11 April 2024 – David Smith and Michael Hodgkinson
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(10.00 am)
Mr Stevens: Good morning, sir, can you see and hear me?
Sir Wyn Williams: Yes, I can, thank you.
Mr Stevens: If I may call Mr Smith.
David Smith
DAVID JOHN SMITH (affirmed).
Questioned by Mr Stevens
Mr Stevens: Mr Smith, my name is Sam Stevens and I ask questions on behalf of the Inquiry. Could I ask you to state your full name, please?
David Smith: Hello, my name is David John Smith.
Mr Stevens: Thank you for giving your evidence to the Inquiry today. I want to turn to your witness statement, it should be in a bundle of documents in front of you, dated 23 February 2024 –
David Smith: Yeah.
Mr Stevens: – and running to 98 paragraphs.
David Smith: Yeah.
Mr Stevens: Can I ask you please to turn to page 32, as I understand you want to make some clarifications to paragraph 92.
David Smith: Yes, that’s right. Simple changes, really. When I wrote this, I wasn’t able to see the board minutes that gave me the exact time when I took over as Chief Customer Officer and Paula took over as Managing Director. So in here –
Mr Stevens: When you say “Paula”, you mean Paula Vennells?
David Smith: Paula Vennells, yes, sorry. In here we talk about November/December 2010. In fact, I’m now aware that – from the board minutes, that Paula took over I think it was the middle of October, the exact date, I think, is in that board minute but around the 18th, which actually means that that paragraph is slightly wrong. It should say “In around September 2010 it became clear around the direction”. And also to clarify that I handed over the day-to-day running to Paula Vennells as per the board minute on 18 October. Otherwise, I’m happy with the statement.
Mr Stevens: Just as a matter of clarity as well, the last sentence you say, “I was still a Director of the POL board”, Post Office Limited board, currently it says for six or seven months.
David Smith: Yes, forgive me, the exact date, I think, is in the Companies House records, it’s sometimes in July so it’s – to reflect the exact date, I think, would be better.
Mr Stevens: Can I ask you please to turn to page 35 of your statement.
David Smith: Yes.
Mr Stevens: Do you see a signature?
David Smith: I do.
Mr Stevens: Is that your signature?
David Smith: It is.
Mr Stevens: Subject to the clarifications you just made, are the contents of the statement true to the best of your knowledge and belief?
David Smith: Yes, they are.
Mr Stevens: That statement now stands as your evidence to the Inquiry. I’m going to ask you some questions about it and other matters.
Dealing very briefly with your professional background, you qualified as a chartered accountant in 1989; is that right?
David Smith: Yes.
Mr Stevens: You joined Royal Mail Group Plc in August 2002?
David Smith: Yes.
Mr Stevens: Your prior board experience before joining Royal Mail was being Finance Director at two other companies?
David Smith: Yes.
Mr Stevens: At this point, I think it’s probably helpful to try to summarise the structure of Post Office Limited and Royal Mail when you took over as Managing Director.
David Smith: Okay. I mean, the actual company structure is quite complicated because there are lots of subsidiaries but, in simple terms, as a group holding company, Royal Mail Group, a subsidiary of that company was the Post Office Group and, underneath the Post Office, there were then some individual subsidiaries, as well. So my responsibility was as a Director of Royal Mail Group, and then also the Managing Director of Post Office and all its subsidiaries.
Mr Stevens: Let’s go through it stages. You were a member of the Post Office Limited Board?
David Smith: Yes.
Mr Stevens: That was a – well, there were two other group companies I want to ask you about at the time. One was Royal Mail Group Limited, and the other was Royal Mail Holdings Plc?
David Smith: Yeah.
Mr Stevens: Is it right that Post Office Limited was a subsidiary of Royal Mail Group Limited?
David Smith: I believe so. I can’t remember the exact structure but, yes, inside the group it was a subsidiary.
Mr Stevens: Royal Mail Group Limited was a subsidiary of Royal Mail Holdings Plc?
David Smith: Yes, I believe so.
Mr Stevens: Of Royal Mail Group Limited and Royal Mail Holdings Plc, which, if any, board meetings did you attend of those two companies?
David Smith: I think I attended all of the – both of them, because I was a director of both companies.
Mr Stevens: Which board of which company was responsible for the group?
David Smith: It would have been the – I think it was the Plc board at the top, it’s the top holding company.
Mr Stevens: Thank you. Back to your career. Before joining Post Office, you served as Finance Director of Parcelforce, which was a part of the Royal Mail Group?
David Smith: Yes.
Mr Stevens: Between 2007 and 2009 you were Managing Director of Parcelforce?
David Smith: That’s right.
Mr Stevens: You were appointed as Managing Director of Post Office Limited in April 2010?
David Smith: Yes.
Mr Stevens: Prior to joining Post Office Limited as Managing Director, what was your understanding of the culture of management within Post Office Limited?
David Smith: I didn’t really have a strong perception of it. My time was in Parcelforce, which is a very separate subsidiary of the group, doing entirely different things. So the only perceptions I really would have had was the occasional group meetings where the MD of the Post Office and the MD of Parcelforce would have met, which would have been part of the management reporting. But inside the company itself, I didn’t really have anything to do with the Post Office before I joined it, so I couldn’t really comment on the culture.
Mr Stevens: It’s right that your predecessor as Managing Director of Post Office Limited was Alan Cook?
David Smith: That’s right.
Mr Stevens: When you took over as Managing Director, did you have a meeting with Alan Cook to discuss the company?
David Smith: I can’t recall the precision of it but I’m sure we would have had not one meeting but number of conversations. I’m sure we would have done.
Mr Stevens: Please could we bring up your witness statement, page 9, paragraph 21. You say that your role as MD and company director at POL, Post Office Limited, was:
“… no different to any other CEO or director role.”
That can come down. Thank you.
So whilst this was a different title, Managing Director, did you see your role as Managing Director of Post Office Limited as akin to a CEO of another company?
David Smith: Yes, in that it was about setting the strategy and direction and resources for the business. That’s what I meant by that.
Mr Stevens: You remained Managing Director of Post Office Limited – well, we’ve discussed it – until October, started in April and then October 2010. When you joined in April 2010, did you expect your appointment to be a long-term one?
David Smith: Yes, very much so.
Mr Stevens: We’ll come back to that in due course. Before moving on, I want to talk about some codes and principles of corporate governance. Did you apply or take into account any codes relevant to corporate governance and management?
David Smith: The structures of the business as the wider group were well established before I joined, so I didn’t change anything, but I was well aware, having been a director of a number of companies, of their general requirements and corporate governance.
Mr Stevens: To what extent did you pay regard to the Financial Reporting Council’s Combined Code of Corporate Governance when you were Managing Director of Post Office Limited?
David Smith: I think I was aware of it through the sort of annual audit cycle, and would have taken counsel, for instance, from the auditors as part of the management letter process, as to the controls that were needed and the governance steps that were needed. So, to that extent, I was aware of it.
Mr Stevens: In your view, were your expectations for the standards of corporate governance in a publicly owned company like Post Office Limited, different to your expectations for a publicly listed company?
David Smith: Yes, there is a difference. There’s obviously the listing requirements from the Stock Exchange, for example, that lay out clear distinctions in terms of requirements. So I was aware there was a difference but I don’t think I spent a large amount of time thinking about that in that particular period.
Mr Stevens: Would any of those differences, which you understood there to be have affected your executive function as Managing Director?
David Smith: I don’t know that I thought about that at the time, I’m sorry.
Mr Stevens: I want, then, to look at the executive function and the Executive Team. We’ve touched on the Post Office Limited Board already. In your witness statement, you describe a level down of management called the Executive Team –
David Smith: Yeah.
Mr Stevens: – and you chaired the Executive Team. Is it fair to say that the Executive Team was responsible for running the Post Office business?
David Smith: From a day-to-day perspective, yes.
Mr Stevens: The attendees would have included Susan Crichton?
David Smith: Yes.
Mr Stevens: You’re nodding yes. At that point, she was Head of Legal of Post Office Limited?
David Smith: I think that was her title, I can’t be entirely certain but, yes, that was the broad area of her responsibility.
Mr Stevens: And Paula Vennells attended those meetings?
David Smith: Yes, she did.
Mr Stevens: Her role was Network Director?
David Smith: Yes.
Mr Stevens: They all, on the Executive Team, reported to you?
David Smith: Yes, I think that’s right.
Mr Stevens: As Managing Director, would you accept that ultimate executive accountability for the operation of Post Office Limited rested with you?
David Smith: Yes.
Mr Stevens: In your witness statement, you say that the Executive Team met once a week?
David Smith: Yeah, I think so. This is vague in time. We would have generally been meeting to talk about day-to-day matters on a weekly basis. We probably met more formally once a month and that would have been used to inform anything that then went up to the POL board.
Mr Stevens: Can you just give us a précis of what would have been discussed at the weekly meetings?
David Smith: So it would have been typically, maybe, we’ve got a new product launch, are we ready for it? There’s a particular question that’s come in that we need to think about or answer from maybe the operation. We might have been talking about the sort of systems rollout that was taking place at the time because we were looking at that on a daily/weekly basis in my early days. So it’s the day-to-day what needs to be fixed tomorrow, what do I need to be aware of immediately type of things, rather than anything, say, more strategic or long-term.
Mr Stevens: Just so we’re clear, Susan Crichton attended those meetings?
David Smith: I believe so, yes.
Mr Stevens: The monthly meetings within the Executive Team, were they where the more strategic decisions were made?
David Smith: Yes, they were more structured so we would have been, for instance, looking at the financial results for the month, looking at the progress on the change programmes in the business, we might have been reviewing investment cases that we wanted to take forwards to the Board. So it was definitely more strategic, yes.
Mr Stevens: You referred to preparing things to then be taken up to the Post Office Limited Board?
David Smith: Yes.
Mr Stevens: Who was responsible for the transferring information from the Executive Team to the Post Office Limited Board?
David Smith: Well, as a combination, we had a Company Secretary. The agenda would largely be discussed between the Company Secretary, myself and the Chair and there would have, I believe, been a set of standing agenda items through the year that we would have been expected to look at, for example, health and safety, and so those items would have been collated into an agenda and then the Company Secretary would have pulled the appropriate papers together, probably with the help of my own Exec Assistant.
