I have recently observed a rise in local authorities identifying concerns about council-owned companies and, more specifically, wanting to understand if their governance structures and processes for managing the related risks are sufficiently robust.
This issue has escalated in part due to the pandemic which has exposed areas where excessive risk has been taken, most notably in matters outside of councils’ day to day activities, such as energy supply.
Councils are looking to review risks relating to their companies and to establish whether they are effectively managed and scrutinised. Different types of companies will be exposed to different risks. For example, development or asset-based companies will be impacted by changes in the Prudential framework which prevents acquisition purely for yield purposes. Service-based companies may be impacted by risks relating to Teckal constraints around growth or controlling of overheads.
A clear, systematic framework is needed that underpins arrangements for overseeing and engaging with companies to ensure councils’ interests are safeguarded. It is critical to have a clear set of KPIs driven by the strategy and business planning process against which senior company staff are performance managed.
Getting the right composition of boards is also conducive to good governance and to minimising the scope for conflicts of interest. Company boards are often a mix of council officers, members and independent directors. However, there is often an opportunity to improve board skills and expertise through greater use of independent directors with both local government and market-specific experience, as well as through ongoing professional training for all board members.
A well-defined business case should sit at the heart of any council-owned company. This will ensure that the use of public resources will not distort a functioning market and challenge market-tested assumptions to avoid ‘optimism bias’.
Once established, councils should continually re-assess the business case and challenge the ongoing existence and relevance of their entities and the extent to which their objectives remain relevant over the company’s lifetime.
It can be difficult for councils to balance competing drivers, such as allowing a company the freedom to manage activities without interference, and ensuring that it is held to account for its actions. Local Partnerships helps councils to examine these issues and establish effective governance structures that strike the appropriate balance.
Sean Hanson is chief executive of Local Partnerships