Report 98/29

Effective financial management in higher education

A guide for governors, heads of institution and senior managers

Ref 98/29

June 1998

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Introduction to the guide from members of the steering group: Context; Developing the guide; Using the guide; Definitions
Principles
Self-challenge questions
Practical examples
Appendices: Appendix 1 Membership of the steering group; Appendix 2 Feedback from the consultations; Appendix 3 Further reading

Introduction to the guide from members of the steering group

Context

1. This guide has been developed to encourage good practice in effective financial management in higher education. Higher education exists in the following context, described by Professor Hanna Gray, former President of the University of Chicago:

'There are basic reasons why academic institutions are organised and governed as they are, in the service of education and research and of excellence in these pursuits. Faculty are not just "professional" with a commitment to their professions outside the institution as well as to the institution . . . They are individual talents and intellectual entrepreneurs demanding developers of their disciplines . . . who have in fact certain constitutional rights in the process of governance and who hold the most important authority which exists in a university, that of making ultimate academic judgements. And boards exist in part to ensure this freedom and creativity and to protect the processes and the health of the environment that make them possible. In short, they exist for the sustenance of a mission . . . . and its related goals.'

- Professor Hanna Gray, former President, University of Chicago

2. However, higher education institutions should seek a balance between the pursuit of their academic mission and the effective management of all `their resources; this balance is reflected in the dual roles of the head of the institution.

3. Higher education institutions are independent bodies, attracting funds from a variety of public and private sources. As they have grown in size and range, placing ever increasing pressure on resources, there is a greater need for effective financial management.

4. We are aware of the existence of much good practice in financial management, and believe that wide dissemination of this would be beneficial. The guide also addresses HEFCE concerns that institutions which have recently experienced financial difficulties have lacked a number of key features which would be expected in a well managed institution.

Developing the guide

5. Development of the guide was a collaborative venture between the HEFCE and the higher education sector. It was overseen by a steering group of representatives from the British Universities Finance Directors Group (BUFDG), the Standing Conference of Principals Finance Officers Group (SCOPFOG), the Committee of University Chairmen (CUC) and the HEFCE. The group was assisted by Coopers & Lybrand.

6. This guide has been developed in parallel with the CUC 'Guide for Members of Governing Bodies of Universities and Colleges in England, Wales and Northern Ireland', which explains in greater detail the framework and governance of higher education institutions. Although the focus of each publication is different, there are some areas of common ground, and this guide should be read in conjunction with the CUC guide.

7. At each stage of its development, the guide was tested within institutions; it was tested formally in two consultation drafts and in regional seminars held in January and February 1998, and in further discussions with sector representative bodies. This final version takes account of all the comments received; further details are in Appendix 2.

Using the guide

8. The HEFCE does not intend to make use of the guide mandatory, nor to impose it through the Financial Memorandum. However, it does expect governing bodies, the head of the institution and senior managers to use the guide to undertake a self-assessment and to act on the outcomes.

9. We intend the guide to be used by institutions as a tool for self- assessment. It has been designed to allow members of governing bodies, the head of the institution and senior managers to test the effectiveness of the financial management arrangements at their institutions, to ensure that they are appropriate and robust. The outcome of the self-assessment should be part of the assurances provided by the head of the institution to the governing body.

10. We recognise that governance and management arrangements differ between institutions depending on factors such as size, mission and culture. However, we believe that the principles and the self-challenge questions set out in the guide apply to all institutions. The differences lie in how those self-challenge questions are answered and what actions then follow.

11. Whatever their size, mission and culture, institutions must achieve an effective balance in their governance and management arrangements. The chart below shows the composite parts of those arrangements. Institutions will vary in the resources they commit to each part, but it is vital that there are resources in each part, and that the balance between them promotes an effective challenge function. The balance is dynamic and may change over time; institutions should use the guide periodically to ensure that their arrangements remain effective.

Graph

12. The principles are below, with the self-challenge questions following; these are followed with practical examples to help institutions assess their current arrangements.

Definitions

13. We recognise that there are differences in terminology between institutions. Most of the terms in the guide are generally applicable, but where there may be ambiguity we have clarified our use of the term. We have also used the words 'responsibility', 'authority' and 'accountability' within this guide very precisely, as detailed below.

Responsibility

Responsibility refers to ultimate responsibility, which cannot be delegated. Responsibility for approving the strategic direction and for the financial viability of the institution rests with the governing body, who consider the recommendations of the head of the institution.

Responsibility for academic matters may rest with the senate or the governing body depending on the institution's constitution, but decisions on the financial implications of academic decisions rest with the governing body. Responsibility for the management of the institution rests with the head of the institution.

Authority

Authority means 'the power derived from the office'. 'Authority' therefore refers to the power of the governing body or senate/academic board, and 'delegated authority' to the power that is delegated by the governing body or senate to other committees, the head of the institution, or senior managers to act on its behalf.

Accountability

Accountability refers to the mechanisms for demonstrating how delegated authority has been exercised, and for calling to account those to whom authority has been delegated.

As designated officer, the head of the institution is accountable to the governing body for ensuring that the conditions in the Financial Memorandum are met. The designated officer is also required to inform the Chief Executive of the HEFCE if the governing body proceeds with a course of action that is incompatible with the terms of the Financial Memorandum.

Audit committee

The audit committee's responsibilities include advising the governing body on audit arrangements, keeping under review the effectiveness of internal control systems, and advising the governing body that satisfactory arrangements are in place to promote economy, efficiency and effectiveness.

Corporate plan

An output of the strategic planning process, the corporate plan provides an over-arching framework for the institution's strategies.

Finance committee

Also known as the Finance and General Purposes Committee, or the Planning and Resources Committee, the finance committee will monitor financial performance. Depending on the scheme of delegation, it may also be responsible for, or may advise the governing body on, the allocation of funds.