Mr Stevens: Just to clarify, firstly, the Chair and the Company Secretary, they didn’t attend the Executive Team meetings?
David Smith: The Chair definitely didn’t. I’m not sure about the Company Secretary.
Mr Stevens: In terms of who was aware of or on top of the discussions at the Executive Team level –
David Smith: Yes.
Mr Stevens: – and what information from the Executive Team level needed to go up to the Board, that was your responsibility?
David Smith: It would have channelled through me, yes.
Mr Stevens: Who was responsible for passing relevant information from the operation of Post Office Limited to the parent company?
David Smith: I – well there were a number of informal channels but the formal channel was I had a monthly report that would be sent to the Group and would be part of the Group Board pack and at the Board meeting, there would be a standing item where I would talk through the matters that the main Board needed to know about.
Mr Stevens: The monthly – the formal monthly channel –
David Smith: Yes.
Mr Stevens: – which person was that report to?
David Smith: I would imagine, but can’t be certain, it would have been the Company Secretary of the Group.
Mr Stevens: What were the informal channels?
David Smith: Well, all – it was group matrix. So, for example, communications, we’d talk to the Communications Team centrally; finance, we’d talk to the Finance Team centrally, et cetera. So those informal matrices would sometimes have a hard line into me, sometimes have dotted line into me and maybe a hard line into the Finance Director of the Group but those were what I meant by informal channels.
Mr Stevens: So is it fair to say that, from the Executive Team, you had a responsibility to pass information to the Post Office Limited Board and to the parent company –
David Smith: Yes.
Mr Stevens: – but there were other lines of communication below you between the Post Office Limited company and the parent company?
David Smith: Exactly so.
Mr Stevens: Did you ever find that the corporate structure within the Group obstructed or hindered the flow of relevant information through the Group?
David Smith: I’m not sure that I did. The only reason for the pause is, as we get to the back end of my time in the Group, we are starting to think about the possibility of separating Royal Mail from Post Office and we, therefore, started to think about the difference in terms of duties of care that those two groups have got and, whilst I can’t pick out a specific example that says, “Here was something that caused friction here”, I’m sure that we were aware of that governance change and we’re managing our way through it, during the sort of later months of my time in the Group. But, other than that, no.
Mr Stevens: It sounds like nothing stands out to you as a particular bit of information that you couldn’t get to the relevant part of the Group because of the Group structure?
David Smith: No, no, no.
Mr Stevens: We don’t need to turn it up but, in your statement, you refer to one of your responsibilities to make sure that the right control systems were in place for risk management and finance. Would you agree that identifying, analysing and managing risk is a very important part of running a company?
David Smith: Yes.
Mr Stevens: Would it be fair to say that it goes to the heart of the role of the company executive?
David Smith: Yes.
Mr Stevens: What steps did you take, on becoming Managing Director, to satisfy yourself that the Post Office business had identified all relevant risks in its business?
David Smith: Yeah, um, the business, like the wider Group, ran a formal risk register and also had internal audit functions to review the controls and systems that were in place across the Group.
I reviewed those systems as part of my induction process, ie have we got a risk register, is it covering the right sorts of risks, et cetera. I also had, or we had, a regular process for an Audit Committee where risks would be reviewed, and we also had a standing agenda to review outcomes of each of the audits each month as they came through the organisation.
So there was on that side and then, from a financial side, we obviously had the internal Audit Teams also looking at finance controls and finance systems, and we also had the external auditors working with us. I had known E&Y in my previous roles in the business, so I was comfortable that the types of audits that they were likely to perform would be sufficient to satisfy our duties, and also met with E&Y as part of the process for preparations for audit, reviewing management letters, and of the signing of the accounts process itself.
Mr Stevens: Can you just, for the record, provide the job title of Ian Wise (sic)?
David Smith: Sorry, Ernst & Young –
Mr Stevens: Oh, E&Y, sorry!
David Smith: Ernst & Young, the auditors.
Mr Stevens: Yes, I apologise, I misheard you. To what extent did you consult with teams, such as the legal department within Post Office Limited, when considering the risk register of how to identify a risk?
David Smith: I can’t remember exactly how this would have worked at the time. But, certainly, the – all parts of the senior management team would have been involved in building the risk register, all parts of the management team, as in the Exec Team that I was describing earlier, would have reviewed the outputs of the risk register, and so Legal, just like all other departments, would have had the opportunity to go through and flag any concerns that they had got, and then we would have discussed what are the mitigants that we can put in place to ameliorate those risks.
Mr Stevens: With that in mind, I want to move to oversight of prosecution. In your witness statement – we don’t need to turn it up – but you say you were almost certain that Susan Crichton gave you a briefing on the work of the Legal Department when you joined as Managing Director?
David Smith: Yeah.
Mr Stevens: You say that that would have likely included the criminal enforcement work. Can you remember any further detail of the –
David Smith: I’m sorry, I can’t. My induction would have taken place through sort of April of that year. I do know that we set up a fairly extensive induction, so it was across all parts of the business, not just in the Head Office but going out to visit branches, for instance going out to the cash centres and all of those things. So I do know that was arranged and organised but I can’t remember the specifics, I’m afraid, of what would have been discussed and disclosed in each of those sessions.
Mr Stevens: You may have to forgive me for just going through this in stages. I want to ask what you think you knew at the time. Were you aware of the prosecution of subpostmasters for theft, fraud offences and false accounting when you were Managing Director?
David Smith: Yes, I would have been, yes.
Mr Stevens: Would that have been from the start of your time as Managing Director?
David Smith: It would have certainly been in the early days. It may not have been on day one but certainly as part of that induction process and also the fact that in the monthly management meetings we would have had standard reports from each department, and certainly I can remember the Legal Department would have laid out these are the current cases that we’re working on.
Mr Stevens: I want to come to those reports in a moment. Staying in with what you knew, were you aware that those prosecutions were pursued using data generated by the Horizon IT system?
David Smith: I don’t think I was initially, but certainly I was – I became aware of it. I can’t remember when but I did become aware of it.
Mr Stevens: At an operational level, who did you think was carrying out the investigations that led to those prosecutions?
David Smith: I was aware that there were a combination of people involved but that we had a security function whose day job it would have been to audit the branch, gather the evidence and bring it back into the business to consider what to be done about it.
Mr Stevens: You said “we had an audit function”, I think. When you say “we”, who do you –
David Smith: As in the Post Office, sorry.
Mr Stevens: Post Office Limited?
David Smith: Yes.
Sir Wyn Williams: Can I be clear Mr Smith, when you use the expression “we” or the expression “the business”, can I take it that you’re talking about the legal entity, the Post Office Limited?
David Smith: Sir, yes, I will try to be clear that, if I don’t mean that, I will put out what entity I’m talking about. But, so far, yes, that’s what –
Sir Wyn Williams: Yes, what I’m anxious to avoid any misunderstanding of crossovers between any part of Royal Mail and the Post Office, if you understand.
David Smith: Yes.
Sir Wyn Williams: So I’d like you to be precise, if you would.
David Smith: Yes, okay.
Mr Stevens: Again, at an operational level, who did you think was responsible for the decision of whether or not to prosecute a subpostmaster?
David Smith: I think that I believed that that was the Legal Team.
Mr Stevens: Which Legal Team?
David Smith: Sorry, under Sue Crichton. I don’t recall the structure underneath Sue but it would have been under Sue’s team.
Mr Stevens: So Post Office Limited?
David Smith: Yes, Post Office Limited not Royal Mail.
Mr Stevens: Again, staying operationally, who did you think was responsible for the conduct of those prosecutions?
David Smith: Again, the same team.
Mr Stevens: Now, there’s a difference between conducting a prosecution, investigations, et cetera. Who did you think was responsible for providing legal advice to Post Office Limited on the conduct of prosecutions and investigations?
David Smith: I was aware that we had a separate external legal firm supporting us. I don’t think I knew for certain, but I would have imagined that, between the Post Office Legal Team and any external support that they may have required, between them they would have made that decision.
Mr Stevens: To what extent did you think that, at an operational level, responsibility for any of those matters to do with prosecution lay with Royal Mail Group or Royal Mail Holdings?
David Smith: Well, in that it was a – that Post Office Limited was a subsidiary of the Group, there’s clearly a reporting line and responsibility there, but I was clear that the conduct of all of the decision making lay in Post Office Limited through the legal structure that I’d described earlier. Not at Royal Mail Group.
Mr Stevens: To what extent did you consider that the Post Office was in an unusual position, in that it was the alleged victim of crimes that it was investigating, that it investigated those crimes itself and then decided whether to prosecute them?
David Smith: I’m sad to say that at the time I didn’t really reflect on it in the way that perhaps I should have done.
Mr Stevens: Presumably you accept that, when carrying out the conduct of prosecutions, Post Office Limited was responsible for conducting them appropriately and lawfully?
David Smith: Absolutely yes.
Mr Stevens: As you say, at executive level, your evidence is that the Post Office Legal Department was responsible for the conduct of those prosecutions. Do you accept that you were ultimately responsible for ensuring that the Post Office Legal Department fulfilled its responsibilities to conduct investigations and prosecutions appropriately and lawfully?
David Smith: I mean, ultimately, as the Managing Director of that entity, yes.
Mr Stevens: What steps did you take to see that the prosecutions were conducted appropriately and lawfully?
David Smith: I think the initial conversations with Sue around the induction to the business gave me a flavour and a picture. I think the monthly reporting that came in through that structure to the Exec Team to review cases, but I didn’t go beyond that to review the individual cases and the conduct of the cases.
Mr Stevens: Please can we turn up your witness statement page 10, paragraph 24. Just before this – we don’t need to have it on the screen – you say that you’re responding to a question the Inquiry asked concerning risk and compliance issues arising from the prosecution of subpostmasters. In paragraph 24, you say:
“As a Crown Office, [Post Office Limited] dealt with the public money and therefore had a responsibility to protect the public purse.”
You expand on that. Towards the bottom, four lines up, you say:
“I cannot recall thinking that any risk or compliance issues arose from [Post Office Limited] undertaking this role, but with the benefit of hindsight, and in light of the wrongful prosecutions, I can see the inherent risks in the prosecutions taking place ‘in house’ and not by an independent enforcement authority.”
That can come down. Thank you.
What do you consider those inherent risks to be?
