Part 1: Good Governance

Local Authority Governance of Subsidiary Entities.

Overall Goals of Our Study

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We carried out this study to:

  • identify and analyse current and emerging issues about how local authorities govern their subsidiary entities1;
  • highlight the risks when governance arrangements do not work effectively; and
  • recommend and illustrate good practice for proper accountability and effective governance.

Current and Emerging Governance Issues

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In our 1994 report Governance of Local Authority Trading Activities2 we commented on the relationships between local authorities and their commercial trading entities. In that report we examined issues concerned with:

  • shareholder control; and
  • monitoring the performance of local authority-owned companies.

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We also commented in our 1994 report on the operation of business units and joint ventures.

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Since then, local authorities have continued to explore new ways to carry out their responsibilities. The Local Authority Trading Enterprise (LATE) model has continued to evolve. Other developments in the local government sector include:

  • differing governance philosophies, principles and approaches across local authorities;
  • new organisational arrangements, such as regional collaborative ventures or shared services; and
  • a growing variety of structural options for undertaking activities, including non-commercial functions.

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In 1998 Parliament passed legislation governing the operation of two stand-alone entities with important roles to play in the development of Auckland’s infrastructure: Watercare Services Limited and Infrastructure Auckland. Our case studies include these two entities because the legislation and the environment in which they are operating have created special challenges for all the parties concerned to make governance relationships work.

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In this report, we discuss relationships between local authorities and many different types of subsidiary entity. Different entities are subject to various statutes, including company and trust legislation, port and energy company statutes, and entity-specific legislation. We do not comment in detail on all the individual statutes. But we are confident that our recommendations are broadly consistent with this array of legislation and are generally applicable to the circumstances and environments in which such entities operate.

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We examined each of the different kinds of governance arrangements in its own context. Relevant influences and circumstances included:

  • differences in legal form (for example, limited liability company, trust, or special-purpose body);
  • protocols, rules and other guiding documents (such as the Rules of the New Zealand Stock Exchange, or management agreements);
  • the subsidiary entity’s role, functions and purpose;
  • the nature of the activity that the subsidiary entity performs (which may be as varied as water reticulation, energy supply, investment management and tourism promotion);
  • the strategic and financial importance of the activity; and
  • the local authority’s circumstances (size, constituency and governance philosophy).

Principles of Good Governance

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Our expectations of good governance practice for subsidiary entities are that:

  • The subsidiary entity should have a clearly defined purpose.
    We expect the purpose of the entity to be clearly stated and reviewed on a periodic basis. The influence exercised by the local authority over the finances, operations and direction of the entity should be consistent with that purpose.
  • The subsidiary entity’s governing body should be effective.
     A local authority should have a process in place to appoint a governing body with the skills and competencies to carry out its duties effectively. Procedures should be in place for evaluating the performance of individual members and of the governing body as a whole.
  • The parties involved should be assigned clear roles and responsibilities.
     The roles and responsibilities of board members, shareholders, councillors and other parties (such as council and entity staff) should be clearly defined. Clear roles and responsibilities make the trade-offs among differing interests transparent and foster effective decision-making.
  • The local authority should be able to hold the subsidiary entity to account.
    A local authority needs the structures, systems, information and capability to–
    • promote its interests (for example, as shareholder or purchaser of services);
    • influence the direction of the entity, as appropriate within the accountability relationship; and
    • monitor performance.
  • Mechanisms for accountability to the community must be in place.
    A local authority should demonstrate that it is managing the community’s financial and non-financial interests in the entity in an effective and efficient manner.

How We Carried Out Our Study

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We carried out our field work between November 1999 and February 2000. We visited ten territorial local authorities, two regional councils and numerous related organisations, including:

  • LATEs;
  • trusts;
  • port companies; and
  • corporate entities with their own enabling legislation3.

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We interviewed elected members, chairpersons, chief executives and senior managers. We also:

  • examined establishing documents – such as constitutions and trust deeds – together with accountability documents, council minutes and papers;
  • read performance reports and general correspondence between the entities and councils; and
  • reviewed file documentation and other relevant material.

The Structure of Our Report

1: In this report we use the expression “subsidiary entity” to refer to any entity over which (in this case) a local authority is able to influence the governance arrangements. Such an entity may or may not be a “subsidiary” within the meaning of either statutory definition or generally accepted accounting practice.

2: ISBN 0-477-02844-6, June 1994.

3: For example, Canterbury Museum Trust Board established under the Canterbury Museum Trust Board Act 1993.

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