Sarah Sasse: I'm joined by Mark Greenburgh, our head of public sector, who's going to talk about the governance of arms' length bodies. So Mark why has governance become such an important issue for public service delivery?
Mark Greenburgh: Well I think it's been coming up the agenda for some time, you can track back to the Audit Commissions report in 2005 when they identified that increasing complexity increased the risk and reduced the accountability of joint ventures. And since the Localism Act in 2011 and the changes to the health service we've got clinical commissioning groups, we've got mutuals, we've got joint ventures between public bodies and with the private sector, all of which increase the complexity and the opportunity for conflicts of interest to arise.
Sarah: In terms of governance, what external controls are there and how do they work?
Mark: Ok there are a number of external controls, the first of which is probably the statutory framework within which the company's going to operate so that might well be the Companies Act or it might be the vires under which it operates such as the Localism Act or the Health and Social Care Act.
Importantly though, there are things like the external auditors, the National Audit Office or the Public Accounts Committee. There are also some softer controls which may come from things like the committee on standards in public life which will look at the ethical governance of public service providers or from regulators such as the HCA or monitor and then there are controls like the press or independent members who may be looking at the governance arrangements.
Sarah: What other controls are there?
Mark: Well internally to the companies there will be things like the memorandum and articles of association which will govern how directors are appointed or dismissed. There will be things like the statutory duties on individual officers, the accounting officer, the monitoring officer or chief finance officer and that will be the same whether you're in the private sector or on the public sector side and then thirdly there's things like the contracts of employment and having imported into your duties to the company the director fiduciary accountabilities which would apply to a director of the board. And finally perhaps the accountability that non-executive board directors or elected members might bring to the participation in those companies.
Sarah: What are the particular issues for health or local government?
Mark: Well let's take those separately. For health I think there's an inbuilt tension, the whole concept of clinical commissioning groups is to have GPs managing the budgets but it's also GPs who will often be providing the services. If you see the polyclinics which are now emerging - which might well have pharmacies, opticians, dentistry services or physiotherapy provided on the same premises - you will find the CCGs actually giving contracts to themselves.
Well clearly there's an inherent conflict there for the participation in those contracts and in the management of those contracts for those on the board. In local government it's a little bit different, but I'd say they key issue there is to be clear whether it's elected members who are going to serve on the board or whether it's the paid officials and not to have a mixture of the two serving alongside each other which can create a lot of internal tensions.
Sarah: And what conflicts commonly arise?
Mark: Well I'd say the most common conflict is that of confidential information because directors of a company have a duty of candour to report to the board all material information which is within their knowledge. And you can see can't you, that if you're the finance director of a service provider and you're serving on the joint venture board and you know that there's information which is relevant to that company, you find yourself in a position in which you can't report either to the joint venture board or indeed to your original employer important information which will affect the affairs of those respective bodies.
The same applies if you're the local authority cabinet member with responsibility for a particular service area and you know there's going to be a budget reduction that's going to be passed on to the joint venture, you're conflicted again between the duties to the company and the duties to the council which you serve.
Sarah: How do you balance the respective powers of the shareholders and the board?
Mark: Well the first thing to establish is the level of control which is necessary. So quite often with these arms' length bodies they're established so as to fit within the exemption to the public procurement rules which is provided for public sector bodies trading with other public sector bodies, what we call "the Teckal exemption".
Now in those cases it's necessary for the shareholders to exert a meaningful level of control over the day to day affairs of the company. But in any event, I think it's very sensible for the shareholders to retain reserved powers over things like employment contracts, levels of remuneration, principle contracts with third parties and land transactions. You'll also want to see the power to appoint and remove directors retained by the shareholders without having to go through the Companies Act procedures and to make sure that they've got the power to require the directors to deliver up material information about the affairs of the company, its contracts and its financial affairs.
Sarah: What are the risks if you don't get it right?
Mark: Well there might be some statutory risks, for example breaches of the Companies Act or civil remedies such as injunctive relief or an account of profits where you're talking about fiduciary duties which have been engaged. I think more importantly than that there might be deadlock in the company where the participating shareholders don't agree and that could affect the finances and perhaps above all the service delivery to essential public service users.
Sarah: What are the key points to consider when entering into arms' length governance arrangements?
Mark: Well I think the first thing to remember, and this doesn't matter whether you're on the private sector side or on a public authority, is to be clear about the roles and responsibilities of the shareholder and of those appointed to serve on the board.
The second point is to remember to have an escalation route in the event of disputes, be clear that you don't have the finance directors or the chief executives of the respective organisations on the board of the company so that where there is a dispute you can escalate it to that forum without going to the courts.
The third thing is to think about the employment contracts of those people who are serving on the board and make sure that they have the extended duties in there such as the duty of confidentiality and the duty of candour.
And finally, think about the default controls, so that where things do go wrong you have got the power to either appoint additional directors, to remove directors, to inspect documents that are in the custody of the arms' length body and that you've got the power to audit their affairs and make sure that they remain Teckal compliant for example.
Sarah: Thank you Mark.
Mark: Thank you very much.