Part 6: The relationship between local authorities and their chief executives

6.1
A healthy and productive relationship between a local authority and its chief executive is an important factor in an authority's effectiveness. That relationship is the vital link between governance and management, and between decision-making by elected representatives and operational activity. If there are problems in that relationship, they can have a significant effect at all levels of the organisation.

6.2
The role of chief executives has been a significant topic of discussion in the local government sector during the last year. Contentious issues have included:

• the decision-making process for making appointments and reappointments;
• what might constitute pre-determination in those processes;
• how remuneration is set and disclosed; and
• the relative responsibilities of chief executives and elected members.

6.3
This Part provides brief comment on those issues.

Appointing and reappointing chief executives

6.4
The main legal requirements for employing chief executives are set out in schedule 7 of the Local Government Act 2002 (clauses 33-36). In summary:

• The local authority has to appoint a chief executive for a term of no more than five years.
• In the year before the contract expires, the local authority must review the chief executive's performance and their skill mix, and consider how the skill mix fits with the local authority's expected future needs.
• Based on that review, the local authority can then decide either to reappoint the incumbent for another two years, without advertising or any other process, or to advertise the pending vacancy and start afresh.
• The local authority is obliged to be a good employer, which specifically includes providing good and safe working conditions, and impartially choosing the best candidate based on merit.

6.5
As the employer, the local authority has a range of duties under general employment law, including the Employment Relations Act 2000 and common law.

6.6
Appointing a chief executive is an important decision for a local authority: it will shape how the organisation is led and managed for the term of the appointment. Recognising how significant this decision is, the Local Government Act requires a Council to take this decision. It must not delegate the decision to a smaller group.

6.7
The appointment process can be reasonably straightforward if it is managed carefully and systematically and supported with appropriate external advice. The LGNZ publication, Guide for Local Authorities on Hiring and Managing Relationships with the Chief Executive, provides useful advice.

6.8
The process can become more complex if the local authority has decided to advertise the pending vacancy and the incumbent is applying. Experience has shown that there are several reasons why local authorities and/or chief executives might prefer to go through this full process rather than reappoint the incumbent for the additional shorter term. In practice, incumbents can and do apply.

6.9
In this situation, it is important that the local authority and the chief executive are clear that:

• as an employer, the local authority has to continue to manage and review the performance of the chief executive under their employment agreement; and
• as a recruiter, the local authority has to carry out the selection process in good faith and with a commitment to appointing the best candidate.

6.10
We know that there is sometimes concern about the risk of the first process contaminating the second and creating a risk of bias or predetermination in favour of the incumbent. We discuss in paragraphs 6.11-6.17 that this risk is likely to be manageable from a legal perspective. In particular, the recent High Court decision in Howe v Keown (2 September 2011) took a practical approach to what would constitute predetermination in an appointment decision. Against this backdrop, a positive performance review of an incumbent is unlikely to jeopardise an appointment process, if both processes are properly run. In an employment context, proper processes require all those involved to:

• be clear about the process they are in and their role and obligations;
• take legal and human resources advice as needed;
• keep proper records;
• behave professionally; and
• keep personal matters confidential.

What constitutes pre-determination?

6.11
The High Court decision in Howe v Keown arose out of Christchurch City Council's process for selecting a chief executive. The council had brought this process forward to avoid a possible change in leadership of the organisation part way through the recovery and rebuilding work needed after the Canterbury earthquakes. Mr Marryatt, the incumbent chief executive, was applying. Mr Howe, a concerned member of the public, sought an injunction to prevent Councillor Keown participating in the decision on who to appoint on the basis that he was not impartial.

6.12
The Judge concluded that Councillor Keown could participate and did not grant the injunction. The judgment contains some useful comment on how to think about bias and predetermination in the context of decision-making by elected councillors.

6.13
The judgment noted that the legal duty in the Act is to be impartial.

But partiality should not be confused with holding a strong and legitimate policy [preference or point of view] in favour of stability in a crisis, unless an outstanding candidate trumps that value. "Impartiality" is the word used in the Local Government Act and is clearly directed to preventing persons being favoured or disfavoured for inappropriate reasons.

6.14
The Judge distinguished between a preference for stability, which he regarded as a legitimate policy that is consistent with the requirement to assess the merits of the candidates, and having a closed mind to the possibility of replacing the incumbent, which would amount to predetermination. The fact that the councillor had publicly expressed his satisfaction with the chief executive's performance did not mean that he had a closed mind on the possibility of replacing him.

6.15
The judgment acknowledged that requiring an elected council to make this decision "virtually guarantees that the decision-makers will have formed strong views before the hearing starts". The legislature has deliberately placed this decision in the hands of an elected and political body. "It means that Parliament intends full political accountability by the councillors to the ratepayers for the appointment of the Chief Executive Officer."

6.16
There are many cases where judges have cautioned against applying the law of bias rigorously to decision-making by elected persons. That body of law has developed to prevent corrupt decisions, influenced by fear or favour on the part of the decision-maker, not to limit the proper workings of the democratic process and political accountability.

