Beyond the code
"The NHF’s merger code isn’t perfect but there is a need for transparency."
Chan Kataria, emh group Chief Executive
The National Housing Federation’s merger code has sparked off some unnecessary controversy with claims that it promotes mergers and is effectively a predators’ charter. At a time when we are trying to mend the image of the sector, such controversy is unwelcome and a diversion from the main issues.
The fact of the matter is that with the advent of deregulation and removal of regulatory consents for structural changes, the need for transparency in this area is now more crucial than ever. I will return to the code later. First, let us consider the issue of mergers and strategic partnerships in general.
The first thing to say is that merger is not always the right answer. The correlation between scale and efficiency is far from positive, as the Chartered Institute of Housing publication, ‘Does size matter…’ demonstrates.
However, with pressures on rental income and reduction in development funding, drivers for strategic alliances are strong. This is evident in the local authority sector where cutbacks have forced a range of arrangements for shared services and combined authorities.
The criterion for any merger is straightforward. If the new merged entity has the potential to lead to a more effective management of assets to meet organisational objectives, then the case is strong.
To remain independent for the sake of it is not sustainable in the long run.
At emh group, we have formed a number of formal and informal partnerships over the years, including vertical (landscaping contractor) and horizontal (other housing associations) forms of integration. When required, we have also amalgamated previously separate entities in the group to unlock capacity and improve value for money.
However, the mere act of a merger does not in itself deliver benefits - whether it is lower average costs, improved services or more development. In our experience, the ability of mergers to deliver the intended outcomes depends on how well the previously separate entities integrate in terms of culture, structure and systems.
Culture is shaped by values and the harmonisation of values at an early stage is crucial. This goes beyond the two boards signing up to a new ethos for, if values are to mean anything, they need to be applied in practice. Some of the ways in which we have done this is by promoting behaviours through the design of our leadership development programme, employee behavioural standards and customer service charters. Effective cultural due diligence at an early stage should help to shape the different programmes for change.
Form follows purpose and organisational structures also need to reflect the aspirations of the merged entity. Whether this is a single legal entity or federalist structure or, more likely, something in between it must represent value for money and enable proper accountability to stakeholders.
This applies to governance as well as operational arrangements. Sometimes, ideal structures are compromised by the requirements of lenders and other stakeholders. No point in paying exorbitant re-pricing costs if instead we can create virtual structures without paying over the odds.
Short-term imperfections may be overridden by longer term benefits.
Systems integration is also important. Merged entities indefinitely operating separate systems on ICT, workflow processes, performance management and information systems are likely to suffer from diseconomies of scale. In the long run, it is not sustainable to have separate systems with their respective service costs, incompatibility problems and so on. This is not about having a one-size-fits-all approach, but integration of systems designed to produce desired outcomes in a consistent way.
Effective knowledge management systems will ensure that good practice, from whichever legacy organisation, may be captured more effectively for the benefit of the whole organisation.
Going back to the merger code, I cannot think of any of our own partnerships where the principles of the code were not applied. For example, board members were informed and led the process from an early stage, proposals were evaluated against agreed criteria and a proper risk map on the proposals was established and monitored by the board.
The principles enshrined in the code reflect good governance. My initial reluctance came from the fact that the code sometimes strays from the ‘what’ to the ‘how’ (e.g. indicative timescales, reporting mechanisms, format of proposals, and so on).
My overall conclusion though is that, whilst it may not be perfect, the code is an attempt to lend transparency and objectivity to an area that has hitherto lacked it.
After all, where’s the alternative?