Levitt’s RICS report: 10 key takeaways

Alison Levitt QC’s report into a governance row at the Royal Institution of Chartered Surveyors has exposed major failings within the institution’s leadership model.  The findings, which were published in a 467-page report last week, paint a detailed picture of how a conflict between RICS’ executive team and four non-executive directors – Amarjit Atkar, Simon Hardwick, Bruce McAra and Steve Williams – blew up into a scandal that has rocked the member’s organisation to the core. A management overhaul is taking place in the wake of the findings, with chief executive Sean Tompkins, president Kathleen Fontana, governing council chair Chris Brooke and chair of the management board Paul Marcuse all stepping down from their roles. Audit committee chair Amit Shah left after his term ended earlier this month. Here, EG takes a look at 10 key findings in the Levitt report, which has uncovered new details in what Levitt calls a “sad and depressing episode in the life of a great institution”. 1. Issues began with cash shortfall after an ‘unexpected’ bonus payment  The events that transpired in 2019 stem from a cash shortfall at RICS a year earlier, prompting the organisation to almost double a £4m overdraft facility quietly in 2018. One of the causes was a £400,000 discretionary bonus paid to chief executive Sean Tompkins, according to Levitt, which seemed “completely unexpected and unbudgeted for”. This coincided with an internal audit conducted by BDO. The overdraft extension only came to the attention of the main management board after Hardwick spotted a note in a sizeable pack of papers provided in advance of a quarterly board meeting. After board members expressed surprise that they were not informed of the issue, and voiced concern over how it had arisen, then-chief operating officer Violetta Parylo assured them that there would be no more surprises and that she would ensure the board was kept informed. However, Parylo neglected to mention that BDO had at that point essentially completed an internal audit of RICS’ treasury management controls, which gave the organisation the lowest possible “no assurance” rating, and warned it was at risk of “unidentified fraud, misappropriation of funds and misreporting of financial performance”.  2. The NEDs accidentally found out about the BDO report The non-executives were therefore surprised to find out about the existence of the no-assurance report “by accident” two months later, after RICS’ director of risk made a passing remark about it. The NEDs tried to see a copy in the months that followed, but were consistently rebuffed by the executive team. Nonetheless the NEDs persisted, and the management board was eventually shown the original report in July 2019 – seven months after it was first delivered. However, it did not see the outcome of additional BDO re-audits that had taken place in the interim.  Notably, Levitt said the re-audit made for “troubling reading” and included the revelation that the organisation had 81 international bank accounts – RICS staff initially thought there were just eight – and that the UK treasury function only had access to 37 of those. And although BDO had prepared a full 31-page report with these detailed findings, it was asked by RICS’ director of risk (reporting to Parylo) to provide a short, two-page summary in its place. The full version was never seen by the audit committee, management board or the finance committee. After the NEDs continued to push for an inquiry into how the audit reports were shared and handled, a special meeting was held in late August 2019 at which it was announced that an internal review into this matter would be held.  Fundamentally, this would be chaired by RICS’ general counsel – a former solicitor at longstanding external legal adviser Fieldfisher, where partner Matthew Lohn held the client relationship. A number of the NEDs protested that the general counsel would not be sufficiently objective since she reported to Parylo, and requested an external review. This was denied. The internal review, delivered in September 2019, concluded there were no governance failures and that governing council – the most senior governing body at RICS, reporting to the privy council – was kept informed of the issue. 3. ‘Considerable effort’ was made to expel the non-execs  However, Levitt said the conclusions of that internal review had “already been decided” before it had even been commissioned, based on suggestions made by Parylo. It had not only reached the wrong conclusion, according to Levitt, but “was not what it appeared to be”. RICS’ general counsel had in fact outsourced much of the review to her former employer.  The law firm did not, at any point, reach out to the non-executives to hear their views – neither were the latter aware of the firm’s involvement. “The most important objective was that there should be no threat to or criticism of the CEO, the COO or the chairs of the management board and audit committee,” said Levitt. The result of the internal review did not satisfy the NEDs, who persisted in making their objections clear in the ensuing weeks. This caused the RICS executives to speculate that the NEDs were trying to overthrow them. By the start of October 2019, a decision had been made by the general counsel, the chief people officer, the chief executive and the chief operating officer that the non-execs, particularly Hardwick and McAra, “had to go”. This decision was heavily encouraged by Fieldfisher. “Over the weeks that followed, considerable effort was expended in finding a way to achieve this,” she said.  