The sorry tale of Cosmopolitan Housing Group’s (CHG) near-collapse and subsequent rescue by Sanctuary Housing Group has strong echoes of Lloyds/HBoS, RBS and the Co-operative Bank during the financial crisis. Cosmopolitan’s toxic mix of errors included over-ambitious expansion, mergers with inadequate due diligence, poorly understood legal instruments (in this case wrongly accounted for finance leases), and a board with insufficient understanding of their business and its risks. Its rapid descent into financial instability and total collapse was narrowly fended off by third party intervention.

The recently published report produced by Altair for Sanctuary and the HCA should be required reading for all involved in a governance capacity in the sector. In this article, we look at some of the key corporate governance lessons for registered providers

Governance failings and lack of board oversight

One overall theme is the quality of decision-making at board level and the extent of understanding of the risks faced by the Group. Although the extent to which this was due to the deficiencies in skills or experience of board members cannot be known, the report flags the need to keep under review the skills required at board level to meet the organisation’s current and future needs.

However, it is clear is that the board can only be as good as the information with which it is supplied. The GIGO maxim of “garbage in, garbage out” applies in governance as well as IT.

On a number of occasions, the report comments negatively on the quality of information provided to the Group board and the boards of Cosmopolitan’s subsidiaries in relation to a number of the key issues facing the Group. Sometimes the issue is that the board was given insufficient time to review and understand the information provided to them. Other times the information provided was itself inadequate and, in some cases, key financial information appears not to have been provided. The minutes of the board meetings were lacking on some occasions and were insufficient to demonstrate that the board had all the information it needed to consider all relevant factors.

The lesson to be learned is that boards need to take a robust view of the importance of these governance processes to ensure that those briefing them do what is needed to enable them to take high quality decisions. Boards should not allow themselves to be bounced into decision-making without sufficient time or information. High quality information must be provided in sufficient time for full consideration. Equally, we see the importance of properly minuting the decision-making process in meetings so that all matters considered by the board are recorded together with all the views expressed by board members, including the dissenting ones.

Overly complex group structure

The structure at CHG was criticised in the report. While this does seem to have been a complex one, there are often good reasons, including risk management and separating diverse businesses, for retaining multiple companies within a social housing group structure. The more serious problem in CHG’s case seems to have been a lack of understanding at Group level of the activities of all the group companies.

A prime example is that a number of guarantees were given by Cosmopolitan Housing Association Limited (CHA), a charitable, registered provider society within the group, for the obligations of Cosmopolitan Housing Association Limited (CSH),an unregistered student housing subsidiary. Such guarantees always need to be carefully considered given the risks to social housing assets that can arise from the activities of unregistered companies.

In this case it appears that the Group board and board of CHA were unaware of at least some of these guarantees and that the guarantees were entered into in breach of an internal agreement that group companies would not guarantee each other’s liabilities.

Although minutes of the CSH board were provided to the CHA and CHG boards, there is little evidence that they were considered in any detail. This is perhaps an example of a formal process which ticks a box without delivering the information and understanding required.

Groups should ensure that they have adequate oversight and control of activities throughout the group, understand the risks faced by each group company and what that means for the wider group. Corporate structures should be kept under regular review to ensure that they continue to meet the needs of the group.

Poor merger decision-making

CHG merged in December 2011 with Chester and District Housing Trust (CDHT). Although legal and financial due diligence was undertaken, it appears to have been incomplete and the report highlights that some of the gaps in due diligence were related to the areas which ultimately contributed to the crisis for the merged group. The quality of information provided to the boards of CHG and CDHT again seems to have been weak and the business case for the merger was not fully thought through. There is a suggestion that the merger was driven more by the respective executive teams than strong belief at board level in the merits.

In some ways, the failings in relation to the merger seem to fall more on the part of CDHT which, in some ways, was caught in the crossfire of CHG’s problems. Some gaps in its due diligence were not followed up and the due diligence reports were not reviewed in full at board level. Nor was a compelling case made for the benefits of the merger for CDHT. Was there an element of passivity because it was the smaller organisation, the junior partner and the one being “taken over”? While there is usually a larger partner in any merger process who can be seen as the acquirer in charge of the process, both parties need to conduct a thorough due diligence and understand and demonstrate how the merger will benefit the organisation and its stakeholders.

Lack of urgency in dealing with solvency issues

CHG’s liquidity problems came to a crisis in summer 2012. However, despite the problems becoming fully apparent in May and June 2012, the Group board did not consider these issues until July 2012. In situations where there is a serious risk to the solvency of the organisation, the issues need to be addressed on an urgent basis rather than waiting for scheduled meetings.

That may mean that the full board needs to delegate its decision-making to a smaller group of individuals within the board who have the skills and availability to deal with the crisis. The scope and limitation of such delegation needs to be clear while ensuring that the full board is regularly informed of the steps being taken. The board also needs to understand its limitations and to seek external advice where necessary as early in the process as possible.

Lessons learned?

The report closes with a series of recommendations for both registered providers and the regulator. Boards should look at these in detail but it really does bring home the importance of good governance to the success of registered providers and the extent to which failures in governance have the potential to bring down an organisation.