Review of further education governance in Scotland

D. The Governance of the FE sector as a whole

What the FE sector looks like today

Annexe G sets out the position of FE College Boards today in terms of their turnover, student populations, WSUMs (see section below), surpluses, and reserves. Annexe H sets out the type of income each College generates in terms of its source be it public, in all its forms, or private. It has been difficult to isolate how much of the difference between total individual College income and that which comes from the SFC comes from other 'Governmental' ( e.g. Local Authorities, Skills Development Scotland etc.) sources or from private industry, but our conclusion is that from the evidence that we have no College has a significant level of commercially earned income, which could sustain its future on its own. Even if they did, unlike the HE institutions, Colleges would continue to rely on public funding being there. Therefore any commercially earned income that a College does have can only be achieved as a result of the public funding that created and provides the continuing basic support for the College.

The one thing that the sector is not short of is data so we could have examined the sector in many different ways, but feel those set out in the Annexes are the key ones for the purposes of this review. What we can say though from our examination and knowledge is that comparing like with like in this sector is difficult and can be misleading. Not every College can do the things another College does and therefore, for example, comparing surpluses across the sector is not sensible as the ability of each College to generate surpluses at a certain level, regardless of how good their management is, is very varied across Scotland through circumstances, which are, in many cases, outwith the control of the individual College.

We will not comment on the data within those Annexes specifically but recognise that they highlight the differences in size and sustainability across the sector as it is today.

It is clear from what we have learned that one of the reasons that the FE Sector was put in the form it is today was to encourage innovation and a different kind of thinking in the sector. It is clear that initially it did and there are examples of that taking place. There have been a number of College European partnerships achieving additional funding e.g. the West of Scotland Colleges' Partnership ( WOSCOP). The College Open Learning Exchange Group ( COLEG) which collaboratively produce open and on line material is another example.

However that is now not as certain as it was and there are other issues now which perhaps say that there are downsides to the way the College Sector is structured in Scotland which have created inequalities across the sector.

Inequalities

What the individualisation of Colleges has done is to create inequalities and differences across Scotland. This in our opinion cannot be good for consistent governance of the sector overall or for the benefit of the learner, particularly where the outcomes for learners should be Scotland wide, not just community specific.

Areas where we see inequalities are:

