Part 2: Proposals for new initial condition E7 - Effective governance

16. We are increasingly finding that newly established providers (with less experience of delivering higher education) are less sure about what is required in terms of the self-assessment we ask for at registration. This leads to inefficiencies in the assessment as a result of:
    1. The need for increased back and forward communications between the OfS and applicant providers to answer queries about the scope and content of a self-assessment, or to request additional information.
    2. Providers spending time assessing and describing their documents to demonstrate they have effective management and governance, rather than simply submitting the documents they already have for direct assessment by the OfS.
    3. Providers that have only recently been established, and are not currently offering higher education courses, are encouraged to have developed and assessed a full suite of policies and processes. It may be more appropriate that some of these are developed and agreed by the governing body subsequently.
    4. Unclear or poorly written documents are being submitted. The current initial conditions do not set standards for the clarity or legibility of documents, as the focus is instead on a provider’s self-assessment. Poorly written documents raise questions about the likely effectiveness of a provider’s arrangements and also about the degree of assurance that can be taken from that provider’s self-assessment of the documents. This can result in delays in the assessment process.
    5. Providers being incentivised to reach a favourable conclusion about their arrangements, to avoid issues with their application, rather than being genuinely reflective about areas for development.
    6. Small providers setting out governance arrangements which mirror those of large multi-faculty universities, which are unlikely to be appropriate for the provider, or deliverable in reality. It is likely that such providers would be unable to deliver these in practice and so they are unlikely to reflect how the provider will actually operate.
17. Our initial view is that a provider’s governing documents remain an important and useful source of evidence for assessing good governance at registration. Our initial view is that well-prepared providers would have these documents in place when they apply for registration, so we do not think our proposal would create material additional burden for a well-prepared provider. By removing the need for a self-assessment, we consider that burden will be reduced for providers and that direct assessment of documents will make it easier for us to refuse a provider that is not ready.
18. For the avoidance of doubt, we are not proposing to change the definition of what constitutes a ‘governing document’ as set out in the regulatory framework for the purposes of condition E1. This definition, and the scope of ongoing condition E1 would remain unchanged.⁶ However, we propose that at registration, a subset of a provider’s governing documents should be directly assessed by the OfS. We have proposed to focus our assessment on the documents that give us confidence that the governing body and its processes are robust and that it will be able to run the provider effectively if it is registered.
19. We have considered whether these changes might cause providers to overlook certain public interest governance principles in their preparation for registration. There may also be a concern that, without a specific assessment of the public interest governance principles at registration, we may register a provider that has not properly addressed those principles when producing its governing documents or designing its governance structures and processes.
20. We think that our proposals overall would increase our confidence in the capability and suitability of the governing body and the processes in place to ensure that it is able to carry out its role effectively. If a provider is registered, we would be assured that its governing body would be effective in ensuring that the provider meets its obligations relating to the public interest governance principles. We are not proposing to make changes to the ongoing conditions of registration that relate to the public interest governance principles, given the fundamental importance of these for students and taxpayers.
21. When developing our proposals for initial condition E7, we have focused on the aspects of effective governance that we consider are most important to assess before a provider’s registration. This does not mean that we think other aspects of a provider’s governance arrangements are not relevant to the experience of students and do not warrant our attention as a regulator. To manage the volume of information that a provider is required to submit at registration, and to ensure that we are making efficient use of OfS resources during the assessment process, we think it is appropriate to focus on particular areas in our registration assessments.

[6] Where we refer to ‘governing documents’ or a provider’s ‘set of governing documents’ for the purposes of this consultation we are referring to the specific set of documents that we propose to include within the requirements of initial condition E7, which is a more limited subset of documents covered by the definition of governing documents in ongoing condition E1.

Question

Question 2a: Do you agree with the proposal that there would not be a direct reference to the OfS’s public interest governance principles in initial condition E7?

22. In summary, we propose to:
    1. Require a provider to have a set of governing documents at registration that would enable the effective governance of the provider in practice.
    2. Set minimum standards for the clarity and consistency of documents, which would mean a provider with poorly written documents would not satisfy the condition.
    3. Limit the scope of the governing documents a provider is required to submit to those which govern the highest tiers of a provider’s decision making, and those we consider particularly relevant for assessment at registration. This would involve focusing on documents relating to:
    1. How ultimate oversight and decision-making authority is exercised, demonstrated primarily through documents that administer the operation of the governing body.
    2. How the provider’s risk and audit functions will operate, reflecting the significant risks to a provider’s ongoing financial sustainability and to public money that these functions are intended to mitigate.
    4. Be more specific about what we expect documents to contain and what constitutes an appropriate document in each case for the purposes of enabling effective governance of the provider in practice. This more limited assessment will replace consideration of whether the documents uphold the public interest governance principles.
    5. Remove the need for a provider to undertake a self-assessment and instead undertake a direct assessment of whether the provider’s arrangements meet those requirements.