Financial Memorandum

The Financial Memorandum between the HEFCE and institutions sets out the conditions attached to the grants provided by the HEFCE. It provides a financial framework within which the HEFCE expects institutions to operate.

Governing body

The university council, board of governors or other body ultimately responsible for the affairs of the institution.

Head of the institution

The head of the institution is both the academic leader and the person with executive responsibility for the management of the institution, that is the vice-chancellor, principal, director, rector or provost.

Senior managers

Senior managers are the team of people who assist the head of the institution in managing the institution. They will usually include senior academics and the heads of the key service departments.

Senate/academic board

The senate/academic board is responsible for regulating and directing the academic work of the institution. Decisions of the senate/academic board which have financial implications are subject to approval by the governing body.

Principles

The following 10 principles of effective financial management have been identified. These are universally applicable. They form a hierarchy: the first two are overarching and the others cascade, from the primarily strategic to the primarily operational.

1. The governing body is responsible for the direction of, and for the key decisions taken within, the institution.

The governing body is responsible for approving the strategic direction of the institution and for the stewardship of funds. It is also responsible for recruiting the head of the institution. Management is the responsibility of the head of the institution and senior managers, who are accountable to the governing body for their actions. Responsibility cannot be delegated. Members of the governing body should set and observe high standards of integrity, openness and transparency, having regard to the seven principles set out by the Committee on Standards in Public Life.

2. The governing body is responsible for the financial health of the institution.

The governing body is responsible for ensuring that the institution remains financially viable at all times.

3. Roles and responsibilities of the governing body, all committees, the head of the institution and senior managers should be defined, understood, accepted and reviewed regularly.

The institution should have a clear management and committee structure. This should specify roles and responsibilities, relationships and reporting lines, including those between the governing body and the senate/academic board. Individuals and committees should be accountable for decisions taken. In particular, it should be clear whether each committee has a delegated decision-making role or is advisory.

4. The competencies of the governing body, all committees, the head of the institution and senior managers should satisfy the institution's needs and should be reviewed regularly.

The breadth of competencies of the governing body, all committees, the head of the institution and senior managers should be sufficient to allow them to fulfill their respective functions. Competencies include skills, experience, personal qualities and, where appropriate, professional qualifications. The governing body and all committees should be able challenge the plans and proposals put to them.

5. The institution should plan strategically.

The strategic planning process should address the mission and the medium and longer term direction of the institution. Strategic planning should be an iterative process taking into account the overall direction of the institution, the external environment and internal resource constraints.

6. There should be a corporate plan which includes a financial strategy as one of its major components.

The outputs of the strategic planning process will include a corporate plan. The financial strategy will identify how sufficient resources will be made available to support the objectives in the plan. It should be supported by plans and budgets which identify how the institution's resources will be managed to deliver its objectives.

7. Opportunities and risks should be recognised, assessed and managed.

As part of the strategic planning process, the head of the institution and senior managers need to identify the major opportunities for change as part of their review of activities. The process should include the identification of the key risks to the institution of either pursuing or missing these opportunities, as well as the risks attached to existing activities. The governing body should satisfy itself that key risks are being monitored and managed.

8. Information to governors, the head of the institution and senior managers should be relevant, reliable and timely.

Effective governance and management depends on good quality, focused, timely and relevant information. This should form the basis of decision-making and action planning. Information will vary according to the needs of the recipient but in all cases the purpose of producing it - whether for information, action or decision - should be clear.

9. Communication should be effective throughout the institution.

Mechanisms should be in place to facilitate effective and consistent communication and consultation throughout the institution. Communication channels should be multi-directional to ensure that individuals have information relevant to their responsibilities.

10. Structures, processes and systems should be in place which are robust and fit for purpose.

The head of the institution and senior managers should satisfy the governing body that structures, processes and systems are in place to satisfy principles 1 to 9. The effective operation of those structures, systems and processes should be reviewed regularly and updated as necessary.

Self-challenge questions

Introduction

Members of governing bodies, the head of the institution and senior managers should assess both their own and their institution's application of the principles at pages 6 to 7, using the self-challenge questions set out below.

In reviewing the outcome of the self-assessment, they should use the guide in ways which are consistent with their own structures and processes, and should be able to satisfy themselves that their answers to the self-challenge questions demonstrate compliance with the principles.

1. The governing body is responsible for the direction of, and for the key decisions taken within, the institution.

1.1 How does the governing body help determine the direction and major new initiatives of the institution?

1.2 Within a structure where functions are delegated, how does the governing body exercise its overall responsibility?

1.3 How does the governing body ensure that the head of the institution and senior managers are held accountable for their actions?

1.4 How do the governing body and the institution's committees know that they are receiving the right advice from the right people?

2. The governing body is responsible for the financial health of the institution.

2.1 How do the governing body and finance committee ensure that the financial health of the institution is maintained?

2.2 What processes does the governing body follow to ensure that activities are delivered in the most effective, efficient and economical way?

2.3 How does the governing body exercise its responsibility for the proper use of funds?

2.4 How does the governing body ensure that it is made aware of control failures and that these failures are rectified promptly?

3. Roles and responsibilities of the governing body, all committees, the head of the institution and senior managers should be defined, understood, accepted and reviewed regularly.

3.1 How does the governing body ensure that its size and composition facilitate effective decision making, with an appropriate balance between non-executive and executive members?

3.2 How does the governing body ensure that its committee structure and composition are appropriate to the current needs of the institution?

3.3 How does the head of institution ensure that the management and committee structures and processes are appropriate to the needs of the institution?

3.4 How do senior managers ensure that faculty, departmental and individual objectives are consistent with the corporate plan?

3.5 How do senior managers ensure that performance is assessed against objectives?

4. The competencies of the governing body, all committees, the head of the institution and senior managers should satisfy the institution's needs and should be reviewed regularly.

