Water Industry Commission for Scotland - independent review: governance arrangements

5. Remit Items and Findings

5.1 Remit Areas 1-4: The role of the Board, its Committees and Chair, WICS Leadership and key governance policies and procedures

Areas of Concern

• The duration of time in post of key individuals charged with governance, including the former Chief Executive and the former Scottish Government Deputy Director Sponsor, alongside the duration of the Chair of the Board’s tenure as a Board member (initial appointment date of July 2016 and appointed as Chair May 2018), may have had a real, or perceived impact on the conditions for objectivity and effective scrutiny, challenge and review in those relationships. ‘A Guide for Members of Statutory Boards’ includes provisions for rotation/tenure of NXD Board members: “no member’s total period of appointment in the same position may exceed eight years”.
• The Board and ARC provided some challenge but there was inconsistent evidence of follow up actions taken. From a review of sample meeting minutes, examples where there is no documented evidence of action being followed up included:
  • May 2022 – ARC members requested the financial procedures were strengthened including any ‘exceptional circumstances’ to be adequately justified. This action was not taken forward until after the Section 22 Report was published.
  • September 2022 – expenses policy presented to the Board and minutes evidence Board members asking for policies to be reviewed against Scottish Government equivalent policies. The ARC also asked for confirmation on who should approve the costs in relation to the Chief Executive’s travel plans and asked for consideration to be given to include wording around the re-claiming of expenses relating to alcohol. However, the ARC was then noted as recommending approval of the revised expenses policy. The policy was not updated to make clear the position on claiming, or purchasing alcohol on company expenses until after the issue was highlighted in the Section 22 Report in December 2023, as noted in the March 2024 ARC Papers. WICS approached the Scottish Government in November 2022 requesting a copy of its Travel and Expenses Policy and were advised that equivalent policies could not be provided as they were wide reaching and varied across business areas. There may have been opportunities for WICS to further pursue this, and/or to engage other public bodies for advice. Moving forward the sponsorship relationship should be a mechanism for sharing good practice from across the Scottish Government public body landscape.
  • October 2022 - Board meeting minutes record that the Board agreed, given the increasing importance of international work to WICS’ budget, staff retention and development, consideration should be given to the future structure and governance of such work. The Board requested a separate session to discuss the future structure and governance of WICS international work. An action was added to discuss this, however it was not brought back to the Board until after the Section 22 Report was published.
  • April/July 2023 – evidence of Board members’ challenge about sustainability of intensive hours relating to international projects. No further action was taken to review this following a WICS Director’s assurance that the work should be seen as capacity building for the future, and not just commitment of current resourcing. At the 6 July 2023 Board meeting it was highlighted that further work was required to better capture staff time required to deliver international activity, noting the success of the New Zealand project was due to staff working beyond their contracted hours.
• The Review Team was advised that a new process (post the Section 22 Report) has been introduced to improve the monitoring and tracking of actions arising from Board and ARC meetings.
• Under the SPFM, the Chief Executive as Accountable Officer is: “personally responsible for the propriety and regularity of the public finances for the body for which you are answerable and ensuring that the resources of the body are used economically, efficiently and effectively”. The findings from the Section 22 report and Grant Thornton reviews of June 2024 evidence that the previous Chief Executive did not discharge aspects of Accountable Officer duties effectively. The Section 22 Report concluded: “the findings of the auditor highlight unacceptable behaviour, by senior officials within the Commission, in the use of public funds”. The Governance Framework states that the Board has corporate responsibility, under the leadership of the Chair for: “promoting the efficient, economic and effective use of staff and other resources by WICS consistent with the principles of Best Value”; “ensuring effective arrangements are in place to provide assurance on risk management, governance and internal controls”; and “demonstrating high standards of corporate governance at all times”. From the sample of Board and ARC papers reviewed, there is limited evidence of challenge and related actions and follow-up in relation to the culture around value for money.
• The Employee Handbook was recently updated (July 2024). It contains some limited information on training. The lack of a Training Policy was highlighted by Grant Thorton during their June 2024 review. There is performance management guidance which the Review Team was advised would be refreshed as part of the above noted HR review. There is no Recruitment Policy – this will also be considered as part of the HR review.