David Smith: I think that the sort of passage of time has shown that conducting the case, gathering the data, acting as the prosecution can lead you to a position where you might not think as independently as you should do about the quality of the information, have you disclosed everything? Have you presented the case in a balanced way? And I think those kinds of risks are clearly there. I think the other danger is that, potentially, the balance of probability might be stretched too far in terms of whether to take a case through a legal process or not.
Mr Stevens: Can I ask you to expand on what you mean by that?
David Smith: Yeah, so I think you should only take a case on where you think that, in layman’s terms you’re certain of the facts, you’re certain of what the case is, you’re certain that somebody is guilty. It is possible – I’m not sure that I ever saw this but it is possible that, you know, that 100 per cent picture might change. You might take a 90 per cent picture or an 80 per cent picture. I never saw that but that’s the type of risk that I was thinking about when I wrote that comment.
Mr Stevens: Why did it require hindsight to identify those risks?
David Smith: I think at the time I was not focused on the level of controls, the level of risks associated with what we can now see. That’s the issue.
Mr Stevens: Why do you think that was?
David Smith: Because, if we go back to 2010, as you’ll see earlier in my statement, the focus of the Board and the focus of the business was actually almost entirely around the separation of the Post Office from Royal Mail Group, a new party coming in from Government, the need to refinance the business, which was fundamental to its long-term existence, because it was coming to the end of a funding package with Government and, more latterly, the Bank of Ireland, sort of, final knockings of the banking crisis from 2008. And those elements, sad to say, were actually where the Board was fundamentally focused through most of the time that I was with the Post Office.
Mr Stevens: The fact that you didn’t identify those risks at the time, what do you think about that now?
David Smith: Well, with hindsight, it’s obviously very sad because, had we identified those risks, we might have been able to put in place better control mechanisms, better inspection mechanisms of governance, and we didn’t.
Mr Stevens: To what extent did you accept responsibility for not identifying that risk?
David Smith: I certainly think I am a part of it. As I said, the structures were there before I came, they were certainly not changed while I was there and, along with the rest of the Executive Team, we did review the risk registers, we didn’t flag this as a potential new risk to think about. But, ultimately, I managed that process.
Mr Stevens: Do you have any insight as to why anyone else in the team didn’t identify those risks or present them to you?
David Smith: No. I mean it’s like all risks in a risk register. If you ask me was Covid on that risk register? No, it wasn’t. You become aware of things, don’t you, and then you react to them, and this is one of those that we didn’t pick up at the time and should have done.
Sir Wyn Williams: I just want to be clear about what the “should have done” means, in that context, Mr Smith, and it’s a theme that has surfaced in various forms throughout the Inquiry and, if I can put it in this way, the debate between foresight and hindsight.
David Smith: Yes.
Sir Wyn Williams: My understanding of your evidence is this, and please correct me if I’m wrong: all the risks which you have elucidated in relation to paragraph 24 were foreseeable risks, at the time. However, because there were other, as you saw it – and I’m not challenging you on this for the moment – more important things to consider in the business, they took up your thought processes, rather than the foreseeable risks which you’ve identified; is that fair?
David Smith: Yes, I think so.
Sir Wyn Williams: Yes, fine.
Mr Stevens: Thank you, sir.
I just want to come, before we move on to a different topic, to the monthly legal reports. You referred to these earlier and you said that it would include lists of legal cases. Was that lists of all cases that Post Office Limited were involved with in terms of prosecutions?
David Smith: I can’t be certain of the detail here because it’s a long time ago, but I do recall that, as with all the other departments, they would have written out their performance overview of what’s happening and inside the Legal one would have been a summary of I think each of the cases that they were acting on at that point in time and the status of that and, if we needed to talk about them, because they were flagged as there’s something that needs to be resolved or an issue here, then they would have been discussed in the meetings.
Mr Stevens: So you said if we needed to talk about them because?
David Smith: Yes.
Mr Stevens: – it was flagged; can you recall any time when you did talk about them?
David Smith: I am not certain but would imagine that we would have talked about the Seema Misra case, but I’m not certain.
Mr Stevens: We’ll come to that in due course.
David Smith: Yes, I’m sure.
Mr Stevens: So you focused back on when you arrived. I want to now look at your knowledge of the IT system. It’s probably helpful, at this point, just to cover some terminology. The IT system that was in place between or used between 2000 and 2010, I’m going to refer to as Legacy Horizon –
David Smith: Of course.
Mr Stevens: – following the Group Litigation use of words, and the version of Horizon that was being brought in when you became Managing Director, I’m going to refer to that as Horizon Online.
David Smith: Okay.
Mr Stevens: In your statement, you say you were not aware of any bugs, errors or defects in the Horizon IT System when you joined. I assume that refers to Legacy Horizon?
David Smith: It actually referred to all of it because, when I joined, I didn’t really know anything about Horizon other than it was the system that was used to operate the business.
Mr Stevens: Did you think that the Horizon IT System would have been completely free of bugs, errors and defects?
David Smith: By the Horizon system do you mean Legacy or?
Mr Stevens: Let’s deal with both. Firstly, Legacy Horizon?
David Smith: So certainly in terms of the Legacy system, it had been in for many, many years. I didn’t envisage there would be material problems with it at that point, no. In terms of the online system, I was aware that we had been going through pilot very quickly into my tenure, as we’ll no doubt discuss in a minute. I was aware that there were problems with freezing accounts and it didn’t strike me as particularly unusual, with a new system coming in, for there to be a bug of some sort that needed to be resolved.
Mr Stevens: When you spoke about Legacy Horizon, you referred to material problems. Does that mean there may have been some bugs, errors and defects that were immaterial?
David Smith: There may have been but I didn’t think that there would have been anything significant. Let’s put it that way.
Mr Stevens: In your statement you also say that you weren’t aware of complaints about the integrity of the Horizon IT System when you joined?
David Smith: Yes.
Mr Stevens: When did you become aware of such complaints?
David Smith: I can’t be certain but it would have been relatively early on, probably through the briefing processes, but I can’t be certain of that.
Mr Stevens: Can I turn up a document, please, UKGI00000028. This is a letter, it’s from Alan Cook on 13 October 2009 – that’s your predecessor – sent half a year before you joined.
David Smith: Yeah, can I have a moment to read it because I’ve not seen this before today.
Mr Stevens: Oh, have you not?
David Smith: No.
Mr Stevens: Yes, of course you can. Please do read it.
David Smith: Thank you. Can we move on, please.
Mr Stevens: Have you read that?
David Smith: Yeah.
Mr Stevens: Thank you. If we could go back to the first page, please. So we see there’s a Parliamentary question that’s been responded to?
David Smith: Yes.
Mr Stevens: It says:
“To ask the Minister of State, Secretary of State for Business, Innovation and Skills, whether he has received reports of errors in the Post Office Horizon system which have led to postmasters or postmistresses being falsely accused of fraud; and if he will make a statement.”
You have read the response that’s there. That can come down. Thank you.
Do you remember if you were made aware of that letter during the process of joining?
David Smith: Based on the fact I’ve never seen it before, I don’t think so. As I’ve said, more generally, I was made aware of some of the challenges that Horizon had encountered through my briefing into the business but not the specifics of that letter, no.
Mr Stevens: I want to break down those challenges. Are you referring to challenges in legal cases, including prosecutions?
David Smith: No, I’m really thinking more about I’ve been made aware of the Computer Weekly sort of press type of noise that was out there. That’s what I’m thinking about.
Mr Stevens: So are you referring to the article by Rebecca Thomson published on 11 May 2009 in –
David Smith: I believe so, yes.
Mr Stevens: That article reported on allegations by subpostmasters – at the time allegations by subpostmasters – that they had been convicted or held liable on the basis of data generated by the Horizon IT System which they claim was unreliable?
David Smith: I believe so, yes.
Mr Stevens: What did you make of those complaints when you first heard about them?
David Smith: Well, I mean, I obviously asked about why we believed our system was robust and why we were continuing to be successful through cases, the themes of which are not dissimilar to what ultimately came through later in the Rod Ismay report, that we’ll no doubt get to.
Mr Stevens: So let’s break that down. You’re saying you were briefed on these allegations and the complaints and, at that time at the briefing you raised questions about how you were certain that the system was robust?
David Smith: In the round, yes. I didn’t – this was not a huge probing exercise to get to the bottom of every single case. This was a “Okay, well, why did we think we were okay”, kind of conversation, and that was as far as it went.
Mr Stevens: Do you remember the response you were given when asked those questions?
David Smith: I think it was along the lines of what eventually comes out in the Ismay report, in other words, the system’s pretty much tamper proof. We’ve got strong audit records. We’ve got independent security going round checking and balancing and the court cases that we’ve held have been largely successful. So it was kind of at that level, rather than anything more detailed.
Mr Stevens: Who told you that?
David Smith: I think – I can certainly remember having conversations with Paula. I think I had conversations – Paula Vennells – and I think I had conversations with Susan Crichton as well but I can’t be certain beyond that.
Mr Stevens: At that point, were you aware of any concerns about how the – sorry, I’ll start that again.
Were you aware of complaints about how investigations were handled by Post Office Limited?
David Smith: At that time no, I don’t think so. We’re talking about April, as part of my induction into the business.
Mr Stevens: Please can we bring up POL00106867. Can we go to page 3, please, and down to the email midway. Thank you. This is an email on 26 February 2010, so before your time. It’s from Andy Hayward, who was Senior Fraud Risk Programme Manager in Post Office Limited Security Team. Do you remember working with him?
David Smith: I don’t really, no.
Mr Stevens: Now, I think it’s important to make one clarification here before we move on. You’ll see there’s a recipient list on the right and in the CC column it says “David X Smith”. The Inquiry understand that’s not you?
David Smith: Correct. That would have been the IT David. I know you’ve had a few issues with this over the course but this is not me, no. I was “David Y Smith” on the systems.
Mr Stevens: The email says:
“Following our conference call today, below is a brief summary of the agreed activities to progress the next steps in relation to the above piece of work …”
You see the above piece of is “Subject: Challenges to Horizon”.
Point 1, it refers to gathering information on past and present cases with reference to the Horizon challenges; point 2, it said Information Security were to conduct initial investigations and provide terms of reference outlining remit and requirements to carry out full investigation; and 3:
“Subject to agreement of 2 above, conduct full investigations into integrity issues, with conclusions/report provided. Once investigated and conclusions drawn, gain external verification to give a level of ‘external gravitas’ to the response to these challenges.”
