Governance and LEPs – Meaning Business

September 14, 2010

Governance of local enterprise partnerships (LEPs) is set to be a key issue. Nicholas Dobson looks at the challenges.

The coalition government is tearing along at breakneck speed, breaking a few necks as it goes. Standards for England, the Audit Commission and regional development agencies (to name but three) have all been given their notice. The economy is in sickly shape and the public purse shackled by gigantic fetters of debt. The government believes that recovery lies in rapidly discharging public debt and rebalancing the economy towards the private sector.

Part of its prescription is to create business-led local enterprise partnerships (LEPs) to replace the current regional development agencies (RDAs). As Communities and Local Government Secretary, Eric Pickles, said at the launch of the LEPs initiative on 29 June 2010 when issuing the joint ministerial along letter with Business Secretary, Vince Cable: "If you want to rebuild a fragile national economy you don't strangle business with red tape and let bloated regional quangos make all the decisions. Urgent action is needed to rebuild and rebalance local economies so that new businesses and economic opportunities spread across the country".

Pickles’ remark radiates his frustration with what he sees as the stranglehold of bureaucratic structures. However, does this mean that LEPs will be allowed to exist in a wild west vacuum of corporate governance? Presumably not. Given public authority involvement and the likely input of public money, government will no doubt not allow this to happen. Indeed the ministerial letter, after highlighting the importance of business and civic leaders working together (with an equal public/private board representation, chaired by a ‘prominent business leader’) went on to point out that the "governance structures will need to be sufficiently robust and clear to ensure proper accountability for delivery by partnerships". But whilst the government is committed to reducing regulation, it is equally passionate about protecting and indeed reducing the public purse. Given also that politicians of every persuasion abhor any inkling of bad publicity, there should presumably be adequate incentive for the centre to ensure sound LEP governance.

Partnership Governance

But what is governance for these purposes? In private sector terms, the UK Corporate Governance Code issued in June 2010 by the Financial Reporting Council points to the underlying principles of all good governance as being: "accountability, transparency, probity and focus on the sustainable success of an entity over the longer term". In the public sector, the Audit Commission has defined corporate governance as: "the framework of accountability to users, stakeholders and the wider community, within which organisations take decisions, and lead and control their functions, to achieve their objectives". Public accountability as well as strategic and functional effectiveness will therefore be key to the success of LEPs.

Clearly then, those setting up LEP structures will need to bear in mind some of the key ingredients of public sector corporate governance. In March 2010 CIPFA (the Chartered Institute of Public Finance and Accountancy’ and SOLACE (the Society of Local Authority Chief Executives and Senior Managers) issued an ‘Application Note’ on ‘Delivering Good Governance in Local Government’. This reprises some of the key principles of good governance from the 2007 CIPFA/SOLACE governance document, including clarity of purpose, outcomes and vision, constructive collaboration, values and high standards of conduct as well as the need for informed and transparent decisions which are subject to effective scrutiny and robust public accountability. The Note also contains a useful schedule ‘to assist in putting the principles into practice’. Clearly, this will need adapting to the particular nature, context and objectives of LEPs as these come more clearly into focus. Governance principles will equally need to be properly ‘owned’ by board members and employees and directly wired into organisational operations. But such documents must also obviously avoid being verbose tombs of worthy impracticability which once drafted end up buried for ever!

Audit Commission – Governing Partnerships

Back in 2005 the Audit Commission gave some valuable guidance on corporate governance and partnerships. This was in its national report: Governing Partnerships – Bridging the Accountability Gap. Although offered in a very different policy context from the present, the document is certainly worth dusting down since many of its core concepts will remain valuable in setting up LEPs governance structures.

So clear protocols and agreements are recommended. This is because partnership governance "should promote good internal accountability between partners and better external accountability to service users". But equally, the right balance should be struck between the need to protect the public pound and ensure value for money and the ‘innovation and flexibility’ that collaboration can bring. Private sector leadership should certainly help in keeping governance structures proportionate.

But while the Commission advised that protocols and governing documents should regularly be reviewed with all partners concerned, there is equally a role for central government in improving "integration of financial accounting frameworks and regulations" to enable alignment of strategic and operational activity. This is a key area that government will no doubt want to look at in taking forward public service synergies along the lines of the Total Place/place-based budgeting approach.

Good partnership governance

Whilst obviously necessary, do we have an adequate handle on what this is? According to the Commission, the hard characteristics of good partnership governance include reliable financial and performance data and risk assessments generated by robust systems producing "timely and appropriate information for decision makers". Personally, I would add that to be useful this information should be short, sharp and relevant. Long and worthy documents with reams of impenetrable figures and turgid text run the real risk of oblivion. Whilst background information should be available as necessary, core ‘bottom line’ data should be readily visible in a form quickly absorbable by busy people.

Amongst the soft factors identified by the Commission are leadership, setting the overall objectives, the roles and responsibilities required to achieve these and "cultural attributes like openness, honesty and integrity".

