Local authority-owned companies can deliver innovation, regeneration and value for money. But their success depends on councils striking the right balance between oversight and interference, says Julia Gregory, Non-Executive and Senior Independent Director, Chair, and Trustee.

Local authority-owned companies (LATCos) are now a familiar part of the local government landscape. They deliver services, build homes, regenerate places and, in some cases, generate commercial income for councils under pressure. But their success depends on something less visible than business plans or balance sheets: governance.

Get governance right and LATCos can combine public purpose with commercial agility. Get it wrong and the consequences are often costly, reputationally damaging and politically fraught.

For councils, the challenge is striking the right balance between control and oversight. Too much intervention and the company becomes little more than an outsourced department. Too little governance and risks grow quietly until they become crises. In my experience as a non-executive director across several local authority companies, most governance failures fall into one of two traps: over-control or under-governance.

The tension at the heart of LATCos

LATCos operate in a hybrid space. They are owned by democratically elected councils and often deliver public services, yet they operate under company law with boards legally responsible for running the organisation.

That dual identity creates inevitable tension. Councils want accountability for public money and delivery against political priorities. Boards need the freedom to make commercial and operational decisions. Good governance does not remove this tension. It manages it.

The starting point is clarity of purpose. When councils and boards share a clear understanding of why the company exists and what success looks like, governance becomes significantly easier

When oversight becomes overreach

One of the most common governance challenges in LATCos is shareholder overreach. Councils should set the strategic direction for their companies. They define purpose, objectives and risk appetite. But problems arise when councils start behaving like managers rather than owners. When councillors or officers bypass the board to instruct company executives directly, governance becomes blurred and decision-making slows. Boards cannot govern effectively if key decisions are being made elsewhere.

At a recent governance workshop with LATCo leaders, participants highlighted that unclear roles between councils, boards and executives remain one of the most common governance risks across the sector.

A well-run board must be able to govern — not simply implement decisions made outside the room.

The shadow director risk

There is another, often overlooked risk when councils overstep their role: the creation of shadow directors.

In company law, a shadow director is someone who is not formally appointed to the board but whose instructions directors are accustomed to follow. This can arise when a council officer or member routinely directs company decisions outside formal shareholder processes. This is more than a technical issue. Shadow directors can carry many of the same legal duties and liabilities as formally appointed directors.

More importantly, their presence undermines governance. If decisions are effectively made outside the boardroom, accountability becomes blurred. Directors may feel pressure to comply rather than exercise independent judgement — even though their legal duty is to act in the best interests of the company.

The solution is not less engagement between councils and their companies, but clearer governance channels: shareholder committees, defined reserved matters and structured dialogue with the board. Clear boundaries protect everyone involved.

The quieter risk: under-governance

The opposite problem is assuming that once a company is established, it can largely be left alone. This often comes from a well-meaning desire to allow commercial freedom. But councils remain accountable for public assets and public money.

Without structured oversight, risks may not be surfaced early enough. Reporting can become overly positive, and financial pressures can build unnoticed. Feedback from a recent governance session with LATCo leaders suggested that reporting and assurance are often ‘adequate but not always insightful.’

Good governance is not about more reporting. It is about the right information arriving early enough to support good decisions.

Governing better, not controlling more

LATCos will continue to play an important role in how councils deliver services and pursue local growth. But their success depends on governance that is disciplined, transparent and well understood The goal is not to control council-owned companies more tightly — nor to distance councils from them.

It is simply this: to govern them better. When the balance is right, LATCos can deliver exactly what they were created for: innovation, sustainable services and real public value for the communities they serve.