Exercising the shareholder function in local authority companies

Fundamentally, a local authority’s role as the shareholder of its company is to safeguard the public money the local authority has in it and to ensure that the company is performing against its business plan to deliver the local authority’s objectives.

The shareholder function is the representation and operational effect of the local authority’s ownership of the company, and as such concerns the local authority’s overview and control of the company, the mechanisms through which it is exercised and in turn, the mechanisms through which the exercise of the function is itself scrutinised.

The shareholder function should be clearly provided for in the local authority’s constitution and its arrangements need to be understood by the local authority and the company, and preferably provided for in a comprehensive shareholder agreement which together with the company’s articles of association, form the company’s principal governance documents.  

A shareholder agreement is a private agreement between the company and the shareholder which should include comprehensive provisions for managing the relationship between them, the company’s reporting to the shareholder and shareholder decision-making. As such, a shareholder agreement should include a list of those matters that can only be determined by the shareholder. These ‘reserved matters’ will usually include the approval/variation of the company’s business plan, the appointment/dismissal of directors, the admission of new shareholders, land acquisitions/disposals, and borrowing/lending.  

Exercising the shareholder function

For local authorities operating the ‘executive arrangements’ model of governance, the shareholder function is an executive function, however, the principles of the shareholder function are the same where a local authority is operating a ‘committee system’ of governance.  There are a number of ways in which a local authority may exercise its shareholder function including:

The executive (cabinet) as shareholder

The cabinet as a whole may exercise the shareholder function and make shareholder decisions collectively in cabinet, and/or may decide to delegate certain decisions when needed to an individual cabinet member or officer.

Named shareholder representative

The shareholder function and decision-making may be delegated to a named cabinet member or suitably senior and experienced officer.

Executive (cabinet) sub-committee/shareholder committee

A shareholder committee may be established as a sub-committee of the cabinet with delegated powers to exercise the shareholder function and make shareholder decisions. Such a committee would comprise cabinet members and may permit the attendance of members from the local authority’s minority groups as non-voting observers.

Shareholder advisory board/panel

The cabinet may establish an informal shareholder advisory board or panel, which may comprise members from the local authority’s majority and minority groups and external non-members with sector-specific expertise. An advisory board/panel would not have decision-making power and decisions would remain with the body delegated authority to exercise the shareholder function, which would be advised by the board/panel.

Liaison and reporting

Whichever arrangements are adopted they should provide for a clear line of communication and reporting between the company and the local authority to ensure the local authority has the information necessary to make informed shareholder decisions and effectively scrutinise the company’s performance.

Conflicts of interest

Care must be taken to identify and guard against (potential) conflicts of interest arising in arrangements for the exercise of the shareholder function. Those advising the shareholder or making shareholder decisions should not also be involved in advising the company or making company decisions and should be careful if also advising the local authority as the landlord, funder, commissioner or customer of the company

Scrutinising the exercise of the shareholder function

The exercise of the shareholder function and as such the local authority’s performance as shareholder should be subject to the scrutiny of the wider local authority.As such, the company’s governance arrangements and the local authority’s scrutiny arrangements should provide for reporting on the exercise of the shareholder function and the holding to account of the body to which it has been delegated.  The scrutiny of the shareholder function also provides for the wider local authority’s overview of the company’s performance.

If you would like more information on exercising the shareholder function in local authority companies, please contact Matt Marsh.

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