise on.
 

The ratio of input to output
But is bigger better? The impetus for such mergers comes from new Government legislation around, welfare reform, extended Right-to-Buy, rent cuts and a requirement to build more homes. To fund this housing associations need efficiency savings that can be gained from their back office, IT and procurement functions. Mergers of this scale can deliver savings in millions. But as with all enterprise it needs to regenerate and this has not really happened since the move away from council housing in the 80’s.

Being larger is not about being better but being able to be more productive with greater output, and larger organisations believe they can increase their capacity. Being larger can improve borrowing capacity too and large scale build-to-rent projects need access to funds.

Housing Associations are increasingly dependent on profits from mixed housing sales; shared ownership, housing fixed assets, right to buy (RTB) or right to acquire, and open market sales. This enterprise based income represents more than a third of their surplus.

If newly merged organisations are focused on house building and income maximisation, then it’s easy to see how social mission and culture could get lost?

Without doubt social housing has been left high and dry by Government policy and it must find and fund its own way through, not just to survive, but also to thrive, remembering that surplus in the non-profit organisation goes on to fund more homes for more people.  
 

Resource, people and money
In the L&Q, Hyde Group & East Thames merger they will set aside £250m for community investment projects and £5m a year to create an academy scheme which will offer training and career development for staff and residents, no lacking of social mission here.

To regenerate the new organisation will need skilled labour and new talent to deliver the promised output.

Change is both challenging and uncomfortable and is resisted because it can hurt. It is also very difficult to do solely with the existing workforce, a diverse mix of skills and experience is required who on the one hand can challenge the status quo and on the other can understand the context of change within the organisation, and this is where culture can be a stumbling block.

Experience from outside of the industry can add impetus to new ways of doing things but it needs a strong leader with a vision to navigate a way through the road blocks. A growing organisation is a great attraction for talent and if organisations continue to do what they’ve always done, in the way that they’ve always done it they will move no further forwards.
Last year L&Q, the largest of the three newly merged associations, had a surplus of circa £200m yet they invested £217m in new build for lettings, £184m in new build for sales and £57m in improving existing stock. Clearly a strong social mission here.  
 

Who holds the power
The biggest challenge facing housing associations is cultural change in accepting that tweaking around the edges is unlikely to deliver what the government wants, the economy needs and communities rely upon. Their power lies within themselves, better to be in than out and better together even if the ‘cultural fit’ isn’t at the start a smooth cog in the gears of the newly formed organisation…this can be worked on over time but it’s not a reason to pull the plug. 

And keep the wage bill down

Executive pay has come under criticism in social housing. In the largest 100 housing associations, pay in the top job has risen by 5.5 percent. It stands out because this is not matched in the lesser ranks and also because Government legislation is sucking out the surplus for many.

The ‘pro’ view for increasingly higher pay has been around the lack of skills and expertise within the sector; that salaries are benchmarked, that this is the going rate, and that ‘their’ particular organisation has twice the housing stock and consequently demands a premium rate - the latter metric having a curious and anomalistic alignment with worth.

The senior appointments team at Morgan Hunt has been placing top execs in the public and not for profit sectors for the past decade and there is some growing concern around the concept of ‘closed shop’ creeping under the boundaries of housing top level jobs; that a precondition of employment for the Chief Executive role is experience within the sector.

“It’s true, that the learning curve at the start of a job might be steeper if the person who is hired is not sector experienced, but there is no evidence to suggest that someone from outside the sector cannot do the job as effectively” says Frazer Thouard, Director, Senior Appointments Division, Morgan Hunt.

Economists always view long run investment curves with a dip to start with and then with increasing returns later on. An example of outside sector recruitment is Carolyn McCall, appointed Chief Executive of Easy Jet in 2010 after 25 years in the newspaper business. Aviation, media? Not a lot in common apart from both being high fixed cost businesses, but it has not mattered judging from her performance.

Are boards too close; do they lack objectivity when it comes to making decisions on pay and candidate selection, should there be more independence, more vision, a wider scope?

Both recruitment and Ftse 100 companies have been lambasted for being too narrow in their search and selection of candidates, including the appointment of non-executive directors.

We should not condone top pay for top skills. Skills of this kind often command three times higher in commerce and industry. Also there is an increasingly larger enterprise remit entering into social housing; and, given their social purpose, the shifting balance will be a higher and more challenging wire to walk for any CEO.

Yet talent in social housing does not solely exist within a homogenous housing group and the laws of economics will drive up price where supply is restricted. “Looking beyond the immediate social housing community can bring in much needed new talent and innovative thinking.” says Thouard. “If social housing is to evolve, it should look outside for fresh ideas. If the sector is doing all right then it’s ok to recruit from within, but it isn’t, and swapping around directors is not the best solution. This would be a mind-set change for the industry”.

This viewpoint is clearly not held by all. And there are issues in attracting good quality candidates from outside the sector due to its image, yet there is still enough within the remuneration package for recruiters to market with confidence.

For example the vast majority of Chief Executives (80%) are on defined contribution pension schemes; this is rare in commerce and industry. With employer contributions of up to 30 percent, recruiters need to wise up on the lure of these increasingly scarce additions.

For more information on Morgan Hunt Senior Appointments email us.

7 'common sense' rules of governance from Morgan Hunt’s round table discussion
 

Morgan Hunt played host to charity CEO’s to discuss how charity boards can become a more effective and informed Trustee body.

