Governance review

An assessment of the current governance arrangements

Introduction

This section assesses the current governance structures and mechanisms in operation across the Tripartite relationship. Key themes considered include strategic alignment, governance framework, accountability, decision making, engagement and collaboration, oversight and assurance.

Our approach to the governance review

We undertook a detailed review of the existing legal, corporate and governance frameworks as they relate to Ministers’ multiple interests as shareholder, sponsor team, procuring authority, contracting party and creditor in relation to voted loan arrangements. This included consideration of the relevant regulatory and legal structures (see overview on pp. 12-13), articles of association, framework documents and key contracts.

The particular commercial terms of individual contracts are out of the scope of this project, with the focus being on the general approach to governance and whether the approach secures accountability, transparency and VfM.

We completed a series of interviews with the key senior members of the Tripartite with a focus on areas they feel work well within the Tripartite, areas for improvement, their vision for the future and any barriers to achieving this. We also conducted a number of focused stakeholder interviews to understand the impact of the current governance structures on the operations of each of the organisations.

Following the interviews and the documentation review, key themes and observations were collated together with the associated risks and potential recommendations. Our findings were reported to an independent oversight group which had a mandate to offer constructive challenge and test key assumptions.

For a full list of interviewees, see Appendix A. For a full list of documents reviewed, see Appendix B.

Our Point of View

Our review of governance structures and practices identified a number of opportunities to improve existing governance structures.

We noted many strong operational working relationships between individuals from the different organisations, particularly within project working groups.
However, multiple stakeholders highlighted that a lack of clear roles and responsibilities following the decision to separate CMAL in 2006 which has historically caused conflict between senior personnel at CMAL and CFL. While stakeholder interviews highlighted that the conflict is now less pronounced, multiple interviewees stated that it is still evident on occasion.
While conflict is not inherently unhealthy (it can facilitate challenge, accountability and improvement), we noted several instances of divergent viewpoints during our review, suggesting a lack of a joint approach and an aligned position.
Some of the behaviours noted are attributable to the corporate structure and prevailing cultures of individual entities. However, the behaviours have not been fully addressed by the current governance arrangements, which at times has led to delays in decision making / progressing projects. Ultimately this could impact the island communities served by the CHFS contract, as there is a risk of ferry services not being developed in line with their needs and in the required timescales. Members of the Tripartite should commit to a culture of honesty and collaboration to improve accountability and transparency.
However, while there are informal governance arrangements in place (for example, regular conversations between TS and CMAL / CFL; strong communication and working relationships at an operational level) there is a lack of a formal governance framework for the Tripartite at a strategic level, increasing the risk of potential misalignment on objectives, culture and shared vision. This may ultimately be to the detriment of the island communities as there is a risk of inappropriate decisions being taken, and individual entities working towards goals which do not align to Ministerial objectives.
Establishing a formal governance structure has been shown in other entities to improve transparency, accountability and efficiency, as the risk of misalignment is reduced and there is a dedicated forum for communication and conflict resolution.

Summary of Key Findings and Recommendations

We have identified a number of opportunities to develop and embed an improved governance structure across the Tripartite, which could be implemented should the decision be taken to continue with the “as-is” structure. Please see Appendix E for definitions of risk ratings.

Risk Reference 4.1

Risk – Medium

Finding - Lack of a formal Tripartite governance structure

There is no overarching governance framework for the Tripartite as a whole, to provide clarity and transparency on collective responsibilities

Key Recommendations

Implement an overarching Framework Agreement, to provide clarity and accountability for the Tripartite members on purpose and shared strategic objectives aligned to Ministerial objectives

Formalise the relationships and expectations between Tripartite members. This includes formalising the Board level governance with each Tripartite member and the establishment of a Tripartite Executive Forum to review and agree collective strategic priorities (aligned to Ministerial objectives), plans, risks and provide an escalation / arbitration point for key decisions.

Risk Reference 4.2

Risk – Medium

Finding - Culture and Behaviours

Our review identified differences in organisational culture and instances where public communications from one entity had been to the detriment of one or more of the other parties, which may hamper effective working relationships

Key Recommendations

Discuss and agree the current and desired culture and behaviours for the Tripartite, over and above the organisation’s individual mission statements, to enhance alignment. The agreed culture and behaviours should be modelled consistently by all Tripartite members and will ensure communications are aligned amongst the Tripartite.