Documents should enable effective governance in practice

23. We are proposing an overarching requirement that a provider’s set of governing documents should enable effective governance of the provider in practice. This means that the rules and procedures set out in the documents should be designed to ensure the provider will be well run, and ultimately deliver high quality experiences and outcomes for students. It also means that the arrangements set out in those documents would need to be deliverable in practice. The rest of the condition proposes the specific requirements for the information contained within governing documents that we think would be necessary to achieve these aims.

Question

Question 2b: Do you agree with the proposal that initial condition E7 should include a requirement for a provider to have a set of documents which would enable the effective governance of the provider in practice?

Please give reasons for your answer.

Limited range of documents

24. We consider that asking a provider to include all governing documents necessary to demonstrate the public interest governance principles are being upheld would likely involve the submission of a large number of policy documents, some of which would set out detailed operational information. Our initial view is that scrutiny of such documents is best delivered in the first instance by a provider’s governing body. We are therefore proposing to focus our registration assessment on the documents that relate to the effectiveness and integrity of the governance arrangements themselves and the oversight of risks. A provider will still need to have all necessary documentation in place to comply with ongoing conditions E1 and E2, including as these relate to the public interest principles.

Governing body documents

25. A provider’s governing body sets strategic direction, makes decisions and holds ultimate accountability for the provider’s actions. While some of this authority may be delegated, the governing body should retain full responsibility for the most important matters and be able to assure itself that it has a line of sight over these. As such, we think it is appropriate to focus scrutiny on how this body will make decisions and exercise its oversight, and that this should continue to include scrutiny of the documents which govern its operation (governing body documents).
26. We have proposed that the governing body documents should contain information about the governing body’s purpose, membership, appointment procedures, responsibilities, decision-making procedures, meeting frequency and the arrangements for reviewing effectiveness. The draft guidance underpinning the proposed condition says that, in practice, this will usually mean submission of the terms of reference for a provider’s governing body, which we consider would typically include all this information. However, a provider would be able to submit any combination of documents which set out this information.

Any other documents that contain rules administering the operation of the provider’s governing body

27. To support the intention of focusing primarily, at the point of registration, on how the governing body will function, we are also proposing that a provider should submit any other documents that might contain additional rules for the governing body’s operation – so that we can fully understand how the governance arrangements work, or will work, in practice. We propose that the following documents should be submitted to fulfil this purpose:

1. Documents that establish the provider as an institution, such as a provider’s Royal Charter or articles of association. These documents are also likely to include details of the rules, responsibilities and powers which govern the provider’s operation and overlap with the arrangements set out in the governing body documents.
2. Documents that set out the rules about any decision making which has been delegated by the governing body, such as a scheme of delegation.
3. Any other documents which contain rules which govern the operation of the provider’s governing body. We envisage some providers might have documents like this. An example could be where a provider has shareholder agreements which grant some decision-making power or authority over the governing body, such as voting rights, or rights to appoint or remove members of the governing body.

Risk and audit documents

28. In addition to the documents above, which focus on the highest level of decision making within a provider, our initial view is that a provider’s arrangements for delivering its risk and audit functions represent a specific area of corporate governance where ineffective arrangements pose a higher risk to taxpayers and, in cases where the financial sustainability of a provider is put at risk, to students. We therefore think that it is appropriate to seek greater assurance about these arrangements before a provider is registered.
29. We think applying greater scrutiny to the governance arrangements for risk and audit functions, compared with other important functions within a provider, is particularly important given increased risks relating to protecting public funds and financial sustainability.
30. In broad terms, ‘risk and audit functions’ mean a provider’s arrangements for identifying and managing risks, overseeing financial reporting and overseeing audit activity. Different providers are likely to have different arrangements for discharging these functions. Some may have a specific risk and audit committee, but in other providers this may be undertaken by a finance committee, or the governing body, or some combination of all of these. Regardless of a provider’s chosen arrangements and structures, our initial view is that all providers should be identifying and managing risk, overseeing audits, including those commissioned to be undertaken on behalf of the provider by a third party organisation, and scrutinising financial reporting. Our proposals would require a provider to submit the documents that govern these functions.
31. Where a provider does have a committee or committees responsible for discharging these functions, we have proposed that it should submit the documents that govern the operation of these committees. Those documents should include similar information about purpose, membership, appointments, decision making and meeting frequency as is required in a provider’s governing body documents. We also propose that the documents should set out arrangements for reporting to, and oversight by, the governing body.

