Governance of Council Companies

Introduction

Local authority-owned companies can deliver innovation, regeneration and value for money. But their success depends on councils striking the right balance between oversight and interference.

Councils frequently struggle with company governance - specifically Local Authority Trading Companies (LATCos) and joint ventures - because they attempt to apply democratic, political, and bureaucratic processes to commercial entities that require agility, risk management, and market-driven decisions. This creates a ‘hybrid’ tension where public purpose often conflicts with commercial reality. They are owned by democratically elected councils and often deliver public services, yet they operate under company law with boards legally responsible for running the organisation.

That dual identity creates inevitable tension. Councils want accountability for public money and delivery against political priorities. Boards need the freedom to make commercial and operational decisions. Good governance does not remove this tension. It manages it.

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.

Key reasons councils get company governance wrong include:

Blurred Roles and "Shadow Directors"

Shareholder Overreach: Councils often fail to act as owners (setting strategy) and instead behave as managers, bypassing the company board to instruct employees directly.
Shadow Directors: When officers or members routinely direct company decisions outside formal processes, they risk being deemed ‘shadow directors’ under company law, blurring accountability and legal liability.
Conflict of Interest: Council officers appointed to company boards may face conflicts between acting in the company's best interest and complying with council orders.

Dysfunctional Culture and Leadership

Lack of Commercial Skills: Councillors and officers often lack the specific commercial, financial, and legal expertise necessary to manage companies, leading to risky decisions.
Optimism Bias: A tendency to focus on potential benefits while ignoring or underestimating risks.
Passive Boards: Companies are sometimes treated as ‘outsourced departments’ rather than independent entities, resulting in passive boards that do not challenge the council.
Poor Relationships: Dysfunctional relationships between senior officers and politicians can lead to lack of oversight and strategic direction.

Inadequate Oversight and Scrutiny

Under-governance: Assuming a company can be left alone to operate freely, which leads to risks growing unchecked until they become crises.
Broken ‘Golden Thread’ of Accountability: When services are outsourced, councils often fail to keep robust oversight of performance standards.
Poor Information Flow: Reporting is often "adequate but not insightful," arriving too late for the board to take corrective action.

Conflicting Priorities

Political v Commercial Goals: Councils may force a company to deliver social value or political priorities that undermine profitability and commercial sustainability.
Multiple Ownership Issues: If a company serves multiple councils, it may face conflicting political and strategic agendas, leading to dysfunction.

Lack of Strategic Clarity

Undefined Purpose: Companies are sometimes formed without a clear, written and agreed-upon business case.
Unclear Boundaries: Failure to establish clear, documented procedures for how the council (as shareholder) interacts with the company (as board).

Background

In August 2020, Nottingham City Council's auditors, Grant Thornton, issued a report in the public interest,^[1] because of serious concerns about failures in the council's governance arrangement in relation to Robin Hood Energy Limited.

Any local authority with interests in corporate vehicles should read the report and take the opportunity to learn the lessons of Robin Hood and review their governance arrangements for connected entities.

The council set up Robin Hood Energy in 2015 as a wholly owned not-for-profit company, in order to tackle fuel poverty in the City of Nottingham and be a realistic alternative to the ‘big 6’ energy suppliers. A key aim was to help people below the poverty line access to better deals. This is a hugely commendable objective and goes some way to explaining the losses that Robin Hood Energy made in its initial years of operation. The losses compounded, cumulating to £34.4m in 2019, which is what brought the attention of the auditors.

A key concern expressed in the public interest report is the council decision making process that led to the giving of significant additional loans to the company in 2018/19 and 2019/20. The report highlights the failure of governance. The additional loans were given despite the council's concerns about the quality of the financial information being produced by the company and the company's deteriorating financial performance and therefore its ability to make repayments.

This is not only a failure of governance but it also goes to the heart of any council's fiduciary duty to its council tax and rate payers. Prudence is a fundamental aspect of any council's financial management and making loans with serious concerns as to the prospect of their repayment is indeed a matter of public interest.

Reasons for failure

The report catalogues the reasons for the company's failure. Whilst the sector in which the company operated was acknowledged to be highly complex, highly competitive and highly regulated, it is nonetheless surprising how much of the failure appears to be due to poor governance. These have been cogently summarised in the report as:

Insufficient appreciation within the council of the huge risks involved in ownership of, and investment in, the company;
Insufficient understanding within the council of the company’s financial position, partly due to delays in the provision of information by the company and the quality and accuracy of that information;
Insufficient sector (or general commercial) expertise at non-executive board level;
A lack of clarity in relation to roles within the governance structure;
The failure to establish an appropriate and consistent balance between holding to account and allowing the company freedom to manage. This worsened as levels of trust decreased and the financial position deteriorated.

The most striking and eye catching statement of the report of the report, highlights that the council's governance of the company was overshadowed by its determination that the company should be a success, and this led to “institutional blindness” within the council to the escalating risks involved.

How could the issues have been avoided and what are the lessons for other councils?

Well, to the first question the answer is difficult as the nature of the energy market would always mean that the company's success was going to be difficult. As to the second question, the recommendations in the report serve as a useful starting off point for councils to review and reflect on their own governance arrangement for corporate entities.

The report suggested, amongst 13 different recommendations:

A review of the council's approach to using councillors on the boards of its companies and other similar organisations, which should be informed by a full understanding of the role of and legal requirements for company board members.
Where it continues to use councillors in such roles, it should ensure that the non-executives (including councillors) on the relevant board have, in aggregate, the required knowledge and experience to challenge management. This is of particular importance where the company is operating in a specialised sector which is outside the normal experience of councillors.
Where councillors are used in such roles, the council should ensure that the councillors are provided with sufficient and appropriate training, which is updated periodically.
The council should ensure that all elements of its governance structure, including the shareholder role, are properly defined and that those definitions are effectively communicated to the necessary individuals.
When allocating roles on council-owned organisations to individual councillors, the council should ensure that the scope for conflicts of interest is minimised, with a clear divide between those in such roles and those responsible for holding them to account or overseeing them.
The council should ensure that risks relating to its companies are considered for inclusion in its overall risk management processes, with appropriate escalation and reporting, rather than being seen in isolation.
The council should ensure that financial information is provided in accordance with its requirements and is fully understood by those holding the company to account, and that robust action, with the oversight of the s.151 Officer, is taken if suitable information is not provided.
The council needs to ensure that responsibilities for scrutiny and risk management are given sufficient prominence, including giving the Audit Committee explicit responsibility for scrutiny of governance and risk management of companies in which the council has an interest.

Conclusion

There is nothing ground-breaking or even slightly challenging in any of those recommendations. They are merely the ingredients of good governance. Put them all together and any council can have well run subsidiary undertakings, whose activities are fully understood, challenged and scrutinised where necessary, and supported by a well-informed council parent.

Geoff Wild is a Legal and Governance Consultant.

^[1]Under section 24 and Schedule 7 of the Local Audit and Accountability Act 2014