Guidance for Council-Appointed Directors
Go back to the main Constitution page.
- Introduction
- What is a conflict of interest
- Conflict of interest risks in the context of council owned companies
- Director obligations to the Company
- Officers as directors
- Councillors as directors
- Advantages and disadvantages of councillors or officers acting as directors
- How to identify a conflict
- I'm not sure whether a conflict exists – what should I do?
- How to report a conflict
- Process for managing conflicts of interest
- Indemnity and insurance for directors
- Conclusion and operational arrangements
1. Introduction
Lancashire County Council is a shareholder for numerous companies which have varying strategic priorities. Officers and councillors have at times be appointed to be a director of those companies to, amongst other things, influence the direction of the company. Appointment of individuals as directors by the County Council, however that may be, will usually be informed by the individual's current role. The result is that the appointed director will be carrying out numerous functions, for example, as an officer and as a director of the company.
|
"Being a director of a local authority-controlled company requires officers and elected members appointed to those roles to operate in a completely different legal and philosophical framework to that they are used to inside their local authority. It can lead to real conflicts between the duty owed to the company and the interests of your council. It can also lead to conflicts of interest on a personal level which makes holding some roles in a local authority unviable whilst continuing as a director. It is necessary to make different assumptions about how things operate and what issues you need to have demonstrated you took into account, and what had no influence. Too often, this is not understood until problems arise, resulting in reputational and financial damage and in some cases, external intervention directly impacting on your authority." (Max Caller, Strategic Adviser and Lead Inspector for HM Government, ‘Local Authority Company Review Guidance’ (2022 edn)). |
This protocol seeks to explore the potential risks associated with conflicts which may arise out of officers and/or councillors being directors of council owned companies, offer guidance on how to avoid and/or deal with conflicts, and provide the appropriate tools for officers and councillors to feel confident in the proper exercise of their duties. The protocol concludes that where possible non-statutory officers will be appointed to shareholder director roles at the council and councillors will have oversight of the council's shareholder interests at the Cabinet subcommittee.
2. What is a conflict of interest
A conflict of interest is a situation that may arise when a person has competing interests and serving one of those interests could damage or harm the other interest. An interest can be interpreted broadly but might include something that benefits an individual, or it can be a duty which someone has taken on. In a local authority context this might typically be a situation where a councillor or officer has an interest outside their role with the local authority which could compete with their duties to the local authority.
Conflicts are not automatically generated by an interest. However, the line between a potential conflict of interest and an actual conflict of interest is both a fine distinction and a blurred one. It is easy to end up on the wrong side of it by accident. In situations where a relationship is built on trust, a perceived conflict of interest may be just as detrimental as an actual conflict.
Conflicts of interest are not always unlawful, although abuse of gifts and hospitality can lead to both a breach of the UK Bribery Act 2010 and a conflict of interest and directors, councillors and officers are also subject to specific statutory duties. Guarding against conflicts of interest will help Lancashire County Council build both a robust system of governance and a strong ethical culture.
Conflicts of interest can be actual, potential or perceived.
- Actual – as a result of various duties owned, there is a real conflict between the duties and interests of an individual there is a real conflict between duties and interests.
- Potential – circumstances mean that there could be a conflict between duties and interests.
- Perceived - a third party could consider that there is a conflict between duties and interests.
It is impossible to set out every scenario or set or circumstances which may give rise to a conflict of interest, so in most case individuals should exercise a reasonable degree of openness and judgment in assessing the nature and extent of their interests and duties and whether this gives rise to a conflict of interest.
3. Conflict of interest risks in the context of council owned companies
A risk arises in respect of council owned companies by virtue of the appointment of individuals to the company's board of directors who are councillors or officers. As set out in more detail below, the competing duties and interests of councillors and officers which arise because of them wearing two hats give rise to a potential conflict of interest. The resulting risk associated with such conflict, is one of personal risk to the individual, but also a reputational risk to the council and the company.
|
The representatives who are appointed directors by the executive will participate directly in the activities of the company and are answerable to the company and have the powers and duties of company directors whilst they do so … this requirement in a trading company and the accompanying conflicts of interests that may arise means that officers are better placed to fulfil this role. (…) Whilst it will therefore be the norm that officers, not members, will be appointed as directors, this should not prevent the council from appointing members as directors where it is considered to be in the best interests of the company and council. (In The Governance of Council Interests in Companies – Code of Practice (2018) Lawyers in Local Government Code of Practice) |
There are numerous types of scenarios which may give rise to a conflict of interest.