Lead speaker Suzanne McCarthy outlined her 7 ‘common sense’ rules and led discussions on what is about to change that will affect how charities operate for good.

Change is in the air. A new code from the Independent Fundraiser Regulator will be published in July. And that’s not all. Down the line new legislation in data privacy will change the dynamics of fundraisers’ relationships with donors.   

In Morgan Hunt’s breakfast roundtable we heard that the donor’s voice got lost under the strong fortissimo of fundraisers’ orchestral needs but how that must change with consent up front.

Suzanne McCarthy, Chair of Depaul UK led an inclusive discussion with our charity CEO’s; we listened to her down to earth advice on the importance of priorities and Trustees responsibilities; why relationships matter, how boards need to ensure that they work as an effective and informed body, where charity boards need skills to function properly, and why empathy alone is sometimes not enough.

The seven rules of governance will become even more important as charities get set to overhaul their operations in line with the new code of practice and new regulation to follow:

 

Governance fit for purpose

The first of the seven rules is grounded in a common problem that all charities face, working with volunteer Trustees.

Difficulties arise from working with a board consisting of volunteer Trustees which is much harder than working with boards made up of paid employees. Charity boards may only meet up to 6 times a year for a few hours at a time, with Trustees removed from the day to day operations of the organisation.

Beneficiary Trustees may have great passion for the cause, but might not possess the functional skills and experience for the task. Yet a charity board must ensure that adequate governance is in place and that their Trustees are fully conversant with their wider responsibilities.

Furthermore Trustees need to realise that everything done in fundraising is now done in their name and that good practise in Governance also demands constant review.
 

The function of the Chair

The Chair’s main function is to set the Board’s tone and direction to ensure Trustees clearly understand their function. The success or failure of a Trustee can depend on this.

A key point made was everything that a charity organisation does must be tied to value. It’s not about the money but about value, and Trustees must have a feeling and a kinship for those values.

This is not the mission statement but about what a charitable organisation is there for. We heard that if this cannot be articulated clearly then the charity will have difficulties with Trustees focusing on what they are supposed to do.

Value driven Trustees are supposed to act in the interest of the charity and their beneficiaries; to protect and safeguard the charity’s assets, and act with reasonable care and skill. They need to understand what the charity is there to do; the charity’s purpose, what the charity does and what it wants to achieve.

 

Trustees – not just for Christmas

It was made clear that being a charity board Trustee is not a half-hearted occupation. We heard that it’s not something that you can pick up and leave, like a puppy. It’s not just for Christmas, but a very serious responsibility that requires long term commitment.

The appropriate mix of expertise to have on board depends on the skills required to function and does not need to be a client beneficiary, unless it is written into the constitution, but you do need their voice.

“We want Trustee boards to genuinely understand the challenges that beneficiaries face. But we also need to move to more professional boards - the two things have to go hand in hand” said McCarthy.

Participating charities discussed ways in which to get understanding. We heard that sending Trustees out in the field or on a beneficiary project so they could understand the values and see what it is they are delivering was a great way in which to build this understanding. Trustees can get the chance to bond together and meet with staff. So it’s possible to get professional boards closer and engaged with beneficiaries.

Common to a lot of charities is the difficulty in recruiting Trustees and often the reason why charities only have beneficiaries on boards of whom may not have the necessary skills required. We heard ideas of non-remunerating ways of engaging people and keeping in touch, indeed with younger members, a chance to acquire skills and experience that they could take with them to new employers.

 

Size matters

Charity boards of the right size matter, particularly when boards have a number of different committees. Trustees must appreciate the requirements of confidentiality, collective responsibility and behavioural standards even outside of meetings.

But it was emphasised that if it is a committee that is covering the issue the Trustee cannot think ‘oh that’s already done’, committees do not let Trustees off the hook.  They still have responsibility for what is going on.

 

Trustee appraisals

Described by one delegate as a weak link many Trustees are still not appraised. We heard about the benefits that an appraisal system has in directing and in relationship building.

Yet a number of our participating charities already had appraisals in place. They were holding reviews and appraising Trustee performance with annual objectives for each member of the board, reviewed at the end of each year. Some participants were positive about how it was helping to professionalise chairs and boards. Others talked about the brick wall that they faced in trying to formalise their Trustee arrangements.

Rule number five is that Trustees should be regularly audited and appraised as individuals and as a collective – ideally on an annual basis.

 

It’s all about Priorities

Since Charity boards do not meet that often a meeting agenda needs to be focused on priorities.

The point was made that work is not done in committee meetings but afterwards. Charities were advised to work on getting decisions made at meetings. Important issues should be given sufficient time and space, commensurate with the level of decision taking required. For example large scale investment decisions should not be trumped by low level irritations.

And as not every Trustee will read every word of the agenda paper an Executive Summary has to be good enough to communicate the priorities. And that Executives and team members should be able to present their agenda to the board in a clear and concise manner.

The first hour of a charity board meeting is the most important. Board papers should be written in clear English, be accurate and contain good and timely performance management data. The requirement for the Trustee should be explained clearly from the beginning of the paper.

Finally always appraise meetings. Sit back and ask whether it went well. Question whether you covered everything that you intended to.
 

The partnership - Chair and CEO

The last of the seven rules was about the relationship between the Chair and the CEO. This must be a partnership and it requires trust, respect and openness. Chemistry counts and the relationship is crucial to get right.

The Chair and CEO must have a robust relationship and trust each other; working together towards strategic goals as a collective, effective and informed Trustee body.

For more information email our Senior Appointments team.