Risk Reference 4.3

Risk – Medium

Findings - Strategic Planning

The Tripartite lacks a comprehensive approach to long-term strategic planning for the future of ferry services in Scotland and this is potentially counterproductive for members of the Tripartite and other interested parties.

Key Recommendations

A longer term strategy should be developed and agreed between parties to enable effective prioritisation and transparency of investment decisions.

Risk Reference 4.4

Risk – Medium

Findings - Accountability and Transparency

As the sole shareholder of CMAL and DML, TS should be responsible for driving alignment, overseeing corporate decision making, and providing challenge and accountability.

However, feedback from stakeholder interviews reflects that this does not consistently happen in practice.

Key Recommendations

Consider which processes should be partly or fully managed in common by the Tripartite, to manage the risk of inefficiencies, duplication or gaps – for example, risk management, project management, and stakeholder engagement.

Risk Reference 4.5

Risk – Low

Findings - Scottish Government Mandate

Documents setting out the mandate from the SG to both DML and CMAL in relation to strategy, finance and operations are insufficient / out-of-date.

Key Recommendations

Risk Reference 4.6

Risk – Low

Findings - Board Composition

There is a need to assess the skills mix of Board members to determine whether they remain appropriate and aligned to longer term strategic priorities

Key Recommendations

The skills and experience of the Board and senior management should be considered to determine whether they remain appropriate and aligned to longer term strategic priorities in order to provide sufficient challenge and support to each entity and the Tripartite.

4.1 Lack of a Formal Tripartite Governance Structure

Risk - Medium

Observation

Governance structures and reporting lines within the individual entities are well defined and understood, which is in line with the UK Corporate Governance Code and the requirements of the SPFM. Additionally, there are clear lines of reporting, performance monitoring and communication between Transport Scotland and CFL / CMAL.

However, there is no overarching governance framework for the Tripartite as a whole, to provide clarity and transparency on collective responsibilities and ensure that the Tripartite maintains focus on strategy, performance and behaviour and does not get diverted by detailed operational matters which are the responsibility of the respective Boards.

Whilst we acknowledge that the Tripartite cannot be collectively responsible for all areas of decision making, a formal overarching structure could enhance transparency, accountability and ownership, including to customers and stakeholders, by providing a forum within which TS, representing Scottish Ministers as the sole shareholder, can hold other Tripartite members to account.

We note that a previous Board level committee was disbanded with no replacement; however, we have been unable to evidence the reasons for the dissolution of the committee either from stakeholder meetings or review of documentation. There is a Network Strategy Group (NSG), which sits above the operational project working groups. However, the role and remit of this group focuses on projects only rather than strategic objectives, and interviews highlight that its role is not clearly understood by all parties.

Risk

The absence of a dedicated forum in which TS can hold the other Tripartite members responsible for decisions and delivery against Ministerial objectives presents a risk to transparency and accountability.

The governance and oversight of the Tripartite is currently operating with a strong reliance placed on relationships between individual Tripartite members. There is, however, increased risk with such reliance on individual relationships when members may change and the corporate history and relationships are lost.

There is also the potential that differences of opinion may not be aired appropriately, increasing tensions between the parties who in turn do not communicate internally and externally with ‘one voice.’

Ultimately this may lead to a failure to deliver appropriate services to the communities the Tripartite serves, as there is no formal mechanism to ensure appropriate input, and no dedicated forum in which Tripartite members are held to account and differences of opinion can be openly discussed and resolved.

Recommendations

Overarching Framework Agreement

An overarching Framework Agreement would provide clarity and accountability for the Tripartite members on the purpose of the Tripartite, the intended and shared strategic objectives aligned to Ministerial objectives. The overarching Tripartite Framework Agreement could include, but is not limited to:

Strategic vision, shared values and desired cultures and behaviours going forward
Roles, responsibilities, accountabilities
Governance structures
Risk management and assurance framework
Communication and engagement strategy, including escalation routes
VfM framework
Contract management requirements which impact Tripartite members (to the extent deemed appropriate) and local communities
KPIs for regular performance evaluation of DML and CMAL by TS – for example, time taken to agree specifications, vessels replaced, completion of vessels to time and budget in line with overarching strategy, emissions.

Formalise the relationships between Tripartite members

Formalise the relationships between Tripartite members.

