Broadacres: ‘Things went wrong that could have been anticipated’

Insight06 Feb 2019Tim Clark

How acknowledging deep-seated governance problems enabled Broadacres Housing Association to return to regulatory compliance. Chief executive Gail Teasdale speaks to Tim Clark

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‘Things went wrong that could have been anticipated’ - Broadacres’ CEO reflects on how the HA learnt from its mistakes to return to #governance #compliance #ukhousing #socialhousingfinance

Failing to have full board scrutiny of a subsidiary lay at the heart of problems that saw Broadacres Housing Association (BHA) downgraded for regulatory compliance two years ago, the provider’s chief executive has told Social Housing.

Gail Teasdale, who joined the association in January 2018, was reflecting on her organisation’s journey back to governance compliance, following the decision by the Regulator of Social Housing (RSH) to return Broadacres to a G2 on 19 December. The provider at the same time received a viability regrade from compliant V2 to V1.

Established in 1993 to take a transfer of stock from Hambleton District Council in North Yorkshire, Broadacres now owns and manages around 6,500 homes. In February 2017, the then-5,950-home provider was given a non-compliant G3 rating for governance after the regulator found that BHA’s board had “failed to effectively monitor” risks associated with a development subsidiary the provider set up as a joint venture with a local agent, which underwent a series of losses.

The subsidiary concerned, known as Mulberry Homes Yorkshire Limited, ultimately cost the provider £10m after a number of developments faced delays or problems, due in part to a sub-contractor working across several developments falling into administration.

In its 2017 judgement, the regulator concluded that Broadacres’ business planning, risk and control framework had not been effective, specifically in relation to board oversight of the activities of its commercial subsidiaries.

An independent review into the subsidiaries’ performance in August 2016 identified a number of weaknesses. “These included insufficient robust, independent challenge by the BHA board, poor-quality operational information to the BHA board hampering its ability to make effective decisions, and a failure to mitigate the risk to an extent that it is reliant on third parties, such as auditors and funders, not enforcing security or calling in guarantees.”

Although Broadacres had sufficient resources to cover any funding gap, Ms Teasdale said, no system had been in place to monitor the subsidiary. “Via stealth, Mulberry took on legitimate development risk, [and] one or two things then went wrong that could have been anticipated – as things do go wrong in developments.”

Problems at the subsidiary mounted after a local contractor, Southdale Homes, went into administration in 2015, Ms Teasdale said. The failure of the sub-contractor meant that the registered provider (RP) faced difficulties on projects.

“We had got them [Southdale Homes] doing lots of developments for Mulberry. They were our primary developer, so it affected a significant amount of our development and again this wasn’t on our risk map. Some work needed to be done twice, and there is a premium charged [by other contractors] for picking up other people’s work. This never interfered with the RP doing its day-to-day activities but it wasted a lot of cash which could have been invested.”

Picture: Getty

That did not, however, extend to any breach of covenants, Ms Teasdale emphasised, adding: “We worked with our funders who were supportive.”

Nor was the provider found non-compliant for viability – its regrade down to V2 (in August 2016) related to “the scale of outright sales and uncertainty”, she said. “We had some significant land options which were sold for less than we bought them.”

Central to getting the provider back on track was to admit to deep-seated problems at board level, and to identify areas it needed to change. “We did a skills audit of our board and executive team to ensure our skills matched what we were aspiring to do. That exposed weaknesses. The risk map was re-written.”

In the aftermath of the governance non-compliance downgrade, Broadacres adopted a system whereby board members for the registered provider are also board members for all organisations within the group.

Broadacres’ path to recovery

Introduced coterminous board membership
Added independents on committees
Added specific skills to boards
New expectation that two board members will change each year
Considering a six-year maximum term for all board members
Full review of information presented to board: treasury; management accounts; relevant KPIs; detailed cash flows

“We had a situation where our developing subsidiary was operating with a subset of board members which then did not report to the main board. This clearly led to difficulties. We introduced a strong committee structure, so we have an asset and development committee, which works for all legal entities in the group, and a customer experience committee for all legal entities in the group. We have on all those committees either one or two independents.”

Ms Teasdale feels the addition of new people helps housing associations to stop becoming insular and to avoid “groupthink”, and adds critical, often specialist insight at the top level.

“It’s important that the financial advice the board gets is strategic, challenging and forward thinking, so it is not just about accurately reporting what happened in the past,” she said.

Ms Teasdale emphasised that, rather than operating in a silo, finance must be at the heart of the executive team’s function, with a long-term financial plan returned to regularly, “not just once a year”.

She added: “The last thing we put in place was a new corporate strategy. A clear corporate strategy ensures the whole organisation works together. That makes it easier to articulate your risks to your workforce. For us the risk is that our risk register was very bland. Now it is very focused, meaning stress-testing is meaningful.”