That can come down. Thank you.
Were you aware that Post Office had considered conducting full investigations in response to challenges to Horizon integrity in February 2010?
David Smith: No.
Mr Stevens: It’s clear, isn’t it, that those challenges hadn’t been resolved by the time you joined as Managing Director?
David Smith: It is now. I’m not sure that it was when I joined.
Mr Stevens: Why do you think you weren’t briefed on or told about that plan to do an investigation?
David Smith: I don’t know.
Mr Stevens: I want to move on to look at Horizon Online now, please. Can we look at your witness statement, page 5, paragraph 11. You say:
“The Board was responsible for the rollout of the upgrade of ‘Horizon’ to ‘Horizon Online’ and therefore this was ultimately my responsibility. I feel it important to point out that, in light of the major issues facing the business outlined above, my primary focus was on keeping the business afloat in a financially precarious time and, as a result of this, and the fact that the rollout was already under way, Horizon Online was a lower priority.”
I want to explore that. Could we look, please, at POL00001615. This is described as a “Weekly Highlight Report”. It says “Forward one2eleven Programme” at the top and it’s for the period 9 April to 15 April, so when you joined. You comment on this in your witness statement. Can you just summarise briefly what this is?
David Smith: Yeah, there’s a change programme that was running through the business called – “Forward one2eleven” was the way it was badged. Programme owner – or project sponsor was myself, programme owner was Sue. This is a weekly update to us on the status of each of those programmes, one of which was the Horizon rollout – horizon Online, I should say, sorry.
Mr Stevens: If we can go to page 3, please, it says, “What did not go so well, this week”, and “Horizon Online”:
“The Horizon Online pilot continues to run at 614 branches, but further branch migrations remain suspended due to the series of live service interruptions which have occurred since 26 March”, and it continues.
So you were aware of issues with the Horizon Online rollout –
David Smith: Oh, absolutely. My comment in para 11 of my statement doesn’t mean I wasn’t working on Horizon. I was, at a couple of points, significant points. One of them is here. But, relative to other priorities and time over the generality of my time in the business, it was a lower priority. But not a zero priority. A lower priority.
Mr Stevens: Can we look at page 7, please. If we see here, there’s a form of risk register is –
David Smith: Yeah.
Mr Stevens: Page 11, please. Horizon Online, we see it’s been given a red risk.
David Smith: Yeah.
Mr Stevens: There’s a series of crossed out dates, which is the planned dates column, which we see the full rollout commencing has been pushed back, and then it’s “TBA”. Could we then go back, please, to page 6. In “New or Major Risks: AEI – Product”, and it says:
“DVLA go live is dependent on HNG-X, [that’s Horizon Online] implementing routers into all required branches by the date agreed with the client.”
So it’s fair, isn’t it, that the Horizon Online rollout and the delays was having effect on the business across the board?
David Smith: Yes.
Mr Stevens: That document can come down now. Thank you.
You were aware of those knock-on effects?
David Smith: Yeah, which is why I’ve said there had been couple of times in my tenure, this being the first of them, where Horizon got high on the priority list, and the challenge here was that we had rolled out about 600, I think, something like that, sites, and they were experiencing problems with freezing screens, which meant that it was trade affecting. So they were not able to transact in the way they should be able to in a timely manner.
We were very well aware that, if we could not fix that problem relatively quickly, we would have to roll back to the Legacy system and, during the course of my first couple of weeks in the business, I had conversations with senior people inside Fujitsu to understand the problem, the fix, the timetable, and to press upon them the importance of correctly fixing or giving us a view that we could roll back, because we needed to be one or the other. We couldn’t have a number of sites that were unable to trade normally.
Mr Stevens: We’ll look at those discussions in a moment but is it your evidence that, at the start, Horizon Online was a higher priority?
David Smith: Higher, yes, it still wouldn’t have been the number 1 priority even at that point, it would have been higher, because the other people in the business were dealing with that on a day-to-day basis, Mike Young, for example, who was running the rollout programme.
Mr Stevens: Could we look at FUJ00174292. If we could go down to the email just below. Thank you. So this is an email from Gavin Bounds Roger Gilbert, and it’s from 9 April 2010, and it refers to:
“Duncan spoke with the new CEO, David Smith, this morning.”
David Smith: Yeah.
Mr Stevens: Duncan there, Duncan Tait?
David Smith: I assume so. Obviously, this was a Fujitsu email so I’d never seen it before you sent it to me but I assume so.
Mr Stevens: If it is Duncan Tait, he was Managing Director of the Private Sector Division of Fujitsu at that time?
David Smith: I certainly spoke to senior people in Fujitsu at that time. I can’t recall exactly who it was.
Mr Stevens: It refers to, it says:
“A constructive session I believe, of course focused on the issues of the last two weeks …”
You may have already answered this but can you recall this specific phone call?
David Smith: I can recall it, I can recall feeling reassured from the call that –
Mr Stevens: Why did you feel reassured?
David Smith: Because they’d identified what the issue was and –
Mr Stevens: When you say “the issue”, what issue are you –
David Smith: As in why the account was freezing. They had a clear plan of action to fix it and, on that basis, assuming that that were to take place, then we would have been back in a sensible place to continue the rollout and, in fact, that’s what ultimately happened.
Mr Stevens: At the bottom, you can see an email that is sent which prompts this reply and that email says:
“What’s the latest on our relationship with the Post Office?”
What was your view of the relationship between Fujitsu and the Post Office at this time?
David Smith: My view was that, at a strategic level, the two parties were comfortable. At an operational level, there was certainly pressure to identify and fix this particular problem, and we had explored internally, you know, what options had we got to put additional pressure on them to make sure that they had the right resource and appropriate focus to get it fixed. So at a strategic level, fine. At an operational level at that point, there were probably tensions between the two groups.
Mr Stevens: Back to the email we looked at first, after the constructive session, it said:
“… but ended with the CEO saying ‘once we have these issues sorted we should meet and discuss futures’.”
Do you think that was something you would have said?
David Smith: I might not have said it exactly in those words but I certainly would have wanted to build a strategic relationship with Fujitsu as a major partner of the business. That would be typical in any role. So I would have expected to be seeing them maybe a couple of times a year at a board-to-board type level, so that probably would have been what he reflects back here.
Mr Stevens: That can come down. Thank you.
Can we turn then, please, to FUJ00142190. If we can go down to show the sender, please.
That letter is from Alan D’Alvarez, sent on 8 April 2010, so a day before your conversation we’ve referred to. Did you see this report at the time?
David Smith: I don’t recall ever seeing it at the time. That’s not to say I didn’t but I don’t recall seeing it.
Mr Stevens: So it’s a draft report prepared by Fujitsu in response to a request by Post Office regarding a particular technical issue, which we can look at if we go over the page, please. It says, “Background”:
“During Branch Trading Statement …”
Pausing there, what does “branch trading statement” mean to you?
David Smith: At the end of a cycle they would print out effectively a balance to say, “This is what we transacted in the period”.
Mr Stevens: It refers to the Trial Report, that allows the postmaster to check that the data is correct, and the Final Report, which was printed off and kept in the office. The Final Report was an important document, wasn’t it?
David Smith: I believe so.
Mr Stevens: Do you know why?
David Smith: Well, I do now, because I’ve read all of the papers. At the time, I wasn’t really aware of the day-to-day mechanics of what happened on each site.
Mr Stevens: The “Problem Description” says:
“On the Final Report, the stockholding figures in the second section of the report are incorrect on the final balance.”
Fujitsu went on to state that the error affect the printed final account but not the database itself. This is different from the screen freezing issue you refer into your witness statement?
David Smith: Indeed, and wasn’t what I was talking to Fujitsu about. I was talking to them about the screen freeze.
Mr Stevens: Were you made aware of this issue?
David Smith: I don’t believe so, no.
Mr Stevens: Could we look, please, at FUJ00095628. If we could go to page 3, please. Page 2, sorry. Thank you.
So we see that this is an email from Duncan Tait on 10 May, it’s internal to Fujitsu so you wouldn’t have seen it at the time.
If we look, it says, “Roger, I spoke to Mike Young on Friday morning”, which would be 7 May 2010, based on this email. He said:
“He made the following points:
“The programme was reviewed at Group level (ie outside the Post Office by Royal Mail board) with Mike Young, Dave Smith (new POMD) and the group legal counsel and FD discussing options.”
Do you recall that meeting?
David Smith: I don’t specifically, I’m afraid, no.
Mr Stevens: It states, in the paragraph with the bullet points:
“Their confidence has been knocked due to:
“Ongoing issues with Oracle stability impacting HNG-X stability.”
Was that a matter that you were aware of?
David Smith: That is what I think of as the freeze accounts, I think that’s what that means, or that’s what it meant to me at the time.
Mr Stevens: The data centre outage?
David Smith: I was aware there had been problems with – at the time at the data centre, yes.
Mr Stevens: The “outage caused by ‘Fujitsu operator error’ last week which caused” –
David Smith: I’m not sure I was really aware of that one.
Mr Stevens: We then look to a series of requests that Mr Young made. If we go down to the numbers, thank you. So:
“Based on advice from Group legal counsel Mike feels he wants some assurance that the P&L for the account is sustainable over the short and long term so they can see we can invest and provide the resources necessary to get the problems fixed. This will look like some form of an ‘open book’ arrangement.”
Do you remember that request being made?
David Smith: Not directly, as in here but, context wise, as I said earlier, we were aware that it was important for us to either move forwards or roll back because of the trade affecting issues. I was aware from the briefings that I’d had that, contractually, we had limited options to push them to move forwards or back, and the list that we have here, I think, is, our sort of considered view as to what levers we might be able to pull in order for Fujitsu to move at the speed we were hoping they would move, either forwards or back. But, beyond that, no.
Mr Stevens: What does an “open book arrangement” mean to you?
David Smith: Well, what it actually means is that they share their financial position in relation to the contract, so that we could see whether it’s making a profit or a loss. The concern that was, I think, at the time was that we were moving from the old contract to a new one and part of the rationale from moving to Horizon Online, as well as the benefits of Cloud and the benefits of simpler systems, was that we would have less complex estate to manage and, therefore, there would be a lower cost.
