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UK Government
Investments
Principles of Portfolio Governance
June, 2017
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Contents
Introduction
Principles
Leadership & Governance
Board Appointments .....
Objectives, Strategy & Accountability .....
Remuneration & Accounting Officer Responsibilities ....
Relationship Management
PN Oa PP WN
Monitoring Portfolio Performance....
ANNEX A: Possible Governance Documents...
ANNEX B: Categorisation of UKGI Portfolio
ANNEX C: Governance Resources Relevant to Companies in Government...
ANNEX D: Annual Governance Checklist
Tals
12:
1.3.
1.4.
1.5.
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Principles of Portfolio Governance
1. Introduction
UK Government Investments (UKGI) manages a broad and diverse portfolio of
organisations on behalf of Government. The portfolio ranges from public bodies
such as Executive Agencies, with strong links to Government Departments, through
to private limited companies.
The existing governance arrangements in place for these organisations, whilst
sharing many characteristics and features, has evolved in different ways over time,
tailored to the needs of the relevant organisations. As a result, there is no common
approach.
Whilst we accept that every case is different, with the relationship with the sponsor
department in particular varies from asset to asset driven by the nature of the
formal position of the asset within the relevant department. However, there are
certain key principles and governance arrangements which we aim to apply across
the portfolio.
The purpose of this document is to set out the clear and consistent governance
principles and processes that we expect to apply to our existing assets and which
we aim to put in place for new organisations when they join the UKGI portfolio.
In general, a “comply or explain” approach is adopted by UKGI — we expect the key
principles and the highlighted features of good governance set out in this guidance
to be put in place unless there is good reason not to do so.
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2. Principles
2.1. Individual organisations Taking the themes highlighted in the Financial Reporting
Council’s UK Corporate Governance Code as a model, UKGI applies the following
general approach in managing its portfolio:
e Leadership & governance
o Weensure appropriate governance frameworks are in place for the
organisation
o We make sure Board roles are clearly established and defined
o We provide clarity on who in the organisation leads on the relationship with
the shareholder (usually the Chair)
° Effectiveness
o We advise upon Board appointments made by Ministers or public bodies, and
help manage the appointment process where applicable
o Where appropriate, we act as a representative for the Government on Board
(and on Board sub-committees)
o We advise Ministers and sponsors on various aspects of the Government's
day-to-day relationship with the organisation — covering the Government's
differing interests from policy, shareholder and customer perspectives
e Objectives, strategy & accountability
o We advise Ministers upon, and hold the Board to account with respect to, the
overarching objectives and strategy which the Board proposes for the
organisation
o Weensure the organisation’s strategy is aligned with its sponsor
department’s objectives
o We advise the sponsor department/relevant Government Ministers on
whether to approve business plans
o Where appropriate, we advise on setting annual budgets for organisations
and we monitor financial performance throughout the year
« Remuneration & accounting officer obligations
o We advise on remuneration, including, where relevant, whether this is
compliant with Government objectives
o We ensure the accounting officer (AO) for an organisation is aware of and
complies with its AO obligations, where these apply
o For assets funded by Government Departments other than HM Treasury
(HMT), we liaise with the finance team of the relevant department and HMT to
ensure direct line of sight for the Principal Accounting Officer, who is often the
Permanent Secretary of the relevant department
e Relationship management
o We develop and maintain clear lines of communication with the Chair, Board
and Executive of each portfolio organisation
o We would expect to have UKGI NED representation on the organisation's
Board (at Director or Executive Director level)
o Weaim to maintain an effective regular meeting “rhythm” with Chair, Board
and Executive, ensuring free flow of information through mutual trust
o We promote and encourage a “no surprises” culture
2.2. The UKGI Portfolio In addition to the principles set out above for individual
organisations, the portfolio of UKGI assets will be monitored and managed as
follows:
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e Regular portfolio meetings
co Held quarterly or biannually, depending on the organisation
o Allow escalation of significant risks/concerns to UKGI’s Executive Committee
(ExCo) and/or the UKGI’s Risk and Assurance Committees
o Issues identified can be escalated to UKGI’s Board for review (if required).
e Regularly updated risk registers for each organisation
o Reviewed by ExCo monthly and reported to the UKGI Board in summarised
form.
e UKGI Board “deep dives” on individual assets
o Held as appropriate to address any significant issues or concerns.
2.3. UKFI’s approach UK Financial Investments (UKFI), a subsidiary company of UKGI
that continues to operate with its own brand, Board, operating model, articles of
agreement, framework document and investment mandate, is responsible for
managing the Government's investments in financial institutions. UKFI follows
similar governance principles when dealing with its investments, which are set out
in the UKFI Stewardship Code.