• Estates where different Colleges for various reasons have not achieved the same standard of learning environment across Scotland.
• Surpluses where individual Colleges have differing opportunities to create different levels of surpluses through no fault of their own in specific cases other than their geographies. Also surpluses have no bearing on the cash position of the College which again can vary.
• Reserves where some Colleges have been able to build up significant reserves while others have not. In many cases this has been unrelated to the standard of management at the College but more to do with the employment and geographical environment within which the college operates.
• Attainment and retention where individual Colleges, because of different ways of selecting students, can achieve different results and this in turn can exclude some learners which in other Colleges may not be excluded.
• Selection of students where some go for as wide and diverse a learning community as they can, where others choose through a selection process which only picks those likely to attain.
• Salaries and conditions where each College has its own terms and conditions for staff so there is great differentiation across the sector for similar posts, and individual pay negotiations for each College.
• Industrial relations where each College has its own terms and conditions of staff and therefore has either grown a good industrial relationship history or not.
• Community deprivation where some Colleges serve areas of considerably greater social disadvantage than others. While this would probably always be the case no matter how the sector was constructed, the way in which these differences are dealt with by individual Colleges varies greatly.
• Leadership where many Boards and Principals will have different views and ideas on what they are there to do and what outcome they will produce.
• Governance where individual Boards have different views of themselves and what they are, and what their role is versus the Principal and executive. Membership of Boards is also very varied dependent mainly on where that Board feel they want to draw their membership from. As one auditor said to us he believes that the FE Sector has some of the best Non Executives across the public sector but some of the least understanding in governance terms of what they are there to do, and of their responsibilities etc. in any consistent form. How Boards recruit and select members also varies across Scotland, as well as who is the Clerk to the Board and whether they are a staff member of the College or an independent appointment.
• Income streams where the opportunity to derive additional income streams can be dependent on geography and what the Board wishes to look for as extra revenue.
• Size which the Annexes illustrate well; we are not sure however if this is any hindrance to consistency.
• Financial health where in some, poor management has led to concerns, or in others where the geography of the College does not allow the generation of surpluses.
• Community reputation where the links of Colleges to their local communities can vary in nature and in strength. For example some Colleges place significant weight on access courses and are seen as a key community resource, while others deliver more provision of national significance and may have weaker community links. In defence of some Colleges, not every Local Authority, or indeed community, appears to value their Colleges to the same extent, which is also part of the challenge.
• Business and community links where these are very varied across the College sector. In some areas there are a number of Colleges within the same Local Authority area or they compete for the same business sector. Also the fragmented landscape of the sector does not make it easy for industry to get a cohesive view or response from it.
• Board operation where , as is stated above this can vary significantly as can their perception of their role. Some Board Members see themselves primarily as Trustees of a charity which is not their primary role at all, while others see their role more akin to Non Executives of a company. Also which members of the College's executive attend Board meetings is very varied. This is acceptable in a sense but we feel the absence of guidance beyond the rules on proceedings set out in the 1992 Act nevertheless runs the risk of leading to bad governance.
• Internal relationships where the relationship between the Chair, the Board, and the Principal is key but it is very varied.
• Student bursaries where, the way these are handled varies. Some Colleges stop taking in students when they reach the end of the funding the College receives for this purpose. Others continue to enrol students on the assumption that the SFC or Government will make further funding available, or because the College chooses to use its reserves to make up the difference. This has resulted in students from different Colleges getting different bursary levels despite doing the same course and having the same financial circumstances. This could also be a large factor affecting differing retention levels.
• Learner/ student representation which is patchy across Colleges with non-autonomous and underfunded associations a key problem.
• Commercial expansion which some Colleges have embarked on in areas which make only a marginal impact for the benefit of learners but require a lot of resource to operate.
• Fee waivers where the application and utilisation of the fee waiver grant has led to inconsistency at individual College level. We believe that the discretionary component of this grant, unless this is changed, will lead to inequality whatever the structure of the sector.
• 'National' priorities where it makes sense for some things to be done on a Scotland wide basis. An eLearning framework and basic curriculum information are two good examples where a single, integrated approach should be taken but is not. This is starting to happen, nationally or regionally, but in a lot of areas this is purely because that is what the sector now see as inevitable rather than for the benefit it brings. We make the same comment on the way funding is targeted at these by SFC through competitive bids for certain items rather than enabling collaboration and sharing of good practice.

While some of these inequalities relate to operational issues, all are affected by how Boards operate and the guidance given to them by the Scottish Government, SFC, or indeed by the College's own management. Therefore we believe these inequalities are issues of governance as in the end the Board will be, or should be, involved in each of these decisions, and responsible ultimately for many.

We are sure that those who know the sector well could think of further variations between Colleges. The list above highlights how the individual Colleges have been left to develop in their own way. In some cases, no matter how the sector was configured, differences would still exist. We are not saying that these differences are not always reasonable and desirable but they are haphazard and not controlled or managed in any way. Also better, consistent, and clear guidance from Government and SFC to Boards may well have stopped some of the above.

However we do believe that in some of these examples, there should not be the differences there are and that the sector should have perhaps a set of national guidelines or rules in which it operates. This is discussed later in this report. At the heart of our approach should be the desire to see that the learner is treated fairly and consistently across Scotland.

The independence of Colleges has also kept their focus on their own geographical area and until very recently there has been little formal sharing of best practice. In fact it has also encouraged some unhealthy competition and Colleges have vied for the same learner at times. As one Principal said to us ' rivalry is good but competition can lead to a different place'.

National Direction

The large number of College Boards, Chairs, and Principals also means that Government, past and present, has found it difficult to conduct coherent strategic dialogue with a sector now comprising 41 representatives often with different voices and opinions. This is why much has been directed through SFC which as we discuss later may not be the best way for dialogue with the sector to take place.