“Situational conflict”
A “situational” conflict may arise if a director has duties and interests towards more than one organisation, for example if they are sitting on more than one company board and they are a councillor or officer of the council. Under Section 175 Companies Act 2006, a director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. Any such conflict must be authorised by the remaining directors of the company to continue acting as a director.
To ensure that “situational conflicts” are properly managed, councillors who are appointed as directors of a council company should declare their role to the council and the company and seek ongoing guidance from the company secretary. Any declarations of interest should be clearly recorded in the minutes of board meetings.
“Transactional conflict”
A "transactional" conflict of interest may arise if a company enters into, or proposes to enter, a transaction or arrangement with a third party (including the council). Transactional conflicts of interest relate to existing transactions or arrangements (section 182, Companies Act 2006) or proposed transactions or arrangements (section 177, Companies Act 2006). Pursuant to sections 182 and 177 of the Companies Act, if a director of a company is directly or indirectly interested in a proposed or existing transaction or arrangement with the company, they must declare the nature and extent of that interest to the other directors. Where the transaction or arrangement is a proposed transaction, a declaration to the other directors must be made before the company enters into the transaction or arrangement.
To ensure that “transactional conflicts” are properly managed, councillors who are appointed as directors of a council company should declare their role to the council and the company and seek ongoing guidance from the company secretary. Any declarations of interest should be clearly recorded in the minutes of board meetings.
Director obligations to the Company
Director's duties under the Companies Act
Under the Companies Act 2006, there are general duties which require that directors:
- Section 171 - act within their powers in accordance with the company’s constitution and use those powers only for the purposes for which they were conferred;
- Section 172 - promote the success of the company for the benefit of its members;
- Section 173 - exercise independent judgement;
- Section 174 - exercise reasonable care, skill and diligence ;
- Section 175 - avoid conflicts of interest;
- Section 176 - do not accept benefits from third parties;
- Section 177 - declare an interest in a proposed transaction or arrangement.
Consequences
Directors may be liable in both criminal and civil law for breach of their statutory duties.
The general duties are owed to the company, rather than directly to members, and only the company will be able to enforce them (although in certain cases shareholders are able to bring a derivative action against the director on the company's behalf).
Liquidators (among others) may apply under the misfeasance procedure (section 212, Insolvency Act 1986 (IA 1986)) for the court to examine the conduct of directors and potentially to order them to make a repayment or contribution to the company's assets in light of (among other things) their breaches of duty.
Officers as directors
Officers of the council may be deemed to be the most appropriate appointment to the board of directors of a council owned company. The council should ensure that the officer has the appropriate experience, training and understanding to ensure they are able to comply with their duties as a director.
Employee officers owe a contractual duty to their employer to comply with the terms of their employment contract and employee code of conduct. This will include obligations of confidentiality, particularly in respect of commercially sensitive information.
Additionally, officers should comply with the seven principles of public life (the Nolan Principles) which set out the following obligations:
- Selflessness - holders of public office should act solely in terms of the public interest.
- Integrity - holders of public office must avoid placing themselves under any obligation to people or organisations that might try inappropriately to influence them in their work. They should not act or take decisions in order to gain financial or other material benefits for themselves, their family, or their friends. They must declare and resolve any interests and relationships.
- Objectivity - holders of public office must act and take decisions impartially, fairly and on merit, using the best evidence and without discrimination or bias.
- Accountability - holders of public office are accountable to the public for their decisions and actions and must submit themselves to the scrutiny necessary to ensure this.
- Openness - holders of public office should act and take decisions in an open and transparent manner. Information should not be withheld from the public unless there are clear and lawful reasons for so doing.
- Honesty - holders of public office should be truthful.
- Leadership - holders of public office should exhibit these principles in their own behaviour and treat others with respect. They should actively promote and robustly support the principles and challenge poor behaviour wherever it occurs.
As an officer and a director of a council owned company, duties owed to the company may at times conflict with duties as an officer to the council as employer, and vice versa.
An officer’s duty to the council is, however, contractual, not statutory so it can be (and often is) waived and specifically excluded as a conflict in the company’s articles of association. Officers of the council are not typically remunerated for their role as a company director. It is recommended that statutory officers including the Monitoring Officer, Head of Paid Service and s.151 Senior Finance Officer do not sit as shareholder directors due to their specific statutory roles at the council.
Councillors as directors
|
"Where authority members are to be appointed to company boards, the authority 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. If there is any doubt with regard to likely conflicts of interest that would make it difficult for the board to take decisions effectively, authority members should not be appointed to these roles." (pg.45, Local Authority Owned Companies: A Good Practice Guide) |
Councillors must comply with the councillor code of conduct. Councillors also have duties of confidentiality, particularly in respect of commercially sensitive information towards the Council (and the company).