In August 2010, Standards for England (another public body now on death row) issued a protocol template for partnership working with a focus on behaviour. This short document usefully identifies key behaviour elements relevant to the following dimensions. These are: achieving intended outcomes; acting in the public interest and demonstrating value; capacity building; respecting and valuing different contributions; acting ethically and aligning strategies and networks. This is certainly worth a look by those responsible for building new LEPs.

Accountability

A key attribute of good corporate governance is accountability to those whom the organisation was set up to serve. In its paper the Audit Commission identifies four key components of accountability i.e.:

Giving an account e.g. by annual reports, reports to sponsors, public events, openness of decision-making meetings;
Being held to account e.g. scrutiny performance appraisal, internal audit, public meetings;
Taking account e.g. research and consultation
Redress e.g. complaints procedures, ombudsmen.

These provide a useful mini-checklist.

Form follows function

Form should always of course follow function. It will therefore be important to ensure that all process exists ultimately to serve outcome. Whilst the forthcoming White Paper on sub-national economic growth is expected to flesh out the currently sparse conceptual bones of the LEP project, we do so far know that LEPs will be business-led with a ‘prominent business leader’ usually chairing the board. We also know that LEPs are envisaged to be central to the government’s vision of rebalancing the economy towards the private sector. As part of this LEPs will be expected to "create the right environment for business and growth in their areas, by tackling issues such as planning and housing, local transport and infrastructure priorities, employment and enterprise and the transition to the low carbon economy". The government has also specifically highlighted the importance of support for small business start-ups.

So it will be important to ensure that the structure of particular LEPs is directly wired into producing tangibly valuable outcomes within their overall remit. And whilst many regions will be inclined to build LEPs on existing partnership infrastructures it will be important to ensure that LEPs remain focused on the outcomes now required i.e. facilitating business and inward investment with no more bureaucracy than necessary for effective operation and sound corporate governance.

A few issues to think about when setting up a LEP (or indeed any partnership):

Storm-proof

Whilst all such arrangements are conceived in a spirit of warm optimism, the reality can often turn out differently – frequently when the ship is well out to sea! This is particularly so if key individuals move on, or the political, financial or policy landscape alters. Therefore do make sure the constitution documents are robust enough to survive stormy weather.

Choose an operational vehicle most fit for functional purpose

Unincorporated partnership or similar: whilst these afford substantial flexibility and ease of institution, there are decided drawbacks in this context. These include individual member liability and inability as an entity to enter into contracts or hold property. Access to loan capital may also be more difficult.

Incorporated vehicle: this is likely to be the preferred route for most LEPs. Subject to any specific government requirements, there are various options including companies limited by guarantee or by shares; community interest companies (subject to functional asset lock and the ‘community interest test); industrial and provident societies and limited liability partnerships. These are profit-making organisations, combining corporate identity with limited partner liability. However, whichever vehicle is ultimately selected, it will be vital to have in place a membership agreement which deals with the relationship and behaviour of members between themselves. This can often get to the parts the other formal constitution documents cannot reach.

Decision-making

Ensure that different categories of decision are taken by those best placed to do so, bearing in mind legal powers, experience, expertise and practical considerations. The arrangement will need to include appropriate but robust urgency and emergency provisions. Vires will also need identifying and embedding in the constitution as necessary. Pro-forma reports to underpin decisions can often be useful in ensuring that no key consideration is omitted. It will be important to ensure that partnership members are properly engaged in framing constitution documents (so they properly know, understand and approve what they are signing up to). A lengthy, impressive but unread document is clearly of little use and may indeed be outright dangerous.

Public accountability

Put in place robust arrangements for public accountability. So the public and those dealing with and served by the LEP will need:

A clear understanding of the nature and purpose of the LEP and how it is funded
Effective and accessible contact points
To know who is responsible for what, how decisions can be influenced and how to utilise the reporting and scrutiny arrangements
Access to formal meetings where appropriate
To have confidence in the arrangements for financial management and the manner of application of funds.

LEPs that mean business

The whole point of LEPs is of course to provide a positive power charge to the different local economies jigsawing across the country. A primary role is therefore to facilitate and support local enterprise so that new prosperity springs from private enterprise rather than relying on public money as is currently so in, for example, large parts of northern England.

A key constitutional issue will therefore be to find effective functional economic areas that do the business without allowing the bureaucratic medium to obstruct or dilute the message. What used in industrial relations circles to be called "full and frank exchanges of views" have been breaking out across the land as one set of strategic alliances argue their benefit against others.

Ultimately no doubt it will be the Government who will call the shots. But as someone once famously said: ‘What matters is what works’. However, what works will actually be judged on outcomes and not on glossy brochures, fancy office space or trendy corporate infrastructure. It will therefore be for local authorities and their commercial partners to make sure that LEPs really do mean business.

Dr. Nicholas Dobson is a Senior Consultant with Pannone LLP specialising in local and public law is also Communications Officer for the Association of Council Secretaries and Solicitors.