A conflict of interests policy

32. We are proposing to require submission of a conflict of interests policy. This is because we think that having robust arrangements in place for identifying and managing conflicts of interests is essential to ensure the overall integrity of the governance arrangements in place at a provider. Our proposal is therefore to require all providers to have a conflict of interests policy in place at registration.
33. The proposed condition sets out our initial views on the minimum requirements for an effective conflict of interests policy. We propose that the policy should contain, as a minimum:

1. A definition or guidance of what would constitute a conflict of interests, which would enable users of the policy to determine whether any conflicts may exist.
2. An explanation of how and when conflicts of interests should be declared to the provider.
3. Mitigations to address conflicts of interests that are declared.

Question

Question 2c: Do you agree with proposals for the governing documents that would be considered as part of the proposed requirement, and the information these should contain?

These are:

• Governing body documents
• Any other documents that contain rules administering the operation of the provider’s governing body
• Risk and audit documents
• A conflict of interests policy.

Appropriate arrangements

34. We propose that, the set of governing documents required at registration provide ‘clear and appropriate arrangements’ for discharging the relevant governance functions. For example, our assessment of a provider’s governing body documents will consider whether those documents ‘provide clear and appropriate arrangements for the constitution and operation of the governing body’.
35. We would expect that the governance arrangements required to satisfy the condition will look different for providers of different size, shape and purpose. For example, the arrangements needed to govern a large, multi-disciplinary institution providing validation services, delivering transnational education and engaged in research activity would be very different to those needed for a small, single-disciplinary, teaching-only provider. It is important that the regulatory framework enables this flexibility.
36. We are therefore proposing to consider ‘appropriateness’ of a provider’s arrangements by reference to the provider’s size, complexity, context and the content of its business plan when assessing whether the documents submitted would enable the effective governance of the provider in practice. For example, we propose that, when assessing the composition of a provider’s governing body, we would consider:

1. The size of the provider: a large provider managing more substantial risks to students may require different leadership capabilities than a smaller provider.
2. Its complexity: a provider with a simple business model offering a single subject or course, with modest forward plans and not undertaking complex activities, may require different decision-making capacity on the governing body than a large multi-faculty institution.
3. Its context and business plan: factors specific to the provider’s circumstances, such as a provider’s involvement in other activities beyond higher education, or the nature of its ownership or corporate form, might mean it is more appropriate to have particular skills within its governing body to accommodate additional, specific roles.

37. We believe that consideration of these factors would help ensure that a provider’s proposed governance arrangements match the needs of the individual provider.
38. Considering appropriateness will ensure that our decisions take into account a provider’s context. However, we propose that the primary judgement the OfS will make is whether or not the provider’s governing documents enable the effective governance of the provider in practice. A provider’s arrangements would not satisfy the condition in cases where arrangements were patently inappropriate in and of themselves. For example, our initial view is that governing body documents that set out an unreasonable schedule of routine meetings, such as once a year, would be unlikely to meet our requirements, regardless of the size or complexity of the provider.

Clarity and consistency

39. We are proposing that all documents submitted in relation to this condition must be clearly written, understandable, internally consistent and consistent with the content of other documents. This is to avoid poorly written, inconsistent documents, as we think this would hinder the effectiveness of a provider’s governance arrangements both now and in the future. Ambiguity in key governing documents may mean that we are unable to assess whether the arrangements are appropriate, and this is therefore likely to result in delays in our assessment.

Drawing on additional evidence of deliverability

40. In assessing the deliverability of arrangements in practice, we are also proposing to draw, where appropriate, on additional evidence from our engagement with the senior leaders of a provider, including members of the governing body, undertaken as part of a provider’s registration application. Where members of a provider’s governing body fail to demonstrate a clear understanding of the arrangements set out in these documents, or describe arrangements that contradict the documents submitted, our initial view is that this could be taken as evidence that the governance arrangements set out in documents are unlikely to be deliverable for the provider in practice, and that the condition is not satisfied.

Question

Question 2d: Do you agree with the proposed requirements for each of the governing documents that would be considered in relation to this requirement?

These are:

• Arrangements should be ‘appropriate’ to the size, shape and context of the provider
• Documents should be clear and consistent
• Documents should be deliverable in practice.

41. We have considered alternative options for achieving our overarching aims, which are set out in Annex B. For Proposal 2, these are:
    1. Retaining current arrangements.
    2. Assessing the public interest governance principles without reference to a self-assessment.
    3. Assessing a more comprehensive range of governing documents.
    4. Assessing a narrower range of governing documents.

Question

Question 2e: Do you have any additional comments on this proposal?