Water Industry Commission for Scotland - independent review: governance arrangements

4. Executive Summary

When this review commenced, approximately seven months had passed since the publication of the Section 22 Report. WICS was still navigating organisational change whilst operating under periods of intense scrutiny and public interest. The organisation was without a Chief Executive from January to March 2024. The Interim Chief Executive was appointed in March following the resignation of the previous long-standing Chief Executive, with effect from 31 December 2023. Two new temporary Board members were appointed in August 2024 and steps are being taken regarding recruitment of a permanent Chief Executive and future recruitment of permanent Board members.

The organisation remains in a state of reset. This review presents at a point in time, an independent assessment of six agreed remit areas which centred on governance, leadership and culture.

WICS’ Internal Auditor - Grant Thorton’s - Reviews of Governance and Financial Management Arrangements reported in June 2024, made a number of recommendations regarding strengthening governance and refreshing and/or putting in place key governance policies and procedures. Refreshing policies and procedures alone will not be sufficient to place the organisation on a firm footing to move safely forward. Of greater importance, will be a reset in the ‘tone from the top’ and getting the basics right. This will include ensuring the organisation has the appropriate structure, capability and capacity to deliver its statutory functions and that roles and responsibilities at all levels are understood and policies are complied with. Fostering a culture where it is safe to challenge, staff views are heard and issues of non-compliance are identified and acted upon. Where there is effective challenge and scrutiny in the right places and follow through of actions from the Board, Audit and Risk Committee (ARC) and other key governance structures and that high quality information is presented to management and key governance groups to support them in discharging their duties effectively. Whether or not WICS continues to support income-generating activity (e.g. supporting the Hydro Nation initiative), it does not preclude the Accountable Officer and those charged with governance from complying with the SPFM, including in relation to the propriety and regularity of the public finances and ensuring that resources are used economically, efficiently and effectively.

Following the Section 22 report, WICS acted quickly to put in place an action plan and to take remedial action in response to the issues identified. It is also taking forward actions from the other reviews that have followed and which are referred to above. Many of the actions WICS has taken to improve controls and processes were still in the early stages of being developed and/or embedded at the time of this review and therefore the Review Team did not assess the effectiveness of, or compliance with those controls. However, the Review Team did note the positive and swift action that WICS has taken to begin to change policies, processes and governance arrangements. It is also important to note, that the views of the Review Team on organisational culture and behaviours represent a point in time view, and while improvements in governance, processes and controls can take effect quickly, cultural changes at an organisation wide level, can take longer to embed and shift. The Scottish Government Internal Audit review of WICS sponsorship arrangements in the period post-Section 22 Report publication should also lead to improvements in the effectiveness of the Scottish Government sponsor relationship with WICS, in addition to some of the improved ways of working that the Government and WICS had already put in place since the Section 22 Report. WICS is also working through a wider organisational change initiative, with over 50 actions to be completed by the end of March 2025. As set out in the 2023-24 Annual Audit Plan, Audit Scotland will: “consider the strategic direction of the organisation and the progress made in tackling the cultural issues reported by the Auditor General for Scotland in 2022-23”. The report from this review is scheduled to be finalised in November 2024.

In conducting this review, the impact on staff of the reputational damage, continued media interest, scrutiny and change the organisation has gone through has been clear. WICS is a small organisation with less than 30 personnel. Moving forward from the period ‘post-Section 22’ and in some regards, the period that preceded it, will require strong leadership in the executive and non-executive space of the organisation and support from the Scottish Government sponsor function to ensure that the organisation can re-build.

The outputs from the reviews completed so far, and the further planned Audit Scotland review, will go some way towards creating a blueprint for the future governance arrangements for the organisation to operate within. The outputs should be considered holistically by those charged with governance to assess the future fitness and direction of the organisation, and whether assurance can be taken that adequate controls have been put in place and behavioural and cultural change is on a positive trajectory, to avoid a repeat of previous long-standing issues and practices relating to governance, financial management and value for money.

