The board of a housing services company was reportedly dismissed at the end of last year (December 2019) following the discovery of problems concerning gas safety, water hygiene, electrical and fire safety checks at the properties it managed. The company managed a number of council homes on behalf of four councils, who subsequently took direct control.

A report by independent experts concluded that:

  • the company lacked leadership;
  • the councils failed to challenge and hold the company to account;
  • there was a collective failure to award contracts, and timely engage suppliers; and
  • a dysfunctional relationship had arisen from the difficulty of the company working for four different councils with conflicting political, strategic and operational priorities.

The current matter follows an article in the regional press from October 2019 concerning a shareholder meeting of a district council's trading company, which is reported to have descended into chaos with the leader of the opposition taking her colleagues out of the meeting, which she described as "a governance farce" and "a complete shambles" with a "whole morass of conflicts of interests at councillor level and officer level."

Regrettably, governance failures in council companies are not uncommon, and they will often result in financial costs as well as adverse criticism and negative publicity. So, in such cases, what is going wrong, and how can it be prevented?

Let us assume that the preliminary issues have been thoroughly considered – the numbers have been crunched, options analysed and, on the basis of a robust business case, a local authority has decided that setting up a company in one form or another is the preferred means by which to deliver a particular service or to engage in income-generating trading activity.

As obvious as it may sound, essential to correctly establishing the company in the first place as well as providing for its subsequent success is remembering that, firstly, a company does not run itself and secondly, that good governance is inextricably linked to the effective running of a company. Where it's a council-owned company, governance needs to include the company's links with the council.

Companies are demanding creatures; once incorporated they have a legal personality of their own and they must be led, managed, financed, resourced and serviced. A council company will be subject to a myriad of obligations imposed by the Companies Act 2006 in addition to legislation specific to local authority companies and the requirements of finance and accounting, health and safety, employment, procurement, data protection, freedom of information and environmental reporting law as well as its obligations under various service agreements it will have entered into.

The company and its directors must be afforded sufficient powers and freedoms to operate and achieve their objectives while remaining accountable to the owning council and committed to its ethos and broader goals. This is not an easy balance to strike; problems are particularly likely to arise when the focus of those involved is too much on the company's business to the detriment of its governance.

Clearly, the more councils involved in a council company, the more complex governance becomes, but in the first instance, effectively establishing a council company and subsequently governing the relationship between it and its controlling council requires several key documents. At a minimum, these should include:

  • a business case;
  • a business plan;
  • articles of association;
  • a shareholder/member or governance agreement;
  • agreements providing for the council's provision of services to the company;
  • additional agreements as required, including data protection and information sharing protocols.

Careful consideration must then to be given to the appointment of the company's board of directors, who are responsible for strategy and overseeing company operations, and who will owe their duties to the company. There are various options as to the composition of a board, which may include a mix of executive and independent, non-executive directors. Whatever form a board takes, as a whole, the directors should provide for a complementary blend of strategic, practical and operational experience, and if a company secretary is not appointed, someone either in-house or externally, must be tasked with fulfilling the company's administration and filing obligations.

It is essential to avoid conflicts of interest arising between the company and the council. For council officers who have been appointed as directors, such conflicts can be managed through a formal letter of appointment in which the council directs that, when acting as a director, the officer must act in the best interests of the company and that the statutory duty to do so will take precedence over the duty owed to the council by its officer.

However, as a matter of public law, elected councillors must always act in the best interests of their council, so there will always be at least a potential conflict of interest when, as a director, they must resolve a decision in favour of the company. As such, whilst it is possible, very careful consideration will need to be given to appointing members as directors of a council company, their involvement in the company may well be better facilitated through their being appointed instead to a shareholder board or member committee as discussed below.

The rights and duties of the council as shareholder or member of the company is an executive function for councils operating executive arrangements and as such decisions taken by the council concerning its involvement in the company may be delegated to a member of the executive, an executive committee or an officer. As such, the council will need to be able to make informed decisions and hold the company to account in line with the council's agreed position, which can be achieved through establishing a shareholder board of members.

The council can nominate a representative to sit on the shareholder board to act on the council's behalf and to decide 'reserved matters'. The board may be made subject to specific terms of reference that can provide for directors or officers of the company to attend and answer questions at meetings of the executive and scrutiny as required. Sitting on a shareholder board may well be suited to elected councillors as the public law conflict of interest discussed above does not arise, and such appointments also provide for member involvement and oversight of the company.

Lastly, good communication and information flow between the company and the council are also key to ensuring good governance, the effective operation of the company and ultimately its success. A company secretary, or someone performing the role, can act as a conduit between the company's board of directors and the shareholder board, which in turn can facilitate information flow between the company and the council. The company and the council each knowing what is happening, when, where and why, in addition to knowing its own and the other's clearly defined roles and responsibilities, will go a long way to guarding against the kind of governance failures described above and providing for a successful company that works alongside its owning council to deliver their joint objectives.

Further information

To discuss any of the issues raised in this briefing, please contact Matt Marsh