Parents must be in control of little ones

In recent years the creation by housing associations of group structures has been a popular answer to a number of the policy and practical questions they face.

More than 70% of stock within the housing association sector is owned by associations that are part of some sort of group structure. The range of structures is wide and the reasons for their development are many and varied, ranging from taxation benefits to stock transfer and efficiency savings.

The more recent changes in the Housing Corporation’s investment agenda, taken together with the efficiency drive following the Gershon review into public sector efficiency, seem likely to further stimulate the move towards group structures and so it is helpful that the corporation clarified its approach in November by issuing Regulatory Good Practice Note 11.

Any new group structure, or an existing one that is to be changed, has to comply with this.

GPN11 mainly restates general principles that the corporation already applied in its consideration and regulation of groups.

For some time, the basis of regulation has been that the group parent must be in a position to control the subsidiaries. Regulation of groups therefore focuses attention on the parent far more than on its subsidiaries.

This approach is reflected in the corporation’s approach to supervision: if a member of a group gets into difficulties, and the corporation decides to intervene, the whole group will be placed under supervision because the parent is held responsible for the subsidiary.

The corporation expects the parent to take steps to identify and resolve any problems within the group. This means it is a fundamental part of the corporation’s appraisal of any group registration application that it is clear that the parent has the power to take those steps in respect of each subsidiary.

The corporation is particularly concerned about governance arrangements within the group. These must demonstrate that the parent has ultimate control over the subsidiaries and this must be clearly reflected in the governing instrument of each subsidiary and in the operational agreements between parent and subsidiaries.

GPN11 sets out a number of the key requirements, which include:

• At least one-third of the members of the board of the parent must be neither residents of the association, local authority appointees, executive staff, nor a board member of any subsidiary. This one-third independence requirement must also be reflected in the quorum arrangements for both general and board meetings (there may be exceptions).
• The constitutional arrangements must not be such that the subsidiaries are able to control the parent through its general membership. So the governing instrument must reflect the requirement that at least one-third of the voting rights in a general meeting are in the hands of people who are completely independent of the group’s subsidiaries.
• Although a degree of overlap is acceptable, there must be some members of the board of the subsidiary who are not on the board of any other organisation in the group.
• The constitutional documents and agreements between group members must create clear and transparent arrangements that comply with the corporation’s expectations set out in GPN11.
• It must be clear in the subsidiary’s governing instrument that the parent has the power to remove all board members in addition to whatever powers of appointment it has (usually at least a majority). In addition, there must be no power for the subsidiary (either through its board or in a general meeting) to remove a parental appointee.
• The parent must have the power to call a general meeting of the subsidiary and there must be a representative of the parent at the meeting as part of the quorum requirement.
• The governing instrument of a subsidiary must not be capable of amendment without the parent’s consent.

A key component of any group structure is the procedure or intra-group agreement, which will provide for the parent to monitor the operation and performance of the subsidiaries and to set the overall policy for the group.

The IGA will set out the extent to which subsidiary boards are able to input into group level strategies and the group business plan. But a key expectation of the corporation is that the parent’s powers should not unreasonably restrict a subsidiary’s operational autonomy or its ability to influence policy, future policy and strategy. This indicates the need for a fine balance between the key constitutional powers by which the parent controls the subsidiary and the freedom of independent action which the parent gives the subsidiary through the IGA.

GPN11 covers much more than has been able to be dealt with in this short article, and a copy of it can be obtained from the corporation’s website.

Those involved with the creation and amendment of group structures have worked for a number of years in the context of a developing, and partially unpublished, corporation policy in this area, so the publication of GPN 11 is most welcome.

But one suspects it will not be the last word on this rapidly evolving area.