And what we were concerned about was have we actually extracted too much cost reduction from Horizon – from Fujitsu for the new Horizon version and they can no longer make money so, therefore, they’re not going to put the effort in to put it right? That was the thread.
Mr Stevens: Number 2 says:
“He wants an independent review of the processes, tools and resource on the programme to assure themselves we are genuinely up to it.”
Do you remember that, as a request?
David Smith: Not specifically worded like that but I do recall a conversation that was saying are we sure they have enough resource to deliver this in the timescales that we need?
Mr Stevens: Requesting an independent review –
David Smith: Is strong, yes.
Mr Stevens: Is strong?
David Smith: Yes, I don’t think we would have expected anybody to agree to that, we wouldn’t have done it in reverse, but this was us looking at ways to negotiate to get the product to where it needed to be as quickly as possible.
Mr Stevens: Were you aware of the plan to ask for an independent review?
David Smith: I’m not certain, I probably would have been. But I’m not certain.
Mr Stevens: As you say, it’s a very significant issue?
David Smith: Yes.
Mr Stevens: This reports that it was a call with Mike Young following a discussion at Group level, which includes you. You say it may have happened, you’re not certain. How confident or unconfident are you that you would have been aware –
David Smith: Unfortunately, this is 14 years ago and I just can’t remember the meeting. I think it sounds like I would have known about it and should have known about it, so it’s likely that I would have had known but I’m not certain.
Mr Stevens: Before going to 3, I want to come back to something you said. What do you think was the likelihood of Fujitsu agreeing to an independent review?
David Smith: I don’t think we thought it was likely at all. I think what we thought it would do was focus their minds to complete the fix that was needed from the freezed-up accounts to enable us to then continue with the rollout.
Mr Stevens: On what basis did you think it was unlikely that they would agree?
David Smith: Well, I was just looking at it in reverse and, I think, you know, we had no contractual right to insist on it. If they believed that they were going to deliver the programme, then why would they want anybody else to look at, was kind of the thinking that I got and, if the boot had been on the other foot, I don’t think that we, as an organisation, as in Royal Mail Group or Post Office Limited, would have accepted a third party reviewing our program of activity either.
Mr Stevens: So if we look below 3, where it says, “My view is it will be difficult, based upon where we are now, for us to resist 1 and 2”, 2 being the independent review, “there is some risk in those areas”; that was against what your assessment of the situation was?
David Smith: That was their internal view. We never saw that, and wasn’t what we were thinking.
Mr Stevens: 3, he says:
“… he wants Dave Smith to have some dialogue with Richard C …”
That’s presumably Richard Christou?
David Smith: I would assume so, yes, I don’t know but I would assume so.
Mr Stevens: “… so they contest the Japanese board’s commitment to the account and programme ([conference] call or VC would work).”
Do you remember that being requested as well?
David Smith: I remember that and I also remember attempts to set up that call and, certainly, a call did take place at some point but when it was I can’t remember exactly.
Mr Stevens: Do you remember what was said on that call?
David Smith: Only that we were concerned about the elements and were pleased to see that they’d moved forwards and progressed them and I think because the call would have taken place some time after the programme had started to roll out again.
Mr Stevens: If we could, please, go to FUJ00095658. So it’s a letter of same day, 10 May 2010. This from Mike Young to Duncan Tait. We don’t need to go through all of the letter, it covers very similar ground, but if we could go to the bottom of that page, please, on the second sentence, it says:
“We would very much like to see the executive correspondence within Fujitsu relating to the recent Red Alert. This, we feel, would give us an understanding of how the Executive Management within Fujitsu are aware and responding to some of the problems we have seen in rollout.”
In your experience, is that request for executive correspondence a standard one?
David Smith: I’m not sure it’s a standard one. I certainly have used similar tactics to get suppliers to move in the directions we wanted to in other organisations, but it’s not standard, no.
Mr Stevens: Why did Post Office want to see that – or did you expect to be able to see that correspondence?
David Smith: No, I mean, again, it goes back to we were looking for levers to ensure that they were moving forwards with the programme because we either needed to revert back or to the old Legacy system or move forwards. We couldn’t stay where we were.
Mr Stevens: At this stage, had the relationship with Fujitsu and Post Office, had that changed since when you first joined?
David Smith: I don’t believe so, not at a macro strategic level, I don’t think it had.
Mr Stevens: We’re going to come back to that theme but I want to stay chronologically for the time being, unless, sir, it may be a good time to break, looking at the time.
Sir Wyn Williams: Yes, fine, Mr Stevens. When shall we resume?
Mr Stevens: Shall we say 11.25 past, sir?
Sir Wyn Williams: Yes, that’s fine.
Mr Stevens: Thank you.
(11.11 am)
(A short break)
(11.25 am)
Mr Stevens: Sir, can you see and hear me?
Sir Wyn Williams: Yes, I can, thank you.
Mr Stevens: Thank you I’ll carry on. Can we bring up UKGI00016119. This is a letter to Sir Edward Davey, then MP, Minister for Postal Affairs, from Alan Bates on 20 May 2010.
Were you aware of the JFSA – the Justice for Subpostmasters Alliance – when you had joined, or in the early days of Post Office Limited?
David Smith: When I joined, no. Relatively quickly thereafter, I would say yes, but I can’t recall exactly when, but yes, I was aware of it.
Mr Stevens: If we could look at the fourth paragraph, please. The last sentence says:
“Though an independent external investigation instigated at Ministerial level would be the most appropriate, and would without any doubt easily find evidence of the error ridden system.”
Had you seen this letter to Ed Davey at the time or when you were Managing Director of Post Office?
David Smith: I think at the time the letter was written, not directly. I’m pretty sure though that, in the correspondence in sort of July time from BIS, it would have been part of the bundle of papers that we’d have come across from Oliver Griffiths, I think, he was saying potentially we’re getting some inbound queries that you need to address, essentially, is what he was saying. So I think I had seen it at some point but not exactly at the date when it’s dated here.
Mr Stevens: Please can we bring up POL00417098, and page 5, please. This is a letter in response, it’s hard to see, but it looks like it will be 21 May 2010. It says:
“Thank you for your letter of 20 May, requesting to meet to discuss the Post Office Horizon system.
“Since 2001, when the Royal Mail (which includes Post Office Limited) was set up as a public limited company with the Government as its any shareholder, Government has adopted an arm’s length relationship with the company so that it has the commercial freedom to run its business operations without interference from the shareholder.
“The integrity of the Post Office Horizon system is an operational and contractual matter for [the Post Office] and not Government, whilst I do appreciate your concerns and those of the Alliance members, I do not believe a meeting would serve any useful purpose.”
That Government position, that these Horizon issues were an operational matter for Post Office Limited, is that something on which you were consulted whilst you were Managing Director?
David Smith: I was certainly having conversations with both BIS and Shareholder Executive, as sort of preparation and briefing notes for the minister coming in. I’m not certain exactly of when and how those meetings would have taken place but there would have been a number of conversations either from myself or my team with BIS to help prepare the response for the Minister so, yes, I suppose is the answer.
Mr Stevens: Were you happy with that approach?
David Smith: As it stood there, yes, based on what we knew at the time, yes.
Mr Stevens: Please can we bring up RMG00000139. This is a report that you gave to the Royal Mail Holdings Board. It says May 2010 but over – at the end, we don’t need to go there – we’ll see it’s dated June 2010. Can we look at the bottom of the first page, please. (3) refers to a meeting with Edward Davey MP.
David Smith: Yeah.
Mr Stevens: If you could just read that paragraph to yourself.
(Pause)
Mr Stevens: Do you recall if you discussed the Horizon IT System at this meeting?
David Smith: I can’t recall specifics of the meeting in great deal, to be fair. I mean, the minutes there probably give you the summary of the key things that were discussed. I think it’s possible that we could have discussed it but I can’t be sure.
Mr Stevens: Before the break, we discussed that the Post Office was seeking an independent review of Horizon Online. Did you tell him about that position?
David Smith: No, I think what we were talking about, if we were talking at all, would have been that – by the time we’re talking here, we’re in early June, I think, that the rollout had now recommenced, and that we were on track to complete it sometime in the autumn, probably September/October time. So the events of the previous couple of months ago had resolved themselves, so I don’t think we would have spent time talking about that particular issue.
Mr Stevens: Let’s look at that. Can we go to FUJ00096312, please. If we could go right to the bottom of the first page, please. It’s an email, Duncan Tait to Mike Young on 29 June 2010. So after your meeting with Ed Davey. Carry on, please, into the body of the email. The third paragraph says “Since your letter”, referring back to the letter of 10 May from Mike Young, which we looked at before the break, in which a request for an independent review was referred to. It says:
“… I am extremely pleased with the progress that has been made. We have located the source of the troubles and taken steps to rectify the issues and we have now recommenced the pilot. Currently counters running on HNG-X stands at just under 20% of the estate. We are now rolling out at about the maximum levels original envisaged with no further sign of the problems that initiated our discussions. Tuning will continue and we expect to emerge from the pilot with high levels of confidence for the remainder of the deployment.”
It goes on to refer to the deficiencies in the product code. If we turn to Mike Young’s email at the top, please, page 1, this is on 30 June, so the day after. It says:
“On the issue of having qualified independent party audit to evaluate Fujitsu Programme execution, along with the staffing levels and skills base, I had been briefed that you had spoken to several entities to pursue this endeavour. Indeed, I was told you were close to agreeing terms with one of these. Additionally, in our calls you will recall I had asked whether there was a possibility of the Post Office ‘owning’ the Terms of Reference and again, this was something you were going to strongly consider.
“As it stands now, I feel I have been led down [a] journey of number of months, just so that you can now say ‘no’. This does not reflect well on our relationship and will not be well received in the next review. I have as a matter of course, been keeping both the Post Office Executive and the Group Executive aware of the progress I was told we were making in these areas.”
So is it fair to say, following your meeting with Ed Davey on 30 June, Post Office was still seeking to pursue an independent review of Horizon Online?
David Smith: I’m not certain, to be honest. I can’t recall the details here. I do know that we were at this point, somewhere around 2,000 sites rolled out, from the sort of 600 back in April, and that the plan was on track to complete the rollout in the autumn. So from that perspective, the imperative of meeting and forcing the review had diminished somewhat but I can’t recall the detail.
Mr Stevens: Well, the email from Duncan Tait says:
“At this crucial phase of the programme we can see no benefit and will not be pursuing a third party review.”
