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Local authority companies and governance: LLG's Codes of Practice

Rob Hann looks at the Lawyers in Local Government’s Codes of Practice for Local Authority Companies.

In an earlier article I mentioned that there has been a renaissance in LA companies, with many local authorities now keen to explore other ways of delivering services through separate corporate vehicles of one kind or another.

But setting up a company (or indeed any other type of corporate vehicle such as a limited liability partnership, community trust or charitable entity) brings certain consequences which are not always clear at the early business planning stages of a venture.  A company set up to take over an existing in-house service, for example will instantly create new relationships, interests and objectives which will (usually) flow both ways - from the ‘parent’ local authority to Newco (e.g. in the form of support or back office services) and from Newco to the local authority (depending on what service is being supplied back to the parent authority).

Until recently, one of the things missing from the local authority toolbox for facilitating such new partnerships, was any kind of guidance or protocol for governance of these entities once established. Local authority trading companies will need to secure the right balance between their need as new venture, for freedom (for example, to find new paying customers in the open market), whilst also acknowledging the need for democratic accountability, a commitment to the sponsoring local authority’s goals, and compliance with that organisation’s systems and data. What all LATcos have in common, and what must never be overlooked or taken for granted, is the fact that they all involve the expenditure of public money and the stewardship of public resources.

Recognising the need for some sort of protocol now that LA companies are becoming the norm rather than the exception, Lawyers in Local Government (LLG) have taken the initiative by publishing not one but two very helpful Codes of Practice to assist local authorities to think through some potentially difficult governance issues commonly arising with LA companies. The development of the Codes were led by a very experienced local government lawyer (and former ACses President), Phil McCourt, assisted by several law firms and other local government lawyers.

The two Codes of Practice for the Governance of Council Interests in Companies comprise a different model for the two different models of local government namely, one code for an executive/scrutiny model and the other code for the committee structure model.

Both Codes sensibly build upon and follow corporate governance Codes which already exist for the better governance of companies in the UK, for example, the UK Corporate Governance Code. Local authorities should begin by requiring all of their companies and other subsidiaries to adopt the “comply or explain” approach of the UK Corporate Governance Code as a demonstration of best practice in corporate governance.

However, in addition, the two LLG Codes outline the particular issues and difficulties faced by local authority owned companies and sets out ways in which these sometimes-competing interests can be best managed. For example:

  • how decisions will be taken as shareholder;
  • how scrutiny is to be conducted where there is a scrutiny function and where there is not; and
  • how regulatory matters and conflicts of interest may be best managed.

Importantly the LLG Codes emphasise that managing relationships and avoiding (where possible) conflicts of interest is crucial. The provision of appropriate training for those tasked with becoming Board members or who are otherwise responsible for taking key decisions relating to the company (e.g. shareholder ‘reserved matters’) is recommended. A governance structure where companies will utilise a unified board, with appropriate non-council directors providing outside expert help and with board committees (such as an audit committee) to provide oversight and ensure delivery, is explained in some detail.

The LLG Codes also outline the crucial role councillors may play to hold the company to account by utilising a Shareholder Board. The Shareholder Board will provide necessary oversight from a shareholder’s perspective, that the parameters, policies and boundaries that the council, as the shareholder has established for the company, are being adhered to. On board representation, the Code states that it will be the norm that officers, not members, will be appointed as directors. However, this should not prevent the council from appointing members as directors when considered to be in the best interests of the company and the council.

On the sometimes vexed question of transparency and disclosure of information, the Codes warn as follows: "It is important that trading companies can operate on an equal footing with their competitors, but it is equally important that they are not used as a device for inhibiting legitimate public access to information about local government and local government services.”

The Codes go on to explain how, whilst appreciating its procedures should operate in a way that protects the company’s commercial interests, those procedures should also ensure that the council can carry out its functions as an investor, as a trustee of public funds and a local authority committed to both due responsibility for the exercise of its functions and for providing a vision for the council.

For those without much knowledge or understanding of the law which has grown up around local authority companies, there is also an outline of the main cases, legislation and basic requirements placed upon a local authority in establishing or owning companies. With many local authorities now finding themselves with several different companies on their books there is useful content as to how local authorities might consider managing interests in multiple companies through a group, holding and subsidiary structure.

As a practitioner in this field for many years I have no hesitation in recommending the LLG’s codes of practice for local authority companies as the first port of call and essential reading for anyone who happens to find themselves involved in such ventures or who are already faced with managing interests in companies and other corporate vehicles. Access to the Codes is free to LLG Members, all of whom will be local government lawyers.

Rob Hann, is a local government solicitor and author of the twice-annually updated book Local Authority Companies and Partnerships (‘LACAP’), local government’s essential guide to setting up and running LACAPs. Rob is currently working for Leicester City Council on major projects but has also recently become a consultant (part-time) with Freeths solicitors, Nottingham.

Statement from Philip McCourt, Past ACSeS President 2011-13

“To provide a reference point to Councils and interested parties, example codes of practice for the Governance of Council Interests in Companies were produced and adopted by LLG. The Codes were the subject of consultation at two LLG training conferences over an eighteen-month period, coupled with discussions with corporate partners and stakeholders. I am delighted that the codes have been so well received and adopted.”