As a councillor and a director of a council owned company, duties owed to the company may at times conflict with duties as a councillor to the council, and vice versa.
The report Local Government Ethical Standards (Committee on Standards in Public Life, 2019) notes that:
Councillors should always declare their interest if they hold a position with a council-owned or council-sponsored body. However, in general, we suggest that local authorities consider councillors or officers having observer, rather than director, status on a relevant board so as to minimise potential conflicts of interest.
Additionally, councillors should comply with the seven principles of public life (the Nolan Principles) which set out the following obligations:
- Selflessness - holders of public office should act solely in terms of the public interest.
- Integrity - holders of public office must avoid placing themselves under any obligation to people or organisations that might try inappropriately to influence them in their work. They should not act or take decisions in order to gain financial or other material benefits for themselves, their family, or their friends. They must declare and resolve any interests and relationships.
- Objectivity - holders of public office must act and take decisions impartially, fairly and on merit, using the best evidence and without discrimination or bias.
- Accountability - holders of public office are accountable to the public for their decisions and actions and must submit themselves to the scrutiny necessary to ensure this.
- Openness - holders of public office should act and take decisions in an open and transparent manner. Information should not be withheld from the public unless there are clear and lawful reasons for so doing.
- Honesty - holders of public office should be truthful.
- Leadership - holders of public office should exhibit these principles in their own behaviour and treat others with respect. They should actively promote and robustly support the principles and challenge poor behaviour wherever it occurs.
Directors must ensure they make decisions in accordance what is best for the company; they must not act on behalf of or in promotion of the council or their political party or their personal preferences. As a director, the councillors has a statutory duty to promote the success of the company and to exercise independent judgement. If the councillors cannot do this without compromising their duty to the council, they should resign.
Advantages and disadvantages of councillors or officers acting as directors
This is often a key discussion area -it is possible to permit councillors or/or officers to act as company directors, however appropriate mitigations and safeguards need to be put in place to ensure both those nominated to be directors do so without risk of conflict and the council as a company member has its interests protected and risk appropriately managed.
It is important to appreciate both sides of the debate. It should also be recognised that any relationship is liable to change over time. While being aware that the role can work both ways, it is fundamental that the legal responsibilities of a director are observed.
Audit Scotland sets out the advantages and disadvantages of council members or officers (council nominees) acting as directors in its report, Councils’ Use of Arm’s-Length Organisations (2018):
Potential advantages of council nominees as board directors or trustees:
- Can improve the relationship between the ALEO [arm’s length external organisation] and the council.
- Can bring an insight into the council and its objectives and the broader community.
- Council representatives can gain valuable first-hand experience of service issues and different sectors.
These advantages can be achieved by councillors through strong council oversight of its shareholder interests through the Cabinet Sub-Committee or via board observer status.
Potential disadvantages of council nominees as board directors or trustees:
- Can bring additional demands to their already diverse role.
- Representatives may lack the background, skills or understanding required of the role.
- Risk of conflict of interest between their role on the ALEO and their role on the council.
- Negative impact on council decision-making where councillors withdraw from committees owing to conflicts of interest.
- Exposure to legal risks and personal liability.
- Risk to continuity if councillors lose their position if not re-elected.
How to identify a conflict
A conflict may arise at any time when carrying out numerous functions and it is therefore crucial that councillors and officers and always reflecting on the creation of conflicts within their day-to-day lives.
The content of this [paper] should offer you the knowledge required to identify what a conflict may look like and what steps to take to either avoid that conflict or appropriately deal with it.
In addition to the task of continuous self-reflection, councillors and officers should give particular regard to the creation of a new conflict or the presence of an existing conflict when:
- Making a council decision which impacts the company;
- When there are significant personal interests;
- There is a lack of scrutiny/oversight of own decisions and/or performance;
- Receiving gifts and hospitality;
- Accessing information, particularly information of a commercial or sensitive nature.
I'm not sure whether a conflict exists – what should I do?
If you are not sure whether a conflict exists, it is advised that you should always err on the side of caution and take advice from the Company Secretary (or their nominee) and/or the County Council's Monitoring Officer. In taking advice, ensure you state the specific potential conflict and the circumstances which give you cause for concern to ensure appropriate advice can be given.
If you are presented with the circumstances of having to making a decision and you are not sure whether there is a conflict of interest, if in doubt, it is best to take a cautious approach and ensure you do not participate in any decision making as either a company director, councillor or officer until such a time that you have sought the appropriate advice regarding the potential conflict.
