Part 7: Monitoring – having an effective relationship between a local authority and its council-controlled organisations

Governance and accountability of council-controlled organisations

7.1
In this Part, we discuss matters that local authorities should consider when determining the most effective model for monitoring the performance of their CCOs. These matters include:

An effective relationship between a local authority and its council-controlled organisations

7.2
However a local authority chooses to monitor its CCOs, its primary aim should be to find a system that enables an effective relationship between parent and subsidiary. That relationship should go beyond the formal statutory requirements.

7.3
An effective relationship is founded on mutual respect between local authority and CCO for the role of the other. It needs to be close enough for the Council to know how the CCO is performing, but still leave the CCO space to operate at arm's length.

7.4
A CCO is part of the Council's broader operations, and the Council is ultimately accountable to the community for the performance of the CCO. The Council will want confidence that the CCO is performing well and meeting community expectations, and that it is operating as a public sector entity should. The Council should not be surprised by the activities of the CCO and, if things go wrong, the CCO should have ready access to the Mayor and the local authority's chief executive.

7.5
After an effective relationship has been established, it needs to be maintained. Elected members and board members change. Induction for new elected members should include a briefing about the local authority's CCOs and how the local authority manages its relationship with them. Similarly, induction for new board members should include a briefing on the CCO's relationship with the local authority.

7.6
In our work with local government, we sometimes observe tensions in the relationship between local authorities and their subsidiaries. Difficulties can arise for several reasons, including:

  • a lack of strategic alignment between the local authority and the CCO;
  • inadequate communication between the local authority and the CCO;
  • the CCO failing to appreciate and respect the accountability obligations of the local authority; and
  • the local authority failing to respect the confidentiality of information provided by the CCO or to allow the CCO to manage its business at arm's length.

7.7
Elected members are directly answerable to their community for the delivery of services and the appropriate use of ratepayer funds, so it is unsurprising that they expect to maintain oversight of a CCO. However, for the relationship between the Council and its CCO to operate effectively, the Council has to trust the CCO to deliver on its expectations.

7.8
The local authority's formal and informal mechanisms for monitoring a CCO's performance should be designed to support that relationship of trust.

What does monitoring include?

7.9
There is no one model for monitoring CCOs. The arrangements that a local authority adopts should fit the particular circumstances of the CCO. Details may even differ from one CCO to another – there may be different practices for a CCO and a CCTO in the same group.

7.10
However, a framework for monitoring should:

  • offer opportunity for genuine engagement between the Council and CCO, at appropriate intervals and at the appropriate level of seniority, on the Council's strategy and priorities and on the CCO's business performance and risks;
  • enable adequate consideration of the CCO's draft statement of intent;
  • comply with the relevant legislation;
  • not impose costs on either the local authority or the CCO that are out of proportion to the benefits that the CCO achieves; and
  • enable councillors to pursue their interest in the CCO's business openly and transparently.44

7.11
At a minimum, a monitoring regime will include:

  • agreement of the statement of intent;
  • regular reporting by the CCO, at least each quarter, on progress against the objectives set in the statement of intent; and
  • a good relationship between the local authority and the CCO, at both governance level and officer level, which enables issues to be dealt with early.

Statement of intent

7.12
Monitoring is not a means for a local authority to control a CCO, but it is an opportunity to set its direction. Engagement on a CCO's statement of intent is the local authority's primary opportunity for influencing the actions of the CCO. The statement of intent should reflect the strategic direction of both the parent and the CCO.45 The statement of intent must set out the CCO's objectives and the nature and scope of the activities it will carry out.

7.13
The statement of intent must set out the CCO's intended objectives and actions for three years. If the CCO has subsidiaries, the statement of intent must cover them as well. The statement of intent must not be inconsistent with the CCO's constitution.

7.14
The Act makes the importance of the statement of intent and constitution clear. It provides that all decisions about the operation of a CCO must be made by, or under the authority of, the board, in keeping with the statement of intent and the constitution.46

7.15
We have observed, in this review and in other work, that both CCOs and local authorities can underrate the significance and value of the statement of intent. It can be considered a compliance burden rather than a useful tool for planning, management, and reporting, and for the CCO's accountability to the public. The importance of the statement of intent process is illustrated by Example 4 in Appendix 1.

7.16
The Act requires the local authority to agree to the statement of intent. A local authority should consider the draft carefully and require the CCO to modify it if necessary. Local authorities can also require the CCO to modify the statement of intent during the year, asking it to add or remove content.47 Our understanding is that the modification process is little used.

7.17
Agreement on the statement of intent ensures that the subsidiary is operating within broad parameters approved by the shareholder. By facilitating an effective and robust process, with councillors who are engaged, and a subsidiary that is responsive and committed to working with its shareholder, the local authority will ensure that the agreed statement of intent is a document that provides clarity and direction for all parties. Figure 5 shows one approach to achieving this.