Formalise the relationships and expectations between TS and respective Tripartite Boards. This will enable formal shareholder monitoring and performance management with bilateral discussions. This will also enable TS to review the corporate strategies of each party and ensure overall alignment to Ministerial objectives.
Establish a Tripartite Executive Forum (constituting CEOs and CFOs of DML, CalMac and CMAL with TS representatives, including the TS sponsor team) as a collaborative working space for delivering common objectives and managing risks for example, on projects and contracts. This Forum could also provide an escalation / arbitration point if required for key decisions collectively impacting Tripartite members. This should include formal documentation of minutes, decisions, action tracking and a communications strategy to provide transparency of decision making.

A key purpose of the Tripartite Executive Forum would be to provide effective leadership, direction, support and guidance to the Tripartite members and ensure that the policies and priorities of Scottish Ministers are implemented. The Forum members should demonstrate creative and innovative thinking and a strong desire and determination to break down any potential barriers, acting professionally with trust and respect with incentives to collectively deliver for the benefit of stakeholders, including island communities.
This would enable leadership to secure an effective and efficient approach based on shared outcomes for the Tripartite, together with transparent and objective scrutiny and challenge of decisions.
The role, function and effectiveness of the Tripartite Executive Forum should be defined and agreed between all members and reviewed at least annually to ensure it remains fit for purpose and is working for all parties.

Network Strategy Group

The role / remit of the NSG should be revisited and aligned to the overarching Framework Agreement and the Tripartite Executive Forum – for example, defining the criteria for escalation of project issues from NSG to the Tripartite Executive Forum.

4.2 Culture and Behaviours

Risk Medium

Observation

Principle B of the UK Corporate Governance Code highlights the importance of ensuring that the purpose, values and strategy of an organisation are aligned to its culture. In a corporate environment, promoting the desired culture is the responsibility of directors.

The Tripartite is collectively responsible for the provision of lifeline ferry services to the island communities, therefore we would expect to see the promotion of a collective working culture by the members of the respective entities’ Boards, supported by a defined and aligned set of values.

Our review identified differences in organisational culture which are exemplified in the mission statements of TS, CMAL, and CFL / DML (see p.13). The TS and CMAL statements are focused on serving and benefitting the people of Scotland, while the CFL / DML statements are more commercially oriented (although we acknowledge that due to the current Tripartite structure they operate under a short term contract which they must operate profitably). This is aligned to feedback from interviews in terms of the culture noted within the organisations.

We have also noted that the entities do not always speak with “one voice” when communicating with external stakeholders. For example, multiple interviewees highlighted that the “ageing fleet” messaging communicated by CFL / DML has negatively impacted how CMAL are perceived in the public eye.

This is unusual behaviour from entities expected to be operating together to deliver a public service. Interviewees also articulated examples where the Rural Affairs Committee (REC) had been critical of TS and CMAL; however, resolution of the underlying issues will require all parties to work together as a collective

Risk

If culture and values are misaligned across the Tripartite then there is a risk of decisions being taken that are not in the interests of the Tripartite as a whole, while poor behaviours from senior personnel are liable to increase mistrust between parties and affect their ability to work together effectively. These behaviours may permeate across other areas of the organisation and hinder the ability of the parties to work together collaboratively and productively.

Ultimately this risks having a negative impact on the efficient delivery of ferry services to the island communities, and a lack of trust in the Tripartite from those communities.

Recommendation

Culture and behaviours

Initiate a workstream to discuss and agree the desired culture and behaviours, over and above the organisation’s individual mission statements. This should include defining the desired behaviours, and in light of this, agreeing what to keep and what to change. This will drive alignment and encourage behaviours that are beneficial to all parties.

Evaluate the areas where current behaviours and culture are not as desired and agree actions that will help the Tripartite progress towards its desired state.

All Tripartite members should be responsible for challenging unacceptable behaviours both within individual organisations and in relation to the Tripartite.

4.3 Strategic Planning

Risk Rating - Medium

Observation

The long-term nature and impact of providing ferry services to the island communities means that the Tripartite should define and plan sustainable outcomes. This is in line with Principle C of the International Framework for Good Governance in the Public Sector, and with the duty of Best Values in Public Services (SPFM).

The current Ferries Strategy runs for 10 years from 2012 to 2022. While this outlines future investment requirements and working principles, it does not include metrics for evaluation of performance, and stakeholder interviews highlighted that there was no mid-point review of the strategy document.