• The requirements of the Framework Document in relation to the appraisal of the performance of the Board, Chair of the Board and Chief Executive were not fully complied with. These mechanisms are recognised good practice and if properly utilised, provide opportunities to identify performance and behaviour issues. These opportunities were missed. The Framework Document states:
  • Chair - assesses the performance of individual Board members on a continuous basis and undertakes a formal appraisal at least annually. The Chair, in consultation with the Board as a whole, is also responsible for undertaking an annual appraisal of the performance of the Chief Executive.
  • DG NZ - there is effective continuous assessment and appraisal of the performance of the Chair of WICS, in line with the requirements of the Code of Practice for Ministerial Public Appointments in Scotland.
  • Scottish Government Deputy Director Sponsor - the Deputy Director shall be responsible for assessing the performance of WICS’ chair at least annually.
• The Board Terms of Reference states: “the Chair should ensure that the Board and all its committees are subject to regular self-assessment to ensure that they are working effectively”. It is standard good governance practice to do so. While ARC self-assessments have been carried out, self-assessments of the Board were limited in recent times to members’ annual appraisals by the Chair of the Board. The Review Team was advised that the last formal Board self-assessment was completed in 2017 which led to the updated Governance Framework of 2022.
• The Review Team was provided with documented evidence of challenge by WICS employees regarding non-compliance with financial processes, including relating to expenses. The Review Team was also provided with documented evidence of the Chair of the Board challenging the behaviour of the former Chief Executive in 2022. There is limited evidence of the action that was taken as a result of that challenge. The Review Team was provided with accounts through interviews which suggest that the Chair of the ARC and Chair of the Board were verbally made aware of issues regarding the conduct of the former Chief Executive. There is no documented evidence of these reports, and while there is documented evidence of the former Chief Executive being encouraged to attend mentoring, the last available appraisal (2022) indicates this had stalled, although the Review Team were advised this was restarted. 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.
• The Grant Thornton Governance and Financial Management reviews highlight a number of policies and procedures that need to be put in place, or refreshed. As outlined in the Governance Framework, both the Chair of the ARC and Board have responsibilities relating to the governance of the organisation. In line with the role of the Board and ARC as set out in the Governance Framework, it would be expected that the Board and/or ARC members would have challenged the absence and/or lack of robustness of key policies and procedures, and the appropriateness of other standard areas of practice, policies and procedures befitting of a public body.
• Concern that independent assurance provided to Board was not as robust as might be expected and issues that were highlighted in the Section 22 Report and subsequent reviews were not reflected in previous audit reports to the Board and ARC:
  • Both Internal Audit (Grant Thornton) and Audit Scotland took a risk-based approach to their work in relation to WICS. In the case of Audit Scotland, the Auditor General for Scotland confirmed in correspondence to PAC on 21 June 2024 that: “there is evidence that the issues identified in my report (Section 22 Report) also existed in prior years”. The Auditor General also confirmed that he is: “considering whether there is a need for further audit guidance for areas of expenditure which are of public interest, such as expenses, that may not be routinely subject to detailed audit testing due to the low values involved”.
  • Grant Thornton Internal Audit reviews in 2022-23, which included Financial Controls, Governance and Risk Management, did not raise any significant areas of concern and each resulted in a reasonable assurance opinion (top rated assurance opinion of four).
  • The Grant Thornton Annual Internal Audit Opinion presented to the Board Meeting of 30 May 2023 noted: “Our overall opinion for the period 1 April 2022 to 31 March 2023 is that based on the scope of reviews undertaken and the sample tests completed during the period, that reasonable assurance can be given on the overall adequacy and effectiveness of the organisation’s framework of governance, risk management and control”. The minutes of the May 2023 ARC meeting noted the ‘good internal audit opinion’.
  • At the ARC in August 2024, Grant Thornton presented their annual internal audit opinion for the period 1 April 2023 to 31 December 2023: “based on the scope of reviews undertaken and the sample tests completed during the period, that no assurance can be given on the overall adequacy and effectiveness of the organisation’s framework of governance, risk management and control” (‘no assurance’ is the lowest rated opinion of four). The opinion relating to January to March 2024 was: “Our view, on part two internal audit work is that we can give reasonable assurance over the adequacy of the design of controls as they relate to the framework of governance, risk management and control, alongside limited assurance on operation of control, in part due to the need for controls to be further embedded. As required by IA standards we are required to give an overall opinion for the year. Therefore, whilst noting the positive developments and improvements in the last quarter, the opinion for year is no assurance”.