Summary Findings and Forward Look

• The duration of time in post of a number of key individuals charged with governance may have had a real, or perceived impact on the conditions for objectivity and effective scrutiny, challenge and review in those relationships. The previous Chief Executive and Scottish Government Deputy Director are no longer in post. Moving forward, both the Scottish Government and WICS should put controls in place to keep key longstanding relationships under review e.g. rotation of sponsor responsibilities and following good practice guidance regarding the tenure of Board and Committee membership and roles.
• Members of the Board are responsible for satisfying themselves that financial controls and systems of risk management are robust and defensible and the Board is responsible for ensuring effective arrangements are in place to provide assurance on risk management, governance and internal control. The Board and ARC provided some challenge but there was inconsistent evidence of follow up actions taken, including in relation to policies and decisions on value for money. The Grant Thornton reviews in June 2024 highlighted a number of issues regarding the absence of, or need to refresh key governance policies and procedures. Prior to the Grant Thornton reviews, and post the Section 22 Report, WICS had recognised as part of its action plan, the need to update and refresh key policies and procedures. In discharging their role as set out above, it is reasonable to expect ARC and Board challenge and review of key organisational policies – including challenging the absence of key policies. The appointment, in August 2024, of two new temporary Board members who are also serving on the ARC is already starting to have a positive impact. Steps are being taken regarding the future recruitment of permanent members of the Board. WICS, with Scottish Government sponsors, should consider any further training and support that Board and ARC members require to ensure that they can discharge their roles effectively moving forward. WICS Committee secretariats, with support from WICS leadership should ensure that there is a robust approach to following up actions from meetings and Board and ARC members should satisfy themselves actions are fully complete before being closed.
• The requirements of the Governance Framework in relation to the appraisal of the performance of the Board, Chair of the Board and Chief Executive were not fully complied with. The Scottish Government Internal Audit review of WICS sponsorship arrangements recommended that the Framework Document was refreshed. Whilst the current Framework is clear on these specific requirements and the issue identified was non-compliance, the refresh of the Framework Document serves as an opportunity for all key parties charged with governance, specifically in this case the Chief Executive, Board, ARC and Scottish Government sponsors to review and refresh their understanding the requirements of their role. WICS should also take the opportunity to review and refresh the Terms of Reference for the Board and its Committees.
• Internal Audit reviews undertaken in 2022-23 relating to risk, finance and governance did not identify any issues that were later surfaced in the Section 22 report or additional work that has followed. WICS Chief Executive as Accountable Officer, the Board and the ARC should reflect on the internal audit resource requirements and internal audit plan focus as part of their work to appoint a new internal audit provider. WICS Senior Leadership Team and Chair of the ARC should work with the internal audit provider to create the conditions for them to operate as a trusted advisor, with appropriate access to WICS information and personnel, and should ensure that there are documented escalation routes for internal audit if any issues arise. The ARC should also ensure that there is adequate consideration and scrutiny of internal audit work.
• Standard staff and recruitment policies were not in place or were not operating effectively. There was no recruitment policy and promoted posts were not open to true and fair competition. As part of the Organisational Change Programme, and to address wider gaps in HR support, an HR specialist has been appointed. They will review WICS’ organisational structures, develop role profiles and objectives for the Leadership Team and wider teams, perform an Equality Impact Assessment, support standardisation of documentation and provide advice on HR requirements and advice on values and cultures. Part of the Organisational Change Programme should include reviewing recruitment policies and procedures and ensuring that they are robust and that those charged with governance (including the Board) relating to staff policies and procedures, as set out later in this report, are understood and complied with.
• Culture and behaviour - in its totality, the accounts and sources of evidence provided to the Review Team, noting that this includes verbal accounts and analysis of staff survey results, suggest some senior officials and the Chair of the ARC and Board were aware of issues relating to behaviour and culture over a period of time, and there was a lack of evidence to demonstrate action taken as a result. Prior to the Section 22 Report, staff surveys had not regularly taken place and the culture in WICS did not appear to be one where all staff felt confident that any issues they raised would be taken seriously and that their views would be heard. Since the Section 22 report, a Workforce Risk Assessment Survey was undertaken and further staff surveys are planned. Moving forward, staff surveys should be undertaken periodically in line with good practice and that the results are dully considered and any subsequent actions taken forward. Arrangements should be put in place to ensure that evidence is retained for the corporate record regarding any actions taken in response to reports of issues, complaints or concerns.