There is no problem with diversity among the Serious Fraud Office staff in Anthony Horowitz’s new BBC drama New Blood. But it is one of the issues that needs to be addressed for the largely male, largely white SFO board, according to a new report by Her Majesty’s Crown Prosecution Service Inspectorate (HMCPSI) into the governance of the SFO—Inspection of the Serious Fraud Office governance arrangements.
This report follows two prior reports by the HMCPSI which looked at the way casework was taken up by the SFO and was designed to assess the major governance changes that followed on from the appointment of the new director, David Green, in 2012 following a “number of damaging reputational issues.” The report notes that previous management and governance arrangements “did not follow good governance principles, which allowed a culture of exclusiveness at a senior level to develop. This led to significant reputational harm and low morale at all levels of the organisation.” Indeed, a parliamentary committee concluded: “This catalogue of errors amounts to a case study in how not to run a public body. These failings have undermined the reputation of the SFO and the morale of its staff which the new Director has to rebuild.”
“The Inspectorate’s recommendations for further potential reform are already being carefully considered—these include the recommendation to appoint a CEO/COO, changing the structure of the Management Board and giving new consideration to our funding model.”
David Green, Director, SFO
The report is based on surveys and fieldwork by three business inspectors and one legal inspector from the HMCPSI, who interviewed all board and senior staff and some former staff, sat in on meetings, and talked to principal stakeholders.
Following Green’s appointment, he initiated a structural reorganization that moved the SFO away from the very small board then in operation and included the appointment of general counsel, a special adviser, and other senior posts. The management board was enlarged to include the entire Senior Civil Servant (SCS) group to “provide inclusivity, develop and promote corporate strategy, and provide as much insight and experience as possible.” The SFO’s governance is based on Corporate governance in central government departments: Code of Good Practice, available from the HM Treasury. Although the SFO is not a ministerial department, the Code encourages most departments to adopt its principles. The SFO has adopted most of the principles set out in the Code, though it does not have a separate nominations and governance committee; something the report recommends changing.
The full list of nine recommendations is given below:
A smaller, more strategic Management Board, should be formed
Development of an action plan to better reflect the diverse workforce at Management Board and Senior Civil Servant level
Consideration should be given to appointing a new Chief Executive Officer
Establishment of an Executive Management Board responsible for the operational function of the SFO
Guidance should be developed to provide committees with clearer lines of reporting and delegation. These should be incorporated into the board operating framework
Development of a strategy to embed existing values throughout the organisation
Further consideration should be given to pursue a change to the funding model in order to build future SFO capability and provide better value for money
Production of a comprehensive risk management strategy
Clear relationship expectations should be agreed between the Attorney General’s Office and the SFO
The report considered five elements of governance during its inspection:
board effectiveness (including an assessment of blockbuster funding and value for money)
stakeholder engagement and accountability
In the SFO’s only statement on the report, Director David Green CB QC said: “I welcome this helpful and positive report on the governance of the SFO. I am pleased that the progress we have made since April 2012 is recognised. The Inspectorate’s recommendations for further potential reform are already being carefully considered—these include the recommendation to appoint a CEO/COO, changing the structure of the Management Board and giving new consideration to our funding model.”
In a press release, the chief inspector of HMCSI, Kevin McGinty, said: “Over the past four years, there has been an overhaul of the management structure, governance, and direction of the Serious Fraud Office. However, it is now time for a reconstruction of the board and executive responsibilities and the establishment of clearer reporting lines and risk management … Whilst blockbuster funding has allowed the SFO to pursue cases it would not otherwise have had the resources to take on, increasing core funding would provide the SFO with the ability to build more capacity and capability in-house…The report [also] recommends that the SFO considers whether and how a degree of independent challenge might be incorporated.”
EXTERNAL OVERSIGHT OF SFO
CW’s Paul Hodgson pieces together excerpts from “Inspection of the Serious Fraud Office governance arrangements” on external oversight of the SFO.
HMCPSI has statutory powers to inspect the SFO to assess if it is providing an effective and efficient service, and Members of Parliament may request a variety of information from the SFO. In 2014-15 the SFO dealt with 169 Parliamentary Questions.
the Communications Commissioner,
the Information Commissioner’s Office,
the Office of Surveillance Commissioners,
the Investigatory Powers Tribunal,
the National Audit Office
the SFO is also subject to Parliamentary scrutiny through Select Committees
the Civil Service Commissioners
the Organisation for Economic Co-operation and Development (OECD).
The SFO’s “outward facing relationships” and its stakeholder engagement with, for example, the City of London, with victims of fraud, other law enforcement agencies, banks and corporations, nationally and internationally, are generally effectively managed. The SFO as a whole is also subject to substantial external oversight (See Box X above). However, the relationship with the Attorney General’s Office (AGO) is not effective, concludes the report. Box Y below gives the recommendations for improving this relationship.
The current SFO board meets approximately every six weeks. Its 15 members include the director, general counsel, the special adviser, all SFO staff at the SCS grade, and three non-executive directors (NEDs). In addition, the head of governance, head of communications, and a member of Private Office also attend, bringing the number in attendance to 18. There has been no CEO since 2012, when the former CEO left the post. The report’s recommendation is to reduce the board size to around eight or nine members to prevent work and duty duplication. No additional NEDs are recommended, but an appraisal process should be instituted for existing NEDs.
