Paul Feild looks at the key points arising out of the non-statutory review into Nottingham City Council and Robin Hood Energy.
In October 2020 Max Caller OBE together with Julie Parker and their expert team were commissioned by the Secretary of State for the Ministry of Housing, Communities and Local Government (MHCLG) to carry out a rapid, non-statutory review at Nottingham City Council (NCC) to provide assurance to the Secretary of State on the governance and commercial and investment issues identified in the recent report in the Public Interest under section 24 and Schedule 7 of the Local Audit and Accountability Act 2014[i]. NCC cooperated well with the team and the work was done swiftly and published in November.
The review team was directed to consider and report back to MHCLG on the following themes:
- Governance, e.g. sense of strategic vision and direction, adequate internal processes; key senior posts filled with appropriate permanent appointments;
- Culture and leadership, e.g. positive and open relationships between councillors/officers and officer/officer; openness to challenge;
- Financial stability, e.g. ability to stick to budget plans; clear plans for closing identified budget gaps
- Services, e.g. reports from inspectorates/regulators/ombudsman;
- Capacity and/or capability to improve, e.g. acknowledging problems and engaging with sector support; evidence that attempts at improvement (possibly with sector support) have been effective.
I have followed Max Caller and his team over the years particularly with the governance issues at Tower Hamlets and Nottinghamshire County Council (see Localism – Best Value Inspections and Northamptonshire County Council, Local Government Lawyer, 06 April 2018 and The 2020 Guidance on Statutory Intervention and Localism, Local Government Lawyer, 20 August 2020). Max Caller’s reports are written with the understanding of a local government leader who as a practitioner has had to deal with transforming poor performance and weak governance to well performing and soundly run organisations.
Of course, as we know what set it all off was Grant Thornton’s report in the Public Interest concerning the issue of NCC’s governance arrangements for Robin Hood Energy Ltd. Grant Thornton (“GT”) said:
The Council set up Robin Hood Energy (RHE) in 2015 as a wholly owned not-for-profit subsidiary, in order to tackle fuel poverty in the City of Nottingham and provide a realistic alternative to the ‘big 6’ energy suppliers. As part of this, it aimed to provide better terms to users of pre-payment meters, who are more likely to be below the poverty line and cannot access the variety of discount arrangements offered to other customers of the big six suppliers. As expected, the Company made losses in its early years but reported a small profit of £202,000 in 2017/18 (although this was subsequently amended to a loss of £1.6m as a result of a prior period adjustment as part of the 2018/19 audit). In 2018/19, it made a large loss of £23.1m, giving it cumulative losses to 31 March 2019 of £34.4m
Despite having concerns about the quality of the financial information being produced by the Company, its deteriorating financial performance and therefore its ability to make repayments, the Council decided to make significant additional loans to the Company on several occasions during 2018/19 and 2019/20. Had it not done so, the Company would have immediately failed, and the Council would have lost most of the value of its existing stake in it, with £47.4m at risk at the time when the largest loan was requested in October 2019. The Council faced a choice between two highly undesirable alternatives, a scenario brought about in large part by its own inadequacies in holding the Company to account. Grant Thornton Public Interest Report (GTPIR) page 2
I am going to examine the governance side of Max Caller’s report focusing on the issue of organisation culture. When I use that term I mean how people in an organisation do things as a matter of practice. I will show that there are some common themes which seem to emerge with failure of local authorities.
The first cultural theme is not reading or listening to the warning signs and acting upon them.
It is clear in NCC as was the case in Northamptonshire CC that the Chief Finance Officer was concerned about the state of finances. To use an airplane analogy, consider a plane flying too low perhaps due to poor visibility and then the planes system sets off a cockpit warning. It indicates that if the plane carries on its current course there would be a crash. An auto announcement goes off and says, ‘Warning Controlled Flight Into Terrain- pull up pull up’(CFIT). What it means is that an airworthy aircraft will crash without pilot intervention.
So, in governance the CFO is warning of the collision course with economic reality and that must be acted up there or disaster will inevitably follow. GT said:
Over the past 4 years the Council has failed to act on the warnings, clearly stated by their Section 151 Officer (the statutory Chief Finance Officer), to manage their budgets on a rolling 3 year basis and bring forward savings proposals which reduced core expenditure and transformed or reimagined services.