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3. Leadership & Governance
Key feature(s):
« — Ensure the appropriate governance frameworks in place, including a Chairman's
Letter where appropriate
« All Board roles and responsibilities to be clearly established and defined (and
explicitly agreed with the organisation)
3.1. All UKGI organisations will have documented governance arrangements. Each will
be unique and driven by the formal shareholder relationship to the organisation.
Governance frameworks will also depend on the status and Government
accounting classification of individual organisations. However, some common
principles should be followed.
3.2. The organisations within the UKGI portfolio broadly break down into Companies Act
companies and Executive Agencies:
« Companies Act companies will operate though a fiduciary Board and will be
governed through Articles of Association and, in many cases, a Framework
Document. Both of these will establish the rights of HMG as shareholder and the
role of UKGI will be to help the sponsor department exercise those rights; the
relationship between UKGI and the relevant department will be set out in the
MoU between UKGI and each department.
e Executive Agencies are non-Companies Act organisations and will normally have
their governance arrangements enshrined through a Framework Document.
There may be ancillary agreements around specific issues such as remuneration.
Types of Executive Agency vary and can range from separate departments in
their own right through to Non-Departmental Public Bodies (NDPBs) and Trading
Funds. Such organisations will also have defined roles for their Accounting
Officer, with letters of delegation from the Principal Accounting Officer (normally
the Permanent Secretary of the controlling department) covering issues such as
financial delegations.
e UKGI also manages minority shareholder stakes in several companies on behalf
of Government. In these cases, the relationship between shareholders and the
governance arrangements are typically set out in the articles of association
(Articles) and shareholder agreement of the relevant organisation.
3.3. In addition to the governance structures set out above, we would expect to issue an
annual Chair’s Letter. This letter provides the opportunity for UKGI to help the
sponsor department set out the objectives and priorities for the organisation for the
coming year and, if appropriate, the longer term, reflecting Government priorities.
This should be discussed with any policy sponsor and then agreed with the Chair.
He/she will then typically use the letter to set out Government's priorities with the
Board and this process is often the best way to ensure alignment of the
approach/decisions being taken at Board level with the wishes of HMG as a whole.
The typical letter should include the following features:
« A brief summary of progress over the last year (and thanks, where appropriate).
e Asense of the progress the Government, as shareholder, expect to see achieved
during the period.
« Asummary of the key objectives for the business over the coming 12 months - in
cases where objectives cover longer than 12 months, these should also be
included but noted as such, and we should seek input from policy colleagues
3.4.
3.5.
3.6.
3.7.
3.8.
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where appropriate. They should reflect, but not be limited to, the objectives set
out in the business plan agreed with Ministers.
Specific targets we would expect the Board to achieve.
Any issues around management/governance that would be appropriate to be
shared.
The draft letter should be shared with the Chair in order to reach an agreed form,
but a protracted negotiation on individual terms should be avoided. The letter
should be written so it is suitable to be shared with the other Non-Executive
Directors (NEDs) on the Board.
In the past, use of these letters has varied and their frequency can be anything from
one to three years; in some cases they are not used at all. UKGI should aim to have
in place an annual letter for all Chairs, as this also helps assess the Chair's
performance during the year.
We would expect Boards to appoint a Senior Independent Director (SID) from
amongst their number.
UKGI’s CEO should have the opportunity each year, canvassing the views of other
Board members where possible, to appraise the Chair's performance — in practice,
this may be delegated to the relevant Director and would typically include the views
of the SID.
In addition, UKGI should ensure regular (preferably annual) Board effectiveness
reviews are carried out. The review should be seen as an opportunity to
constructively draw out any areas for development, and link back performance to the
organisation’s objectives, the Board’s terms of reference and other governance
documents. At a minimum, these should be conducted by a third party once every
three years. In between, the Chair could conduct the review and report back to
UKGI, with the SID, where appointed, reviewing the performance of the Chair.
3.9. Within UKGI, there is an established Governance Framework which flows as shown
below, and has these features and characteristics:
e UKGI - Shareholder relationship/role
© correct framework/MOU
° appropriate governance ‘levers’
© Clear policy/shareholder roles
e Shareholder — organisation relationship/role
o established frameworks for relationship with organisation
co Clear structures for decision-making
o clarity on appointments process and policy
e Day-to-day shareholder relationship
0 effective communication and clear interaction
o strong working relationships built around trust
o “no surprises” culture
e Regular reporting
o clarity on strategy
5-year business plan
annual budget
reporting against budgets and business plan
monthly reviews
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e Internal UKGI structure
°
°
°
°
3.10.
