Local authority companies have hit the headlines this month thanks to two high profile failures. Croydon's dealings with a range of arms-length companies is reported to have contributed to the issuing of its recent S114 notice, and Nottingham's Robin Hood Energy caused the council to write off millions of pounds of investment.

These examples are two from many hundreds, or possibly thousands, of local authority-owned companies. Every council in the land has them and they have become an established part of the public services landscape.

A powerful tool for councils

Used judiciously, arms-length companies are a powerful tool for councils wanting to do things differently. This includes turning around or sustaining existing services, introducing a more commercial outlook, managing risk, and investing in areas that may not be councils' core business. The choice to set up a company should always be based on a rigorous options appraisal – one that looks at the strategic fit, financial rationale, and ability to implement a new solution effectively. This decision includes the important choice on company model – wholly-owned companies, joint ventures or social enterprise – and legal form.

Examples of local authority companies include Essex Care Limited, the largest provider of Adult Social Care in Essex, Reading Buses, which operates a series of popular and well-used routes around the town, and Bristol Waste Company, which provides waste management services to the city and surrounding areas. These companies have been able to make services better, more sustainable and stay connected to their communities.

In my experience, what all successful examples of local authority trading companies have in common is robust governance, which is able to hold them to account and protect the public's stake in them. In that regard, local authority companies should be no different from any other public service in having to answer for the decisions they make.

Questions of governance

A key insight is that ensuring effective governance is an ongoing job. Getting governance structures up-and-running is a task for the set-up of the company and should be reviewed regularly. For those already operating, there are three questions it is useful for councils to ask themselves.

First, do you know what you want achieve from investment in the company? Having clear goals focuses the mind and helps defines what they want to gain from having a company. Councils should be able to set out what success looks like for them commercially – be it achieving a social outcome for a particular cost or achieving a target return on investment. This should be accompanied with a shared vision and purpose that is ‘baked in' to the companies governing documents, mission statement and culture.

Second, do you have the right expertise? Robust governance structures are essential but councils must assure themselves that they have access to the right knowledge and experience within that to provide scrutiny. In the case of Nottingham's Robin Hood Energy, the author of the recent public interest report criticised a lack of advice from experts that understood the energy market and the risks involved. If you aren't able to ask the right questions, or know when things are going wrong, how can you protect your investment?

Third, are you at risk of being too close to the company? Good relationships are an important component of success but shouldn't become too cozy. Council representatives must not be afraid to be testing in their interactions, ask difficult questions, and making their own assessment of risks. Key practical issues, such as the question of council representatives on the company board, must be debated objectively and any conflicts of interest recognised.

Ultimately, councils' use of companies, and their investment in them, exist to serve the interests of the public. Mechanisms of governance are there to provide a check and balance, and ensure value for money.

But like any investment, there are risks involved. Good governance can't guarantee success, but it can increase its chances.

John Copps is managing consultant at Mutual Ventures