Local authority companies – Governance health-check

Preparing for the annual governance statement is a good time for local authorities to undertake a governance health-check of their companies, suggests Matt Marsh.

Many local authorities will be preparing for the sign-off of last year’s accounts, in preparation for which their monitoring officers will be thinking about, amongst much else, the annual governance statement (AGS) required under the Accounts and Audit Regulations 2015. The AGS is published alongside an authority’s annual statement of accounts and follows a review of the effectiveness of a local authority’s governance framework and internal control systems. It should also include details of any companies in which a local authority has an interest.

Good corporate governance is essential to the success of any company and for a local authority company (LATCo) it is also a key means through which a local authority can demonstrate its satisfaction of the best value duty. The aim of LATCo governance is to ensure the company’s directors have the freedom they need for the company to achieve its objectives, whilst simultaneously providing sufficient overview and control for the owning local authority to safeguard and achieve a return on its investment in the company and ensure its business and activities continue to align with the authority’s values and strategies.

The means through which to achieve these twin aims is robust and simple corporate governance arrangements, which are comprehensively provided for in the company’s governance documents and mirrored in the council’s constitution [1].

Articles of association are mandatory and must be filed with Companies House. Essentially, they are the directors’ rule book and provide for matters such as the nature of the company’s business, the appointment and termination of directors, the board’s composition, the extent of the directors’ powers and procedures for the running of the company.

A shareholder/governance agreement is an optional private agreement between the company and its owning local authority. It can be used to flesh out the articles of association and provide for reserved matters which must be determined by the local authority (such as board appointments, business plan approval and borrowing money) and governance requirements such as regular accounting and reporting, information sharing, decision-making, managing risks and potential conflicts of interest.

A shareholder/governance agreement should also clearly define the authority’s role as shareholder and provide for how it will exercise its shareholder [2] function [3] in respect of the company and in turn, how the exercise of the shareholder function, (and through which so too the company’s performance), will be scrutinised by the wider authority. The arrangements through which the shareholder function will be exercised and scrutinised must also be provided for in the local authority’s constitution.

Governance arrangements should be reviewed regularly to ensure they are operating effectively to provide for shareholder’s overview and scrutiny of the company’s performance against the business plan. This could be part of the AGS or a separate exercise. The reviewer(s) should understand LATCos and the given company’s business and might be an officer of the authority not involved with company, or an external advisor. The reviewer should be provided with documents such as:

  • a business case for establishing the company;
  • business plan(s);
  • loan and support service agreements;
  • governance documents (articles, shareholder/
    governance agreement, board and shareholder terms
    of reference);
  • risk logs (company and authority);
  • policy and procedure documents;
  • board and shareholder reports, minutes/decision
    records for preceding 12 months; and
  • accounts/audit reports.

In consideration of the above, the reviewer should be satisfied that:

  • the purpose for which the company was established remains valid, aligned with the authority’s values and strategies and is reflected in the business plan;
  • the business plan is realistic, up-to-date, being delivered and providing best value;
  • risks to the company and the authority are identified, assessed, managed and reviewed;
  • the loan/support service agreements are adhered to;
  • governance arrangements (per the governance documents) are effective and adhered to;
  • clear communication channels and reporting lines between the company and the shareholder body and the shareholder body and the wider authority;
  • decision records evidence clear, informed decision-making by the company and shareholder, based on sufficiently detailed and accurate reports;
  • where applicable, there is regulatory and Teckal compliance; and
  • there has been effective challenge and scrutiny.

Running a successful LATCo is not easy, but a sound business case, robust and regularly reviewed governance arrangements will go a long way towards it.

Matt Marsh is an Associate at Anthony Collins.

[1] We recommend bespoke articles of association and a shareholder/governance agreement.

[2] Or member function for a company limited by guarantee.

[3] An executive function under The Local Authorities (Functions and Responsibilities) (England) Regulations 2000.
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