David Smith: (The witness nodded)
Mr Stevens: That’s quite stark, isn’t it?
David Smith: Yes, it is.
Mr Stevens: You can’t recall what you made of that?
David Smith: Well, I think I can’t recall the detail of this specific email exchange but I can recall that, at that point in time, we were rolling forward again at pace and that, had that to continue, which it did, then we would have been content to have completed the rollout.
Mr Stevens: I take it you don’t recall anything further what happened after this email?
David Smith: No, I’m sorry I don’t. I mean, this would be more in Mike Young’s space because he was managing the day-to-day relationship here.
Mr Stevens: Well, looking at this now, how did this affect or did it have any affect on the relationship between Fujitsu and Post Office Limited?
David Smith: I don’t think at the time I was viewing it particularly different from where I was in April. What I had seen was a conversation high up into Fujitsu with myself, following which there was action, the programme did start rolling out again and actually completed later in the autumn. So, at that level, the relationship was okay.
Mr Stevens: Can we go to POL00004669. Thank you. This is a letter that’s addressed to you from Pamela Stubbs on 5 June 2010 and I think, in your witness statement, you say you don’t recall having received this letter.
David Smith: That’s correct, yeah.
Mr Stevens: It says:
“I am writing as a subpostmistress who has worked for the Post Office for some 23 years and who has been in charge of this office for eleven years since my husband’s death. During this time I have had very few problems with the work involved in running the office. However, all that changed when I moved from my old building into a Portakabin for the duration of the demolition and rebuild of the new shop in the office. Almost from the day my Horizon system was relocated into the Portakabin, my office balances were short by thousands of pounds in each trading period.
“I flagged up each shortage with the helpline, particularly after the Christmas 2009 trading period when the office was short by some £9,000 – even though I had only been open for two-and-a-half weeks. No help or advice was forthcoming and so I decided on my own that I would print off transaction logs for every week to enable me to make some sense of these losses.”
Later on in the fourth paragraph it says:
“I have had an Auditor monitor me at work. He checked my cash, did a cash declaration, watched every transaction for a morning’s work. At the end he produced another cash declaration which showed, on Horizon at least, that the office had lost £190.”
If we could go over the page, please, final paragraph says:
“I sincerely hope that you will be able to intervene in this matter, since I am of the opinion that no one will actually look at Horizon in an impartial way unless directed by a person of Authority at the top of Post Office Limited.”
That can come down. Thank you.
We don’t need to go there, you note in your witness statement that this letter was acknowledged on 8 June 2010 by Simon Smith who was in the Executive Correspondence Team.
David Smith: (The witness nodded)
Mr Stevens: You’re nodding your head.
David Smith: Yes, sorry. Yes.
Mr Stevens: Can you just describe how the Executive Correspondence Team was made up?
David Smith: There was a senior lead person who ran a team of, I can’t remember the exact number but, say, three to five people, that sort of size and, in keeping with many large organisations, letters that would come in for the senior team, for the Chair, for the Chief Exec or the MD, would generally be dealt with by that team. They would have the power and responsibility to enquire into different parts of the business to enable them to write an appropriate response and, generally, they would judge whether that would need to come across my desk to review, and then sign off.
Mr Stevens: Firstly, who was responsible for overseeing that team?
David Smith: I think at that time – and I apologise, I may have this not right – but I think it was Mike Granville who ran the overall team and then I think it was Michele, was it, Graves, under him, who was actually running the day-to-day of the activity.
Mr Stevens: But presumably if this team was preparing correspondence to be sent out in response to letters to you –
David Smith: Yeah.
Mr Stevens: – you would have had some oversight of it?
David Smith: Absolutely. They physically sat about where this team is here, so they weren’t far away, so they always had the opportunity to say, “Have a look at this, what do you think about this?” kind of thing but, in this particular instance, I don’t recall anything about it unfortunately.
Mr Stevens: You said in your witness statement – we don’t need to go there – you say, if appropriate, the answer to a bit of correspondence might appear on your desk to look at?
David Smith: Yes.
Mr Stevens: What type of correspondence would they put on your desk?
David Smith: I would have thought letters from MPs, for example. I remember seeing a letter from David Cameron as an example. I think I mentioned that in the statement. That type of thing would come across my desk but, generally, 80 or 90 per cent, I’m guessing, probably wouldn’t have done.
Mr Stevens: So was it linked to the perceived importance of the person rather than the importance of the –
David Smith: No, it was a judgement of both. A judgement of both.
Mr Stevens: To what extent did you set parameters or give them guidance on what correspondence should be directed to you?
David Smith: I don’t think I did because that was already in existence before I joined, and I let it run as it was running.
Mr Stevens: And do you know what that guidance specifically said or was it just in accordance with the evidence you’ve given?
David Smith: I don’t know, I’m sorry.
Mr Stevens: So is it the case that complaints such as the one we just went to, those wouldn’t be passed to you as a matter of course?
David Smith: Not necessarily they wouldn’t. They wouldn’t have always come to me, no.
Mr Stevens: Please can we look at POL00106847. If we could go to page 13 at the bottom, please. So we see the start of an email at the bottom from Mark Dinsdale on 14 September 2010, and you’ve clarified evidence this is about the time that you were considering leaving the Post Office. You’re nodding yes.
David Smith: Yes, sorry.
Mr Stevens: Over the page, please. It says, “This is quickly” – I should say, sorry, it refers to the Barkham Post Office, which is what we’re considering here.
David Smith: Right.
Mr Stevens: It says:
“This is quickly turning into a bit of a problem.
“This is a potential fraud where loss has occurred when an SPMR moved into a Portakabin, but ceased the moment she was suspended and somebody else run the office.”
Firstly, was it usual for complaints such as this still to be investigated and not responded to months after they were made?
David Smith: I can’t comment in general terms but I would have expected at least an initial response to say we are investigating it.
Mr Stevens: As I said earlier, that was done on 8 June?
David Smith: Yes.
Mr Stevens: I’m talking about a finished investigated response.
David Smith: Sorry, repeat the question. I’m not quite sure.
Mr Stevens: Of course. To what extent was it usual for the Executive Correspondence Team to take several months to come back with a substantive response to a complaint, such as the one we saw earlier?
David Smith: I don’t know, it would have depended upon the nature of the issue and what needed to be done to investigate it but, in this particular case, they were obviously investigating deeply what happened so I’m not surprised it took a while to respond.
Mr Stevens: In the fourth paragraph, maybe, the last paragraph, it says:
“This now leaves us in a very difficult situation with the SPMR writing letters to Dave Smith, her MP and no doubt countless other people, this is high profile. She has also joined the SPMRs’ fight to question the integrity of Horizon.”
It being described as “high profile”, do you think this is something that would have come across your desk at any point?
David Smith: I don’t know. I would have hoped so but I don’t know that it did.
Mr Stevens: Please can we turn to FUJ00121097, and page 2, please. If we could go to the bottom, please. It’s an email from Penny Thomas of Fujitsu to Post Office, members of the Post Office. Do you recall any of those people on the send line?
David Smith: Sue and Mark I certainly remember being in the business. I’m not exactly sure what their job titles were at the time but they would have been relatively senior management, I would have thought.
Mr Stevens: It says:
“We have identified that a number of recent ARQ returns contain duplicated transaction records.”
Would you have known at the time what ARQ data was?
David Smith: I’m not sure I would have done, no.
Mr Stevens: Do you know what it is now?
David Smith: I understand it’s a data log, data pool of all the detailed transactions from the branch account.
Mr Stevens: That is the basis on which – the data with which Post Office would pursue prosecutions in some cases.
David Smith: I understand, yes.
Mr Stevens: So the issue of there being duplicated transaction records within that, would you accept that’s a significant problem?
David Smith: I would.
Mr Stevens: Is this something you were briefed on?
David Smith: No, I’m not aware of it.
Mr Stevens: Why do you think that important information like that wasn’t getting to you?
David Smith: I don’t know. I can’t say.
Mr Stevens: Please can we turn to POL00417098, please. Page 13, please. This is a document referring to a Parliamentary question asked by Priti Patel on 6 July 2010:
“To ask the Secretary of State, Department for Business, Innovation and Skills, what his most recent estimate is of the cost of postmasters and subpostmasters of errors in the Horizon operating system; and if he will take a statement.”
The Department asked you to respond to Priti Patel in a letter?
David Smith: Yes.
Mr Stevens: What did you think your personal obligation was when writing to MPs such as Priti Patel to respond to questions?
David Smith: The same as it would have been to anybody else, to respond in a factually accurate way, with what I understood to be the position.
Mr Stevens: Can we look at your letter in response, please, it’s POL00001762. If we can go down to try to get as much of the letter in as we can, please. We see at the bottom it says “GRO” which is a redaction, but this is a letter which was signed by you, wasn’t it?
David Smith: Yes, I do agree with that.
Mr Stevens: In your witness statement – we don’t need to turn it up – at paragraph 70, you say that:
“I am confident that I would not have written my response without being satisfied at the time with what we were saying and based on the provision of relevant information.”
How did you satisfy yourself that the information in the letter was accurate?
David Smith: The letter itself would have been drafted by Mike Granville and his team would have done the usual internal review processes, so that’s the first thing to say. The position with Horizon at the time was that we were back to rolling out the system, so I was comfortable that the system was okay. I had obviously got the legal processes and reports from Sue and team giving me an indication of the status of each of the legal reports and, overall, I was comfortable at that time that the system was robust and couldn’t be accessed, because of the sort of tamper-proof logs and backdoor system protections, and the internal Audit Team’s work and Security team’s work that was going on in the generality. So that was the backdrop in my mind as to why I was comfortable to stand behind a set of statements like these.
Mr Stevens: So you didn’t make any particular investigations in response?
David Smith: Not specifically to this but you’ll see later on that, obviously, I then did look for an internal review.
Mr Stevens: We’ll come to that shortly. You also said you didn’t draft the letter, it was put on your desk, effectively?
David Smith: Yes.
Mr Stevens: Could we look please, it’s a letter I showed you earlier and, unfortunately, you hadn’t seen it before but you had a chance to read it earlier, UKGI00000028, please, and can we look at that side by side, please. If we look on the – there’s the letter to Mr Newmark MP on the left and the letter to Priti Patel MP on the right. The first paragraph after the question says:
“The Horizon computerised accounting system operates in around 12,000 Post Office branches and processes up to 750 transactions a second at peak times.”
