2021 has seen the relationship between chief executives and non-executive board members of “not for profit” entities under the spotlight.
February saw the publication of the judgment in the “Kids Company” case *. Among the issues that had attracted press attention, was the balance of responsibilities between an entrepreneurial full time paid CEO of a high profile charity and those of a voluntary but experienced, unpaid non-executive board – and the tensions between their respective roles.
We now have the publication, in September, of a review written by Alison Levitt QC into governance at the Royal Institution of Chartered Surveyors (RICS)**. A key issue was whether an audit report of deficiencies in the financial controls of the RICS should have been shared with the main board.
The reviewer found that that there was a failure of governance for, among others, the following reasons:
- The reporting lines and areas of responsibility were unclear. There were two issues. Firstly, the governance structure was less transparent than a standard commercial model (with a single “topco” board and sub committees with delegated authority). Furthermore, there was a lack of clarity about the roles and responsibilities of the senior management team.
- There was a significant concentration of power in the Executive, particularly the Chief Executive and the Chief Operating Officer, who became accustomed to deciding what was in the best interests of RICS – a not unfamiliar circumstance where the NEDs are not actively engaged in the day to day affairs of the organisation;
- There were sectional rivalries, with various governance bodies and a ”guarding” of ”turf”;
- There had been an over-dependence on rules, process and external legal advice at the expense of good judgement, sound governance principles and plain common sense;
- There had been weak leadership at Chair level; and
- A senior employee, had failed to understand that her duty was to the organisation as a whole and not merely to protect senior staff from criticism.
The Independent Reviewer concluded “that the origins of what went wrong in this case lay in the “governance architecture of RICS”. She concluded that “the constitutional structure has led to a lack of clarity about the roles and responsibilities of the boards, the senior leadership and the management…it was an accident waiting to happen….”
The distinction between the authority of a Chief Executive and that of the board is critical to a good relationship between them. The split of authority between the Chief Executive and Chair is particularly important.
However, the two cases above highlighted that this authority will vary. This will reflect the cultures and legacies of not for profit bodies. Here are some ideas for facilitating a good relationship:
- Avoid “surprises” – this was an issue in the RICS review. Non-executives do not want, for example, unexpected adverse publicity. That said, “bad news”, in itself, is not a “surprise”;
- The delegations to senior executives should be reviewed regularly to ensure that the balance is correct and the board is always aware of key risks of the business;
- Executives should keep the non-executives aware of key issues, no matter how unpalatable they are; and ensure the non-executives have a current and fair representation of the position;
- If a Chief Executive is making the board’s strategy happen the non- executives should provide a “bedrock” of constructive challenge where discussion is encouraged rather than closed down;
- If the senior management is being forced to adopt pragmatic solutions to circumvent unwieldy governance arrangements, this may be a “warning” that the governance needs fixing;
- Is there a conduit for ‘clearing the air’ outside formal meetings; and
- Can the non-executives take external advice without reference to central management or will they be perceived as “going behind the back of management”?
For more information, please contact Andrew Cowan, Andrew Crawford or Keith Jenkins.
*Official Receiver v Batmanghelidjh & Others [2021] EWHC 175 (Ch)
**Royal Institution of Chartered Surveyors (‘RICS’) Independent Review in respect of the issues raised at RICS in 2018 and 2019 following the commissioning by the RICS Audit Committee of a Treasury Management Audit – Alison Levitt QC – 7th September 2021
