How Often Should a Local Authority Review Its Companies?

Many local authorities own or invest in companies. These may include housing companies, regeneration vehicles, joint ventures, companies providing services to the local authority that establishes it or trading companies. A local authority needs to ensure that any decision it takes to establish a company is a reasonable exercise of its powers, taking account of the authority’s objectives and ensuring that the company’s governance arrangements reflect those objectives. The local authority needs to keep the company under review to ensure that it continues to operate in a way that is consistent with the local authority’s objectives.

Regular reviews help ensure that a company remains financially viable, well governed and aligned with the council’s objectives.

Why Reviews Matter

A company can change significantly over time. For example:

• The original purpose of the company may no longer exist or the company may no longer be meeting requirements associated with the original purpose.
• The company may be making losses.
• Governance arrangements may no longer be appropriate.
• Directors may not fully understand their duties.
• Officers and members who serve as company directors may not be balancing their role in the company with their role in the local authority effectively.
• The council may no longer be receiving the information it needs as shareholder.

A simple review process can identify issues early before they become more difficult to manage.

Annual Strategic Review

At least once a year, the local authority should ask some basic questions:

• Why does the company exist?
• Is it still achieving its objectives?
• Does it remain financially sustainable?
• Is involvement in the company consistent with the local authority’s best value duty?
• Does the current structure still make sense?
• Have there been any legal or practical developments which make it necessary for the local authority to review its involvement and the particular structure associated with the company?
• Does the local authority consider that the extent of control or influence that it has over the company is still appropriate?
• If the company is subject to local authority control or influence for the purposes of the Local Government and Housing Act 1989, is the company complying with all relevant obligations associated with local authority control or influence?
• Is the local authority’s interest in the company sufficiently material to require the local authority to prepare group accounts?
• Are officers and members complying with their duties both as company directors and as local authority members or officers?
• Are there any tensions between compliance with the company’s governing documents and company law, and compliance with the local authority’s codes of conduct?
• Has there been adverse publicity relating to the company?

The review should identify clear recommendations for the future of the company, and the council should take an appropriate decision in light of those recommendations.

Quarterly Monitoring

An annual review on its own is usually not enough. The council should receive regular updates throughout the year covering:

• financial performance;
• cash flow;
• major risks;
• significant contracts;
• disputes or claims; and
• progress against business plans.

Quarterly reporting is often a sensible starting point.

Governance Review

The council should periodically review whether the company’s governance arrangements remain fit for purpose. This may include:

• board composition;
• director appointments;
• conflicts of interest;
• reserved matters; and
• reporting arrangements between the company and the council.

A company can quickly become difficult to oversee if governance arrangements are unclear.

A local authority should consider the potential consequences of making significant changes to a company’s governance arrangements. For example, if the local authority currently awards contracts to an in-house company without a procurement, it may no longer be able to do so if it alters the level of control that it has over the company or alters the extent of activities which the company carries out for customers other than the local authority.

Legal Health Check

Every few years it is worth carrying out a legal review of the company. Common areas to check include:

• Companies House filings;
• statutory registers;
• shareholder agreements;
• articles of association;
• director appointments;
• compliance with key contracts; and
• compliance with relevant statutory requirements.

Many issues take only a few hours to fix if identified early but can become much more complicated if left unresolved.

Warning Signs

Councils should pay particular attention if:

• board meetings are not taking place regularly;
• financial information is late;
• directors rarely challenge decisions;
• the company is consistently loss-making;
• the council is unclear about the company’s activities9; or
• complaints have been made about an individual’s role in a company.

These are often signs that a more detailed review is required.

Conclusion

A local authority will need to comply with various specific rules relating to its involvement in companies but should also generally keep its involvement in companies under review. A local authority should ensure that it maintains comprehensive records of its involvement in companies and regularly reviews those arrangements. A sensible approach is:

• quarterly operational and financial monitoring;
• annual strategic review; and
• periodic governance and legal health checks.

Regular reviews help ensure council-owned companies remain effective, properly governed and aligned with the authority’s objectives. They are also far easier than dealing with problems after they arise.

If you require any assistance, guidance or advice, please contact Manjot Shokar.