If you just read those letters to yourself. The letter to Priti Patel MP is effectively taken from this earlier one from Alan Cook.
David Smith: It does look very similar, yes.
Mr Stevens: Were you aware at the time that people such as Alan Bates were complaining that the response that was coming from Post Office on complaints was like a template, the same response?
David Smith: No, I wasn’t, and, obviously, I’d not – as I said to you earlier, I’d not seen this letter before today but it is clearly quite shocking.
Mr Stevens: Those can come down. Thank you. I’m now going to come to the investigation you referred to. You’ve already mentioned the Shareholder Executive, just for background, would you accept that that was a Government body which managed the Government shareholder relationship with businesses such as Post Office?
David Smith: Yes, that’s a basic description, yes.
Mr Stevens: Could we look at POL00417098, please. If we can go to the email at the bottom please. It’s an email from Oliver Griffiths at Shareholder Executive. Do you recall dealing with him?
David Smith: Yes, he would have been a regular contact of mine through my time in role and was generally a liaison point between the Post Office and the Shareholder Executive.
Mr Stevens: So this was sent on 21 July to you.
David Smith: (The witness nodded)
Mr Stevens: It says:
“As we discussed briefly on Monday evening, there has been recent interest from MPs in purported cases where the Horizon system has left subpostmasters out of pocket.”
Do you recall that discussion?
David Smith: Not now I don’t but I’m sure it took place.
Mr Stevens: It says:
“We have to date said that this is an operational matter for POL [Post Office Limited] and resisted calls to impose a review of Horizon …”
The email goes on to say:
“We are in theory happy to continue holding this line – but if we do so and it turns out that there have been problems with Horizon, then there will be significant political heat. Grateful therefore if you could let me know how confident [Post Office Limited] is that there is nothing behind these claims.”
Can we then look at POL00417100. Please could we go to the third page. Further down, please. Thank you. We have an email from you, David Y Smith, 21 July 2010 at 19.04. So that’s after the email from Shareholder Executive.
David Smith: Yes.
Mr Stevens: You say:
“Further to yesterday’s complaint around Horizon from Oliver and a Parliamentary question to Ed Davey from Priti Patel on the same issue we have today been notified that Channel 4 will run a news item on the same issue. This may be all the same group of people and may also just be a function of the new rollout. However …
“Sue Huggins will lead our response via Mary to the specific request. But I want an internal investigation under Mike Moores lead please over the next week on the following.”
You sent this the day after responding to Priti Patel. Why did you now think you needed an investigation but you didn’t when you responded to Priti Patel?
David Smith: I was really, in my mind, responding to Oliver asking for, essentially, a stress test that we were comfortable with what we were saying. What came out of Oliver’s piece was a set of conversations inside the business and I wanted to make sure that we had got documented, you know, why did we think the system was robust; what did we think the issues were or weren’t; and how were we comfortable that the challenges that were being presented in the Channel 4 programme particularly and in the issues flagged again by Oliver were actually being correctly addressed?
So it was really the Oliver email to me that made me think, actually, I probably should look more deeply here than we have done so far.
Mr Stevens: But why didn’t that spring to mind when responding to a Member of Parliament?
David Smith: Well, because the work that had been done previously, as I’d outlined, gave me comfort that what we were saying in that letter was true. I still believed it was true but I wanted to be able to give the Shareholder Executive the same confidence that we had got by pulling out the data that said, “Look, this is why we believe that our systems are robust”.
Mr Stevens: So you were looking to give confidence to the Shareholder Executive?
David Smith: Yes, yes.
Mr Stevens: The queries you ask, the first is “How robust is Horizon”? Now, below that, there then appears to be an answer. If we go to the first page, please, of the document, we see there’s an email from Mark Burley, you’re not included in the list, but it says:
“I have added some specific comments against the questions from David Smith below and I would also [add] the following …”
So do I take it that the answers to your questions weren’t in your original email?
David Smith: Absolutely not, no. My email, I know I’ve seen previously there weren’t Terms of Reference for the Ismay report but my email was, essentially, the Terms of Reference, here’s the questions that I think we should be answering, to give us confidence to, or to give the Shareholder Executive confidence in what we’re saying. So this set here, that you see here, is after that has happened, and people are starting to annotate their answers to the emails.
Mr Stevens: Can we turn to page 5, please, and if we could go down to the bottom, the penultimate paragraph it says:
“How do we treat discrepancies? Is there any exceptional circumstance applied where we don’t seek recovery of funds, prosecution, etc, ie are we heavy handed and disproportionate in our response?”
Then over the page at the top, it says:
“How many have we prosecuted? What is our success rate?”
Why did you seek answers to these questions?
David Smith: I wanted to understand if the process that we were going through was fair, I suppose. In other words, that we got the right judgement of we’d got the right evidence and we were prosecuting correctly, and I was looking for not just an internal measure but, for instance, what was the same situation that was going on in the banking world where cash would be handled in a similar way. So I was trying to verify and give an external benchmark, if you will, that the rate of prosecutions that were taking place inside the business were not out of line with what you might expect for any environment where there’s a lot of cash around.
Mr Stevens: Well, that’s the rate of prosecutions. What about the question “How do we treat discrepancies? Is there any exceptional circumstance applied where we don’t seek recovery of funds or prosecution, ie are we heavy-handed and disproportionate in our response?”
David Smith: Yeah, I mean, I was trying to find out the answer to that question because I wanted to ensure that we were acting fairly.
Mr Stevens: If you go, actually, on page 7, please. If we could just go down to the bottom. Thank you. It says:
“Suggest we need input from Lynn, Keith Woollard, Rod and Leslie as a minimum.”
Were any of those people in the Legal Department?
David Smith: I can’t tell you. Leslie was IT; I can’t remember Lynn; Rod was obviously Rod Ismay, who was in the finance world; and I’m not sure what Keith’s role was. So I don’t know is the answer to that.
Mr Stevens: The questions you are asking, why weren’t you getting this type of information from your weekly Executive Team meetings?
David Smith: In the weekly Executive Team meeting, we were just looking at the cases that were live at any point in time, so we were not looking at general trends and prosecution rates versus other companies and many of those types of things. So it wasn’t visible.
Mr Stevens: The requests you made here at this stage, would you have discussed this in the Executive Team meeting?
David Smith: Yeah, the genesis of what came out here is really a combination of the request from Oliver, which we’ve discussed, the board discussions that would have been taking place at the time around the questions from Channel 4, which were we were being asked about and, more generally, myself trying to get a balance and sense of, well, if I were outside of this organisation, what would I want to know that would give me comfort that we were following due process?
So it’s a combination of those and, unfortunately, in the mists of time, I haven’t got any way of saying this came from here and this came from here and that came from there but the genesis of this and ultimately the Ismay report that comes from it, is effectively that set of activity that was taking place in that period of time.
Mr Stevens: You referred to conversations with the board about the Channel 4 proposed programme. Can you recall the detail of any of those conversations?
David Smith: Not specifics. In the generality, as a business – and I’m talking about Royal Mail Group here – any items of PR would have been dealt with by the group’s PR function, and I think it was Mary Fagan, probably at the time, and so they would have taken the overall control of how that process was to be handled. A set of questions, I think, did come in from Channel 4 for us to respond to, some of which would have ended up being in the summary of what we just looked at, and I know that at a sort of weekly and monthly sort of cadence, we would have been generally talking about PR issues in the round because, as I’m sure you’re well aware, the Post Office and Royal Mail, more generally, is pretty much in the news all the time and, therefore, there’s always an eye on what is going on from a PR perspective.
So that’s, it would have been in that sort of context that we’d have had conversations.
Mr Stevens: So was the real trigger for this in your email Channel 4’s involvement?
David Smith: No, I think it was a combination of in my mind, as I’ve said in here, in my mind it was – Oliver was the specific trigger but, if we look at what was happening in the round at the time, there were a number of elements that come together that ultimately give us the, albeit brief, terms of reference that we’re using to pull together a summary and, essentially, what I’m thinking about in my head at the time is I’m trying to stress test what people are telling me so that I’ve got confidence and so that ShEx have got confidence in our position.
Mr Stevens: If we can bring back the last document again, please, it’s POL00417100, and if we could turn to page 9, please. An email from Paul Budd to you and Sue Huggins, and below, it says it provides a draft of a response to Channel 4.
David Smith: Yes.
Mr Stevens: If you could just move down to see the response, please.
Reading that, did you approve of the message that was set out in this draft?
David Smith: I don’t know that I physically approved it. So it would have resonated as the house position, the business position at the time, as to what we thought about the system. We didn’t know what the Post Office – what Channel 4’s programme was actually going to say, so it was difficult to be more specific than that. But that was generally accepted as the position of the business at the time.
Mr Stevens: In your statement, you refer to having a conversation about the questions being taken through the –
David Smith: Yes.
Mr Stevens: Following that conversation, what were you views on the robustness of the Horizon IT system?
David Smith: So the – I think – can you point me at where in my statement –
Mr Stevens: Yes, of course, sorry.
David Smith: I just want to be certain before I answer.
Mr Stevens: If we turn to paragraph 73, please.
David Smith: Thank you. Yeah.
Mr Stevens: So you say, “My email is addressed to Mike Young, Sue Huggins and Mike Moores”.
David Smith: Yeah.
Mr Stevens: That was the email we were just referring to:
“… and it looks from the email like we met and chatted to work our way through our responses.”
David Smith: Yeah.
Mr Stevens: “Due to the passage of time, I cannot say why these particular questions laid out in my email were asked but they were likely to be a combination of what I was asking …”
David Smith: Okay. Yeah, I understand the context of the question. So this is me sitting down with the senior members of the team – Mike Moores being the CFO, the Finance Director, Sue, who was responsible for, essentially, the operation of Horizon day-to-day, and Mike Young, the Head of IT – and we were discussing the framing of what we wanted to do in terms of the review. So that’s what I meant by that. What we were not doing was discussing all of the detail of each of the individual components of what our position would be. So, in other words, we didn’t have a long conversation about, for instance, Fujitsu’s control systems or those types of things. That came afterwards when the Ismay report was written.
Mr Stevens: Well, let’s –
David Smith: This is more about a conversation about how do we set up the review?
