Company Secretary Snapshot

Welcome to another edition of the monthly snapshot. This month we’re looking at the Social Housing (Regulation) Bill, board remuneration and more developments around the sector.

The Social Housing (Regulation) Bill is published

The Social Housing (Regulation) Bill was published on 8 June 2022. Some of the main reforms in the bill include:

• "Ofsted Style" Inspections: the Regulator of Social Housing (RSH) will have powers to regularly inspect landlords in relation to such matters as health and safety and repairs performance. The length of time that RPs will be entitled to notice of such inspections is cut from 28 days to 48 hours.
• Consumer regulation: as expected the 'serious detriment' test will be removed which will allow the RSH to monitor the consumer standards similarly to the way it monitors the economic standards.
• Performance improvement: the RSH will have the power to issue ‘performance improvement plan notices’ to RPs that fail or risk failing to meet certain standards.
• Health and safety: RPs will need to have a named person as health and safety lead who will be responsible for health and safety requirements. RPs who do not comply will be subject to fines or enforcement action.
• Information: Tenants of housing associations (though not the public) will be able to make information requests similar to Freedom of Information Act requests.
• Building safety: the RSH will have the power to order and/or carry out emergency repairs (at the landlords’ cost) if the RSH finds that there is an “imminent risk of serious harm”.
• Transparency in reporting: the RSH can require RPs to provide and/or publish certain information. This includes publishing information about the remuneration of executives.
• Tenant engagement: tenants will be able to demand certain information and rate their landlord as part of new satisfaction measures. The RSH will set up a new advisory panel, which will be made up of tenants, RPs, lenders, councils and grant providers. This panel will aim to provide the RSH with views on anything that “could have a significant impact” on the provision of social housing.
• Complaints handling: further reforms to the role and remit of the Housing Ombudsman, including a more joined-up approach with the RSH – they must record how they intend to work with each other in a (maintained) memorandum. The secretary of state will be allowed to “name and shame” landlords in relation to particular findings of the HO.

FAQs – What factors do you need take into account when it considering board remuneration?

Welcome to our monthly FAQ section where we spotlight some of the more common topics that you have been asking us to advise on. We have recently been receiving a number of queries in relation to board remuneration.

The idea that the board members of charitable bodies could be paid was once considered unfeasible. Since the NHF published the second edition of its code of governance in 2004 (and explicitly made provision for the payment of non-executive board members), it is now common practice across the sector to remunerate charitable boards.

Below is a selection of some topics that have come our way recently:

• Make sure that you have a board remuneration policy in place and that you are adhering to it and applying it fairly and equally across your organisation/group. If it’s not fit for purpose, amend it. If it’s not broken, don’t fix it.
• You should also have an expenses policy and a conflict of interest policy which speak to your remuneration policy.
• Apply the code! Whichever governance code you have adopted make sure you are applying it in relation to board remuneration. Under the National Housing Federation’s code, payments to board members must be (amongst other things) permitted by your constitution, in the best interests of your organisation, proportionate to your size and complexity and regularly reviewed.
• Sometimes it helps to be clear about what is not being remunerated. For example, if board members are not being paid for training, but they are still required to attend training, then then it may be helpful to explicitly set this out.
• Paying the board members of registered charities (i.e. charitable trustees) should not be treated in the same way as paying board members of registered societies. Registered charities will usually be unable to pay their trustees unless their governing document explicitly allows this. Amending the governing document to allow for trustee pay will require Charity Commission consent.
• Disclosure – most organisations are required to publish board remuneration in their annual financial statements. See above for how the new social housing bill will also shine a spotlight on the remuneration of executives. With this in mind, now is a great time to review your remuneration policies and the terms of reference for whichever committee is responsible for reviewing pay.

A Voluntary Code of Conduct for Directors

The Institute of Directors (IoD) has called on the government to develop a voluntary code of conduct to encourage business leaders to become more accountable for their actions and behaviours, and to commit to a set of principles that will enhance public trust in business.

In its policy paper, ‘A voluntary code of conduct for directors’, the IoD suggests a voluntary approach would be more effective than a heavily regulated regime, where individual responsibility and the importance of business-led solutions could be emphasised. The IoD considers that a more heavily regulated regime could risk inducing a “counterproductive focus on compliance” and hamper businesses’ efforts to be strategic and innovative.

It is hoped that a voluntary code setting set principles to guide business leaders’ behaviours would encourage modern thinking, in particular in relation to issues such as climate change, diversity and business purpose. By committing themselves to the code, directors would signal their willingness to apply high ethical and behavioural standards in their governance and leadership.

The suggestions come in the wake of recent corporate scandals at Carillon, P&O Ferries, NHS and other significant enterprises which have resulted in an understandable demand for businesses to be held more accountable to the wider society.

A survey of almost 600 business leaders in May 2022 found that 78% supported the creation of a director code of conduct. This included 58% who felt it should be mandatory for all UK directors and 21% who felt it should be a voluntary decision.

The Law Commission on Corporate Criminal Liability

The Law Commission has published its options for the Government for how it can improve the law to ensure that corporations are effectively held to account for committing serious crimes.  

The Commission was asked by the Government to carry out a review of the law on corporate criminal liability, and present a set of options for strengthening the law, in a way that does not overburden businesses.

The review followed concerns that the law falls short in adequately holding corporations – especially large companies – to account, particularly for economic crimes such as fraud.

Under current law, companies and other “non-natural persons” can be prosecuted for a range of crimes in England and Wales, which can also include environmental or regulatory offences.