4.1 How do the governing body, and its committees ensure that their membership includes the right mix of competencies, skills and personal qualities?

4.2 How do the institution's policies minimise the risk of appointing or retaining dishonest or ineffective governors?

4.3 How do the governing body and the head of the institution ensure that there is the right mix of competencies and skills among senior managers?

4.4 How do the institution's policies minimise the risk of appointing or retaining dishonest or incompetent staff?

4.5 How do the governing body and its committees keep in touch with the activities of the institution and the higher education sector more widely?

5. The institution should plan strategically.

5.1 How does the governing body influence the strategic direction of the institution?

5.2 How is the corporate plan developed?

5.3 How does the governing body monitor progress against the plans?

5.4 What is the process for authorising initiatives which are not included in the plans, and on what basis are resources allocated to them?

6. There should be a corporate plan which includes a financial strategy.

6.1 How is the financial strategy developed, as part of the corporate plan?

6.2 How do senior managers translate the corporate plan into an annual operating plan and budget with restricted resources?

6.3 How do the governing body, and its committees ensure that the institution's resources are managed, controlled and protected?

6.4 How does the governing body ensure that the institution's assets are identified, safeguarded and fully utilised?

6.5 How do the governing body and its committees ensure that all liabilities are identified and managed?

7. Opportunities and risks should be recognised, assessed and managed.

7.1 How does the governing body ensure that major new opportunities are identified?

7.2 How does the governing body ensure that the key risks associated with each aspect of its activities are identified and managed?

7.3 How do senior managers assess the risks associated with key aspects of the institution's activities?

7.4 How do senior managers ensure that staff know how to identify, assess and manage risks?

7.5 How do the governing body and the head of the institution ensure that all key risks and opportunities are being actively managed?

8. Information to governors, the head of the institution and senior managers should be relevant, reliable and timely.

8.1 How do the governing body, the head of the institution and senior managers review the provision of information to ensure that it is relevant, reliable and timely?

8.2 How do users ensure that they receive information appropriate to their needs?

8.3 How is the consistency of information across the institution managed and monitored?

8.4 What measures are in place to ensure that information is acted upon?

9. Communication should be effective throughout the institution.

9.1 How does the governing body ensure that information is communicated consistently to the right people in the institution?

9.2 How do senior managers ensure that communication reaches and is accepted by those it is intended for?

9.3 How does the governing body ensure that procedures are in place to obtain feedback from staff and students?

10. Structures, processes and systems should be in place which are robust and fit for purpose.

10.1 How does the governing body ensure that the institution's key systems are adequate and appropriate?

10.2 How do senior managers ensure that the institution's information systems (IS) strategy is consistent with the corporate plan?

10.3 What measures are in place to test the quality of the systems and their outputs?

10.4 What contingency and recovery plans are in place to ensure that the institution could cope with breakdowns in key systems?

Practical examples

These examples are designed to cover a range of institutions, so not all examples will be relevant to all circumstances. Given the variety of cultures and missions within the sector, it would not be practical or sensible for every institution to apply them all. Equally, other existing practice may be in operation which adequately addresses the self-challenge question. Further, the examples do not purport to be comprehensive and to cover all situations.

Practical examples which may be relevant are listed below that self-challenge question.

1. The governing body is responsible for the direction of, and for the key decisions taken within, the institution.

1.1 How does the governing body help determine the direction and major new initiatives of the institution?

There is an environment which encourages real challenges to existing practice, with suggestions for new directions and ways to develop the culture of the organisation. This environment is supported by the governing body, the head of the institution and senior managers.
Members are recruited to the governing body because they have the relevant experience and background to contribute to discussions on direction and initiatives, and have sufficient understanding to challenge proposals.
The governing body is involved in determining the institution's mission and strategy at an away-day early in the strategic planning cycle; this is also attended by the head of the institution and senior managers. The mission and broad strategic objectives are determined at this away-day, and are provided to senior managers to develop the more detailed corporate plan following financial appraisal.
One meeting of the governing body each year is reserved to consider the overall corporate plan with its financial forecasts, and the annual operating plan with its budget. In deciding to approve these the governing body explicitly considers the results of previous plans. None of these tasks are delegated.
The governing body receives papers at least one week before meetings. Papers present options and their resource implications, a full analysis of advantages and disadvantages, and make recommendations.

1.2 Within a structure where functions are delegated, how does the governing body exercise its overall responsibility?

The governing body determines its meeting timetable so that the frequency, quality and coverage of its meetings are sufficient for it to fulfil its role.
The governing body retains a formal schedule of matters specifically reserved to it for collective decision-making.
There is a scheme of delegation which permits the chairman, named governors and named senior managers to take decisions normally requiring governing body approval, between governing body meetings, in exceptional circumstances. Procedures exist for reporting all such decisions to the governing body at the following meeting.
The governing body considers whether its members are adequately represented on other key committees.
The governing body ensures that the institution is adequately represented on the boards of any subsidiaries, related parties and joint ventures of the institution.
The governing body receives a report from all major committees of the institution including the senate/academic board, and each member has the right to ask for papers if further detail is required.
The governing body receives copies of the audit committee minutes, as well as reports from the audit committee, to assure itself that there are effective systems and controls throughout the institution.
The governing body approves the financial regulations following appropriate advice and review, and ensures that appropriate mechanisms are in place for reporting non-compliance with the financial regulations, and for any subsequent action.
The financial regulations provide mechanisms which ensure that any decision with significant resource implications (relating to academic and support activities, and revenue and capital expenditure) can only be made after those implications have been identified, estimated and built into future plans.

1.3 How does the governing body ensure that the head of the institution and senior managers are held accountable for their actions?

The governing body agrees a scheme of delegation, which also shows how accountability is to be discharged.
The governing body receives regular reports against key institutional performance targets. Explanations for significant variances from the targets are part of those reports.

