Local Government Committee,

Meeting date: Tuesday, May 9, 2000

Official Report 155KB pdf

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Ethical Standards in Public Life etc (Scotland) Bill: Stage 1

I welcome Brian Jamieson, who is the secretary of Scottish Enterprise. We have invited you to give evidence to the committee because there has been discussion about the possible inclusion of local enterprise companies in the Ethical Standards in Public Life etc (Scotland) Bill. The Executive's view is that that is not possible. The committee, however, felt that it ought to be possible and that it might be desirable. We are keen to know your views on that.

The usual procedure is that I ask the witness to make an opening statement and then take questions from members.

I am the secretary of Scottish Enterprise and my responsibilities include corporate governance issues, of which this is, obviously, one. I will give a brief statement of Scottish Enterprise's view on the matter and on the context in which that view has been formed.

Scottish Enterprise is a statutory, non-departmental public body. We welcome the bill's proposals because they are likely to increase public confidence in bodies such as SEN. We operate a code of corporate governance, which was revised following recommendations from the Scottish Affairs Committee and from the Nolan committee. We keep that code under review and introduced further refinements to it on 1 April.

The local enterprise companies are not statutory and were not mentioned in our founding legislation, which was the Enterprise and New Towns (Scotland) Act 1990. They are not public bodies and their board members are not public appointees. The LECs are private companies and are subject to the Companies Acts and to an operating contract with Scottish Enterprise, which obliges them to operate a code of corporate governance that is similar to that which Scottish Enterprise operates but takes into account their status as private companies. The Companies Acts contain a detailed code for the dealings and actions of directors, to which the boards of local enterprise companies must pay heed.

The Nolan committee considered the corporate governance of LECs and found examples of good practice, which they recommended to other bodies. They made recommendations, which the LECs incorporated in their codes of corporate governance and on which they report to us annually.

It is Scottish Enterprise's view—a view that is shared by Highlands and Islands Enterprise and by the Scottish Executive, with which we have discussed the matter—that it would be inconsistent with the structure of Scottish Enterprise and its devolved LECs to impose statutory obligations directly on the LECs. It would be unnecessary to do that because it is open to the Scottish Enterprise board to pass on the same obligations that one would find in the statutory code to the LECs through operating contracts. Scottish Enterprise must also ensure that those obligations are consistent with the Companies Acts, to which the LECs are subject. That is the route that we have taken in all previous matters of corporate governance.

If a statutory code were imposed directly on the LECs, there would be a risk of conflict with the Companies Acts because there might be areas that overlap. The codes that we have developed might, in some respects, be more stringent than the statutory code and the LECs would have various documents to refer to. The statutory route would also imply a change of status for LECs, which would, properly, be a separate policy consideration for the Government. As members will be aware, a ministerial review is under way of their powers, functions, operations and structure, which is due to be completed by the summer recess.

An analogy could be made with the position of higher education bodies. The Scottish Higher Education Funding Council is a statutory body, so the new legislation will apply to it. However, the higher education bodies, which are funded by SHEFC and some of which are companies, are not included in the bill. That seems to be the appropriate way to deal with local enterprise companies. In higher education, SHEFC lays down recommended codes of corporate governance, which are followed by the higher education institutions.

I will be happy to answer members' questions.

The committee had already identified many of the points that you made. Unfortunately, we do not agree with you. We are concerned by the fact that LECs and higher education bodies are exempt from the bill. You said that you were a non-departmental public body; the key word there is public. Although I accept that LECs have many good practices, the bill is aimed at dealing with bad practices. As Scottish Enterprise is a public body, and we are trying to ensure good practice, we want the local enterprise companies to be covered by the bill.

You consider yourselves to be public bodies. You deal with the public and with public money and services, but you want to be exempt from the remit of a bill that aims to encourage good practice in public bodies.

We do not wish to be exempt from the demand for good practice. The only matter on which we differ is the method by which good practice should be implemented. We are delighted that, as an NDPB, Scottish Enterprise is subject to the bill. We think, however, that the imposition of obligations on the local enterprise companies—which are not, technically, public bodies—would be done best in the way in which good corporate governance has been achieved until now. We think that the LECs have a good story to tell—the Nolan committee gave them a good report and their corporate governance is good. LECs have often adopted principles of corporate governance from the private sector because they have private sector board members, who are often from large companies. They have used various initiatives such as the Hampel report and the Turnbull report to improve their corporate governance. Therefore, we think that they would have no difficulty complying with the obligations in a statutory code, but we do not think that that would be the best method of applying those obligations to them.

The committee has encountered a difficulty in that many councillors are appointed to local enterprise companies because they are councillors. They would be subject to the new legislation, but the other members of LEC boards would not. That is the anomaly that we are trying to address.