Board
CEO
Director (overall responsibility)
Executive Director (ED) and Assistant Director (AD)/Manager team —
responsible for day-to day management.
It is recognised that individual assets may have different processes as a
result of their specific circumstances, with sponsor departments often playing a
more involved role, but the Framework above may assist as a guide to best
practice.
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4. Board Appointments
Key feature(s):
« Leading role for UKGI on Board appointments — particularly where these are
Ministerial appointments
« Where appropriate, a UKGI representative on Board (and on Board sub-committees
as relevant)
4.1. One of the most important levers UKGI has in its governance role is its role in the
appointment of an organisation’s Board. In most cases this will be done by
managing Ministerial approval of Board appointments, particularly NEDs. Even
where appointments are made by a Board directly, we should where possible be
fully involved on behalf of the sponsor department.
4.2. The role of UKGI/HMG in Board appointments will be set out in the Articles and/or
Framework Agreement for each organisation. In most cases input in all NED
appointments will be possible, but in others only appointment of the Chair and SID
roles might be caught, with responsibility for appointment of other NEDs delegated
to the Board.
4.3. In many cases the appointment of the CEO will be made by the Board with no
formal role for Ministerial approval, but nevertheless UKGI should be involved from
the outset on behalf of the shareholder/sponsor department, informing Ministers as
appropriate.
4.4. The majority of Board appointments are Ministerial and will follow the public
appointments guidance, recently updated following Sir Gerry Grimstone’s review of
the public appointments system, which can be found here.
4.5. Whether a Ministerial appointment or otherwise, UKGI’s involvement in Board
appointments should generally include the following:
e We (particularly the shareholder NED if appointed) should work with the Chair to
ensure that role description and attributes sought take into account the overall
needs of the Board and Government's priorities for the organisation.
e We should ensure that the proposed remuneration for the post is proportionate
and will allow the right calibre of candidate to be found, securing necessary
agreement from HMT if required (see paras 4.6 below for more detail).
« Where head hunters are to be used, we should help manage their selection and
appointment in accordance with the relevant department's policies on head
hunters and ensure they are aware of the Minister's views and the general
requirements for public appointments.
e We should aim for the UKGI shareholder NED, or another UKGI official (e.g.
Director) to be on the selection panel (or advisory assessment panel for
Ministerial appointments), and as such, be involved in longlisting, shortlisting and
candidate interview stages.
Together with the sponsor department, ensure that Ministers’ views are
represented appropriately in the process at all stages and that Ministers are kept
informed throughout, to allow them to take informed decisions where they have a
role in the process.
4.6. Board appointments (both executive and non-executive) which are the responsibility
of Ministers may also require approval from the Chief Secretary to the Treasury
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(CST) for the remuneration offered, if it exceeds certain thresholds. Guidance on
remuneration is set out in more detail at section 6 below.
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5. Objectives, Strategy & Accountability
Key feature(s):
« Leading role in testing overarching objectives and strategy
« Review of business plans, to be endorsed by the Board and approved by the
shareholder and relevant Ministers
« Advising on annual budgets
5.1. UKGI should provide guidance around the overarching objectives for each
organisation, drawing on views of the sponsor department as shareholder and any
relevant policy requirements. This should be communicated to the Board through
the annual Chair's letter and reinforced where possible through UKGI’s Board
representation.
5.2. We should ensure that each organisation has a clear strategy and 5-year business
plan, endorsed by its Board. This will normally be the basis for any executive
incentive arrangements.
5.3. UKGI should scrutinise and review any business plan submitted for approval to the
relevant Ministers.
5.4. The 5-year business plan should be reflected in a more granular annual business
plan.
5.5. Both the 5-year and annual business plan should reflect the agreed funding
envelope and relevant Spending Review settlement(s).
5.6. Flowing from the business plan, the organisation should produce an annual budget,
against which performance will be measured on a month by month basis. UKGI
should have a leading role in reviewing and agreeing these annual budgets on
behalf of sponsor departments.
5.7. Both the business plans and annual budget will form a central plank of the
standards against which any pay incentive plans will be assessed.
5.8. The business plans should be monitored during the year on an ongoing basis.
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6. Remuneration & Accounting Officer Responsibilities
Key feature(s):
¢ Ensuring Board-level remuneration is compliant with Government objectives
« Ensure accounting officers aware of and comply with their AO obligations
6.1. Remuneration The remuneration for an appointment caught by Government
controls needs to be agreed before the role is advertised, so the time taken to seek
CST approval should be factored into your planning. Sponsor departments may
also have their own internal remuneration approval processes to be followed before
decisions on remuneration can be taken by Ministers, and should be checked with
sponsor department contacts. UKGI should work with both the organisation and the
sponsor department to ensure that clear arguments are developed to justify the pay
proposed for Board roles, including use of relevant comparators and benchmarking.