The Commission’s possible options presented to the Government for law reform include:

• Retain the current general rule of criminal liability applied to corporations – the “identification doctrine” – as it stands.
• Allow conduct to be attributed to a corporation if a member of its senior management engaged in, consented to, or connived in the offence. This could be drafted so that chief executive officers and chief financial officers are always considered part of an organisation’s senior management.
• Introduce an offence of failure to prevent fraud by an employee or agent. This would apply when the company has not put appropriate measures in place to prevent their own employees or agents committing a fraud offence for the benefit of the company.
• Introduce an offence of failure to prevent human rights abuses.
• Introduce an offence of failure to prevent ill-treatment or neglect.
• Introduce an offence of failure to prevent computer misuse.
• Make publicity orders available (requiring the corporate offender to publish details of its conviction) in all cases where a corporation is convicted of an offence.
• Introduce a regime of administratively imposed monetary penalties.
• Introduce civil actions in the High Court, based on Serious Crime Prevention Orders, with a power to impose monetary penalties.
• Introduce a requirement for large corporations to report on anti-fraud procedures.

Termination clauses in contracts

The High Court has recently passed judgement on a case which considered whether a clause preventing termination except by written notice also prevented an informal novation.

The facts of the case were that a new supplier had been performing a contract in place of the original supplier without any formal agreement to do so. When the new supplier was not paid by the customer, he sought a summary judgment against the customer for the recovery of unpaid sums.

Although the supply contract provided that it would remain in force until either party gave the other not less than three months’ notice in writing, the Court interpreted this with business common sense to conclude that this provision only applies to unilateral termination. Where both parties agree to terminate the contract, it would make no sense to require three months’ notice and the contract contained no formalities for termination by agreement, the parties were free to terminate the contract by informal novation.

In any case, the Court considered that the customer would have been estopped from relying on the termination clause. By receiving and paying the new supplier's invoices, the customer had encouraged the new supplier to believe it was contracting with the customer and the new supplier had relied on this by providing services and incurring expenses.

As part of its judgement, the Court also provided a useful summary of existing case law on the effect of unreasonably withholding consent to assignment and what constitutes unreasonable withholding; If a party unreasonably withholds consent, the other party is entitled to proceed as if consent is no longer required. Organisations undertaking intragroup business transfers may find the judgement interesting when considering how to deal with any residual contracts post-transfer.

Strengthening audit, corporate reporting and corporate governance systems

Following extensive consultation, the Government has published its plans to strengthen the UK’s audit, corporate reporting and corporate governance systems.

The Government is intending to revamp the UK’s corporate reporting and audit regime by introducing a new regulator, replacing the Financial Reporting Council with the Audit, Reporting and Governance Authority. The Government also plans to introduce greater accountability for big business and to address the dominance of the Big Four audit firms. It will also be reviewing wider reporting burdens on large and small businesses, including those from retained EU law, with a view to helping the UK’s companies grow whilst bolstering investment.

Under one example, the Government will be updating the definition of micro-enterprises which, in its current form is believe to be forcing many of Britain’s smallest businesses to spend time and money preparing accounts to a level of detail which should only be required for larger companies. By reforming the current systems in this way, the Government is intending to regulate British businesses in a more proportionate and agile way that works for those businesses.

The genesis of the audit and corporate governance reforms is to enhance society’s trust in the wider UK business environment following various corporate scandals and collapses. Whilst it is hoped that the reforms will do just that, commentary around the Government’s response indicates a level of discontent that the reforms have been stalled and scaled back.

It is expected that legislation to implement the relevant reforms will be introduced after June 2023, however some measures still be implemented through other means such as revising the UK Corporate Governance Code.

Regulatory Upgrades

Our monthly review of regulatory upgrades/downgrades/regrades in the sector has highlighted the following themes:

• Governance downgrade resulting from:
  • a lack of assurance that the board managed its affairs with an appropriate degree of skill, diligence, prudence and foresight
  • ineffective governance, risk management and internal control frameworks
  • lack of assurance on ability to accurately report on loan covenants
  • leading to a failure to identify the potential crystallisation of a serious risk in sufficient time

• Breaches of the consumer standards resulting from:
  • fire risk assessments being overdue
  • not having carried out remedial actions identified in fire risk assessments.
  • not having an asbestos management survey in place
  • electrical inspection certificate records being overdue
  • we are continuing to notice that there have been a number of regulatory notices published recently in relation to the consumer standards, particularly from Local Authorities. We will continue to keep an eye on this.

AOB

Ensure your colleagues know…

• Building Safety Act 2022 Published - The Bill has now become law after receiving royal assent on 28 April 2022, but not all of the Act comes into force immediately. In fact many of the provisions have a transitional period, meaning they will come into force at a later date. Our colleague Louise Mansfield outlines the current key dates that you to be aware of in her recent article.
• Leasehold Reforms Act
  The Leasehold (Ground Rent) Reforms Act also received royal assent in February this year.  The Act is now in force and brings about some fairly sweeping changes to the treatment of ground rent in relation to leasehold properties as Richard Stirk explains.
• Renters Reform Bill
  The long-awaited Renters Reform Bill will seek to abolish Section 21 (of the Housing Act (HA) 1988) evictions to rebalance the tenant/landlord relationship. The abolition will apply to all tenancies governed by the HA 1988 Act, including tenants of Registered Providers. What does this mean for landlords? Kate Hicks outlines the details.