Background

The role of a Chief Executive Officer in Victorian local government is essential to the delivery of council services for the community. Successful appointees to the position are accountable to the councillors who are their employer, to ratepayers, the media and local industry and to staff. They are also a crucial player in the council’s interaction with other levels of government.

Often the role of council and CEO are misunderstood. The council are elected under the Local Government Act to undertake their duties in the best interests of the people in the municipality by providing the overall policy and strategic direction. One of the most important decisions a council makes relates to the employment cycle of their CEO, who is the only person council employs. CEOs manage council's operations and business including its delegated functions and powers, employ staff, deliver projects and implement council decisions including the budget and council plan. This is a unique and complex role given the political nature, service delivery and business imperatives.

The Local Government Inspectorate has reviewed existing arrangements between councils and CEOs, including the complete employment cycle of recruitment, performance management, tenure and separation. This was completed for the purpose of identifying opportunities to strengthen employment practices and performance management, with the overall goal of ensuring the best overall outcome for the community.

Previous work by the Inspectorate together with the Local Government Act review has identified a number of issues with the employment relationship between CEOs and councils. The way in which both new and reappointed CEO contracts are negotiated, prepared and executed has at times been problematic, prompted in part by a misunderstanding by councillors of their roles and obligations in this process and/or limited experience or capability in human resource management.

Instances have occurred in which the proposed contract has not been subject to proper consultation with councillors; the proposed appointment and contract may not be subject to a proper report and recommendations to the council; or the council has not formally adopted or executed the contract. Each of these circumstances could pose an unintended financial risk for the council.

The Inspectorate is aware of instances where CEO performance reviews have not been appropriately conducted or where review outcomes were not formally reported and adopted by the council. There was also many examples of a lack of capability among the employer in managing the CEO review process.

The Inspectorate consulted a cross section of current and former CEOs and mayors and the peak representative organisations and reviewed relevant reports and publications on the topic. In particular their views were sought on the way in which both new and reappointed CEO contracts are negotiated, prepared and executed and on performance management of CEOs by councils. Views were also sought on the appropriate length of CEO contracts and the termination process.

Case study 1

An Inspectorate investigation found that contract negotiations had not been properly conducted and ratified for three separate contracts for the same CEO at two different metropolitan councils.

Contracts were negotiated by two mayors to give favourable terms to the CEO, which also left the employer exposed to substantial financial risk due to costly exit clauses.

The same CEO was investigated while previously at another council, leading to the successful prosecution of two mayors for misuse of position by exceeding their authority in agreeing to contract arrangements during the CEO appointment process.

Case study 2

The Ararat Commission of Inquiry found there was no sound or defensible reason for the termination of the CEO on 7 July 2017. The Commission found that the CEO was paid $171,000 in excess of what was legally necessary without any sound or defensible reason.

The Commission also found that the majority of councillors failed in their obligation to act in the interest of the municipality at arm’s length from the CEO in the decision to terminate the contract and by failing to obtain independent and impartial advice on the applicable termination payment.

There appeared to be no appreciation that the sum of $271,044 gross paid to the CEO as an ex gratia payment raised risk issues as to whether the council had paid over and above the CEO’s contractual entitlements.

In another example, the Ombudsman was concerned about CEO severance packages, particularly the lack of transparency to council and the community. The Ombudsman called for guidance to be provided on all remuneration packages to ensure the packages were in the community’s interest.

Case study 3

A review of two successive CEO contracts at a regional council revealed a termination clause had been included over and above sector standards. The clause allowed council to terminate the agreement for any reason, provided the CEO is compensated for early termination with the full remaining value of the agreed remuneration package. In effect, this would mean that a council could be liable, based on an average CEO salary, for nearly $1 million if an early termination was sought after only 12 months. This may expose the council to significant financial risk, which would ultimately be borne by the ratepayer.

Updated 4 December 2019