1.4 How do the governing body and the institution's committees know that they are receiving the right advice from the right people?

The head of the institution advises the governing body on strategic and policy issues.
The governing body, all committees and the head of the institution have access to professional advice, and draw on this where appropriate.
The director of finance reports directly to the head of the institution.
The governing body or the head of the institution always seeks advice on the financial implications of any intended proposal.
Appropriate senior managers are members of the institution's committees which consider matters in their areas of expertise. For example, the director of finance is a member of the finance committee; the estates director is a member of the estates committee. Where this necessitates a change to the charter and statutes of the institution, this has been actioned.
The secretary to the governing body guides it on its responsibilities under the rules and regulations to which it is subject, and alerts the governing body if any proposed action would exceed its powers. The secretary is also the conduit through whom governors can seek independent advice.
The secretary to the governing body is answerable to that body for the duties undertaken in that role, is suitably qualified, and has a sufficient status to command the respect of governing body members, the head of the institution and senior managers.
The secretary to the governing body is a member of the senior management team. The secretary's roles and responsibilities are clear, and there are procedures for dealing with any conflict of interest.

2. The governing body is responsible for the financial health of the institution.

2.1 How do the governing body and finance committee ensure that the financial health of the institution is maintained?

The governing body and the finance committee include members with financial expertise. They understand the financial climate within which the institution operates, and the benchmarks against which the institution's financial performance should be measured.
The governing body, advised by the finance committee, reviews appropriate management information and monitors actions taken as a result of this information.
The governing body has been informed of the formal risk assessment process that is in place: this identifies, quantifies and manages major opportunities and key risks.
All papers for decision include a section detailing the financial implications of the paper.

2.2 What processes does the governing body follow to ensure that activities are delivered in the most effective, efficient and economical way?

There is a culture of securing value for money within all the institution's activities.
The value for money (VFM) programme includes a review of available external benchmarks in all areas of the institution's activities, to set targets and monitor progress.
The institution identifies a 'family' of similar institutions around the UK and benchmarks key data from that family for review.
The governing body, advised by the audit committee, approves the institution's VFM programme and ensures that responsibility is clearly defined for implementing both the programme and findings from other studies.
The institution responds to sector-wide VFM studies,. Senior managers report their responses to the governing body via the audit committee.
The terms of reference for internal audit include a requirement to ascertain that systems of control promote the most economic, efficient and effective use of resources.

2.3 How does the governing body exercise its responsibility for the proper use of funds?

The financial regulations ensure that terms and conditions attached to funding are met. Systems and procedures are in place to ensure these regulations are complied with.
Governors receive induction and on-going briefings on relevant matters. These include the financial and regulatory framework for higher education institutions, and the report of the Committee on Standards in Public Life.
The governing body is aware that the designated officer will appear on its behalf if he or she is called to appear before the Public Accounts Committee.

2.4 How does the governing body ensure that it is made aware of control failures and that these failures are rectified promptly?

The governing body is assured, through the audit committee, that there are systematic internal control procedures which draw its attention to any serious breaches of control.
The governing body, advised by the audit committee, is satisfied that appropriate internal and external audit functions are in place in line with the HEFCE Audit Code of Practice, and that these are regularly evaluated using good practice guidelines.
The governing body, advised by the audit committee, considers the results of internal and external audits, including management letters and HEFCE Audit Service reviews, and ensures that appropriate action is taken following advice from the audit committee.
The governing body considers the results of academic quality audits (research and teaching) and ensures that appropriate action is taken, following advice from the senate/academic board and the head of the institution.
The institution has a fraud policy statement which covers prevention, detection and subsequent action.
The governing body is satisfied that policies and procedures are in place to allow for, and take appropriate action on, 'whistle-blowing'.

3. Roles and responsibilities of the governing body, all committees, the head of the institution and senior managers should be defined, understood, accepted and reviewed regularly.

3.1 How does the governing body ensure that its size and composition facilitate effective decision making, with an appropriate balance between non-executive and executive members?

The governing body is small enough to enable proper debate of issues and ownership of decisions made, yet large enough to promote a broad representation of the diversity of the institution.
Where the size of the governing body has been reviewed and considered too large for effective debate and decision-making, the size has been reduced. Where this necessitates a change to the charter and statutes of the institution, this has been actioned.
The composition of the governing body - the number of lay members, members elected by related organisations, senior managers, staff and student representatives - is reviewed regularly to ensure that it remains appropriate to the needs of the institution, its mission and strategies.
To ensure that there is responsibility and accountability for decision-making and actions, members of the institution's executive are members of the governing body, including the head of the institution and senior managers. Where this necessitates a change to the charter and statutes of the institution, this has been actioned. Consideration is given to the implications for being quorate and to conflicts of interest between management and governor roles.

3.2 How does the governing body ensure that its committee structure and composition are appropriate to the current needs of the institution?

Each committee is provided with a clear remit and written terms of reference, including a description of the powers delegated to it. It is clear which committees are decision-making (and for what decisions) and which are advisory.

The committee structure is reviewed regularly as part of the strategic planning process, to ensure that:
- it meets the current needs of the institution, taking into account any specific major issues, such as abnormally large capital projects
- committees work effectively as individual units, within a clear, defined and integrated structure
- there is no unnecessary duplication or referrals back and forth
- there are no gaps in coverage
- each committee is aware of the major opportunities and key risks for which it is responsible
- each committee has the correct balance of skills and experience
- each committee is clear about its reporting requirements.
Where unusual activities are included in the corporate plan, - such as , a very large capital project or a potential merger, - additional temporary committees are set up to make recommendations to the governing body.

3.3 How does the head of institution ensure that the management and committee structures and processes are appropriate to the needs of the institution?

