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Two external observers will be brought in - at a cost of hundreds of thousands of dollars - after an independent evaluator identified a leadership void and strained relationships.
Sir Tim (73) is the focus of much of the concern, particularly related to his ability to fulfil significant aspects of his role.
He has said he will not resign, however.
An independent review, released yesterday, was carried out by Richard Thomson, a clinical psychologist and former two-term Dunedin city councillor.
He highlighted a series of problems - including the mayor’s difficulties becoming increasingly apparent, the lack of a working relationship between the mayor and chief executive Clare Hadley, and the input of new deputy mayor Nobby Clark, who is sometimes viewed as rude and aggressive.
"Many interviewees reported a range of obvious concerns, including short-term memory deficits, confusion, and the need to be closely managed by both council staff and senior councillors in order to chair a council meeting.
"They report increasing incidents of embarrassment during meetings which a, generally, compassionate council has done its best to hide from the general public."
Mr Thomson noted that after Toni Biddle’s resignation as deputy mayor this year, she had commented the role was stressful due to being required to "do the mayor’s work for him".
Mr Thomson said he received a letter signed by three southern mayors, as well as a phone call, expressing concern.
The mayors had observed a decline in Sir Tim for years, but this had increased in recent times.
Sir Tim dismissed this as a vendetta.
Mr Thomson said some councillors were concerned Ms Hadley had become too heavily involved in governance.
Sir Tim also startled his colleagues when he delivered a rambling speech yesterday, including a withering review of the conduct of some councillors.
He supported bringing in the two observers, believing they could serve as a check on councillors and staff.
Central Otago Mayor Tim Cadogan confirmed he was one of the signatories to the letter.
He said he firmly believed concerns needed to be raised and he was pleased a process was now in place to manage the situation.
Waitaki Mayor Gary Kircher, also the provincial sector chairman, said it was a difficult situation.
He suggested Sir Tim was struggling to do the job as well as he had in the past.
"We want Sir Tim to be remembered well."
Mr Kircher also expected the outside observers would get a solid grasp of the overall picture.
The third signatory, Clutha Mayor Bryan Cadogan, said he raised issues to the team leading the inquiry to assist colleagues in challenging times.