Governance Spotlight - The vital link between Governance and Treasury

Most organisations recognise the need to ensure these two vital functions work in tandem – so why do we see many organisations struggle to implement this in practice?

In the first of our quarterly ‘spotlights’, Louise and Sarah have partnered with DTP, a consultancy specialising in finance, treasury and governance, to consider why this alignment poses such a challenge - and how you can ensure your day to day practices equip you to face the uncertainties ahead.

Setting the scene

As the lockdown eases, the Regulator of Social Housing (the Regulator) is scaling up its regulatory activity. Its IDA programme has recommenced, and it is seeking assurance on the overall position of the sector through the annual stability check process. FFRs supported by current business plans are now required from associations by 30 September 2020.

While associations have adapted considerably in the last 5 months, it is clear that there is still a lot of uncertainty contend with; a recession, increasing unemployment amongst residents, a backlog of compliance and the challenge of managing operations during the phasing in and out of lockdown restrictions.

The Regulator will be focusing on how assocations are managing these uncertainties and, in particular, how their governance and financial management is coping.

We are also increasingly seeing funders taking a more active interest in reviewing governance arrangements, assessing risk exposure by reference to associations’ governance gradings. The ratings agency S&P expects £17 billion in new debt deals for housing providers until 2021 to fund the building of 54,000 more social homes annually. At a time when rates are incredibly low, offering associations a unique opportunity, those associations who can demonstrate good internal controls will be best placed to secure the funding necessary to support the development of new homes on the most advantageous terms.

There is significant interest in the social housing sector, which is seen as a low-risk investment particularly in the current climate due to the perceived strong governance and a robust regulatory regime, which help to tick the “Environmental, Social and Corporate Governance” (ESG) box.   Treasury and governance teams at associations have a role to play in proving that is the case and consequently keeping the interest of those investors.

It is clear now, more so than ever, how vital it is that your governance and treasury functions are aligned in order to adapt to these challenges.

The challenge

In our experience most associations recognise the importance of this link and attempt to achieve alignment through their processes and procedures. However, some organisations struggle to actually ingrain this within the day-to-day working of the association, and only truly bring governance and treasury together in order to report to the Board.

This can lead to:

• A disjointed approach to identifying, managing and mitigating risks, and how this influences the Board’s risk appetite and decision-making
•  Failure to implement appropriate internal controls through governance structures to manage and mitigate risks
• Unexpected issues arising on strategic projects  - e.g. slippage / cancellation, creating possible impact on cash flows or costly holding of unnecessary cash, pressure on the finance process leading to potentially higher interest rates on debt and over-reliance on decision making by use of urgency procedures
• Lack of clarity over roles and remit leading to duplication in governance structures - including amongst the board(s) and committees
• Over-reliance on advisers because they offer a broader view and carry corporate history, or because there is a lack of skills or knowledge on the Board. This can lead to a failure to ‘ask the right questions’ when making decisions, and to hold those advisers properly to account
• Poor quality reporting which goes unchallenged by the Board 
• Inappropriate delegation by of important treasury matters to a committee perpetuating the view of treasury as a specialist function and thereby justifying the abdication of responsibility 
• Failure to appropriately monitor plans during periods of change – for example, questioning the business case and whether there has been an impact on business plan assumptions? 
• Poor integration of fundamental changes into the business because of a lack of understanding of roles/responsibilities for on-going management and retention of corporate history

and so on…

Generally these symptoms will go unnoticed or only reveal themselves at times of ‘high stress’ – when this period is over, organisations move on and fail to take learnings into account for the future. However, at a time when associations are adjusting to significant and on-going change, they are likely to become more acute and persistent.

A holistic approach

Raising debt on the capital markets, by way of a public bond, or to a lesser extent a private placement or merger, tends to shine a spotlight on the governance arrangements of associations and drive fundamental changes. Interestingly we see less of the above “challenging” symptoms arising for those associations which have been through that process.

The rigour of the process of raising such finance where your governance is analysed in granular detail in order to develop your prospectus and ‘sell’ yourselves to the market forces associations to question and challenge their governance in more detail than ever before.  The increased emphasis of investors on “ESG funding” provides an additional incentive to ensure that governance and treasury functions reflect best practice.

What can we learn from this?

Significant transactions such as bond issues or mergers require involvement at all levels of an organisation’s structure. This can drive cultural change - it is clear that achieving alignment is not just about imposing new structures, lines of responsibility and processes. In most cases, culture– with the tone set from the top – is the starting point to drive a more holistic and integrated working environment.

Verification during a bond issue, in a similar (and arguably more rigorous) way to due diligence carried our pre-merger, also requires critical assessment and challenge in order to prove all statements made to the market. This requires organisations to have effective internal lines of communication, an understanding of each other’s roles and how they ‘fit in’ to the wider picture.

It is not about ‘checking each other’s homework’ (although this will be an important part of obtaining assurance when delivered in the right way); true alignment arises from working on a day-to-day basis in a collective and integrated way.

A key challenge and risk for the sector is that many associations have resourcing issues in relation to specialist and experienced governance and treasury staff when compared with other industries. Often organisations will re-assess the skills of the leadership team and boards and committees as part of the preparation for a large fund-raising event, such as a bond issue. But these requirements apply irrespective. Boards and leadership teams need to ensure that their organisation has the right skills, experience and expertise for the business to operate successfully at all times. And that all remits, roles, committee structures and delegated functions are clear and understood by everyone.

Being able to provide reassurance quickly to investors and the Regulator is vital. Boards should ensure that monitoring and reporting are sufficiently comprehensive and robust to enable them to quickly identify and address issues in order to meet the Regulator’s requirements for compliance. It is clear that increasing levels of details and disclosure within business plans and forecasting are expected.

Finally, associations need to ensure they involve both governance and finance staff at early stages of projects. All aspects of the business are inter-dependant and ensuring that teams, committees and boards work in a co-ordinated manner with the wider governance and treasury function significantly reduces both legal and business risks. Governance and treasury teams may be fortunate to be able to call on the counsel of a Company Secretary to advise on and support decision-making across the organisation. The empowerment of the Company Secretary at the highest levels to take a lead of compliance - and to hold those to account who do not operate within the controls system – is a vital assurance tool.

And – when things do get sticky, for whatever reason – it is vital that organisations take the time to reassess and learn.

In the current environment, having governance and treasury working in isolation is no longer sustainable; all associations need strong, skilled boards and clear, effective governance frameworks in order to thrive. Governance arrangements and structures have to be fit-for-purpose both now and for an (uncertain) future.

Written in partnership with

Resources of interest

REGISTER NOW - Challenging your governance function; re-thinking the role of the Company Secretary (in partnership with DTP)

ON DEMAND Webcast - NHF Housing Governance Conference 2020 - The Company Secretary as the agent for change
If you were unable to attend the NHF Housing Governance Conference this year, you can now watch our presentation on ‘The Company Secretary as the agent for change’. Join Sarah Greenhalgh, Senior Associate at Bevan Brittan and Gemma Burton-Connolly, Company Secretary at Radian as they discuss: How the role of Company Secretary is evolving in the sector; Promoting the importance of governance; Pioneering new ways of working and finding innovative solutions to familiar problems