The Tripartite lacks a comprehensive approach to long-term strategic planning (for example, vessel requirements and harbour needs to meet projected demand; environmental targets) which could lead to inefficient vessel/ infrastructure procurement, asset maintenance and replacement strategies. We acknowledge that there is a Vessel Replacement and Deployment Plan (VRDP) in place; however, this lacks a long-term, holistic, strategic view, and does not consider the broader structural and economic context within which ferries services operate.

The lack of clearly defined long-term strategy for the future of ferry services in Scotland is potentially counterproductive for members of the Tripartite and other interested parties.

While collaboration and joint working takes place, this is at an operational level as opposed to a strategic level which limits strategic thinking, forward planning and alignment to the SG’s longer term agenda, for example climate change. However, there is a lack of clarity over the measures / KPIs used to monitor the performance of each entity at an overall strategic level, linked to the objectives within the Ferries Strategy and Ministerial objectives.

Risk

An absence of long-term planning / strategy increases the risk that the maintenance and / or replacement of vessels is sub-optimal. This risk could manifest itself via higher than necessary or unforeseen maintenance costs, and in some cases has materialised in the need to procure expensive emergency vessels. This presents operational challenges and is unlikely to represent Best Value.

Recommendations

Long term Strategy

A longer term strategy for ferry services should be developed and communicated to all parties to enable effective prioritisation and transparency of investment, operational, contractual and commercial decisions. This would support greater alignment between members of the Tripartite and provide clarity of direction to reduce the risk of misalignment. The strategy should appropriately consider the holistic needs of the communities served – for example, the knock-on impact on road networks on the islands.

KPIs

KPIs should be embedded within the strategy and formally monitored together with agreed corrective actions by the Tripartite. Examples of KPIs could include, but are not limited to: customer service; reliability; vessel resilience; climate targets; VfM targets; complaints. Future CHFS contracts should be aligned to the KPIs outlined in the strategy, and consideration should also be given to whether similar targets would be beneficial on other routes.

4.4 Accountability and Transparency

Risk Rating – Medium

Observation

Principle G of the International Framework for Good Governance in the Public Sector states that those making decisions and delivering services should be answerable for them, and that activities should be carried out in a transparent manner. Assurance providers, such as internal and external audit, have a key role to play in this.

As the sole shareholder of CMAL and DML, TS should be responsible for driving alignment, overseeing corporate decision making, and providing challenge and accountability.

However, feedback from stakeholder interviews reflects that this does not consistently happen in practice. This is supported by some of the behaviours noted (e.g. communications with the media / external stakeholders that are detrimental to one party) and as highlighted above there is no dedicated Tripartite governance forum, with representation from all parties, to facilitate improvement.

We also noted the following areas where accountability and transparency could be improved:

Whilst risks may be considered implicitly as part of ongoing Tripartite discussions, there is no overarching Risk and Assurance Framework, including internal audit, for the Tripartite. An overarching Risk Management Framework would provide a common language and consistent definition / assessment of risks and enable more effective risk management of shared risks or interdependent risks. Whilst TS, DML and CMAL have their own internal audit functions, TS does not have oversight of the assurance provision and management of risks within each entity. A risk and assurance map would provide visibility of assurance provisions and potential assurance gaps / duplication to enable a more co-ordinated risk and assurance view. The SPFM articulates the importance of clearly defining risks, assigning responsibility for them, and of regularly monitoring these. The Tripartite Executive Forum could define key risks requiring a collective response.
There are no common processes across the Tripartite - for example, in compatible areas such as programme / project management, risk management, stakeholder management and engagement. We acknowledge that it is not necessarily appropriate for all processes to be shared, as this may have a negative impact on the appearance of independence for TS. However, collaborative working may be desirable in some or all of the areas highlighted.
TS consult with CMAL, DML and other parties to inform policy issues, which is in line with expected practice. However, there should be clarity on the intent of the consultation, the expectations of parties to contribute, and any recharging mechanisms as compensation for the consultation. Interviews highlighted that not all stakeholders feel this is consistently the case.

Risk

Without structured oversight and an agreement around common processes that could be shared, and the form these should take, there is a risk of inefficiency, duplication, or gaps developing – for example, if risks were not appropriately escalated and managed.