Figure 5
Aligning council-controlled organisations with their local authority's strategy – Wellington City Council

One approach is to let the CCOs consider how they fit with the local authority's overall strategy. Wellington City Council told us that, when the Council was developing a long-term strategy for the city,* all CCOs were asked through letters of expectation to tell the Council how they were contributing, rather than the council setting out its expectations. This was a "bottom up" method for ensuring that the CCOs considered the strategic direction of their shareholder and what they needed to do to ensure alignment in the early stages of development of the Council's strategy.

* Known as Wellington Towards 2040: Smart Capital.

Timing

7.18
The Act requires a CCO to:

  • present its draft statement of intent to its shareholder on or before 1 March each year;
  • to consider the shareholder's comments within two months;
  • to complete the statement of intent by 30 June; and
  • to make it publicly available within one month of completion.48

7.19
This time frame was intended to fit with the local authority's consultation on its annual or long-term plan, which must also be completed by 30 June.

7.20
However, most local authorities finalise their draft annual plans or consultation documents in March or early April. This allows a local authority little time to incorporate information about the CCO into those documents. In practice, some local authorities require their CCOs to submit information at an earlier date than the statutory date for the draft statement of intent. Directors of one CCO commented that they were required to provide budget information in the previous October. They thought that it was too early from a commercial point of view to have firm plans for the next financial year beginning nine months ahead.

7.21
That said, the formal presentation of the draft statement of intent draft should not be the local authority's first intimation of any significant new initiative that the CCO plans. Ideally, the local authority and the CCO would be in regular discussions about the CCO's proposals before the draft statement of intent is presented. If engagement starts early, there should be no surprises when the draft statement of intent is presented. This should enable the local authority to incorporate any significant proposals in its documents for consultation.

Letter of expectations

7.22
Some local authorities (for example, Christchurch and Tauranga City Councils) also provide their CCOs with a letter of expectations. Although there is no statutory requirement for a local authority to do this, it can be a useful mechanism for providing clarity about roles and responsibilities, and for setting clear boundaries on how the board meets its obligations. It can be a valuable addition to the local authority's monitoring regime.

Monitoring regimes

7.23
Local authorities use a variety of models for monitoring their subsidiary entities. Some assign responsibility to a holding company. Others prefer to monitor their subsidiaries directly, sometimes through a sub-committee of the Council with support from a dedicated Council business unit.

Holding company

7.24
A holding company has responsibility for managing a local authority's interests in its subsidiary entities and will usually carry out the monitoring role on behalf of the local authority. It can also review the performance of the boards and directors of its subsidiaries.

7.25
Of the local authorities that we considered in this review, three have holding companies that monitor their subsidiaries – Christchurch and Dunedin City Councils, and Greater Wellington Regional Council. Example 1 in Appendix 1 describes the Christchurch group. Example 3 in Appendix 1 describes changes Dunedin City Council made to its holding company after a review.

Council monitoring

7.26
Of the local authorities we considered, three have in-house CCO monitoring units that support the Council in its monitoring of CCOs.

7.27
Auckland Council set up a CCO Governance and Monitoring Committee of Council to monitor the performance of its CCOs, appoint directors, and negotiate the statements of intent. Auckland Council has a dedicated monitoring unit in the Council's Finance team to monitor and assess performance.

7.28
At Wellington City Council, monitoring of CCOs is carried out by the relevant committee of Council, based on the committee's area of responsibility. The Council has a dedicated CCO business unit that provides support and advice to the committees, manages the Council's relationships with its CCOs, and oversees the monitoring regime.

7.29
The advantage of an in-house monitoring unit is that it is a ready point of contact in the local authority for CCOs. It can also be a ready source of advice for elected members.

7.30
However, there are disadvantages. There is a risk that council officers can become involved in the business of the CCO. Several of the CCO interviewees claimed that CCOs' performance reports to the Council were in effect prepared by council officers, rather than by CCOs.

7.31
If an in-house business unit performs the monitoring role, the local authority should ensure that council officers respect the subsidiary's governance framework and management structure and allow the subsidiary to fulfil its obligations without undue interference.

7.32
As we noted in paragraph 3.4, the need to monitor CCOs and manage the local authority's relationship with them means that the local authority must have the capability to do so. This is particularly so where the Council carries out the monitoring directly, supported by its officers.

Informal mechanisms

7.33
In addition to the statutory requirements, local authorities and CCOs can consider other ways to improve the effectiveness of their relationship. Which mechanisms are appropriate will depend on the nature of the CCO.

7.34
For local authorities, this may include:

  • supplementing the statutory accountability framework to make their expectations clear to CCOs, such as by sending a letter of expectations;
  • involving their CCOs in their strategic planning processes (see Figure 5); and
  • periodically reviewing how their CCOs contribute to the local authority's overall objectives and outcomes.

