The Inspectorate sought views on a range of topics related to the employment cycle of the CEO from the three Victorian peak bodies that represent councils: LG Professionals (LGPro), Municipal Association of Victoria (MAV) and Victorian Local Governance Association (VLGA).
As part of the review, the Inspectorate asked the peak bodies to give their views on any current gaps in the employment cycle process and improvements that could be made. In particular, the Inspectorate sought views on the method in which new and reappointed CEO contracts are negotiated, prepared and executed and on the current performance management of CEOs by councils. Peak bodies were also asked about the appropriate length of CEO appointments without the requirement to formally advertise the position.
LGPro gave a detailed response to inform all aspects of the Inspectorate’s review, while the VLGA provided a summary of its key issues and recommendations. MAV indicated the relevance of its submissions a, b to the directions paper for the new Local Government Act and Local Government Bill exposure draft to the issues raised.
In its response, LGPro considered the relationship between CEO and council to be critical and any legislative change or sector improvements put in place need to strengthen the relationship and help to improve, or at the very least safeguard, the perception of the sector.
It was recognised by LGPro that this relationship is potentially more difficult where there is a perceived power imbalance; inexperienced and unskilled councillors (non-professional or skilled backgrounds) and an experienced CEO. The same could be said to apply where long serving councillors appoint an inexperienced CEO. It was indicated that while the issues identified by the Inspectorate are significant, there was a prevailing view that they are prominent rather than prevalent.
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VLGA and LGPro acknowledged the high proportion of recruitment activity for CEOs over the past 12-18 months. They also saw there was a variation across the sector on processes undertaken to recruit a CEO. It was also noted there was a broad range in the capability of councils to undertake the recruitment process. Both variations can lead to less objectivity in the process.
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Issues: Variation in contracts; conflict of interest in staff being involved in preparation of contracts; process to recontract the CEO and advertising requirement for CEOs unnecessary; lack of formal oversight, deliberation and resolution procedures.
Potential solutions: a sector-specific minimum standard contract; councils being mandated to receive independent advice; remove requirement to publicly advertise CEO contract; mandate formal oversight process.
Peak bodies generally agreed that standardised contracts, independent advice on contract matters and maximum payouts on exit clauses were vital in gaining the best value and transparency for the community.
LGPro broadly supported the establishment of a sector-specific minimum standard contract. While it was acknowledged that a model based on a templated contract is in place in many municipalities, this is not consistent and even the templates vary in terms of minimum requirements on matters such as notice, benefits or exit clauses.
In addition to minimum standards, it would be helpful to develop a list of optional clauses for matters that are at local discretion, but could provide some guidance to councils and/or CEOs on appropriateness or relevance.
On the matter of exit clauses, it was recognised that there is a significant diversity of outcomes currently in this area. While the negotiated outcome may need to depend on location and risk factors associated with the role, ‘no fault’ exit clauses should have a 12 month maximum and six month minimum payment associated with them.
With regard to tenure, LGPro recommended fixed term contracts, with a maximum five year term. It supported a legislated requirement that no contract should be agreed with an expiry date that falls within the next projected caretaker period.
It was strongly suggested that the current requirement for councils to publicly advertise their intention to renew the contract of their CEO in advance of their decision making on the matter be removed on the basis that the employment relationship is between the CEO and the elected council, and the advertising process only serves to undermine the credibility of the CEO and destabilise the workforce.
Key issues of concern:
- The full council was sometimes not privy to the contractual arrangements and there was a need for a formal council oversight, deliberation and resolution process
- The need for appointments/ reappointments and performance reviews to be done in an objective manner
- The capability of some councils to negotiate and enter into contract arrangements.
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Issues: internal staff involvement leading to conflict of interest; susceptibility of the performance management process to a loss of objectivity.
Potential solution: all councils should obtain independent professional advice, though this comes at additional cost.
LGPro stated that the focus needs to be on developing a sound framework which would include:
- an independent facilitator drawn from an accredited panel of suppliers.
- a set of basic KPI’s that cover annual plan qualitative and quantitative measures with capacity for “local issue” KPI’s
- administrative support for the process.
LGPro submitted that politics impacts on CEO performance and perception of performance, which was seen as one of the reasons why CEO turnover is always high after a council election, and has been high across 2017 and 2018.
It was also acknowledged that any system will work effectively providing that there is goodwill/intent on the part of all parties.
While some councils use the advice of internal staff in the CEO recruitment and contracting process, this was not recommended as good practice due to potential conflicts of interest arising from the power imbalance, and should be actively discouraged.
In its draft submission on the Local Government Bill exposure draft, MAV observed that the new provisions provide for the council to obtain independent professional advice in relation to the matters dealt with by the policy. The submission recommended that the obtaining of independent advice should be at the council’s discretion and not mandated.
Case study – Lack of councillor capability in managing CEO
A recent Inspectorate investigation found inadequate performance management over a long period of time at a regional council. In this case it was found that councillors expressed reservations about CEO performance but did not have the knowledge or skills effectively performance manage. The organisation was unable to provide independent assistance or advice. The consequences led to a mismanaged organisation and serious governance failures.
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Issues: separation payments made to CEOs outside contractual arrangements can have a financial and reputational impact on councils (see case studies 2 and 3). Termination conditions vary between councils.
Potential solutions: separation payments should not exceed terms agreed to in CEO contracts. Standardised termination conditions within the contract would provide fairness to the council and the employee.
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There was broad acknowledgement that councils would benefit from guidelines on how councils should go about the full employment cycle, including a remuneration policy.
It was generally agreed that if the sector is to operate within best practice guidelines that they should be developed and “owned” by the sector.
VLGA and LGPro expressed similar views on the guidelines, in that they should include items such as:
- principles supported or based on contemporary practice in public and private sectors;
- training provided to councillors on a regular basis on recruitment/selection and overseen by Local Government Victoria;
- consideration of the public report at council meetings regarding the process and outcome to improve public perception
- role of independent expert advice
- need to review guidelines regularly, e.g. after each election
- role of council staff.
Overall recommendations included that:
- a working group be established to create best practice standards and guidelines for the CEO recruitment and review process and that these be appropriately disseminated
- workshops are offered to councils to increase their understanding and capability in relation to good governance.
Peak bodies acknowledged remuneration was a contentious issues, both by councils and the community. They generally supported a principle-based remuneration policy that provides guidance to councils on appropriate remuneration ranges and processes for remuneration reviews. This should incorporate transparent guidance on ‘in-contract pay adjustments’ to apply in circumstances where lower than market remuneration rates may be set upon appointment but warrant review based on demonstrated performance and delivery.
Peak bodies agreed that the following standard benchmarks should be used in determining remuneration review:
- KPI outcomes
- salary benchmarked to the equivalent market rates for a similar sized council group
- CPI movement.
The concept of performance related bonuses should be discouraged on the basis of difficulties in administering the process in a way that is consistent and transparent.
In summary, any revised approach to these matters should provide CEOs, councillors and a majority of the community with confidence that there is a fair and reasonable process in place. Peak bodies also supported the proposed requirement to have a CEO employment remuneration policy mandated by the state government.
In its submission to the Local Government Act Directions Paper, MAV expressed concerns that the “proposed monitoring and reporting on compliance with the CEO remuneration policy” by the audit and risk committee “may detract from the key audit and risk role and require members with additional expertise”.
Reviewed 06 December 2019