6.2. Where appropriate, remuneration arrangements should include Short Term
Incentive Plans (STIP) and Long Term Incentive Plans (LTIP). UKGI will have a
leading role in ensuring these plans (and the incentives/behaviours that such plans
drive) align with Government requirements, including all relevant policy areas.
6.3. The majority of non-executive roles will only need to seek CST approval once, as
the remuneration will be fixed (e.g. an annual fee paid each year for a fixed three-
year term). However, many executive roles will have an element of performance-
related pay which may change each year, and these pay frameworks may need to
be agreed by the CST annually.
6.4. The pay thresholds set by the Cabinet Office 2013 review into senior pay which
trigger the need for CST approval are:
e Remuneration greater than £142,500 per annum (the relevant guidance on
remuneration non-ministerial departments and agencies, and for public sector
workers in NDPBs can be found here)
« Any part time (including Chair, NED fees) remuneration where the full time
equivalent (including any additional fees e.g. Committee chairmanship fees)
exceeds £142,500 per annum
e Any bonus payment (or potential bonus payment) greater than £17,500 — this
threshold is pro-rated when assessing bonus arrangements for part-time roles
« There are maximum thresholds for appointments working one day per week or
fewer of (i) £28,500 per annum for base pay and (ii) £10,000 for bonus payments
6.5. Managing Public Money The public, and Parliament acting on their behalf, have a
right to expect that funds raised using powers agreed by Parliament will be used for
the purposes intended. Public servants have a demanding fiduciary duty to use
public money responsibly. The full Managing Public Money guidance is contained
here.
6.6. Much of what managing public money, or MPM, requires is just good common
sense, or sound financial management. There are also some specific rules and
conventions about how certain things are handled, which ensure that policies,
programmes and projects work smoothly and serve their intended purposes.
6.7. Accounting Officers MPM guidance requires each Government body appoint an
Accounting Officer to ensure that its use of resources meets specific standards of
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governance, decision-making and financial management. This is usually a senior
decision-maker in the form of the Chair or CEO. UKGI should ensure an effective
balance between the role of the AO and the fiduciary responsibility of the Board.
6.8. A clear line of communication should be established with the finance team of the
sponsor department, and their input sought on financial management. Early
engagement prior to annual review and on matters likely to affect the organisation’s
financial performance is strongly encouraged.
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7. Rel
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lationship Management
Key feature(s):
rd
Tei
7.3.
74,
Clear lines of communication with the Chair, Board and Executive
Effective regular meeting “rhythm”, ensuring free flow of information through mutual
trust
Enshrining a “no surprises” culture
. The UKGI team must establish a regular meeting cycle to cover a range of areas.
This should include any succession issues and review the organisation’s progress
against its:
(i) strategy;
(ii) budgets (monthly); and
(iii) annual and 5-year business plans (quarterly).
The UKGI team should find the most effective structure for these meetings while
ensuring that all areas are covered on a regular basis and in the appropriate level of
detail.
In addition, the UKGI team (particularly the responsible Director/ED) should have
regular dialogue (through one-to-one meetings) with the Chair and CEO, as well as
contact with the SID and other NEDs.
The respective roles of UKGI, the sponsor department and the Board should be
clearly defined (including the split between the relevant department's shareholder
and customer roles, where applicable), allowing all parties to operate in an
atmosphere of mutual understanding, while allowing each group to play its
particular role as effectively as possible. It is essential to keep the sponsor
department engaged, sharing information and giving the relevant decision-makers
the opportunity to input where appropriate.
7.5. The underlying philosophy should be based on a “no surprises” culture. Honest,
open and transparent dialogue is essential to allow this to develop.
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8. Monitoring Portfolio Performance
Key feature(s):
8.1
8.2.
8.3.
8.4.
Regular portfolio meetings
Regularly updated risk register
Use UKGI Board “deep dives” to explore complex issues
. UKGI has an established structure for managing and monitoring its portfolio assets.
This comprises the quarterly or bi-annual portfolio review meetings, the UKGI Risk
and Assurance Committee, ExCo and the UKGI Board.
The Portfolio reviews form the focal point for regular reviews of portfolio assets.
These should occur quarterly for the larger or higher risk assets and bi-annually for
others. Portfolio reviews should include a panel of 3-4 UKGI EDs and/or Directors.
Quarterly and bi-annual reviews should be chaired by an ED, while annual reviews
are chaired by the Director of the UKGI Portfolio.