Indeed a common complaint of Colleges is that Government does not make it clear to the sector what is expected of it. Other countries appear to have the better balance. For example in New Zealand ^[1] the Government publishes a strategy paper which sets the agenda for the sector. That Government is crystal clear on what it expects from colleges and backs this up by using a funding system which measures an institution's performance against the objectives set out in the strategy and awards funding which rewards those whose performance matches the strategy. There is consequently a very high level of cohesiveness throughout the sector in New Zealand. Interestingly this does not appear to threaten institutional autonomy. An OECD review of New Zealand's tertiary sector praised the system for striking an excellent balance between having a clear, cohesive national strategy passed down from Government and autonomous, entrepreneurial institutions implementing the strategy.

However in the defence of Scottish governments of all hues it also has to be said that meetings within the sector of Chairs and Principals have themselves not always been productive. The ability of the sector to speak with a single or coherent voice has been difficult.

Our discussion with SFC suggests that it has experienced difficulty in achieving its objective of getting coherence across the sector, as this is too difficult within the limits of the levers and instruments at the SFC's disposal.

Also both Scottish Enterprise and Skills Development Scotland for some time kept Colleges out of their strategic discussions around skills on the grounds that they were independent entities providing a service for these agencies. Colleges were seen as suppliers not partners. While that has improved there is still not the same strategic involvement of each College across Scotland as perhaps there should be. Since Colleges are a key part of economic development in Scotland, like universities they must be part of the economic thinking process and fully involved in the outcomes of that thinking. Not to do so undervalues the input the College Sector has on Scotland's economy, which is significant.

Myths and other issues

The number and independence of Colleges has given rise to some myths and issues which need to be laid to rest once and for all. We believe these have corrupted and hindered debate and solutions in the sector for some time.

a) It does not appear to us that Colleges would lose their charitable status if they changed their corporate status. Within the criteria applied variously by the Office of the Scottish Charity Regulator ( OSCR), the Office of National Statistics ( ONS), and Her Majesty's Treasury ( HMT), Colleges have been deemed to be public sector bodies. Colleges therefore fail to meet one of the standards governing charities in Scotland, namely the 'independence test' which provides that, unless an exemption is given, the constitution of a charity must be free of Ministerial control. The reason Colleges enjoy charitable status is the Ministerial exemption which was applied in 2007 . This same exemption could equally be given by Ministers to whatever corporate structure Colleges might adopt.

We believe there has been an excessive focus on what, in our opinion, is the relatively small matter of charitable status, given all the wider challenges that the sector has had. This caused the Government in 2006 to lessen its control over the sector which it did not need to do. In 2006 the power of Ministers to give direction to the Board of a College was removed by the Government of the time in an apparent attempt to convince OSCR to maintain the charitable status of Colleges. However that proved insufficient and the Government therefore used its powers the following year to exempt Colleges from the standard rule that charities must be independent of Ministers. By that time however Ministers had lost a key power. This may not have been beneficial to either Government or the sector as it removed one of the few powers Government had to direct Colleges where it needed to. Given the comments of SFC to which we refer later in this review on the limited powers Government have in this sector it is odd that Ministers gave a key one up for this attempted outcome.

We understand that consideration is still being given to the ability of Colleges to operate successfully within the new 'public sector' classification made by ONS and to the steps which will require to be taken if it is necessary to pursue the reversal of this classification. While we do not know what that final outcome will be, we believe that the changes and recommendations we propose may help this as they may allow the sector to be judged in a different way than it is today, which may be helpful to all.

In our view Colleges probably fit better into the definition around Arm's Length Bodies ( ALB) which states that ALBs are

' Bodies which have a role in the process of Government, but are not a government department, or part of one and which accordingly operate to a greater or lesser extent at arm's length from Ministers but can still be 'controlled' by them.'

b) College Board members are not there solely as Trustees of a charity but as Non Executive Board members with responsibility to create the strategy for the College, employ the principal, and monitor the implementation of the strategy.

c) Principals are not Accounting Officers in the true sense of the public sector definition of the post and have accountability only to the Chief Executive of the SFC for the funding allocated to them.

d) Charitable Status would not hinder Chairs or Board members being remunerated, within certain limits, if that was felt to be appropriate. It is done elsewhere.

There are also other issues within the sector which affect its governance.

Governance comes from the effect various people have and wish to have on an entity. In the case of FE the key players are Government, SFC, the learner, the employer, the community and the staff. In this sector Government is or should be most aligned with the role the shareholders play elsewhere, and SFC with that of the bank or financier.