1.4 The Council has a significant number of wholly owned companies in its portfolio. Roles and responsibilities in managing and directing these companies have not been understood in the past, liabilities have been incurred without the returns justifying the risk. Until this is addressed there will be continued high levels of risk.
1.5 The current Executive Member and top Officer structure is confusing and overlapping. Ownership and responsibility is diffuse and the processes employed prevent speedy decisive action. It is not fit for purpose in facing up to the Council’s current challenges. GTPIR
The problem is that for the beleaguered aircraft without added power to give lift, just pulling up will cut airspeed and lead to a stall = crash. So, the same with the company, if the CFO/ S.151 expresses a concern then unless there is an intervention of further input of cash and change of direction the council’s company will crash into insolvency. But that is not the end of the story because the officers of the company have a duty not to run at a loss that would lead to insolvency as that would be wrongful trading. So they will have their day of reckoning too[ii].
Furthermore, Max Caller found that Nottingham’s business affairs were problematic:
3.4 They have pursued a policy of ‘commercialisation’. In part, this has been seeking opportunities to maximise income streams, albeit, without much understanding of either the volatility or quality of these streams creating a risk issue in setting the budget. In part, purchasing investment properties outside the core purpose of the authority, aimed at producing income streams to avoid cutting the revenue budget and, in part, by holding some services or assets in a wholly owned or joint venture company structure. This appears to have been done, in some instances, to avoid redundancy costs or hoping to secure a return from increased trading. However, the Council has not understood the implications of this strategy and, in particular, the business environment in which they operate. The Covid-19 crisis has not caused this strategy to fail as of itself. It has just exposed the risks the Council were exposing themselves to. NSRNCC
3.5 …If there were councillors and/or officers who understood this business, they would have seen the huge risks and the likely limited rewards that this initiative implied. At the very least, the Council would have wanted to ensure that at both Executive and Non-Executive levels the business was fully understood.
3.6 The PIR documents what happened. The skill level at Board level was unable to critically appraise the trading position and a forecast profit outturned as a significant loss. Even worse, RHE did not even deliver the best rates in the market so the political objective was not achieved. By the time the Council recognised this and brought in seasoned industry professionals as interim managers to manage an exit it was a question of how to limit the damage. NSRNCC
So, to return to the doomed flight the perilous situation has been identified but the crew have to act or avoid an impending disaster. In aviation the situation whereby an airworthy plane has an accident is referred to as being due to ‘human factors’ and the CFIT scenario is due mostly due to the pilot not knowing exactly where he/she is[iii]. So too with RHE the information needed to construct and maintain a viable commercial flight plan was not gathered or acted upon.
Thus, not reading the signs is a serious failure of governance and management.
The second theme which emerges is the competence and capabilities of key persons involved in the governance.
Max Caller points to the problem of having the wrong people leading and holding RHE to account. There is a temptation with such enterprises to make councillors directors and to sit on shareholder panels. It is part of getting a buy-in and it is council money after all. But running a trading company is a very different activity to running public services not least in that the company is a separate entity with different and narrowly defined interests to the owners.
What this experience demonstrates however, is that for a local authority councillor, being a company director is not just about a 1-day training course on the difference in legal duties in the different roles. Being a brilliant ward councillor or an effective political leader are not necessarily the skills you need in assessing a business. You cannot run a 1-day course in how to read a balance sheet, profit and loss account and challenge the assumptions in the management accounts. Being a company director needs specific skills and experiences, either in the industry itself or the wider business environment. NSRNCC
To compound matter further the shareholder role was misunderstood. Caller says:
We would also emphasise the importance of the shareholder representative role. These are relatively recent appointments so the scope and effectiveness will need to be developed over time. Whether the importance of this role is fully understood at the moment is questionable. Minutes from a recent CGESC included the following statement:
The shareholder representative is the representative of the shareholder, i.e. the Council, and is authorised by the Council to protect its investment. By providing a report back to this Committee, this is the fulfilment of the role and provides the necessary assurance that the investment is protected.’
5.21. This implies that the role is merely a reporting one, when, in reality, it should be the key interface between the company and NCC, with a clear watching brief on the Council’s financial stake whilst ensuring the Council’s policy aims are being delivered to the optimum level. It is intended that reports will be presented quarterly to the CGESC on each company by the shareholder representative, but clearly there will be monthly / bi-monthly reviews in the companies where the shareholder representative and non-executive board members will need to monitor performance and hold management to account. NSRNCC
Max Caller observes NCC defined the role of the shareholder representative as a ‘representative of the shareholder’ which apart from being a self-reference tautology was then limited to reporting back being the ‘fulfilment of the role’.
