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BriefingShareholding membershipContact:Stephen Bull Team:GovernanceTel:020 7067 1035Email:stephen.bull@.ukDate:September 2011 Ref:governance briefings Registered office addressNational Housing Federation, Lion Court, 25 Procter Street, London WC1V 6NY IntroductionThe following briefing reflects the discussions and outcome of correspondence and a meeting between the FSA, Devonshires Solicitors and Stephen Bull (National Housing Federation) regarding board appointments. The meeting sought to clarify the situation and subsequently provide some guidance for members. In recent years, some registered providers have, for good reasons, adopted provisions which allow for the appointment of new board members by their existing boards, rather than by election at a general meeting. The Financial Services Authority (FSA) has, until recently, registered such rule amendments without general comment. However, it has lately expressed concern about the increasing adoption by Industrial and Provident societies of rules that exclude their shareholders from the board member selection process.NarrativeThe majority of our members are Industrial and Provident societies and, following a recruitment process, board members are elected/ appointed by the shareholders of the organisation. This is broadly carried out in one of three ways:Via the shareholders at an AGMBy the board members if board members constitute 100% of the shareholding membershipBy board members even if there is a wider shareholding membership. This is often the case with LSVT organisations which may have board members nominated to their board eg by councils or tenants. Board members will in effect appoint these nominees to their boards. The Financial Services Authority (FSA), in its recent communications with solicitors and the Federation, has highlighted its policy regarding shareholding membership. They have expressed some concerns regarding the situation where a board will appoint new members to the board even though there is a wider shareholding membership. In effect the shareholders are not being asked to engage in the board appointment process. The FSA have summarised their concerns as follows:an industrial and provident society, whether a bona fide co-operative society or a society set up for the benefit of the community, should be controlled by its members and that control should be exercised in a democratic manner; the control of a society by its members is as intrinsic to the nature of an industrial and provident society as it is to the various other forms of mutual society registered with the FSA; the proposition that the Board should essentially elect its own board members is contrary to good governance principles that generally apply to the management of companies and other legal forms; we (the FSA) would therefore expect each industrial and provident society to provide within its constitution for members to be able to easily exercise that control - one of the prime examples being the ability to have a say in who should sit on their society's committee of management or board; there are some 7000 plus industrial and provident societies, and there is rightly no exact template for each to follow, so each will have its own way of making suitable provision for how their boards are composed, but we (the FSA) think each society should be mutual in nature and so have rules in place to facilitate that, including rules relating to the composition of its Board. In summary, the FSA believes that control of an organisation should be exercised in a democratic manner.Point number three is primarily concerned with a situation where a board appoints new board members and does not engage with the wider shareholding members eg by asking shareholders to elect new board members at the AGM. In our discussions with the FSA they also expressed a concern that allowing a board to appoint its own board members (even if the board makes up 100% shareholders) could lead to an increased distance between boards and (if applicable) other shareholders or stakeholders and the creation of a cosy environment where board members tend to appoint like minded individuals. Our response has been that the Code of Governance is explicit in its expectation that board appointments/elections should follow a rigorous open recruitment policy and that the skills and competencies of prospective board members are considered fully. Part D of the code refers. Our model rules also refer to recruitment procedures (rule D14) and are worded to allow for both open and closed shareholding membership. Any rule changes should give clarity around the composition of the shareholding membership ie frame any rules with appropriate reference to the organisation’s membership. At present, if an association has a wider shareholding membership but still wants to retain the option of a board appointing its board members without them being elected/ratified by the wider shareholding membership, the FSA have stated that a letter with the application should be sent to them that covers:how the board demonstrates transparency of decision makingconfirmation that there will be independence among board members to the extent that each will be able to speak and exercise their judgement in an unfettered mannerthat the board is able to guarantee that the community will continue to benefit from the society not withstanding that the membership will have no say in the composition of the society’s board. If it is felt that the method of appointing the board will enhance the benefit to the community then this should be stated and a brief rationale attached. The FSA would have no objection to a parent association making the appointments to a subsidiary board. The FSA will be considering their policy guidance and will finalise it later in the year. ................
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