The responsibilities of all committees (including those of the senate/academic board), of their chairs and of senior managers operating in the same field are agreed and transparent, without duplication.
The operation of any committee does not obscure or confuse the reporting and accountability lines of any individuals operating in that area; this applies particularly (but not only) to non-academic functions.
The senior management group has a clearly defined role and methods of working. The director of finance is a member of the senior management group.
With a matrix management structure, particular attention is paid to the clarity of primary responsibilities across the institution and how accountability is to be exercised for those responsibilities.
Senior managers' responsibilities are balanced, well defined and not duplicated at all levels within the institution. Individuals are held to account for those responsibilities by the head of the institution.

3.4 How do senior managers ensure that faculty, departmental and individual objectives are consistent with the corporate plan?

Job descriptions are consistent with the management structure, and individuals are appraised against their job description and objectives, consistent with the corporate plan.
Senior managers recognise and promote corporate objectives as well as those of their particular constituency.
Objectives are communicated throughout the institution so that individuals understand the relationship between their personal objectives, their department's objectives and those of the institution as a whole.

3.5 How do senior managers ensure that performance is assessed against objectives?

There is a regular (at least annual) assessment of departments, reviewing progress in achieving objectives.
There is at least an annual appraisal process for individuals, which includes a review against their objectives.
Feedback from individual appraisal and departmental assessment informs future objective setting at all levels.

4. The competencies of the governing body, all committees, the head of the institution and senior managers should satisfy the institution's needs and should be reviewed regularly.

4.1 How do the governing body, and its committees ensure that their membership includes the right mix of competencies, skills and personal qualities?

The nominations committee sets out the optimum skills and competencies required by members of the governing body and committees. When openings arise, these skills and competencies are used to assess potential candidates.
The nominations committee fills current skill gaps and addresses succession. Where skill gaps are identified at any level, the risk of those gaps is recognised and the necessary compensating controls put in place, until such time as the gap is eliminated.
Where members of the governing body are nominated by another body, the nominations committee informs that body of the skills and competencies required, to ensure that as many of them as possible are met. The nomination is done in consultation with the governing body.
Non-members of the governing body are co-opted onto its committees. Co-opted members are later considered for membership of the governing body, so reducing the time for new members to become familiar with the institution.
Longer-serving governors rotate between committees to improve overall understanding of the institution.

4.2 How do the institution's policies minimise the risk of appointing or retaining dishonest or ineffective governors?

The nominations committee has a transparent process and defined criteria for the re-election of members of the governing body.
The institution has a Register of Interests which is updated at least annually. Members are also required to declare interests in meetings, and to leave meetings when relevant discussions take place.
Procedures exist to develop and enhance the effectiveness of governors.

4.3 How do the governing body and the head of the institution ensure that there is the right mix of competencies and skills among senior managers?

There are competence requirements for each senior management post, which are applied during the selection of senior managers, including any elections or appointments from existing staff. These competence requirements include:
- professional qualifications where appropriate (for example, the director of finance holds a qualification recognised by the Consultative Committee of Accountancy Bodies(CCAB))
- relevant experience either in the sector or outside
- personal transferable skills and strength of character.
Training for senior managers is provided and its application reviewed regularly.
Professional staff are encouraged to follow recognised schemes of continuing professional development.

4.4 How do the institution's policies minimise the risk of appointing or retaining dishonest or incompetent staff?

Policies are in place and include:
- defining competencies and skills for all posts
- following-up references and checking qualifications prior to appointment
- probationary procedures covering the first six months
- formal performance appraisal at least once a year
- disciplinary procedures, including procedures for the dismissal of dishonest or incompetent staff.
Induction procedures for all new staff include an introduction to financial regulations and emphasise their applicability to all employees.
The institution has a fraud policy statement.

4.5 How do the governing body and its committees keep in touch with the activities of the institution and the higher education sector more widely?

The institution provides induction and ongoing briefings for governing body and committee members, covering key aspects of the HE sector and the institution, and including financial training where required. Such induction and briefings are reviewed annually to ensure they remain valid.
Members of the governing body and committees keep themselves informed on developments in the sector and have adequate time to commit to the institution, including regular attendance at meetings.
Members of the governing body involve themselves in wider reading and with organisations which provide a forum for discussion, such as the Committee of University Chairmen or similar forums.
Groups of institutions in a region arrange joint briefings for their governors, thus providing the opportunity for networking.
Summaries of key HEFCE and sector bodies' publications are provided regularly to members of the governing body, with an indication of the possible implications for the institution.
Members of the governing body and committees are briefed on their responsibilities at the time of appointment. Annual updates are provided.

5. The institution should plan strategically.

5.1 How does the governing body influence the strategic direction of the institution?

The governing body considers, as frequently as necessary, the institution's mission statement in the context of national education policy and market conditions.
The governing body, the head of the institution and senior managers meet at the beginning of the strategic planning process to discuss the institution's strategic direction. The mission and broad strategic objectives are determined at this meeting, and responsibility for developing the corporate plan is delegated to senior managers.

5.2 How is the corporate plan developed?

The corporate plan is developed and updated using both internal and external information and benchmarks.
The process for developing the plan involves 'top down' strategic guidance and ensures wide ownership by involving academic and administrative staff in 'bottom up' contributions.
Different elements of the corporate plan are developed by different groups in the institution and brought together in a coherent way by senior managers. Conflicts are identified and resolved - especially those between aspirations and financial reality.
Senior managers identify the financial implications of the overall corporate plan - both capital and revenue - to develop the institution's financial strategy and forecasts. Until this is done, and objectives are aligned with available resources, the corporate plan cannot be approved.
The corporate plan and accompanying financial forecasts are formally approved by the governing body before submission to the HEFCE. The assumptions underlying the plan and forecasts are set out clearly in the commentary and are consistent between the two.
A five-stage approach is used :
- governors, the head of the institution and senior managers set the overall strategic direction and outline the parameters within which the institution is planning
- departments produce their own objectives
- departmental objectives are brought together and prioritised against the institutional strategic direction
- the objectives are reviewed in the light of available budgets and financial limits
- the objectives are pulled together to produce a coherent and costed corporate plan for the institution as a whole.

