Multiple challenges of rising inflation, increased material costs, inter-continental trade challenges and the cost of living pressures are having an impact on local government generally. 

The creation of council companies as a recipe for creating additional and new capital and revenue streams is also being affected. Trading circumstances are more challenging, business plans are being tested and political pressure may also be having an impact on commercial achievements.

In a recent article in The MJ (‘Max calls councils out', 23 June 2022), straight talking Max Caller was clear: ‘They [council companies] are not council departments by another name. If you want to launch a company, do not assume your councillors can become the directors. Pick proper directors…and then understand the limitations on your control.'

Recent research I conducted provides some additional insights into potential success factors and suggests now is the time to create a national network of council companies to drive best practice, mitigate against the risk of failure and provide insights about positive commercial activity.

Commercial ventures by councils appear to be here to stay despite some high profile and much quoted casualties. In the East Midlands, Nottingham City Council has been left with a £38m financial hole after the collapse of Robin Hood Energy. The similar circumstances in the South West mean Bristol City Council is asking Bristol Energy to try to trade its way out of a comparable scale problem.

As part of my Masters dissertation I had the opportunity to analyse this emerging area. I conducted a literature review to assess prior research, carried out investigative fieldwork and then drew up a set of findings and recommendations. I aim to promote the setting up of a community of best practice hosted by Christ Church Business School at Canterbury Christ Church University, and have already garnered support from national legal practice Browne Jacobson. I am also building links with other experts in the field such as the Chartered Institute of Public Finance and Accountancy (CIPFA) in the endeavour and recently recorded a podcast on the subject for them.

This network could be an effective means to drive and encourage successful entrepreneurship, innovation and commercial activity in the public sector which is currently lacking. It will be marking the unique nature of council companies and the long history of mutual support and learning in local government, because collaboration – done right – is better than going it alone.

Companies are purposely created to make a profit to provide a return to their shareholders. They are legally required to appoint a director or directors who must promote the success of the company. There are other forms of commercial entity that have developed over the years with the ability for bodies with a social aspect to form – for example community interest companies that are not for profit organisations. The third sector can also create structures that are charitable in nature with the focus on delivering against charitable aims and any surplus created being ploughed back into the charity. These more social value focused organisations have different corporate governance requirements.

For councils, the idea of monetising what might have historically been considered as benevolent activity, is not completely new. Councils have been ‘trading' by selling their surplus services to other public sector organisations for just over 50 years under the Local Authorities (Goods and Services) Act 1970. More recently legislation has been passed that allows councils to go further and create companies to trade with a wider market, such as in competition with the private sector (Local Government Act 2000, Local Government Act 2003). Guidance was issued in 2004 indicating the need to produce, for example, a business case before commencing commercial activity. This was augmented by a trading order, the Local Government (Best Value Authorities) (Power to Trade) (England) Order 2009, requiring a business case. Given Max Caller's stark warning, I have come to the view that for these business cases to be robust and objectively so, they should be prepared by someone external to the council.

There are now thought to be hundreds of council companies in existence although no central forum for them to share best practice that I am aware of. Central Government has been creating commercial entities it controls or owns for some time. The National Audit Office in 2015 compiled a list of such companies by Department, which shows the sheer breadth of such government-backed trading, with references given for more than 200 such companies.

As I conducted a literature review, I found academic publications on the pure phenomena of council companies were in relatively short supply. So, I considered state owned company performance and issues, because of the obvious parallels with both being publicly funded and involving the leadership, in some form, of politicians. I also noted the excellent practical guidance and commentary material already available to assist councils starting or developing their companies such as that issued by Lawyers in Local Government, Local Partnerships and CIPFA.

Given the nature of this investigation, a qualitative study was more appropriate to offer an insight into the council governance processes over council companies, and to obtain an in-depth understanding of what factors might be likely to affect the performance of one. The case studies I developed grounded the research in three sets of council companies I had first-hand knowledge of. I conducted structured interviews with councillors, officers, non-executive directors and employees involved in these companies at the three separate authorities. From the 14 key individuals I was able to acquire insight and data to analyse before producing findings and recommendations.

As an example, when interviewed, Richard Clewer – leader of Wiltshire Council – saw the concept of council companies as one of the considerations local authorities should think about: ‘Certainly for the larger councils, creating a commercial vehicle to harness the value they have for wider social benefit, is closer to an imperative'.

For those who have already responded to that imperative and those still considering it, here are some of the findings and recommendations of my research.

1. Effective governance structures

Consider what you need to do to get the governance and structural relationships between stakeholders right. Conduct a ‘governance review' if you have not already done so. Use the excellent Local Partnerships guide or the recently published CIPFA guide. Also see what we did at Wiltshire where the cabinet agreed sensible changes to improve the chances of delivery against the business plans.

Ensure your scrutiny and audit committees know their role in relation to these new entities. Have a clear roles and responsibilities guide like the one we created at Wiltshire.

2. Programmatic performance evaluation for company staff

Council companies benefit when they have dedicated staff – not just seconded council staff. To hope to drive commercial delivery you need people to focus on the business plan and make sure stuff happens. Asking already hard-working council staff to double up in commercial ventures brings its limitations.

Have a mechanism of performance management for company staff with clear metrics.

3. Functioning board of directors based on business expertise

A main board with non-executive directors with industry knowledge is a better way to recognise the need for commercial acumen – you may choose to have no councillor directors on the main board and instead councillors can hold the company to account through a separate shareholder group (in line with the Lawyers in Local Government guidance). That is the structure we have introduced at Wiltshire.

Whoever is on your boards, you need a performance management regime for them too, which could be for individual directors or the board's joint performance and make-up.

4. Market assessment and monitoring

Be mindful of the current challenges in your area, which impact on your council companies – there may be political pressure to overload the company with commercially questionable projects. Allow the space for that to be discussed and challenged. There may be a lack of commercial expertise on the board or the company. Be honest and open about that and consider an action plan to redress that. Your company may be failing to leverage the trusted brand of the council in its strategy. Allow the means to evaluate that and if appropriate rectify it.

Councils are good at sharing best practice, collaborating, drawing on academic research and being innovative. Setting up a council company network seemed therefore a sensible next step. The Business School at Canterbury Christ Church University (where I studied) has kindly agreed to play host in their Innovation Hub to the network and I am looking forward to building a community of expertise, supported by Browne Jacobson and with specialists like CIPFA to complement and augment the other expertise already in the sector.

Perry Holmes is director legal & governance and monitoring officer at Wiltshire Council

@wiltscouncil @cccuccbs

• This article was written with input from Dr Ping Zheng, senior lecturer at Christ Church Business School, Canterbury Christchurch University.

For those wishing to find our more information about the network Perry Holmes can be contacted by email: perry.holmes@wiltshire.gov.uk