The structure of a portfolio review is a document that should cover the following
areas:
(i) action points from the previous meeting;
(ii) summary of areas the team would like to discuss;
(iii) review of key developments since the last meeting, including progress
against UKGI priorities;
(iv) overview of financial performance, against budget, annual and 5-year
plans, including commentary;
(v) summary of operational performance;
(vi) review of the organisation’s Board and management, remuneration issues
and succession planning;
(vii) I performance against objectives for the organisation; and
(viii) I the proposed UKGI priorities for the next period.
At the end of each review, the team and panel will consider whether there are any
issues that need to be escalated to the UKGI Risk and Assurance Committee
and/or ExCo.
8.5. The Risk and Assurance Committee and ExCo may then arrange meetings to cover
specific aspects of risk or material decisions. Issues that come to the Risk and
Assurance Committee and ExCo will then normally be reported to the Board as
either a deep dive on a particular asset or as part of the CEO’s report.
15
oT
Name I Parties Purpose Key features
Chairman's Letter UKGI/sponsor ‘Setting out Government's aims and _Articulates the Chairman’s objectives, with a particular focus on the next 12 months
department ‘expectations for the company ‘but also setting out longer term goals.
Framework (i) Sponsor department, To ensure that the company Includes policies and procedures on:
Document and (ji) the company ‘complies with the necessary policies
and procedures (particularly around + Recruitment and pay;
Managing Public Money) ‘+ Reporting and responsibilities;
+ Business planning; and
‘+ BISSoS consent matters as shareholder.
Finance and {i) Sponsor department, To set out the financial Includes:
Delegations Letter and (i) GovCo arrangements between Government
‘and company GovCo's annual budget;
Matters requiring specific Government sign-off; and
Reporting requirements.
‘+ Financial delegation thresholds;
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ANNEX B: Categorisation of UKGI Portfolio
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ANNEX C: Governance Resources Relevant to Companies in
Government
Private Public NDPB which
company company is
Governance resources limited by limited by incorporated
shares or shares (Plc)
guarantee
(Ltd)
UK Code No Yes No
2
3
2 UK Code — smaller unlisted Yes No Yes
i companies
G
D
xo} Yes (if Yes (if Yes (if
be UK Stewardship Code exercising exercising exercising
S Pp stewardship stewardship stewardship
= role) role) role)
a
o
Disclosure and Transparency
© Rules No Yes No
G
co)
8
2 Companies Act 2006 Yes Yes Yes
&
<x
Articles of Association Yes Yes Yes
> Managing Public Money Yes Yes Yes
8
ne} a
Fi g Code of Good Practice Yes Yes Yes
ea
oo
& & I NDPB Code No No Yes
oc
a 2
So
= : Public Appointments Yes Yes Yes
<3
rs
° Framework Document Yes Yes Yes
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ANNEX D: Annual Governance Checklist
The ALB - Core Role and Strategic Objectives [Name of ALB]
Core role, governance framework and strategic
objectives set out in Framework Document?
Government policy objectives communicated to
ALB?
Multi-year strategic plan in place?
Annual business plan agreed with the
Department?
ls a clear Board TOR in place and agreed with
the Department?
The Board - Membership
Is the CEO on the Board?
ls the CFO on the Board?
Is the Chair independent?
What percentage of the Board is independent?
ls Board effectiveness reviewed annually?
ls Board effectiveness reviewed independently
every 3 years?
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The Chair
ls the Chair appointed by the Minister?
Is Chair an independent NED?
Does Chair set Board agenda?
Does Chair have skills and experience to
challenge executive team?
Does Chair play key role in appointment of
NEDs?
Does Chair appoint the CEO?
Does Chair play a role in setting CEO's
objectives and KPIs?
Are NEDs on fixed-term contracts of no longer
than 3 years?
Have any NEDs served more than 2 terms?
Is there a Department NED?
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Board Sub-Committees
Does Board have an audit/risk committee?
Does the Board have a remuneration committee?
Are any committees chaired by independent
Board members?
Does the skill-set of the committee reflect its
activities?
Does the CEO meet with the Permsec annually?
Interaction with the Department
Does the Chair have an annual standing meeting
with the Minister responsible?
Is there a quarterly performance review of the
ALB by the Department?
ls there a Chair letter setting out the Chair's
KPls?
Are the ALBs strategic targets and objectives
also communicated annually from Government?
Is the Chair's performance evaluated annually by
the Department?
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Accountin inance and Consent Matters
Is the Permsec the PAO?
Is the CEO the AO?
Has the AO received training on the AO role?
ls a clear delegation framework in place for
spending decisions?
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