Local government

How best to set up a local authority trading company

Six ways enterprising authorities can maximise the benefit of wholly owned subsidiaries

We are seeing increasing numbers of local authority trading companies (LATC) being set up around the country. This is in response to continued austerity, making local authorities consider different ways of delivering services in order to make efficiencies and create additional income. As the numbers grow, the responsibilities that local authorities have in relation to governance increase – and this is an area that is easy for local authorities to lose sight of. 

The six key learning points below come from our experience of our local authority clients and knowledge of best practice across all sectors, and will help local authorities derive the most benefit from these arrangements.

1. Allow operational freedoms

The local authority is the shareholder in the trading company – and therefore should not have an operational lead role. This can be challenging if the company needs support in its early stages, but freedom and agility are key to allow the company to act commercially and thrive in this environment.   

2. Place less reliance on performance measures

Monitoring the ongoing performance of the trading company in this way can stifle innovation and prevent the partnership between the council and the company from developing. This is particularly important as some authorities are moving towards a commissioning model for services and need to have the right skills to ensure that they get the best service from their partners by managing them in the best way.

3. Place more focus on future business planning

Review future goals to ensure that both company and council are aligned, and their goals are both served. There is often a lack of clarity and alignment of goals, which may change over time as the authority and entity evolve to respond to the needs of the landscape in which they operate. The use of governance documentation, such as a memorandum of understanding and a joint risk register between council and company, can be useful to support joint working and can be updated to ensure they continue to reflect the operating landscape.

4. Be clear on members' roles

When allocating board directorships to elected members it is important to ensure that their duties to the council and to the company are clear and that any conflicts of interest are identified. For example, a member may sit on the board of a housing company that may require planning consents that may not be aligned to council priorities.

5. Encourage external challenge

Bring in expertise from the business world to provide challenge and a different perspective through the appointment of independent non-executive directors onto boards. Encourage them to work alongside members and officers, and provide challenge from a commercial perspective.

6. Ensure proper strategic oversight by creating a shareholder committee

Where an authority has several arm's-length companies in its group, this may be best served by a shareholder committee that sits above all the company boards and has a single point of access to the council via the cabinet. This over-arching board aids consistency, for example it can help to agree the business plan and ensure that there is alignment across the group.

Words: Vivien Holland, Regional Head – Local Government Advisory.

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