Comment / Can the NHS learn from the banks

Former finance director and NED Peter Reeves wonders whether NHS governance could benefit from banking failures

Banking failures have dominated the news. Their impact has stretched from economic growth and jobs to property prices and bank charges. But are there lessons for NHS governance?

There may seem little in common between banks and the NHS. Banks met their downfall  in high-risk areas and problems were fuelled by huge levels of financial discretion and a risk-rewarding culture. NHS trusts inhabit a different world. They enjoy more financial certainty, a relatively benign competitive environment and risk-averse management. Break-even or small surpluses are the order of the day and the main element of costs, pay, is set centrally.

But the sectors are united by governance. Both have formal board and committee structures with non-executive directors (NEDs) in evidence, detailed policies on risks and appropriate authorisation limits.

NHS governance arrangements may seem robust but before the crisis, so did the banks’. Its spectacular inadequacy must have been as much of a shock to banks’ boards as it was to everyone else.

Assuming ‘it couldn’t happen here’ is dangerous. In the NHS, events do sometimes go badly wrong and could lead to the collapse or near-collapse of an organisation were it reliant on market-based funding.

Banks’ failures arose in new business areas or through poor or badly understood information at board level. For NHS trusts, problems with new capital financing schemes, ambitious cost-saving programmes, new services and mergers can also be traced back to lack of corporate expertise in those areas or poor understanding in the boardroom.

Recommendations from a recent Treasury review of bank governance covering risk and the board may be relevant to the NHS. Should the NHS also have a board risk committee separate from the audit committee with a remit to include ‘worst case’ reviews? What about a chief risk officer with ‘total independence from individual units’? In the NHS, too, NEDs should be ‘ready, able and encouraged to challenge … strategy’ and satisfy themselves that boards’ risk discussions are based on ‘accurate and appropriately comprehensive information’. 

Review chair Sir David Walker said: ‘Many boards inadequately understood the type and scale of risks they were running and failed to hold the executive to high standards of sustainable performance.’

Sound familiar? The Audit Commission has called for directors to be more challenging of information and ‘more sceptical’ in approach. The former Healthcare Commission said board members ought to ‘ensure they understand the data’ and ‘challenge information whenever it appears unclear’.

Trust NEDs comprise the majority of board members and have a responsibility to raise challenges. But do they understand NHS politics, language and the organisation enough to judge the information? Can they appreciate whether all options have been properly risk-assessed? And are boards tolerant enough of persistent challenge, with agendas that allow for sufficient challenges? 

One consequence of more vigorous accountability may be routine appraisals of management capacity and organisational culture, for which NEDs may be well suited. A lesson for finance directors is the importance of challenging executive colleagues in the formative stages of proposals and beyond. The key assumptions and risks underlying proposals and projections must be prominent and clear. With other executives they must ensure information is accurate and clearly reflects all significant problems.

So the banking failures do offer governance lessons for parts of the NHS, centred on understanding risk, sound information, board members’ responsibilities and the need for rigour and continuous challenge.  Not new lessons, perhaps, but a reinforcement of where priorities always need to lie. Boards, and finance directors, should not miss the opportunity for reassessment.