6.17
This judgment is a useful reminder for the sector that it is not appropriate to automatically translate the general legal rules on bias and pre-determination to decisions being made by an elected body in a political context. It is always important to be careful to ensure that the actions of individual elected members do not undermine proper decision-making. However, the law does not require elected members to have no opinions.

6.18
We comment on these general issues in more detail in Part 5 of our good practice guide, Guidance for members of local authorities about the Local Authorities (Members' Interests) Act 1968, published in October 2010.

How chief executives' pay is set and disclosed

6.19
How much chief executives are paid has been a topic of public debate. In a time of concern about the performance of some local authorities, rates increases, and the general economic situation, many citizens have questioned some remuneration packages and pay increases.

6.20
The available guidance on how to set remuneration for a chief executive encourages local authorities to take expert advice on the relevant employment market and salary movements, and to consider longer term questions of retention of good staff, not just the short-term costs. This advice is sound.

6.21
However, it is important for a Council to ensure that it retains responsibility for these decisions, and treats expert advice as no more than an input to its final decision on what is appropriate. Like any employer, a Council will need to consider the organisation's financial situation and general questions of affordability and appropriateness, as well as market movements and performance. The Council has to decide on the right balance between its obligations as a good employer and its obligations to its ratepayers. It has to be ready to be politically accountable to its ratepayers for these decisions.

6.22
The Local Government Act 2002 helps this accountability by requiring the annual report to include information about the pay of each of the mayor or chairperson, the other members of the local authority, and the chief executive. Requests under the Local Government Official Information and Meetings Act 1987 can lead to more detailed information being released. All local authorities should expect that this information will be carefully scrutinised and be ready to justify the decisions made.

6.23
In our view, the focus in these situations should be on the accountability of the council members acting collectively as the employer rather than the employee. In the end, the employer decides on the appropriate pay package and should be ready to defend the decision and protect their employee from inappropriate personal criticism.

6.24
It is important for elected members to remember that they are employers with legal obligations to be a good employer and to provide good and safe working environment. It is unlikely to be appropriate to raise concerns about a chief executive's performance or the terms of their employment in public and to make it a matter of political debate. Doing so risks causing harm to the individual and to the local authority's legal position as employer. Concerns that relate to an individual's employment, even if that person is a chief executive, need to be handled carefully, respecting that person's privacy.

6.25
The LGNZ guide comments that:

Confidentiality is paramount. It is important to remember in both recruitment and performance management processes that the local authority is dealing with the personal and professional lives of individuals. At times there is a tension between the good employer and confidentiality requirements and the ‘political' roles of councillors.²⁵

6.26
Occasionally, a local authority or a chief executive will approach the Auditor-General for advice or ask us to intervene in a difficult situation. We do not generally intervene in individual employment matters. These are best resolved by the employer and employee, supported by expert legal advice. We cannot substitute for that advice, for either party. There are specialist institutions dedicated to dealing with problems in employment relationships.

The relative responsibilities of chief executives and elected members

6.27
The other area of regular concern is the need for elected members and chief executives to have a clear and shared understanding of their different roles and responsibilities. In broad terms, the elected members have a governance role and the chief executive is responsible for managing the organisation. However, in practice it is not always easy to identify where the line falls.

6.28
Throughout the public sector, we see examples of governing bodies playing too limited a role and leaving too much to managers, and examples of governing bodies that get too involved in day-to-day managing. Both situations create risks.

6.29
In the local government sector, the more common risk is that elected members will defer too much to the organisation's professional staff. Particularly when members are new, it can be difficult to know what questions to ask or what reporting to require. Alternatively, the elected members may be so politically divided that they struggle to come together to exercise effective and collective governance.

6.30
In October 2011, Audit New Zealand presented a report to Hamilton City Council on the management of the V8 Supercars Event. Among other things, that report drew attention to the need for:

• important decisions to come to the full council, as early and with as much information as possible;
• councils to insist on full and regular reporting to them on important projects, from inception to completion, so that they are aware of emerging risks;
• councils to ensure that they have enough information to understand the risks and consequences of decisions before they take them, even if that involves "robust enquiry of management" at times;
• managers to operate on a "no surprises" basis with its governance group;
• managers to ensure that reports to council are written in clear and non-technical language so that they can be understood by elected members and the public; and
• councils to maintain a clear, up-to-date delegations policy so that decisions are taken at the right level and properly authorised.

6.31
Overall, the elected members and the chief executive have to establish a working relationship based on respect and trust. Keeping a constructive relationship requires regular communication and open discussion to address any emerging tensions as soon as they arise.

6.32
We encourage all local authorities and their chief executives to periodically consider whether this core relationship is operating well from each of their perspectives, and whether there are any aspects that could be improved.

25: Local Government New Zealand (2008) Guide for Local Authorities on Hiring and Managing Relationships with the Chief Executive, page 9.