I noticed that the committee had discussed that matter—in the context of area tourist boards, I think. I am not an expert on the constitution of area tourist boards. However, I know that councillors are on LEC boards because they are councillors, but they do not sit on them as councillors; they do not represent councils and they are not nominated by them. While they sit on LEC boards, they do so as board members of private companies. Their primary duty is to discharge that responsibility. I doubt whether the new legislation would apply to them while they act as local enterprise company board members, because they are not discharging the functions of councillors in their roles as board members.

The Executive is examining that question.

Can you give an example of the conflict that would arise with the Companies Acts, if LECs were covered by the bill?

I am handicapped by not knowing what would be in the statutory code. However, if it laid down obligations on conflicts of interest, as the Companies Acts contains provisions on conflicts of interest, one would need to decide which statute ruled. That seems to be an unnecessary complication, given that board members are already governed by an extensive code in the Companies Acts.

In your experience, when you discuss matters or policies that affect councillors' areas—councillors are appointed to boards in the areas that they represent—do councillors declare an interest before they take a decision?

Yes. Previously, I worked for a local enterprise company. The councillors on the board regularly declared interest in matters in which the council had a role—which was often, in view of the level of joint working by the two bodies.

I acknowledge all that you have said. You say that the codes that you have developed are, if anything, stricter than those that we are proposing in the Ethical Standards in Public Life etc (Scotland) Bill. The committee will, therefore, have to re-examine the matter.

Surely the key issue is that the public should be aware that there is an overarching bill that deals with all companies that handle public money and work in the public sector. Any organisation that the committee spoke to could point to this or that exception to rules in the Companies Acts. It is important to restore public confidence, not just in elected members of local authorities, but in NDPBs by accepting the code. Surely no possible conflict with the Companies Acts is insurmountable. It might be an irritation, but it would not prevent the bill from being applied effectively to LECs.

It is possible to conceive of the code being drafted in such a way, but one would need to draft different codes for different purposes. Scottish Enterprise would regard that as an unnecessary complication. If the code were extended not only to LECs, but to other companies, one would need to consider codes that were custom-made for each body. We already have custom-made codes for our network.

We are saying the opposite—we want one overarching code. You have your own codes, but so do many local authorities. For seven years I was a member of Glasgow City Council, which has a code. The idea is that there should be one overarching code, so that the public knows where it stands, rather than every organisation or institution that deals with the public sector having a different code. In such a situation, an issue of ethics might involve a breach of one code but not of another. That would lead to anomalies such as those that the committee is concerned with.

That is why I said that the Scottish Enterprise board, which has discussed the matter, is entirely open to the suggestion that—so far as is practicable—we should impose all the provisions of the statutory code on the local enterprise companies. However, we would like to do that in the way in which we have proposed, instead of going down the statutory route. Technically, LECs are not public bodies. Applying the code to them by statute would create a precedent and would suggest a change in the status of those bodies. It is for Government policy to determine the status of local enterprise companies. Since their establishment under the 1990 act, they have not been public bodies.

Are you saying that this cannot be done, or that it ought not to be done? Are you saying that, if the Parliament so decided, it would be possible for it to apply the code to LECs, but that you think that that would be undesirable?

I am not aware of anything that would make what you suggest a constitutional impossibility. However, it would not be our preferred option.

Do we have details of the code that Mr Jamieson is talking about? Could you tell us a little about the policing of the code?

I do not think that you have the code. I can supply copies of the current code as it applies to local enterprise companies. Local enterprise companies submit an annual report to Scottish Executive on their compliance with the code and the steps that they have taken to enforce it. That is the formal route. In practice, I am consulted regularly by the company secretaries of local enterprise companies about issues arising from declarations or conflicts of interest and the appointment of board members. There is a constant dialogue.

We will end the discussion there. When we are dealing with the bill at stage 2 we will reflect on what has been said. Thank you for your attendance. It was useful to get Scottish Enterprise's perspective on the matter.

Before we leave this item, we must agree the order of consideration of the bill. Are we agreed that during stage 2 of the Ethical Standards in Public Life etc (Scotland) Bill, each schedule should be considered immediately after the section that introduces it?

Yes.

The purpose of that is to ensure the smooth handling of the bill when it comes before the committee at stage 2.

Before we move on to item 4, I would like to return quickly to item 2. I should have indicated that Jack McConnell's contribution was the last evidence that we will take in the budget process. At our meeting on 23 May, a draft report—to be submitted to the Finance Committee—will be available for the committee to consider. If members have specific comments that they want included in the draft, they should contact Eugene Windsor.