What are the responsibilities and liabilities of boards of governors during times of strategic change?

University governance is in the spotlight, and not surprisingly, it’s making some boards feel nervous.

As the Committee of University Chairs reviews and refreshes the Code of Higher Education Governance, the Office for Students and the Department for Education will be watching closely. It is hoped that, not only the refreshed code itself, but the sector discourse and accompanying measures that may be announced surrounding it, will give reassurance to those concerned that sector governance arrangements may not be equal to the scale of the task ahead.

Last year OfS chair Edward Peck signalled via a letter to university chairs that he plans to develop a more direct line of communication with boards, particularly in relation to appreciation of specific governance risks, including financial pressures, significant change programmes, delivery with a partner, risks around misuse of public funds, and compliance with free speech legislation. Peck has indicated that he intends to write more frequently to board chairs going forward and that he expects that OfS correspondence with institutions should routinely be shared with boards.

This signals, to some extent, a change of status in higher education governance. What might have presented as an opportunity to make a meaningful contribution through a civic and professional volunteer role may now to some governors appear to be a much larger and more complex undertaking than previously appreciated.

The haunting of higher education governance

At issue is the capability of boards to ensure the long term financial sustainability of the institutions that they govern. This extends beyond the governance of finances in and of itself, to oversight of major strategic and structural transformation projects. For many institutions, operating against an adverse funding environment and difficult market conditions, their sustainability depends on the capability of their leadership to execute such projects and make a success of them into the future.

The elephant in the room of every board meeting is the well-publicised financial challenges faced by the University of Dundee, and the governance issues documented in the subsequent Gillies report. While the circumstances and policy environment surrounding Dundee were very different to those faced by institutions in England, the Dundee case seems to have heightened the sense of risk that boards are feeling.

Higher education governance is undoubtedly complex. Regulatory, legal and compliance requirements are significant, the sheer range and diversity of stakeholders to which institutions are accountable is enormous, and much of the operating environment is determined by external factors and not in the gift of institutional leaders to influence.

Most governors – by design – have limited direct experience of higher education strategic leadership. In relatively benign times that external experience and expertise can be a source of strength and constructive challenge. In more challenging moments, when the stakes feel impossibly high, boards may become more preoccupied about what they fear they don’t know, than strategic about deploying their collective skills.

What is more, while the role of university governor is undoubtedly a highly valuable one – and even more so that of university chair – there is a risk that the heightened attention to governance breeds an exaggeration of the responsibilities and legal liabilities attached to the role.

Governors who fear that they may be exposed to personal liability if they make a “bad” decision are more likely to be risk-averse, more likely to stray over the line from effective challenge and support for leadership into micromanaging and, as a corollary, much less likely to feel confident to take on, and make the most of, the role of governor. That takes an already challenging situation and makes it worse, taking up leadership time and bandwidth, reducing the opportunity for institutions to take on critical strategic change projects, and generally creating a climate of frustration and anxiety.

The law on personal liability for governors

It is helpful and appropriate to distinguish between responsibility for a decision and liability for its consequences. Those who take decisions are very likely to be held responsible for them, and may be asked to explain why a particular decision was taken. But that form of accountability is quite different to being personally liable for the consequences of a decision.

A key feature of a corporate body, such as a limited company, a higher education corporation or a royal charter body, is that the corporation itself can hold assets and incur liabilities. Where the corporate body is a charity, the trustees of that charity (usually the governors of the institution) are under a number of duties as charity trustees, including the obligation to ensure that the charity’s assets are used to further the charitable objects of the institution. Where the trustees’ decisions are controversial or unpopular, or they lead to a loss in the charity’s assets, what is the risk that the trustees may be held personally liable?

In practice, it is unlikely that governors who have acted in good faith will be held personally liable. Good governance is the route to avoiding personal liability. If trustees properly consider their charitable duties when taking decisions; seek professional advice where needed; and minute the consideration of their duties, it would be difficult to prove that the trustees had acted outside of their duties, even if the decision leads to a loss to the charity.

If there is a concern that trustees may be personally liable, trustees have the power under the Charities Act 2011 to purchase indemnity insurance from charity funds, notwithstanding that this would technically be a personal benefit. Insurance may be purchased only for certain personal liabilities and only if trustees are satisfied that it is in the best interests of the charity. The legislation imposes certain exclusions (so, for example, the insurance must exclude any indemnity for a trustee in respect of a fine imposed in criminal proceedings).

It should be noted that the Charity Commission and the courts have the power to relieve a trustee from personal liability for a breach of trust or duty if they have “acted honestly and reasonably and ought fairly to be excused”. No such leniency should be expected where loss is caused to a charity by a trustee’s deliberate or reckless breach of their duties as a trustee.

While trustees owe their duties to the charity’s charitable objects during normal, solvent, times, those duties may shift on insolvency, although the position is not clear-cut for For royal charter corporations and higher education corporations which are not companies under the Companies Act. Under the Insolvency Act 1986, if the directors of a company allow it to continue trading beyond the time when they knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation, they can be personally liable for the debts incurred.

Most universities are not companies so it is uncertain which insolvency processes would apply to them. Given the risk of personal liability, governors of an institution should operate on the working assumption that the Act applies.

Strategic oversight is a meta conversation

In times of financial challenge, volatile recruitment markets, and rapid change, it is highly unlikely that every strategic decision will work out as planned. Effective discharging of the duty of governance does not, nor could it ever, mean exercising foreknowledge of whether a strategic decision is likely to be the right one. That means that boards need to tool up their ability to conduct a meta conversation – one focused on judging the effectiveness of the process of developing and executing strategy – not an absolute conversation focused on judging the appropriateness of the strategy itself.