So when the four non-executives wrote to then-president Chris Brooke in November, they “walked into a trap”. It was felt that the NEDs were “threatening” to tell governing council about the treasury management matter. Although they highlighted in the letter that they “wanted to help” find a “positive outcome” to the treasury management issue, Brooke instead interpreted their behaviour as “passive-aggressive” and terminated their contracts. 4. Fieldfisher’s ‘partisan’ approach had a significant part to play in the NEDs’ dismissal Unknown to the non-executives or governing council, Fieldfisher charged RICS £118,677.30 in August to November 2019 alone for advising on issues relating to the quartet. But Levitt concluded that Fieldfisher’s advice “fell short” of what RICS was entitled to expect. It was this same advice that influenced Brooke and Paul Marcuse, then-chair of the management board, in their decision to back the dismissal of the non-executives. While Levitt stopped short of labelling the situation as a conflict of interest, she notes the law firm became “inappropriately partisan in their approach to the governance questions in play, and they provided legal advice which fails the test of objectivity”. “Fieldfisher… [sided] with the executive against the four non-executive members without any objective analysis of the true merits of the situation,” she said, adding that it had more than one potential conflict of interest which it has either “ignored or misjudged”. 5. The NEDs and GC2019 did not deserve their treatment Levitt concluded that the four non-executive directors that flagged their concerns over the audit report were “right to challenge the refusal” from leadership for full and proper information relating to the treasury management function. “I find that the four were not troublemakers either individually or as a group; rather they were genuinely concerned about fulfilling their duties to RICS, which they took very seriously,” said Levitt. “They did not deserve the treatment to which they were subjected and should receive a public apology.” Additionally, as then-president of RICS, Brooke was not entitled to terminate their contracts by giving a month’s notice. On the whole, the process of summary dismissal was found to be an “unfair” one. Another individual found to be unfairly blamed was Paul Wilczycki, the former director of risk and assurance, who was made redundant in November last year and felt Parylo was “very annoyed” with him for originally disclosing the existence of BDO’s report to the non-executives in 2019. RICS’ public claims after the event that the governing council of 2019 were “kept informed” of the events during that year were also found to be “inaccurate and misleading”. Members of governing council in 2019 told Levitt that they had only first heard of the BDO report in November 2019, when the NEDs were dismissed. Until that time, they only knew what they had been told by updates from Tompkins, which referred “lightly” to overdraft issues and asserted that audits had been undertaken, without indicating their severity. They never saw a copy of the original BDO report. Subsequent letters sent to the GC2019 group, threatening members with defamation proceedings, were “an overreaction and should not have been sent”. 6. There was too much power in too few hands Levitt said that RICS management and others have “on occasion given the impression of reluctant acquiescence in the review process rather than willing participation in and facilitation of it”. This manifested in the early stages of the review, where Levitt felt as though RICS was “making it as difficult as possible for people to contact” her. Despite this, Levitt observed that neither Tompkins nor Parylo are “bad people”. She said there was nothing to suggest any criminal offences or financial impropriety have been committed. “I am satisfied that in the main everything they have done has been with what they perceive as being RICS’ best interests at heart,” she said, adding that they believed RICS is hampered by a “cumbersome ‘two board’ system”. “I can see that the CEO has made significant attempts to try to persuade RICS to adopt what he believes is a more functional model; he plainly feels that the membership has rejected his efforts for reasons that have everything to do with sentiment and nostalgia and very little to do with modern commercial practice.” Consequently, the duo devised “workarounds” that “paid lip service to the constitution” while allowing them to “get on with the job”. 7. Old habits die hard for the executive team But, as Levitt underlines, this is “not what good governance requires”. “No large organisation such as RICS should hand all its power to one or two employees, however senior and experienced,” she said. “The CEO and the COO had become used to running RICS in the way they felt was in its best interests and then updating the various bodies as and when they thought necessary and appropriate.  “It was not so much a question of withholding things, rather it was that they had become accustomed to not sharing the fact that there was a problem until the solution had been identified and, ideally, implemented.” Moreover, since the pair had, by that point, become accustomed to making decisions on behalf of RICS, there was a “deep-seated resistance to challenge” – with Tompkins and Parylo “over-sensitive to perceived criticism and quick to take offence”. 8. Governance failures caused a ‘power struggle’  Levitt said that while there was no cover-up, there were serious governance issues that triggered, and escalated, a “power struggle” between different parties in the leadership structure. RICS’ constitution generated a lack of clarity about the responsibilities of its boards, senior leadership and management. This in turn bred tension and put stress on the system – which “erupted” in 2019 over the way the BDO report was handled. “Far from being merely an unfortunate episode which was badly handled… it was an accident waiting to happen,” said Levitt. She added: “This situation should never have been allowed to develop in the first place, far less escalate to the point where four senior and respected figures, properly exercising their independent judgement, were summarily dismissed from an organisation for which they had all done a great deal. Time after time there were opportunities to de-escalate matters, but these were never taken. “There seems to have been a collective failure of common sense by all those on the executive and senior leadership ‘side’. The very fact that there were sides at all is deeply troubling, but exist they undoubtedly did.” There are several areas where the governance model failed, including “unclear” reporting lines and areas of responsibility, with overlapping areas causing confusion. Sectional rivalries were at play, with various bodies and individuals “jealous” of their perceived areas of responsibility. The friction between the audit committee, which reports directly to governing council, and the management board also served as a prominent example. “Weak” leadership at chair level was another factor, in which Brooke and Marcuse “should have realised that they were being intimidated into doing what the executive wanted”, and “worked harder to find a solution consistent with good governance”. The chief people officer also “failed” to understand her duty was to the organisation and not simply to protect senior staff from criticism. 9. Fieldfisher caused the report’s numerous delays – and there could be more evidence to follow Levitt’s findings were delayed several times in the past few months. This was chiefly blamed on a “very late disclosure” of a file held by Fieldfisher, which it withheld until 10 June. Levitt would go on to discover the law firm had a greater role in proceedings than she was originally led to believe, after the executive and the senior leadership teams went to “extraordinary lengths” to conceal “the extent” of the law firm’s involvement. “Reading it completely changed this report from the one I had been going to write,” said Levitt. “Contained within the 436 separate documents was clear evidence that the senior leadership had been trying to find a way to get rid of the ‘troublesome’ non-executives for many months. “Regrettably, it shows too that some of those to whom I had spoken had not been wholly transparent with me.” RICS had engaged Fieldfisher again this year to advise on extensive “preparation” for the independent review, including protocols for witness participation. Levitt said the law firm should not have been involved in the process given its role in the 2019 decision, and that it was not clear why RICS’ general counsel required external advice. Although RICS purported to eventually disclose all files to Levitt, who had encountered significant pushback on her requests for Fieldfisher’s documents, she believed she is still “missing a number of relevant documents, some of which might be very significant”. Lohn also refused to participate in Levitt’s report.  Levitt has recommended that RICS should consider replacing Fieldfisher as external legal advisers, ideally by putting the matter out to tender, and to scrutinise its involvement in the matter, particularly in relation to “possibly unwise decisions”, whether its advice was non-partisan; and the level of spend.  She said: “I was denied access to some documents in the file on the ground that they were internal Fieldfisher communications and thus did not belong to the client (RICS). “I disagree with this view and suggest that RICS might consider making a request of Fieldfisher in order to see the internal discussions which took place.” 10. RICS must act now to prevent similar issues in future Levitt urges the organisation “not to waste the opportunity presented by the wider governance review”.  She has outlined several recommendations, including a review of financial bonuses for senior executives, rejigging senior-level responsibilities, an overhaul of the whistleblowing structure, a new framework for external legal advisers and public apologies to wronged parties.  RICS’ governing council has voted unanimously to accept Levitt’s conclusions and recommendations. “There is much which remains to be done,” said Levitt. See also: Ousted RICS non-execs find closure after ‘worrying’ ordeal To send feedback, e-mail pui-guan.man@eg.co.uk or tweet @PuiGuanM or @EGPropertyNews Image © Jeff Blackler/Shutterstock