Since the creation of SFC's predecessor body in 1999, the Government has appeared to pass on some of its powers. This has given SFC and its predecessor a guidance and governance function of both the funder and shareholder. Whether that is appropriate or correct, or indeed now reflects the situation today is discussed later. The position of other key stakeholders has been mainly through representation on the Boards of Colleges.

However neither staff nor learners believe that this formal involvement has actually brought an increase in participation and we will seek to address this later. In terms of employers and communities we are not convinced that either truly know what they require and what the strictures of running a College put on that. Nor do we think they have clear views on how they should input, or not, into individual Colleges. We see this as fragmented and different across Scotland. On all of these issues we have offered suggestions which derive from our belief that there are better ways of doing things in this area.

The funding mechanisms operated by the SFC through WSUMs also do not contribute to good governance. The SFC acknowledges this and it could be argued it has therefore not done, or been asked to do, enough to change or rectify this. Chairs and Non Executive Board members, if they are to exercise their duties properly, need to understand how an entity is funded and more importantly how changes to that affect them. In both the case of WSUMs and also bursaries it is clear that this is not the case. In fact it has been said to us that Boards are not 'scared' of the SFC as Boards do not understand what and how the SFC do things. Therefore the Board have to rely almost entirely on the Principal and the management team to inform them of the implications. This reduces the amount of challenge a Board should apply to its management on such issues.

In terms of Colleges that fall below acceptable levels of performance the majority have been on the grounds of financial rather than primarily academic performance. Examples include Inverness and James Watt Colleges, both of which have been the subject of 'Section 22' reports to the Parliament by the Auditor General.

In its official response to this review the SFC points out

' In terms of powers to intervene with a Board which appears to be falling below acceptable levels of performance, the powers currently in statute relating to this are either very limited (the power of a member of the SFC to attend and address a meeting of a Board) or comparatively draconian (powers of Ministers to remove some or all Board members).'

Boards of any entity should understand clearly what is wanted of them, and what they are responsible and accountable for, and what happens if they fall short in any of these areas. This is clearly not currently or consistently the case in the FE Sector.

Critically, it is also worth looking at the situation today in terms of the relationship and relationships between the Chair, Board, Principal, and Senior Management Team ( SMT).

As is stated above, the way Colleges operate differently across Scotland and this is certainly the case in this specific area.

The Educational Institute of Scotland ( EIS) in its formal response to this review stated

' Many College Boards of Management have become emasculated by powerful College Executive Groups led by powerful Principals'.

We understand why EIS and indeed UNISON, who are the other main union involved in this sector, could see this in the FE Sector. We will set out later we believe that for good governance to operate in this sector the hierarchy has to be set out as follows.

The Chair

The Board

The Principal

The Senior Management Team ( SMT)

A large part of the reason this is confused at present is how the Chair is chosen, which is by the Board itself from its own number. The Chair is therefore not truly independent nor is, initially, specifically appointed to carry out that role. This is a very unusual process today in all forms of corporate or public life and shows again the municipal background from which Colleges came. In our discussions with Audit Scotland during the review they described the sector as 'odd and peculiar'. In their view the process used to appoint the Chair does not fit with any of the good practice that other entities of whatever corporate structure adopt. So if we are to move to a sector with improved governance and clear lines of accountability and responsibility that will need to change. Also what these perceptions and inconsistencies have done is build up a lack of trust between Colleges, stakeholders, Government and funders which will need to be dealt with as we move into the new governance structure that we propose in the coming sections of this report. This has put some restraints on the pace at which we think that change can be delivered, which is sad to reflect, but is where we are currently.

Finally in looking at what governance of the sector should look like into the future there are a few issues that need addressed. Specifically the provision for a Local Enterprise Company ( LEC) Board member to be part of a College Board needs to be removed since they no longer exist. We need to re-examine the length of term, and number of terms, of Board members. And we need to deal with the current successor arrangements where members leave within their term, the age limit on appointment of Board members, and the anomalies around who can be the Chair of the Board. We will deal with all of these in the sections below.

The way forward for the FE Sector in Scotland

It is as a result of all the above that we came to the conclusion that the regionalisation model for the FE sector in Scotland was the right one. It is the right model because that is where all the evidence leads, and not just because of fiscal constraints.