7.35
For both CCOs and local authorities, other considerations are:

  • agreeing how often CCO boards or board representatives should meet with elected members, whether formally at Council meetings or informally (perhaps in a workshop setting);
  • whether to set up regular meetings between the Mayor and the chair and their respective chief executives;
  • agreeing on appropriate communication channels for CCO staff and local authority staff;
  • considering informal ways of communicating, including briefings or workshops for significant activities or projects;
  • considering whether reporting more regularly than half yearly is necessary and, if so, to what purpose; and
  • agreeing to a "no surprises" approach to communication.

7.36
Informal points of contact will help to support a "no surprises" approach and help the CCO to understand the local authority's appetite (or lack of appetite) for risk. Particularly for a CCTO, informal points of contact provide an opportunity for the directors and managers of the CCTO to understand the culture that the local authority considers acceptable for a public sector entity.

Council observers on CCO boards

7.37
We encountered a few instances where a shareholder local authority sends an "observer" to board meetings of its CCO subsidiary. The observer might be the Mayor or another elected member, or an employee of the local authority. The observer reports back to the local authority informally on the CCO's business. The reasons usually given were that the observer gave the local authority "some comfort" about the CCO and could provide the local authority's perspective to the CCO.

7.38
If there is an effective monitoring regime and a good relationship between the local authority and the CCO, we consider that an observer is unlikely to add much. However, in the example of Port Otago Limited in Figure 6, the role was based on good relationships and seemed to work well. If there is to be an observer, then the role must be clearly defined and understood by the CCO, the local authority, and the observer. For example:

  • Does the observer have the right to speak at meetings?
  • Does the observer convey information to the board from the Council?
  • Who does the observer report back to and on what matters?
  • What CCO information will the observer receive?
  • Does the observer have access to confidential information, and who can the observer report that information to?
  • Could the observer's role amount to them being a "deemed director" of the CCO?49

7.39
We suggest that, if there is to be an observer, the role should be designed to benefit both the local authority and the CCO. Above all, an observer should not be a substitute for formal monitoring by the local authority.

Figure 6
Otago Regional Council observers at Port Otago Limited

We spoke with representatives from Port Otago Limited (the company) and Otago Regional Council. The company has both port and property activities. It is governed by a single six-member board and pays regular dividends to the Council.

The company and the Council told us that the long-standing accountability and governance relationship between them, which involves both formal and informal mechanisms, works well.

The board members are independent directors appointed by the Council. The Council does not appoint councillors to the board. A senior Council staff member attends board meetings as an observer.

As well as formal half-yearly and annual reports, the company's chair and chief executive report periodically to the whole Council, and a liaison group of company and Council representatives meets as required to discuss particular issues. The liaison group also briefs councillors from time to time. The company takes a "no surprises" approach to its dealings with the Council.

Board evaluations

7.40
Another aspect of performance monitoring is regular evaluation of a CCO board's performance – whether by the board itself, by a holding company, or by a reviewer external to the board. Evaluation should cover the performance of the board as a whole and the performance of individual directors.

7.41
Formal evaluation is an opportunity to assess how well the board is performing, to identify possible improvements in how it operates, and to identify skill gaps in directors. It can identify training and development needs for individual directors.

7.42
The Institute of Directors is a source of guidance on evaluating board performance.

Compliance costs

7.43
Local authorities and their CCOs can incur significant costs in ensuring the CCO's accountability to the shareholder and the community. A local authority should consider whether the obligations it imposes on its subsidiary entity, in terms of both staff resourcing and costs, are in proportion to the function, size, and capability of the entity.

7.44
It is important that the local authority establishes clear channels of communication with the CCO for monitoring purposes and that those channels are used. For example, an elected member wanting information from the CCO should seek that information through the appropriate Council officer. To go direct to the CCO risks duplication and can impose an administrative burden on CCO staff outside the formal accountability requirements.

7.45
There is also a risk that a local authority's role as owner can become confused with its day-to-day engagement with the CCO as the provider of a service. We noted in our review of Watercare Services Limited in 201150 that such confusion of relationships could require additional reporting by Watercare that goes beyond what councillors need to know to discharge their governance role.

7.46
If a local authority purchases services from the CCO, it will want to monitor service performance. This dual interest as shareholder and purchaser can lead to more intensive scrutiny than a similar entity might experience from its shareholders in the private sector.

44: Letter to the chief executives of Watercare Services Limited and Auckland Council (2011).

45: See Schedule 8 of the Act for the purpose of the statement of intent, and process and content requirements.

46: Section 60 of the Act.

47: Section 65(2) of the Act.

48: Schedule 8, clauses 2, 3, and 7, of the Act.

49: Section 126(1)(b)(ii) of the Companies Act 1993.

50: Letter to the chief executives of Watercare Services Limited and Auckland Council.