The current board, however, is predominately white—and, although two thirds of board members are male, the report notes that the proportion of female board members is above the initial target set by Lord Davies for FTSE 100 boards of 25 percent female membership. To address this, the report recommends development of an action plan to better reflect the SFO’s diverse workforce. In addition, though there is marked reluctance to appoint a CEO because of what the report coyly terms “legacy issues,” this reluctance is being overcome and it is one of the recommendations of the report in order to ease the burden of work the current director is facing. Lastly, at the senior management level, it is recommended that the current SCS group be restructured to become a “Management Board” with strategic responsibilities.
The current committee structure also comes in for some criticism. The committees of the board are: audit and risk, which advises the director and board on issues of risk, management procedures, and internal control systems; strategy, which advises on business strategy and external engagement with partners; infrastructure, which advises on information technology and evidence handling; and people and culture, which deals with recruitment and development of staff, and the working environment. There are a whole host of other non-board committees and groups dealing with all sorts of other issues, some of which are also dealt with by board committees, that lead to much confusion and little communication. The report recommends rationalising this situation and the establishment of a nomination and governance committee.
The report also notes the results of the Civil Service autumn 2015 People Survey which “give a clear indication that the senior management team have set a consistent message of the SFO’s purpose.” The results are: clear understanding of SFO’s purpose, 92 percent; clear understanding of SFO’s objectives, 90 percent; and understanding how work contributes to SFO’s objectives, 90 percent. All of these results are higher than the Civil Service high performers’ results. However, the report notes that the SFO’s “Values” are not displayed anywhere, either physically in offices or on the intranet, or anywhere else. In addition, it says 14 percent of staff reported that they had been bullied in the last 12 months, so more work is needed despite the progress.
CLARIFYING THE RELATIONSHIP BETWEEN THE SFO AND AGO
CW’s Paul Hodgson pieces together excerpts from “Inspection of the Serious Fraud Office governance arrangements” on the relationship between the SFO and AGO.
It is clear from evidence taken through interviews that there is a need for clear expectations to be agreed so that there is clarity of the relevant matters the AGO should be sighted on. Clarity of expectation will also lead to increased transparency and help prevent any of the damaging reputational issues evidenced prior to April 2012. There needs to be greater clarity on the following:
more formal reporting mechanisms
a clear expectation of what should come to the AGO, which issues should be reported and shared
sighting the AGO on all projects as part of normal business, proportionate to risk
advance notice of issues to ensure that the AGO is not blind-sided in terms of accountability to Parliament
notification and discussion of the business plan and annual report
agreement of a forward agenda
information concerning the potential for blockbuster funding
updates on how the SFO is achieving value for money
separate expectation with regard to meeting with the SFO’s NEDs
While there is substantial external oversight of the Director, the report recommends a number of ways of increasing internal oversight of the position which would bring the SFO more in line with governance practices at other civil service agencies. The “lack of challenge, real or perceived, may be mitigated in several ways,” it says. These include:
appointment of a CEO
appointment of a lead NED or CEO to chair the Management Board
clear expectations and lines of reporting to the AGO
introduction of independent oversight and challenge at the case acceptance and case review stages
appointment (through the AGO) of a line manager for the Director
development of feedback, through the NEDs and SCS members about the Director’s performance as chair
development of a formal mechanism of personal appraisal of the Director’s performance as chair of the board
The funding model is recommended to be reviewed because the current model—some core funding and substantial one-off (known as blockbuster) funding—leads to large numbers of temporary staff flooding the SFO at times of major investigations. The report says that at the time of its inspection, 21 percent of SFO staff were non-permanent, which is a very high proportion. It concludes that this leads to a “lack of consistency in teams, which becomes particularly problematic because of the lengthy nature of SFO investigations.” Such a staffing model is also more expensive than employing permanent staff. Finally, contract staff leave at the end of investigations and take valuable skills with them. The proposal is to raise core funding, while retaining the ability and flexibility to draw on blockbuster funding for exceptionally large cases such as LIBOR.
In general, the report notes that casework processes are “sound and much improved since prior investigations and reports by HMSCI.” However, there is still the potential risk of what the report calls groupthink. It suggests that these can be mitigated by taking the following steps:
include an existing or new NED at the case acceptance and case progression stages
develop a system of internal peer review of cases within the SFO
develop a system of external peer review of cases with another agency, such as the National Crime Agency.
Risk management processes, says the report, have not been reviewed for three years and are somewhat generic, so it recommends that these be revisited and that there is more board oversight of the issue. The current management of risk is undertaken largely by the risk management and moderation committee and the audit and risk committee. The responsibilities for different areas are:
Strategic risk: audit and risk Committee and risk management and moderation group oversee the strategic risk register
Operational risks: risk management and moderation group and divisional risk registers
Casework risks: general counsel maintains a register of casework risks, and individual casework risks are maintained by the investigative team
Projects: each project has its own risk register and is overseen by the oversight and governance board
Security and data: managed by the senior information risk owner
SFO Conviction Rates
Finally, the report collates SFO conviction rates for the last seven years, 2009-2010 to 2015-2016. Despite the SFO’s improvements in structural and governance terms, its conviction rates appear to have declined in the latest year, after fairly consistent success from 2009 to 2015. Conviction rates in general, defendants pleading guilty and defendants convicted after trial all fell in 2015-2016 to the lowest rates during the period (31.6 percent, 15.8 percent and 15.8 percent, respectively). In contrast, the proportion of defendants acquitted after trial rose to an all time high of 68.4 percent. Until the latest results, conviction rates had never fallen below 70 percent and were generally in the 80s and 90s.