Part 5: Appointing directors

Governance and accountability of council-controlled organisations.

In this and the following three Parts, we discuss the role of a local authority, and its elected members, in relation to its CCO(s). The local authority's primary responsibilities under the Act are:

  • to appoint the directors of a CCO (see Part 5);
  • to set the direction of the CCO through the statement of intent (see Parts 6 and 7);
  • to monitor the CCO's performance (see Parts 6 and 7); and
  • accountability for the CCO's performance (see Part 6).

In this Part, we consider:

Legal requirements for appointing directors of a council-controlled organisation

The Act requires a local authority to have an objective and transparent process for appointing directors to a CCO.30 The Act provides that a local authority can appoint only a person with the appropriate skills, knowledge, or experience to contribute effectively to the entity's achievement of its objectives:

57 Appointment of directors

(1) A local authority must adopt a policy that sets out an objective and transparent process for—

  1. the identification and consideration of the skills, knowledge, and experience required of directors of a council organisation; and
  2. the appointment of directors to a council organisation; and
  3. the remuneration of directors of a council organisation.

(2) A local authority may appoint a person to be a director of a council organisation only if the person has, in the opinion of the local authority, the skills, knowledge, or experience to—

  1. guide the organisation, given the nature and scope of its activities; and
  2. contribute to the achievement of the objectives of the organisation.

A CCO's governing document (such as a trust deed) might also contain provisions about who may be appointed to a CCO's board or the method of appointment.

Appointing directors is an important role, because it is one of the local authority's principal means for influencing the performance of a CCO. In large part, good governance depends on the performance of the directors. A transparent process is important so that the public can have confidence that directors are appointed on merit and drawn from a wide range of possible appointees.

If a local authority complies with section 57 of the Act, the board of a CCO should be made up of a diverse range of people who are able to bring relevant expertise to the organisation. For the board to be fully effective, it should comprise directors with a range of complementary skills and experience to ensure that ideas are challenged and tested and that decision-making is robust.

The local authority's purpose for a CCO will determine its choice of directors. A CCTO is likely to need directors experienced in working in a commercial environment, at least some of whom will be skilled professional directors. A CCO operating a community facility might benefit from drawing a director or two from the community.

Chair of the board

The local authority usually appoints the chair unless the CCO's constitution states otherwise. An effective chair will influence the success of the board. The chair will be the spokesperson for the entity and will be the primary point of contact between the local authority and the entity. The chair will manage board meetings and play a leadership role in guiding the direction of the CCO.

The local authority should aim to appoint a chair who is experienced in governance and who understands the context in which local government subsidiaries operate.

Independent directors

The Financial Markets Authority has noted that:

Independence of mind is a basic requirement for directors … Directors with an independent perspective are more likely to constructively challenge each other and executives – and thereby increase the board's effectiveness.31

To meet the statutory requirement for directors with appropriate skills, knowledge, and experience, the local authority is likely to need to appoint directors who are independent of the local authority. The desirability of engaging commercial expertise in a council business is often a reason for setting it up as an arm's-length entity.

The general view is that independent directors can be appointed to provide:

  • commercial and governance expertise;
  • diversity on the board; and
  • an insulating layer between the political activities of the Council and its operational arms.

Conversely, it is argued that independent board members do not always appreciate the legislative obligations of the parent local authority or that the expectations of a CCO differ from those of a private organisation. Commercial directors may know little about local government and may not understand the political context and expectations for increased transparency.

Local authorities should recognise that new directors from the private sector might not have experience of the challenges of the local government environment. A CCO's induction for new directors should be designed to address that need.

Councillors as directors of CCOs

Local authorities may want to appoint councillors to the boards of their CCOs.32 Reasons may include a desire to prioritise the parent local authority's objectives and expectations and to provide a way for information to flow between the subsidiary and the local authority.

The same statutory provisions apply to appointing an elected member as a director: the appointment process should be objective and transparent, and the elected member should have the requisite skills, knowledge, or experience to contribute as a director.

Our review identified a range of opinions about appointing elected members. Each of the following arguments, for and against, was made to us several times during interviews.

Elected members say that councillor-directors:

  • are likely to have a good knowledge and understanding of local government and of the local community;
  • contribute valuable "political nous" to a CCO board;
  • provide an extra layer of assurance that the subsidiary will be kept in touch with the "mood" of the Council;
  • add value by managing matters about the CCO that are before the Council;
  • contribute to the diversity of the board; and
  • can act as a representative for their community's interests.