5.3 How does the governing body monitor progress against the plans?

Performance measures and success criteria are built into the corporate and annual operating plans; these are well defined, measurable, achievable, realistic and timely.
The results of monitoring against the key performance measures in the corporate and annual operating plans are reported to the governing body every quarter.
Where the monitoring of results shows that performance is moving off target, the head of the institution and senior managers indicate what actions are to be taken, and report this to the governing body, seeking agreement as necessary.
Action plans arising from such monitoring are included in reports to the governing body.

5.4 What is the process for authorising initiatives which are not included in the plans, and on what basis are resources allocated to them?

The head of the institution and senior managers respond to opportunities or unforeseen circumstances which may require action and which are not within the current plans. To do so they are clear on:
- the level of any initiative that can take place without being approved by the governing body
- where the responsibility and accountability for defining any such initiative will rest
- when it is acceptable to enter into a new initiative that is not part of the plan
The financial implications of initiatives not within the plans are agreed with the director of finance, who will indicate how the resources will be provided. If resources are available and the initiative is approved, the plans will be revised, and reported to the next governing body meeting.

6. There should be a corporate plan which includes a financial strategy.

6.1 How is the financial strategy developed, as part of the corporate plan?

The roles of the governing body, the finance committee and senior managers in the production of the financial strategy are defined.
The financial strategy sets the context for the development of both financial forecasts and budgets.
The financial strategy includes financial targets and timescales to achieve them, for example:
- the level of annual operating surplus
- reserve levels
- short-term and long-term borrowing levels, and the proportion of income from any one source
- treasury management
- pricing guidelines and net contribution targets for commercial activities.
The financial strategy is reflected in income and expenditure forecasts, cash flow forecasts and balance sheet forecasts, covering both capital and revenue. It addresses the timings of cash flows and explores options to manage surplus funds and to fund any gaps. Appropriate advice is taken on financing options, taking into account tax and VAT implications, and any potential risks.
Investment appraisal procedures are followed as part of decision-making processes, and are used before committing to material capital and revenue investments.

6.2 How do senior managers translate the corporate plan into an operating plan and budget with restricted resources?

The annual planning process is set down in a planning calendar or timetable.
Taking the corporate plan as the starting point, each management unit develops its operating plan bids with associated resource requirements.
Criteria are in place to prioritise the possible elements of the plan; these follow from the overall mission and aims of the institution. They include the evaluation of new and existing activities.
Major opportunities and key risks are taken into account when prioritising elements of the plan.
The senior management group provides a forum at which plans and aspirations are reconciled with their financial and other resource requirements, to agree the final objectives and to set priorities within the corporate whole.
The corporate and annual operating plans include key milestones and a review timetable to monitor the achievement of objectives.
The revenue and capital resource allocation processes are consistent with the results of the various planning processes. This check is especially important where resources are allocated by formula.
Plans for using departmental reserves are included in the financial strategy so that the institution's cash flow can be managed effectively. Subsequent use of departmental reserves is agreed before the expenditure.

6.3 How do the governing body and its committees ensure that the institution's resources are managed, controlled and protected?

All income and expenditure is the responsibility of an identifiable budget holder.
The annual operating plan has a budget associated with it, broken down into separate budgets for each individual budget holder. Budgets are profiled to allow regular monitoring.
Management information is produced to enable regular monitoring of resources and key risks, and to assess performance against the corporate and annual operating plan objectives.
Management information includes the timely reporting of variances, for approval of variation to budgets, for virement and subsequent action.
Management information includes year-end projected out-turns from the end of the first quarter.
Monitoring procedures are multi-layered with appropriate monitoring in different parts of the institution (for example departments, finance department, committees, governing body and related companies). Each layer receives management information appropriate to its role.
Performance measures are tested against appropriate external benchmarks (peer group and good practice).
Staff with responsibilities for finance, such as budget holders, receive appropriate training on their roles and responsibilities. This is updated annually.
Finance staff who are responsible for monitoring departments' finances and advising departmental heads on financial issues develop close working relationships with their internal 'clients'. As a result, departmental heads understand the financial context of the activities and the financial staff understand the academic context.
As part of the financial strategy, the finance committee formally approves the types of investment into which institutional funds may be placed.
Purchase requisitions are automatically compared to the uncommitted budgets by the institution-wide finance system before committed orders are created and authorised. Staff appointments are signed off by senior managers as being within budget before the positions are advertised.

6.4 How does the governing body ensure that the institution's assets are identified, safeguarded and fully utilised?

The asset register includes estate, intellectual property and data.
Members of staff who are key to the delivery of the institution's strategy are identified.
The corporate plan and relevant operating plans across the institution include plans for fully exploiting the institution's assets, including intellectual property and physical assets.
The governing body, the head of the institution and senior managers identify any legislation which may impact, as an opportunity or a risk, on its assets - including intellectual property.
Assets are adequately insured and safeguarded. The remit of internal audit includes reviewing the adequacy of such safeguards.
Asset holdings are regularly reviewed; this includes identifying under-utilised assets.
There is an estates strategy, incorporating estate development plans and long-term and short-term maintenance plans. Maintenance plans are appropriately funded. The estates strategy feeds into the corporate and operating plans.

6.5 How do the governing body and its committees ensure that all liabilities are identified and managed?

The governing body reviews the exposure to, and the management of, liabilities, such as:
- short-term and long-term debt
- contingent liabilities
- future commitments (on and off balance sheet)
- financial guarantees given to third parties
- the use of financial instruments
- exposure to exchange rate fluctuations
- exposure to interest rate fluctuations
- use of departmental reserves
- investments made in subsidiary or associated companies, or joint ventures.