How to report a conflict
If a conflict exists, you should:
- Notify the Company Secretary (or their nominee) of the conflict and notify the county council's Monitoring Officer as soon as possible and in any event prior to any further decision making.
- Declare any conflicts on a meeting by meeting basis on specific agenda items.
Process for managing conflicts of interest
|
In The Governance of Council Interests in Companies – Code of Practice (2018), para 10.3, Lawyers in Local Government notes that: Procedures must be put in place for dealing with conflicts of interest. Conflicting interests should be declared on every occasion and in accordance with the rules in the company’s articles or in relevant council codes of conduct. A reminder at the beginning of a meeting can be effective. (…) Training on awareness of conflicts of interest is important, and the use of an annual signed statement serves as a reminder. It is important that non-executive members receive updates periodically. Non-executive directors should also be able to access advice when required with regard to how they should act; for example, by withdrawing from the discussion." (pg.51 Local Authority Owned Companies: A Good Practice Guide) Conflicts of interest protocol There must be a formal protocol to ensure that local authority members and officers are aware of potential conflicts of interest when performing their role for the local authority and their role in respect of the company. The protocol should set out how they should act in such circumstances. The protocol should recognise that conflicts may be reduced if local authority members and officers with designated roles acting for the local authority are not also appointed to senior positions in the company. " |
Where a matter (other than a disclosable pecuniary interest) arises at a meeting which affects:
a) Your own financial interest or wellbeing;
b) A financial interest or wellbeing of a relative or close associate; or
c) A financial interest or wellbeing of a body included under non-pecuniary interests, you must disclose the interest.
You may speak on the matter only if members of the public are also allowed to speak at the meeting. Otherwise, you must not take part in any discussion or vote on the matter and must not remain in the room unless you have been granted a dispensation. If it is a ‘sensitive interest’, you do not have to disclose the nature of the interest.
[You must also have due regard to the Protocol for Dual Hatted Members and this Guidance for Council-Appointed Directors. In cases of uncertainty, you should seek advice from the Monitoring Officer.]
Process
- Outset - declaration: potential Council appointees to a company should complete declaration of interest forms before their appointment is made;
- Training: training on identifying conflicts of interest should be given to each appointee, as arranged or commissioned by the Monitoring Officer;
- Potential conflicts: if an officer or councillor considers a potential conflict exists between their ‘council’ and their ‘company’ role, they should confidentially discuss with the Monitoring Officer (or her Deputies) to determine whether a conflict exists on the council side and with the Company Secretary on the company side;
- Declaring the interest: the person should follow the Council’s and the company’s normal procedures for declaring and registering an interest; it’s important that both officers and councillors take full note of the content of agendas and whether the business to be transacted raises any potential conflicts; there will be a point on each agenda where interests should be declared. You must disclose any disclosable interest at the beginning of any meeting or decision-making session at which a matter relevant to your interest is considered;
- Stand down from discussion: having declared a conflict of interest, there should be no taking part in a decision about the issue. Unless dispensation has been granted by the Conduct Committee, you may not participate in any discussion of, vote on, remain in the room for, or discharge any Executive or non-Executive function related to any matter in which you have a disclosable pecuniary interest;
- Ethical wall: in the case of an officer who may have a conflict between their roles, the Monitoring Officer may consider implementing an ‘ethical wall’ between the person and their access to information, or their influence towards fellow officers; this would be recorded and proportionate to the circumstance;
- Annual update of registers of interest: there should be an annual reminder to each officer/councillor to update their registers of interest to encourage continued thinking about potential or emerging interests.
- Where a matter (other than a disclosable pecuniary interest) arises at a meeting which affects:
a) Your own financial interest or wellbeing;
b) A financial interest or wellbeing of a relative or close associate; or
c) A financial interest or wellbeing of a body included under non-pecuniary interests, you must disclose the interest.
You may speak on the matter only if members of the public are also allowed to speak at the meeting. Otherwise, you must not take part in any discussion or vote on the matter and must not remain in the room unless you have been granted a dispensation. If it is a ‘sensitive interest’, you do not have to disclose the nature of the interest.
You must at all time comply with the County Council's Constitution, as amended from time to time.
Indemnity and insurance for directors
The county council has in place officer and councillor indemnity insurance.
Conclusion and operational arrangements
Given the review of best practice in this area it is agreed that where possible non- statutory officers will sit on council company boards as directors reporting back to Councilors who will have shareholder oversight at the Cabinet Sub-committee. Where this is not possible due to capacity the council will consider independent NED to represent council interests.