Councillor-directors can also add to the Council's understanding of the affairs of the CCO. Around the Council table, they are able to provide clarity to their colleagues about matters affecting the CCO. They can ensure that the Council has an informed debate that focuses on the main issues for decision. That said, councillor-directors may be unable to participate in decisions on matters about the CCO because of their interest as a director.

However, those we interviewed also identified disadvantages in having councillors on boards. The principal arguments made against councillor-directors were:

  • councillor-directors often lack the skills to perform well as a director;
  • there is an inherent conflict between a councillor-director's obligations to the Council and their community and their obligations to the subsidiary; and
  • councillor-directors are more likely to be subjected to, and swayed by, pressure from community groups, so that it may be more difficult for a councillor-director to maintain confidentiality of commercial or other information about the CCO's business.

There is a view that the potential for conflict between a councillor-director's interests and responsibilities as a councillor and as a CCO director is reduced where the councillor is a director of a CCO holding company. The reasoning is that the holding company will be focused on managing the local authority's investment in its CCOs, rather than on the specific business of each CCO. However, a director of a holding company has a particular need for business acumen and governance experience.

Most independent directors and CCO board chairs we spoke to believed that the disadvantages of councillor appointments outweigh the benefits. The unanimous view was that CCO directors should be competent to carry out the governance function effectively, and some noted that some councillor-directors lack that competence.

We consider that appointing elected members to CCO boards should be the exception. If local authorities wish to appoint elected members to their subsidiary boards, then the appointment should be open and transparent, and subject to the same selection criteria as for independent directors.

We acknowledge the argument that elected members can make a contribution to CCO governance. We also recognise that councillor-directors may add value to a board by being a Council voice, by ensuring that the CCO's objectives are aligned to those of the local authority, and by providing a community perspective. However, a councillor-director must have the necessary skills and experience to contribute fully to the governance of the CCO.

If a local authority appoints councillors to the boards of its subsidiaries to ensure that the CCO remains mindful of its shareholder's expectations, the councillor's presence on the board should not be a substitute for a formal system for monitoring and accountability. There are other, more transparent methods for the parent local authority to influence a CCO, such as the statement of intent process, a letter of expectations, the dividend policy, and approval of major transactions.

In our view, effective monitoring and oversight, including setting clear expectations about the CCO's purpose and strategic alignment, should obviate any need for councillor-directors to provide an additional layer of oversight.

Local authority managers as directors of CCOs

A local authority may want to appoint its chief executive or another senior officer to the board of a CCO.

Many of the advantages and disadvantages with councillor-directors will apply also to managers as directors. There is also real potential for a manager's role as adviser to the Council to conflict with his or her obligations to the CCO as director.

Appointments process

A local authority must adopt a policy that sets out a "transparent and objective" process for appointing a governing body with the skills and competencies to carry out their duties effectively (see paragraph ).

The policy should cover such matters as:

  • who is eligible (or not eligible) for appointment – for example, elected members, staff, residents of the district;
  • the process for identifying which skills appointees should have;
  • how candidates will be identified;
  • how candidates' skills will be assessed;
  • the composition of the appointment panel (for example, does it include external members?);
  • the role of the CCO Chair (for example, will the chair be consulted or be a member of the appointment panel?); and
  • the remuneration of directors.

Each local authority we spoke to had appropriate appointments policies for independent directors. However, the processes for appointing councillor-directors were less clear. An exception was Christchurch City Council.

Many local authorities do not include the CCO chair in the process of appointing directors. Some chairs said it would be useful for them to take part. This was because they have greater knowledge and experience of current board members and are better able to determine the "fit" of a preferred candidate. Although it is the right of the local authority to appoint directors to its boards, we recognise that there may be value in including the chair in the appointments process.

Remuneration of CCO directors

The usual practice is that councillor-directors receive directors' remuneration in addition to their remuneration as councillors. A CCO director is responsible for the governance of the CCO. The position, if discharged properly, involves work, so remuneration is appropriate.

Wellington City Council adopted a policy in 2011 that councillors appointed to subsidiary boards are not remunerated. One councillor-director told us that this policy was intended to take the politics out of appointments. However, he thought that councillor-directors are now "second class citizens" because they are treated differently from remunerated independent directors.

29: We use the terms "director" and "board" in the same way that the Act does (see section 6(3)(b)) to include trustees or other office holders responsible for the governance of a CCO.

30: This requirement applies to all appointments to council organisations, which include CCOs.

31: Financial Markets Authority (2014), Corporate Governance in New Zealand Principles and Guidelines A Handbook for directors, executives, and advisers, page 13.

32: However, the Auckland model for substantive CCOs has a statutory prohibition on appointing councillors or local board members to the governing body of a substantive CCO (apart from Auckland Transport, where two councillors can be appointed).