7. Opportunities and risks should be recognised, assessed and managed.

7.1 How does the governing body ensure that major new opportunities are identified?

The strategic planning process includes a review by the head of the institution and senior managers of major opportunities arising from changes in the external environment.
Departmental staff identify opportunities available to their departments and these are brought together in a coherent way by senior managers.
Senior managers appraise the key risks attached to major opportunities.

7.2 How does the governing body ensure that the key risks associated with each aspect of its activities are identified and managed?

The governing body ensures that the key risks attached to each aspect of existing activities are identified (for example, the effect of changes in Government policy for HE funding, changes in international recruitment, the non-renewal of nursing contracts).
The governing body ensures that the overall level of risk within the corporate plan is quantified and acceptable.
Senior managers develop a model to show the different types of risk which may apply to each activity and the nature and timescale of that risk. Examples include strategic risk, reputational risk, financial risk, compliance risk, legal risk and contractual risk.
Senior managers formally re-appraise the key risks of existing activities as part of the strategic planning process.

7.3 How do senior managers assess the risks associated with key aspects of the institution's activities?

The risk model is applied to major aspects of the activities by assessing:
- the likelihood of the key risk occurring
- the timescale for the impact of the key risk
- the potential impact on the activities
- any controlling and mitigating factors.
Risk management plans are developed for all key risks, with contingency plans for high impact and high likelihood risks.
The postholders responsible for managing each key risk are identified, and the task is built into their objectives and appraisal.

7.4 How do senior managers ensure that staff know how to identify, assess and manage risks?

Risk awareness and risk management are embedded in the institution's culture, and it is recognised that these are everyone's responsibility.
There is a risk strategy with supporting policies and a consistent and clear institutional approach to risk management.
Training in risk management techniques is provided to key staff.
Financial regulations specify that all perceived risks, including any new risks, are reported to one senior manager.

7.5 How do the governing body and the head of the institution ensure that all key risks and opportunities are being actively managed?

Senior managers report to the head of the institution and to the governing body on risk assessment and management.
Senior managers review the effectiveness of risk management annually.
The finance committee has an annual presentation from the institution's insurance brokers to its their understanding of insured and uninsured risks.

8. Information to governors, the head of the institution and senior managers should be relevant, reliable and timely.

8.1 How do the governing body, the head of the institution and senior managers review the provision of information to ensure that it is relevant, reliable and timely?

An information strategy is in place which identifies the institution's primary information needs.
When preparing the corporate and annual operating plans, senior managers ensure that systems can provide enough information to inform and monitor the plans.
Information to the governing body refers to key performance targets. Senior managers decide on the information they need to monitor action against those targets.
Consolidated management information is available to senior managers within 10 working days of the month end, with a 'health warning' that it does not reflect month-end adjustments such as accruals and prepayments.
Senior managers review annually the quality of information provided by their departments; they consider whether the information meets users' needs and whether it is cost-effective to produce.
Information is 'colour-coded': for example, items for information are green, and items for decision or action are red.

8.2 How do users ensure that they receive information appropriate to their needs?

The institution has a system to identify and evaluate the different levels of information from the perspective of the various users, with increasingly summarised information for senior managers, the head of the institution and the governing body. For example, budget holders receive detailed activity reports for their budget codes; reports for departmental managers detail total spend against each budget code; reports for central managers detail the total spend of each department.
Users of financial and non-financial information are able to challenge the format and content of the information provided to them, to ensure that it meets their needs.
Information is focused and relevant, with supporting commentary and use of exception reporting.
Where non-financial information (such as student numbers) would help to interpret financial information (for example, fee income), the two are combined.
Management information includes appropriate graphs and ratios. Senior managers identify the most useful indicators to them and information is provided on these.

8.3 How is the consistency of information across the institution managed and monitored?

Senior managers ensure that information is evaluated consistently across the institution. This includes ensuring consistency of data inputs, methodology and format.
Information is only created once, by the most appropriate source, and is available to all relevant users.

8.4 What measures are in place to ensure that information is acted upon?

Management information includes the identification of actions taken or to be taken. This includes reporting back on the outcomes of those actions in subsequent reports.

9. Communication should be effective throughout the institution.

9.1 How does the governing body ensure that information is communicated consistently to the right people in the institution?

The institution has a communications strategy; this includes policies for horizontal and vertical communication within the organisation, and for external communication with customers, suppliers and others.
Employees' duties and responsibilities are communicated individually as well as through networked systems, such as intranets.
Minutes of all non-confidential meetings of the governing body and its committees are held in the institution's library on its intranet, with supporting papers to explain the issues.
A briefing is held soon after each governing body meeting on the key points discussed at the meeting.

9.2 How do senior managers ensure that communication reaches and is accepted by those it is intended for?

The institution's mission and the supporting plans and policies are made available to all staff individually as well as being communicated through networked systems, such as intranets.
The head of the institution and senior managers ensure that there is an effective structure for cascading information throughout the institution, and that there is timely and appropriate follow-up action after communication is received.
Staff appraisals are used to review the effectiveness of communications.

9.3 How does the governing body ensure that procedures are in place to obtain feedback from staff and students?

The communications strategy includes mechanisms to inform staff and students of the role of the governing body, and to allow feedback to that body from staff and students.
An integrated system of team briefing and interchange is embedded in the organisation's culture, involving all staff regularly throughout the year.

10. Structures, processes and systems should be in place which are robust and fit for purpose

10.1 How does the governing body ensure that the institution's key systems are adequate and appropriate?

The Information Systems (IS) strategy identifies the key systems required for the institution to deliver its strategic and operating plans and all the management of the tasks set out in sections 1-9 above. All procedures are fully documented.
The management structure includes an appropriately skilled senior manager with responsibility for information systems.
The remit of the audit committee covers the adequacy of systems, both financial and non-financial, throughout the institution. The results of reviews are reported to the governing body.
Each development project has a designated project manager and an implementation team which includes users.