Evidence of Good Practice

• WICS Board and ARC Meetings are regularly convened with documented minutes and actions retained. All existing members have received reappointment letters which clearly set out their roles and responsibilities. Members have a broad range of skills covering economic analysis, financial and risk management and private industry. Training has been provided, including induction training in 2020 from WICS staff covering the Governance Framework, finance, cyber resilience, information management, Hydro Nation and Long-Term Price Setting and more recently 2023 independent training from Oxera (consultancy firm) on economic regulation in the water sector.
• Board papers during 2023-24 covered strategic items including:
  • Strategic discussions including Scottish Water’s performance;
  • Strategic Review of Charges;
  • People structures and financial reports and specific business over the course of the year including an overview of the financial policies and procedures the work plan response to the external audit;
  • Scottish Water’s charges scheme for 2024-25;
  • The process for approving annual charges and WICS’s role;
  • Annual Report and Accounts 2022-23 – Performance Report within the accounts and Governance Statement were noted by Audit Scotland as consistent with the financial statements and properly prepared in accordance with the relevant legislation and directions made by Scottish Ministers;
  • Review of Expenses Policy; and
  • Annual Work Plan and Budget.
• ARC agendas featured items covering ARC business (minutes, actions, forward work plans), Internal Audit and External Audit Updates and Risk and Compliance Reports. The ARC had also recently undertaken a self-assessment, as per good governance practice and as required in the Governance Framework.
• Audit Scotland presented its report on the annual audit of WICS for the year ended 31 March 2023 on 21 November 2023. Immediately following presentation of the outcome of the external audit, the ARC recommended remedial action should be taken with a sense of urgency. The ARC also emphasised that employee communication in relation to the audit report and issues raised was essential and noted that behavioural change would be required at a senior level to enable improvement. The ARC further requested that Internal Audit was to focus on a review of financial policies and procedures, in particular those pertaining to the issues raised in the external audit report, with a revised annual work plan and scope of work to be drafted.
• WICS developed a work plan to respond to the recommendations in the Audit Scotland Annual Audit 2022-23 and the subsequently published Section 22 Report. At the time of this review, WICS had reported, following regular updates to the Board, that 23 of the 25 actions required to address issues raised were complete and that the two outstanding actions would be covered as part of the response to the Grant Thorton Internal Audit Review.
• Grant Thornton, in response to a request from the ARC, undertook a review of financial and governance arrangements which have subsequently been included in correspondence from the Interim Chief Executive to PAC. Following presentation of the Grant Thornton Internal Audit reports to the ARC at its meeting on 11 June 2024, WICS developed an action plan aimed at delivering a stronger system of governance and financial control at WICS. Due to the timing of the Grant Thornton reviews and the reports being finalised, this review did not include assessing WICS progress in implementing the recommendations made by Grant Thornton.
• Two experienced NXDs have been recently appointed to support and bolster the roles of the Board and the ARC, following the departure of a previous NXD (Board and ARC member). We understand that as part of their roles they intend to provide support and challenge in particular around the organisational change programme, performance reporting, risk management and the role of the ARC in financial reporting.

5.2 Remit Area 5: Culture and ethos at WICS

This review considered the culture of the organisation at a point in time. Some of the conclusions reached, reflect the impact of the legacy culture and behaviours, which at an organisation-wide level, take time to change. The Review Team views on the culture were formed by interviews, attending a staff meeting and risk workshop, assessing the returns from an anonymous survey and triangulating those to other evidence sources. The quantitative outputs of the survey did not produce unanimous results and pointed to some degree of polarisation. However, the overall view of the Review Team is the legacy culture and values contributed to an environment where a number of staff felt that their views and ideas were not welcome - and some of that sentiment has remained.