To act as effective stewards of their institutions and be able to sign off strategy or specific strategic projects governors need to feel confident that:

• the leadership’s strategy or strategic projects are well-founded in evidence and in alignment with the institution’s mission
• potential risks and pitfalls have been identified and taken account of, including expert advice having been sought where appropriate
• any risks involved are proportionate and acceptable in the context of pursuit of a reward that is strategically significant and in line with institutional mission and charitable objectives
• meaningful consideration has been given to what would happen in a scenario in which the risks materialised

One challenge is for boards to come to a collective view about what a reasonable degree of assurance could look like in relation to each of these elements. Some of this comes down to collective judgement about the nature and quality of evidence that is shared with boards. Major strategic projects, for example, need to be considered from the perspective of market conditions and forecast returns, as well as setup and ongoing resourcing costs. But there should also be consideration of opportunity costs, such as what needs to stop or be delayed in order to create headroom for a new project.

The views of key stakeholders will likely be relevant, and the degree to which those views have been gathered systematically or in an ad hoc way. For some projects, such as a merger or structural change, boards will wish to see that various options have been considered before alighting on the preferred structure. And there needs to be confidence at the outset that there is both a clearly defined strategic goal and a baseline in place from which to monitor progress towards it over time. At key points as the strategy is executed, the board should expect to see evidence that there is monitoring of the intended strategic outcomes and the institutional agility to adjust and adapt in light of new information or a change of conditions.

The board is unlikely to be in a position to judge whether these elements are “correct” in the absolute sense – leaders and their teams hold the expertise and have the capacity in most cases to execute these strategic development processes well. But the board should be well positioned to define the critical elements of well-founded strategy in relation to any given strategic agenda or project, and to insist on being assured that these are in place before giving consent to any major new activity. It may even be helpful to agree the key elements in advance of being given sight of them, to avoid a scenario in which boards request more and more information beyond what is needed to offer that assurance.

Part of the process of working through how these questions are resolved in practice involves setting out processes of delegated authority to sub-committees and working groups convened for the purpose of delivering a major project or change agenda. Thought needs to be given to the moments in the process when constructive challenge will most effectively support effective development and delivery of the strategic project – these are the best moments to actively solicit challenge, weigh up counter-evidence and encourage robust debate, deploying the full range of voices and views available.

The other challenge is about calibrating an approach to risk that creates space for doing things that are innovative or experimental. The traditional approach to risk seeks to manage and mitigate risks arising from business as usual, where more significant risks tend to come in the form of circumstances outside institutional control, rogue actors, or novel compliance requirements. In these cases, boards want to be assured the institution is doing everything in its power to reduce the risks and put mitigating actions in place.

The kind of risk associated with strategic innovation is materially different and calibrated in relation to institutional strategic objectives. At stake may be money, public reputation, morale, stakeholder relationships, or mission drift. Different institutions will have different degrees of license to risk different forms of “currency” and the degree to which risk is tolerated will depend on the strategic value of the reward associated with the objective and the judgement of how well that risk can be managed (not necessarily wholly mitigated) through good market intelligence, effective project resourcing and stakeholder management, due diligence where required, and planning for exit strategies. There are likely to be real risks in maintaining the status quo, and these should be made explicit as part of the discussion.

Again, while the board will certainly wish to see evidence that these factors have been considered in detail, and case studies consulted where they exist, there is no way to say at the outset whether a project will deliver. Taking on risk is not the problem in and of itself. Boards, rather than pursuing the reduction of risk, in a context where an institution needs to transform to survive, need to have a clear shared sense of what effective management of risk looks like from a governance perspective.

A regulator calls

All this is, of course, in the interests of achieving a board culture that fundamentally supports the strategic agendas of institutional leadership while offering the constructive challenge to ensure the foundations of effective strategy are in place.

But effective governance remains a condition of registration, and at the back of chairs’ minds could also be the prospect of being prepared to demonstrate to OfS that the board has a clear and justifiable sense of its responsibilities around strategic change and transformation and is executing them accordingly.

It’s worth noting that just as it is highly unlikely that board members will be made personally liable for the outcomes of strategic decisions, OfS may not dictate exactly how boards discharge their oversight duties. The regulator is more likely to take a view on whether a particular approach meets the conditions of registration including specifically whether a board is discharging its duties in line with its own processes.

If an institution were to be investigated under the governance condition of registration OfS would likely want to focus on the decision making process of the board, and examine the extent to which the board scrutinised the executive’s planning and execution of the strategy. Effective governance in hindsight can most readily be proven through effective minute-keeping of board decisions, documenting actions taken and the reason for those actions.

In a worst-case scenario, assuming leadership has provided information and strategic insight to the best of its ability and boards have diligently exercised oversight to the best of theirs, the institution may still find itself in dire straits. At some point, there has to be a recognition that structural factors may in some circumstances simply overwhelm even the most diligent leaders and boards. And it is that risk that simply cannot be managed out, no matter how hard you try.

But it is also worth remembering that no stakeholder – whether students, the regulator, lenders to the sector, trade unions, government or local communities – wants to see a higher education institution fail. While the task facing boards of governors may sometimes feel more complex and high-stakes than anticipated, and discussions occasionally more fraught as a consequence, there is deep satisfaction to be had in contributing to the national higher education endeavour, one which is shared by everyone who works in and with the sector’s institutions.

This article is published as part of a partnership with Mills & Reeve. The authors would like to thank the heads of institution and senior colleagues who indirectly contributed to the ideas shared here via a private round table discussion about managing relationships with boards during times of strategic change.