10.2 How do senior managers ensure that the institution's IS strategy is consistent with the corporate plan?

There is a recognised point at which the IS strategy is considered within the overall corporate plan.
The information systems provide appropriate information to deliver all the management tasks and meet all the management information requirements set out in Sections 1-9 above.
The IS strategy includes details of how the institution intends to keep pace with technological change. This includes sector-specific developments, such as through the Funding Councils' Joint Information Systems Committee (JISC), as well as wider technological changes.
Where systems are not integrated, the strategy ensures that information is consistent between systems.
The IS strategy reflects likely internal and external changes, such as the year 2000, European Monetary Union (EMU) and tuition fees.

10.3 What measures are in place to test the quality of the systems and their outputs ?

There is a structured process for evaluating and developing new systems. All replacement computer systems are subjected to parallel running before being introduced.
The scope of internal audit includes the review of both financial and non-financial systems. The review process includes pre- and post- implementation reviews for all new systems, external benchmarking and user group feedback.
Key systems are identified and regularly reviewed and tested for reliability and robustness. Full advantage is taken of published good practice, such as the HEFCE Audit Code of Practice, and guidance from the Chartered Institute of Public Finance and Accountancy (CIPFA).

10.4 What contingency and recovery plans are in place to ensure that the institution could cope with breakdowns in key systems?

The IS strategy provides for adequate security, maintenance and servicing.
Procedures are in place to back up IT and other key system failures, including activities disruption plans. These procedures are documented and tested at least every six months. Back-up procedures include maintenance of duplicate records at a site that is independent of the main store.
Detailed knowledge of operating systems does not rest with only one individual.
Network back-up facilities are available.

Appendix 1

Effective financial management steering group

Members

Ian Lewis
Head of Finance, HEFCE (Chair)

Richard Aveling
Financial Controller, Nene College of Higher Education, representing SCOPFOG

Miles Hedges
Finance Director, University of Nottingham, representing BUFDG

Eric Morgan
Director of Finance, The Nottingham Trent University, representing BUFDG

Alan Woods
Chair of the Governing Body, the University of Derby, representing CUC

Paul Greaves
Deputy Chief Auditor, HEFCE

Camille Hewins
Finance Consultant, HEFCE

Sarah Tilley
Finance Adviser, HEFCE, Secretary

Advisers

Coopers and Lybrand

BUFDG	British Universities Finance Directors' Group
CUC	Committee of University Chairmen
SCOPFOG	Standing Conference of Principals Finance Officers' Group

Appendix 2

Feedback from the consultations

1. We consulted the sector formally twice on this guide. The first consultation draft was issued to the sector in December 1997, and was followed by a series of regional seminars in January and February 1998. The second consultation draft was issued to the sector representative bodies in April 1998, with supporting presentations and discussions at conferences and training events.

Status and structure of the guide

2. A recurring theme throughout the consultations was the status of the guide: was this a checklist to be used by the HEFCE and would adoption be compulsory? We have always emphasised that if the guide is to be effective it should be a self-assessment tool to be used by institutions themselves, and this message has been reinforced in the Introduction to the guide.

3. The principles and self-challenge questions were generally accepted from the start, but there was a perception that much of the guide - especially the evaluation criteria in the first draft - was too prescriptive. The second draft replaced the criteria with good practice examples. This change was well received, but questions were raised as to the status of the examples: for example, whether they were endorsed by the guide, and whether institutions should attempt to apply them all. We wish to stress that the examples are just that: examples of ways in which institutions may answer the self-challenge questions. They do not purport to cover all situations, and are designed to cover a range of institutions; there may well be other practice in operation which adequately answers the question.

First consultation draft

4. The key messages from the first round of consultation were that the guide should provide:

a greater focus on responsibility rather than accountability
a clearer distinction between governance and management
a clearer balance between the roles of the governing body and the academic board/senate
a clearer recognition of the role of the head of the institution as the academic leader as well as the chief executive.

All these comments were incorporated into the second draft.

5. A large number of governors attended the seminars, and two further themes emerged from their comments:

although they welcomed the clarification of the responsibilities of the governing body, there was some anxiety that the legal liability of governors remained unclear,
they valued the seminars, as both networking and training events for governors; and expressed a wish for further training and/ or networking. We will discuss these issues with the sector bodies.

Second consultation draft

6. The second consultation draft was welcomed as a much improved document, and the comments focused on the detail of the draft. The broad themes were:

that the remit of the guide and its relationship with the CUC 'Guide for Members of Governing Bodies of Universities and Colleges in England, Wales and Northern Ireland' was unclear
that the strategic planning process defined in principles 5 and 6 was unclear
that some practical examples- for example, those relating to senior managers' membership of the governing body, were forbidden by the charter and statutes of some institutions.

Final version of the guide

7. In response to these comments we have clarified the remit of this guide. We have also amended the title, from 'Effective Financial Management and Governance: recognising the financial impact of decision-making' to its current title. We have clarified its relationship with the CUC guide, and ensured consistency with that guide. We have also retained the references to governance where they are relevant to financial management, but have deleted such references which go beyond the scope of this guide.

8. We have clarified our explanation of the strategic planning process and are now confident that it will be acceptable to institutions.

9. A couple of the practical examples raised issues relating to powers under institutions' charter and statutes. We gave great consideration to these issues. In the end we decided to retain the examples for two reasons: first, as we mentioned before, the examples are just examples, and we don't expect all institutions to apply them all; secondly, because we know that some institutions have changed their statutes in order to bring about change which they considered to be necessary.