• Findings from other reviews referred to earlier in this report point to a culture where compliance and ensuring value for money were not embedded in the fibre of the organisation, nor were they demonstrated by senior officials. The ‘tone at the top’ was not as would be expected for a public sector body.
• Grant Thornton concluded in phase two of their June 2024 Governance and Financial Management Reviews that finance procedures historically were not being followed and that there was a risk that this culture continues. The Review Team recognises WICS’ focus, since the Section 22 Report, on setting out clear actions to improve processes, controls and governance. However, at the time of the review, a number of refreshed processes were being developed, in the early stages of development, or were planned, and therefore the Review Team did not assess whether the impact of these changes was driving improvements in compliance. Nor was the Review Team positioned to draw conclusions on the impact of these changes on wholesale behaviour and culture change over the time period of the review.
• The Review Team was provided with information to confirm that staff were reminded on numerous occasions of the policies, procedures and guidelines (by the Finance Team) over the course of several years from 2018 to 2023.
• The Review Team issued an anonymous staff survey focused on a number of areas which can be used to gauge measures of organisational culture. In summary, responses to a number of key questions indicated a polarised organisation – a number of questions provided significant proportion of responses at opposite ends of the scale. Some members of staff have commented on improvements since December 2023, however some views highlighted a culture where staff views were not valued and where some staff felt they were not listened to, in some cases this sentiment remained at the time of the review. Some of this may contribute to an ongoing lack of trust in the Senior Management Team, largely because of the legacy culture prior to December 2023, that would now need to be re-built.
• Staff surveys were not regularly undertaken. At a Board meeting in August 2023, Board Members highlighted the requirement to measure cultures and requested that a staff survey be carried out, with follow up pulse surveys and results to be shared with the Board. The Board also requested a report on staffing issues and wellbeing be developed and shared with them on a recurring, at least six-monthly, basis. There was no evidence in the sample of Board meeting minutes and associated papers reviewed which indicate that this was actioned. Senior Leadership Team Meetings in June 2023 refer to staff surveys being undertaken but there is no evidence that this was progressed.
• Following the Section 22 Report, a Workplace Risk Assessment Survey was carried out. The output from the survey was reported in March 2024 and a Board update on the results concluded: “there is clearly a lot to be done to improve the overall culture at WICS”. The timing and context of this survey need to be taken into account, and undertaking regular surveys will allow for a clearer indication on the trajectory of improvement and change.
• Whilst not unanimous in the survey issued by the Review Team, taken alongside wider interviews, above findings relating to actions not being followed up, and the fact staff surveys were not undertaken as a matter of course, the culture in WICS was not one where all staff felt confident that any issues they raised would be taken seriously, nor was it one where leadership demonstrated that they wanted to hear employee views and concerns.

As noted earlier in this report, this review was undertaken during a period of significant change and commenced less than five months into the Interim Chief Executive’s tenure. There have been no other changes in staffing in the Senior Leadership Team since the Section 22 Report. Two additional temporary Board and ARC members were only recently appointed. WICS has put in place actions to respond to the changes that need to be made as highlighted by the Section 22 Report and Grant Thornton reports and to improve governance, processes and controls at WICS. It is, however, the opinion of the Review Team that it is too early to assess whether these changes are affecting a change in culture and behaviour, which as stated earlier in this report, can take time to shift at an organisation wide level.

5.3 Remit Area 6: Review of organisation structure at operational and governance levels

The organisational structure created by the previous Chief Executive, and which was in place when the issues identified in the Section 22 report took place, is still largely in place. While there is a new Interim Chief Executive and two new NXDs, the structures and make up of key groups has largely remained the same.

Given the points set out below it is unclear how individual skills were matched to specific posts. Added to this, it was unclear how individuals were placed in pay bands if job requirements, including clear roles, responsibilities and defined objectives are not set out.

As set out in the Governance Document, WICS has responsibility for: “recruitment, retention and motivation of its staff”, including: “the level and structure of its staffing, including grading and staff numbers, are appropriate to its functions and the requirements of economy, efficiency and effectiveness (subject to SG Pay Policy for Staff Pay Remits).”

The Board has a responsibility for ensuring that WICS has: policies and procedures that comply with employment law; avoids discrimination of any kind against current or potential employees and has policies to guarantee equal opportunities and

value diversity; has in place agreed terms and conditions of employment which should reflect the general standards set out in the Model Code for staff; and has in place clear policies and strategies relating to staff.

Compared to other public bodies, while difficult to make a direct like-for-like comparison, it is the view of the Review Team that the organisational structure is top-heavy. This aligns with the view in the Grant Thornton report. Grant Thornton also concluded that: “the organisation restructure in 2019 was unclear in terms of benefit to WICS of the revised structure, the level of approval and whether it was approved by the Board”.

None of the leadership team had documented role objectives. Some of the leadership team stated they had no formal job descriptions. Survey results indicate that lack of job descriptions is also an issue for other staff members or that some have drafted their own. Lack of clear roles and responsibilities at Director level was also highlighted by Grant Thornton in their points for consideration in the June 2024 reviews.

The Leadership Team had not received a formal annual performance appraisal from the former Chief Executive during their time in post.

There was no recruitment policy and promoted posts were not open to true and fair competition. Members of the Senior Leadership Team were appointed directly into roles by the previous Chief Executive without those roles being advertised either internally or externally. The Review Team was advised this practice was also in place for all other roles in the organisation. It should be noted that the Interim Chief Executive role (March 2024 appointment) was advertised internally and open to all staff.

As part of the Organisational Change Programme, an HR specialist has been appointed to 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 a HR requirements and advice on values and cultures.