Democracy in Britain III

They bypass the democratic
will of the people. Are ALEOs
even legal?

Gordon MacGregor

While we shouldn't give way to excitable speculation about shadowy cabals – Glasgow City Council is more reminiscent of Tammany hall than la cosa nostra - it is plain that the matrix of power and accountability in Glasgow has become much more fluid and intangible during the past decade. While once we had a fairly predictable vertical arrangement of administration we are now treated to a barely intelligible spaghetti of partnerships amongst stake-holding agencies, both public and private.
     Central to this re-vamped structure of service delivery has been the creation of a number of 'arm's length' private companies (ALEOs) and limited liability partnerships to take over many of the functions of the council, leaving the latter free to do….well, other things. The attraction of these is obvious; accountable only to their shareholders, outwith the ambit of administrative responsibility, able to apply for alternative sources of funding, they are far more attractive than dull civic committees. And there is a political bonus. They bypass the democratic will of the Glasgow electorate and represent nothing short of a coup.
     Unsurprisingly, the boards of these limited companies are heavily weighted with councillors though leavened with some notable worthies. This allows the council effectively to keep control of its interests while benefitting from the de-regulated business structure. Unfortunately, one of the inconveniencies of running a limited company is that much of the company's business becomes open to public scrutiny and there are some awkward legislative requirements that must be followed: the Companies Act 2006 for instance.
     There is a particularly nasty devil lurking in the detail of that statute which could threaten the future viability of ALEOs, may remove them from effective council control and could even lead to individual councillors footing the bill for any loss caused by their decisions. The devil is to be found in section 175 of the Companies Act. This provides a legislative mechanism to deal with directors' conflicts of interest.
     Say, for instance, I am a director of a company created to manage a city council's cultural and sporting interests. I (or a member of my family) am also a council officer: I may reasonably be deemed to have a conflict of interest. This should mean that, when faced with any decision that might be affected by my conflict of interest, I have a duty to avoid it. I should declare my interest and – following best practice – I should absent myself. If I do vote on the decision then my vote should be discounted and I may be held in breach of a director's duties. Another option is that the shareholders can authorise my conflict of interest and I can then proceed to vote, but only where the 'situation cannot reasonably be regarded to give rise to a conflict of interest'. This process should be on-going and followed for every potentially conflicted decision.
    
That is the process we might expect to see in operation at Culture and Sport Glasgow Ltd. But they operate far more pragmatically. Following the recommendations of a report by the council's director of finance, the trading company CSG CIC altered its articles of association 'to specifically state that a director will not be deemed to be in breach of his/duty to avoid a conflict of interest simply because he/she is an officer, elected representative or employee of Culture and Sport Glasgow (as the holding company) and/or Glasgow City Council'.
     This would appear to be a deliberate attempt to contract out of – rather than follow – the clear legislative provisions on directors' duties. The law does not allow you just to deem that something is not a conflict situation when it patently is. Nevertheless, it was a step in the direction of acknowledging a conflict of interest. The charitable company - which makes the big decisions - made no effort to alter its articles and appears not to have taken any action to address the situation. This may seem like a fine legal distinction but much may turn on this small point.
     The board minutes (available on the company's website) show that both CSG and its trading company are ignoring s.175. Unless conflict situations are authorised – or councillors absent themselves – on an individual and on-going basis then the upshot of ignoring the rules could be far-reaching. Councillors in breach of their directors' duties may be sued by the company itself, by an insolvency practitioner, or by a shareholder. If they (or their families) make any direct or indirect gain they may have to account for it and if they cause any loss by their breach they may be found directly responsible for it.
     But if CSG were to act lawfully then the situation might be worse. If conflicted councillor/directors fulfil their duty to avoid conflict situations then they would be prevented from voting and that leaves a minority of unelected, independent directors pulling the levers of the company (assuming that a quorum can be reached). This would seem to defeat the entire purpose of creating these ALEOs.
     The concerns are acute in the case of CSG since it is one of the key players involved in the delivery of the 2014 Commonwealth Games. If the company does not follow the legal requirements in its decision-making then the effects could be felt personally by the directors further down the line, especially if they enter into litigation following the games (as happened with the Homecoming festival). In that event, these 'robust' individuals may find that the wheeze of sitting on the board of a limited company is something of a double-edged sword. Bear in mind that this article has only discussed the way CSG is being run. Whether the breach of legislation is an endemic problem across Glasgow's ALEOs is a moot and worrying point.
     But how was this situation allowed to develop in the first place? We are told that the creation of Culture and Sport Glasgow followed a council review and report and that the company was created on 1 April 2007. Since section 175 of the Companies Act was due to come into force on October 2008, we can only assume that the council was aware of its restrictions and had devised a method of dealing with it: one that did not entail simply ignoring its requirements.
     Accountability and council control has only been achieved thus far by attempting to circumvent the legal requirements. If the law is followed properly, the whole structure of ALEOs becomes a little shaky. When the minutes of the next CSG board meeting are posted on its website it will be interesting to see if the restrictions of the Companies Act are being observed. But at least Councilor Purcell may breathe a little easier on that count: he ceased to be a director of CSG in November 2009.

Gordon MacGregor is a lawyer