However it is clear also that in moving to this new regional governance structure Government should be central in guiding the sector and directing the strategy more perhaps than they have done in the past.

Regional Structure

The new regional structure is set out in Annexe J

We are heartened that subsequent to our discussions with Government during our review, and subsequent to the initial consultation paper in September, the later consultation by Ministers on the single issue of 'regionalisation' was revised in a way which brought the earlier proposals into line with our own thinking.

Therefore we recommend

That as soon as is practicable, and if possible by academic year 2013/14, we deliver a new regional structure for the College sector in Scotland using the regional alignment set out in Annexe J of this report.

Annexe K sets out in rough terms what the base numbers would be for each region using the 2009/2010 data.

It will be clear to those that know the sector well that there is one omission from our own proposals on a new regional structure. This relates to those Colleges that currently are academic partners within the University of the Highlands and Islands ( UHI) framework. We have listened to all the parties involved in the debate about how this unique part of the sector should be governed. While HE and FE are delivered in all Colleges across Scotland up to HND and HNC (and occasionally beyond) this is the only geographic area where HE and FE are delivered in their totality up to degree level through a single structure. Whether that is fully joined up between UHI and the Colleges, in terms and FE and HE students being treated the same, is also not clear. However within the time we have had to complete this review we do not believe the knowledge we have been able to gain of the complex issues associated with the UHI network is sufficient for us to make a clear recommendation on the future configuration of Colleges which are academic partners of UHI. That view takes into account not just the unique nature of UHI itself but also the unique influences of Highlands and Islands Enterprise and the Local Councils which happen nowhere else in Scotland in this form or to this degree. Nor do we believe that the review UHI is currently carrying out itself through Capita will fully resolve the governance issues examined by us, since we understand it addresses UHI's own structure and not those of its partners, so we are not convinced that review will move the wider debate on UHI forward as well.

There are clearly differing as well as concurrent views in this area which need to be aired. Any review or solution needs to address this holistically, which is where the challenge lies, rather than in individual bits which we fear will resolve very little. Also there has to be an understanding at the beginning that the configuration of the Colleges in question is not right and will need to change in some form, which we are not sure all parties are bought into either.

Therefore our recommendation in this area is that

The Chairs and the Principals/ CEOs and the Student Representatives of all the Colleges, the UHI centre, the Local Authorities, Trade Unions plus any other body that has a key current or potential interest in UHI be given the task of by June 2012 producing a solution for their area which uses the regional structure and governance proposals from this review as its base.

Returning to the new regional structure we are absolutely clear that regionalisation must involve the 'merger' (through whatever route) of all the incorporated Colleges within that region. Simply put, to achieve the benefits that this regionalisation process brings, there can only be one controlling Board for a region with all the funding and power to decide how best to manage the learning access points ( LAPs) under its control. This also means that there should be only one 'employer' in the region in terms of staff.

Until recently the sector has shown little desire to come together on any regional, far less national basis, notwithstanding many impressive collaborative initiatives on specific issues. This has led us to the view that left to their own devices Colleges are unlikely themselves to come up with a strategic configuration that is fit for purpose and provides the degree of consistency and control across Scotland which the learner needs.

However this does not mean is that each current College within the region would lose its own identity, or deny its community's ability to make demands of it. Branding and community involvement will be a specific responsibility of the new regional Board and we could see in many cases why the new Regional Boards would wish to keep some of the current identities of individual Colleges the same as they now.

Crucially we believe that you cannot move to a regional structure and then allow the individual parts of those regions to have control over what the regional entity does. This would deny the key benefits which a single regional controlling Board will bring. Without this fundamental recommendation being accepted we are not sure that our other recommendations will work. This could lead to a position which is even more disparate than it is today which would frustrate our overriding aim of having regard to the interests of the learner. How each new style Regional Board then operates within that region is, we believe, open to the degree of flexibility which we set out in the section below.

We have also accepted that the land based Colleges are advanced in their own solution to integration so have left that alone. We would wish them however also to take into account our recommended new ways of operating a Board in the sector, in recognition of the good practice which we believe these bring for all Colleges in Scotland.