Additionally, any perceived lack of transparency around the nature and purpose of consultations may fuel further relationship difficulties within the Tripartite. This could impact negatively on public perception and ultimately on delivery of lifeline services.

Recommendations

Communications alignment

While not all processes can or should be run in common, an example of where alignment and consistency is particularly desirable is communications. We have previously highlighted the “ageing fleet” messaging released by CFL to the detriment of CMAL, which has significantly coloured public and media perception of both organisations-

Common Purpose

Consideration should also be given to which other processes should be partly or fully managed in common by the Tripartite, to manage the risk of inefficiencies, duplication or gaps

Risk Assurance Framework

The Risk and Assurance Framework for the Tripartite should be developed including consistent risk assessment criteria / reporting / risk escalation and a risk and assurance map

Assurance Mechanisms

We acknowledge that for independence purposes it is important for individual entities to maintain their own assurance mechanisms (e.g. internal audit); however, as the sole shareholder, it should be formally agreed what is reported to TS

Reporting and Governance Framework

A formal reporting and governance framework should be developed by TS to outline key governance and reporting requirements. This should inform the Tripartite Executive Forum. This should clearly define what needs to be escalated out of individual entities and up to the Tripartite Executive Forum – for example, where risks in one party may affect another, and how these are rated and managed. This will improve transparency and support accountability

Consultation Process

TS should formalise the expectations around the consultations process for all parties. This will reduce the risk of misconceptions around the nature of these consultations and their outcomes.

4.5 Scottish Government Mandate

Risk Rating - Low

Observation

DML is wholly owned by Scottish Ministers. It is common practice among comparable bodies to have in place a Framework Agreement that sets the strategic, financial and operational parameters within which they operate.

For DML, the Framework Agreement is in draft form and has never been signed or formally approved. This has led to a lack of clarity on the Scottish Ministers’ agenda for DML’s commercial ventures and differing views on priorities within the Tripartite.

For CMAL, a Financial Memorandum / Management Statement is in place that sets out the overarching mandate and direction; however, review of this document is overdue. According to the Memorandum, which is dated 2017, the document should be reviewed every 2-3 years. However, this had not yet taken place at the time of fieldwork (May 2021), although we have not identified any instances of CMAL operating outwith the parameters of the agreement.

There is routine Ministerial engagement with both bodies and ongoing real time discussions of priorities; however, there is no formalised documentation to support / reinforce this.

Risk

Without signed / up-to-date Framework Agreements setting out strategic, financial, and operational parameters for DML and CMAL, there is a risk of continued misalignment on priorities within the Tripartite.

The lack of a formal Framework also presents a further risk to accountability as the entities are not signed up to deliver against defined objectives (besides those outlined in DML’s operating contract), making it more difficult for Ministers to hold Tripartite members responsible for any failure to deliver.

Recommendations

Shareholder Contract Agreement

Whilst it is recognised that there is routine Ministerial involvement and ongoing discussions, a formal approved Financial Memorandum / Framework / Shareholder Contract Agreement should be considered. This should set out the strategic, financial and operational parameters within which each party operates, including:

Board remit, tenure length, appointment process, roles and responsibilities
Financial powers
Delegation of Authority

Such an agreement would not by itself effect wholesale cultural change, but it would provide Ministers with a mechanism by which to hold Tripartite members to account, thus driving improved alignment in the medium to long-term, and increasing the likelihood of delivering value to the island communities.

4.6 Board Composition

Risk Rating – Low

Observation

Principle B1 of the UK Corporate Governance Code states that “The board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively.”

Whilst skills matrices are in place and regularly reviewed by TS, and Board members of the Tripartite entities have significant infrastructure, maritime and transport experience, the skills matrix does not include future focused skills such as data analytics or digital / technology experience. As such, these subjects may not receive adequate discussion and challenge at a Board level and the Tripartite entities may miss out on opportunities to deploy data and technology as part of strategic decision making.

Risk

Failure to ensure appropriate skills and experience mix on Boards may lead to impaired discussion and decision making.

Recommendations

Boards skills and experience

The skills and experience of the Boards and senior management should be considered to determine whether they remain appropriate and aligned to longer term strategic priorities in order to provide sufficient challenge and support to each entity and the Tripartite.

Since the date of our fieldwork, management have represented that this has occurred for recent recruitment rounds.

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