So, the shareholder role was wrongly set but this was compounded by not properly involving the key statutory officers and by that, I mean the S.151 officer and the Monitoring Officer. If it is funded with council resources, they do need to know what is going on. But their role can be frustrated by carrying on as if the company is a different world, rather than remembering it is a vehicle owned by the Council and ultimately funded with public money. But the company is likely to commission its own finance advice and its own legal advisors. Max Caller observed:
one of the major causation factors for the position the Council now finds itself in is the inability to recognise, respect and take action on the advice the Section 151 officer (S151 officer) was providing. Over a period of years, the position she had correctly identified was delayed in reporting, not supported by other senior officers, and resulted in no effective action being taken. This was not aided by the structure of the Council, which had established posts in spending and delivery areas which properly needed to come under the professional oversight of the S151 officer. In a similar vein, the team also noted that it was possible for legal advice to be sought and proffered to the Council without the clear oversight of the Monitoring Officer. Such an approach completely undermines the Statutory Officer roles that these officers are required by legislation to play and is completely unacceptable. NSRNCC
So for RHE there was an intrinsic failure in governance by a structure of limiting the role of the shareholder and the S.151 statutory officer views not being given weight and acted upon and the Monitoring Officer not knowing what legal advice was being given.
Certainly in the case of the statutory officers, they need to make sure their supremacy in terms of financial and legal advice to the Council is firmly carved in stone within their council’s Constitution. This message needs to be made clear and any consultants be so informed and given marching orders if they don’t comply. In my experience external legal advisors’ liaison partners will be fine about a ‘keeping the council in the picture’ relationship.
The periodical New Scientist has had a long running feature called ‘Feedback’ in which they examine inter alia the principle of ‘normative determination’. The thesis is that your name will have an influence on what you do. Clearly the legend of Robin Hood inevitably means for many folks - robbing the rich and giving to the poor. Not going to be good optics to a Conservative government, but that is not what brought RHE down, it was governance. In a nutshell the evidence is that the local authorities governance and accountability of RHE was flawed, statutory officers were kept out of the information loop, their concerns were not addressed and there was a fundamental built into the system misunderstanding as to what shareholder accountability meant.
In terms of action points, I would recommend that your council constitution spells out in black and white the supremacy of the Chief Finance Officer in the financial affairs of the council and the Monitoring Officer in matters of legality and their role in oversight of council special purpose vehicles (companies). Certainly, in the case of Teckal companies and Council majority shareholder companies the statutory officers need to know what the financial situation is and what legal advice these bodies are receiving. Sure, it is more work but they are needed.
Secondly, a review needs to be carried out of shareholder representatives and council appointed directors. It does no one any favours to have appointees who have not been trained for the job or do not have the time to devote to properly understand what is going on. Frankly, the default position should be the retention of professional non-executive directors to serve on council company boards. Equally an advisor needs to assist the council shareholders. If that had been so they would have said let’s be clear about what my role entails. I would be confident the professional director/advisor could have assisted in ensuring the shareholders knew what was going on.
With best value and the four ‘C’s of compete, compare, consult, and challenge, it is the challenge which is the hardest for fear of the accusation of being non-collegiate. Well you cannot challenge if you do not know what is going on, which is why directors need to understand the business of the companies.
Can it be concluded that there needs to be professional council appointees to the board and professional advisors to the shareholders? Yes. Furthermore, if the company memorandum and shareholders agreement do not do so provide, then change it.
For the statutory officers they too need to know what advice is being given. The law is on their side and they should be grateful to Max Caller in his timely and blunt restatement on governance of council company activities and why the role of the statutory officers matter.
Non-Statutory Review Nottingham City Council - Max Caller OBE November 2020
Report in the Public Interest concerning the Council’s governance arrangements for Robin Hood Energy Ltd – Grant Thornton 2020
[ii] This is important while the Localism Act 2011 S.4 requires a company / LLP to be used for commercial purposes, that will protect the council to an extent but there will still be liability if there is wrongful trading.
[iii] It is surprisingly easy to get into this state where perhaps due to low cloud an aviator can become disorientated. Indeed, it is one of the most common causes of fatal crashes.