Mr Stevens: Well, let’s look at that. That document can come down. Thank you.
The Inquiry refers to and you have referred to the Ismay report. That’s referring to a report made by Roderick Ismay on 2 August 2010 called Horizon Response to Challenges Regarding System Integrity. When do you think you provided – or when would you think Mr Ismay was instructed to prepare that report?
David Smith: I can’t remember the exact date but it certainly would have been very soon after that set of emails we’ve just looked at so within a day or two, I would have thought.
Mr Stevens: You accept that there were no written terms of reference?
David Smith: Not specifically, no. Only the conversations that we would have had and also the email that we just looked at that laid out the questions from the Channel 4 piece.
Mr Stevens: Why weren’t there written terms of reference for such an important report?
David Smith: I don’t know and, obviously, looking later on in my statement, I reflect back that that’s a mistake.
Mr Stevens: Can we look at, please, page 29 of your statement, paragraph 82. You refer to the terms of reference – oh sorry, I’m going too fast.
You refer to the terms of reference in the first few sentences and then, in the middle, you say:
“I also believe that I spoke with Rod Ismay to further explain the context for the request for him to carry out a review. I cannot say for definite but I expect that I asked him to produce an answer for Parliament and to provide a response to the Channel 4 news item and therefore I wanted to get something which could quickly but effectively confirm what our position was and if it was incorrect.”
Should that sentence finish there?
David Smith: No, it looks like a mistake – “and, if it was incorrect, to flag back what we needed to be aware of”, I think.
Mr Stevens: Why did you have a conversation with Mr Ismay and not – why wasn’t that delegated to one of the people in your line?
David Smith: I think the structure at the time was that Mike Moores – actually it was Mike I had charged with writing the report, and that between Mike and myself and Mike Young and Sue, we go back to that conversation, we agreed that it would be appropriate for Rod to carry out the actual activity, and Mike, myself and Mike Young, all at various times, did have conversations with Rod to sort of set the tone of what we wanted and expected to come back and also to help and review his progress. That was more the two Mikes than myself but the three of us – it wasn’t just one conversation, it was a set of conversations.
Mr Stevens: So your evidence is that Mr Ismay was getting instructions from multiple people at multiple times?
David Smith: No, he was getting instructions from me at the start, he was then getting input and guidance on, you know, where information might be, how to get it, how to pull it together and what the summary and structure of the report might best be presented like to present it back in a coherent way.
Mr Stevens: What would you have said to him in your instructions?
David Smith: I would have said that “The BIS team have requested that we pull together a stress test report, summary report, to review why and how we consider our Horizon system to be robust and, in order to do that, I’d like you to also consider the types of questions that are here from the Channel 4 investigation, I want you to look across the whole organisation, I want you to pull in whatever resources you need to pull this together, I want you to liaise with Mike Moores, Mike Young and Sue to assist you in pulling that together, and then I’d like you to report back. The board wants an honest view; it doesn’t want a view that is one sided; it just wants a view of what you see, what you know, and we need it in a couple of weeks’ time as a first view because we are being asked to report back to ShEx”.
I think that would have been the shape of it.
Mr Stevens: If that was the instructions you gave, why was Rod Ismay the man for the job?
David Smith: Rod was highly thought of in the business. He had held a number of senior management positions right across a lot of the organisation. So he ran Internal Audit for a period of time. He had responsibility for security for a period of time and, at that particular point in time, he was running the back office accounting teams. He was a qualified Auditor, having come to us from Ernst & Young, he was highly respected across the business and, as I had charged Mike Moores, he was a reporting to Mike. So that was the set of reasons why we chose him.
Mr Stevens: What about his IT experience?
David Smith: No, he wasn’t an IT expert but I wasn’t asking him to audit the IT system. I was asking him to give me the rationale as to why the business thought that we were confident and comfortable in the assertions that we were making, and I was asking him to talk to the relevant experts across the business. So he had Mike Young and team, for instance, Lesley Sewell, to talk to from an IT perspective, just like he had Susan Crichton from a legal perspective, just like he had other experts from the business to be involved.
And I think you can see, in the sort of summary of the report that comes back, it’s an extensive list right across the organisation that input into the report, because no one person could have written it anyway.
Mr Stevens: I think you just said that you were looking for the rationale for why the business was confident in its position?
David Smith: Yeah, that is essentially the exam question that we were being asked by Oliver at Shareholder Exec.
Mr Stevens: Could we look at Mr Ismay’s statement, please, WITN04630100, page 10, paragraph 39. Mr Ismay in his written evidence to the Inquiry says that:
“… after being asked by David Smith to conduct a review in light of the challenges being made about the system. It was a summary of existing conclusions not a fresh investigation. The conclusions came from internal discussions with recipients of the document or with their team members that they recommended be consulted, including IT.”
Do you agree with that?
David Smith: Broadly, that sounds right, yes.
Mr Stevens: Can we turn to paragraph 41, please. It says:
“The report was requested, and I wrote it, in an environment where challenges were made about Horizon, but there was no ready document available which pulled together reasons for assurance.”
Do you agree with that?
David Smith: I think that’s true, as well, yes.
Mr Stevens: Were you asking Rod Ismay to produce that document?
David Smith: I was asking him to give me, as I already discussed, a stress test report on why we believed that we were confident in our assertions that the system was fine.
Mr Stevens: They’re separate things, aren’t they? One is finding a report which gives reassurance and drafting a report for why there is reassurance, and a stress test or investigation into whether something does have integrity?
David Smith: Yeah, I mean, at the level of doing a full audit review yes, of course there is. In the timescale that we were talking about here, which is a sort of one to two-week report, I was not expecting him to come back and say he’s done a full forensic investigation into Horizon. That wasn’t what I was expecting back.
Mr Stevens: Can we turn, please, to Mr Ismay’s oral evidence to the Inquiry. It’s INQ00001063. Can we turn, please, to page 26.
If we could focus on the top two – that’s perfect, thank you.
Line 16 of page 101, Mr Ismay is asked the question:
“What were the terms of reference for the writing of the report?”
He refers to not being given written terms and, at page 25, he says:
“Dave, I think, was relatively new to Post Office.”
Sorry, line 25:
“Dave, I think, was relatively new to Post Office. I think he was only Managing Director for about a year. I think he came from somewhere in Royal Mail and went back to somewhere in Royal Mail.
“In the period that he was there, I think that, given the comments that he was hearing allegations, this was a question to me to say, ‘Well, you know, what’s the counterargument to this?’”
Was that what you asked him to do, to provide you with a counterargument to allegations?
David Smith: No, no. I stand by what I said.
Mr Stevens: Can we go back, please, to POL00417098. At the bottom was the email from Shareholder Executive that I took you to earlier. The top email is from Tracy Abberstein. That was your personal assistant?
David Smith: That’s correct, yes.
Mr Stevens: You see at the top it says “From: Tracy Abberstein on behalf of David Y Smith”. On the “From” line, beneath Mike Granville; do you see that?
David Smith: Yes, I do.
Mr Stevens: How would this email have come about? Would it have been dictated?
David Smith: I would have thought so. I can’t recall exactly but I would have thought so.
Mr Stevens: So the response is – sorry, the email says:
“Mike Granville will liaise with you both to prepare a brief for Oliver to give the reassurance required!”
Is that not what Rod Ismay is saying: that he was asked to provide a brief or a report that set out grounds for reassurance in the Horizon IT system?
David Smith: I don’t think those are the words that he used. We may be splitting hairs here. As I said, the genesis of the report was a combination of what is here and what was in the Channel 4 email that we’ve gone through earlier, and I was asking for, essentially, a summary position on our thoughts around those areas, which we could then use to respond back to Oliver, for sure, but that wasn’t the only purpose of the report.
Mr Stevens: Could we please go to POL00106867. Could we start, please, I think it’s page 5. Just go down slightly, please. It might be the next page, I apologise. No, my error, page 3. I’m terribly sorry.
If you could go down, please. You remember this email from Andy Haywood, which we looked at at the start of your evidence?
David Smith: Yes.
Mr Stevens: So that’s on 26 February 2010. You remember it said, number 3:
“… conduct full investigations into integrity issues …”
Could we look at page 9 of this document, please. This is from Sue Lowther, 8 March, so it follows that email. It’s later in the chronology. It says:
“As was discussed on the conference call and taking into account Rob’s comments, to confirm that what we are looking at is a ‘general’ due diligence exercise on the integrity of Horizon, to confirm our belief in the robustness of the system and thus rebut any challenges.”
Do you accept that this is effectively asking for a document or an investigation that, rather than investigate integrity issues, would look to confirm the belief and provide assurance for Post Office’s position in the robustness of the system?
David Smith: Yeah, I mean, as I said before, I wasn’t here when this came but, on the face of what I see here, yes.
Mr Stevens: Do you think that’s consistent with what Rod Ismay says he was asked to do?
David Smith: It does look like it, yes.
Sir Wyn Williams: I’m sorry, I’m struggling a bit with parts of this evidence. Can I just recap a moment?
Could we go back, please, to Mr Ismay’s statement and the paragraphs you took Mr Smith to, paragraphs 39 and 41, on page 10 and 11.
Mr Stevens: Yes, of course, it’s WITN04630100, thank you, and it’s page 10.
Sir Wyn Williams: Yes. It’s paragraph 39, is it not?
Mr Stevens: Yes, paragraph 39, sir, page 10.
Sir Wyn Williams: Yes.
Mr Stevens: Sorry, we’re on the wrong witness statement. I may have given the wrong reference, sorry. The reference is WITN04630100, page 10, please.
Sir Wyn Williams: Yes, so in paragraph 39, Mr Smith, you see that it contains the sentence, essentially, in the middle of the paragraph:
“It was a summary of the existing conclusions, not a fresh investigation.”
Yes?
David Smith: Yes, I see that.
Sir Wyn Williams: Then if we go to 41, it ends:
“… there was no ready document available which pulled together reasons for assurance.”
My note – and this is what I want to check with you – is that you, essentially, agreed with Mr Ismay’s descriptions of what the report was to be, as set out in paragraph 39 and 41.
David Smith: Sir, yes, that’s correct.
Sir Wyn Williams: Fine. Then can we please look at your witness statement. This is – sorry, I – let me get the –
Mr Stevens: WITN05460100.
Sir Wyn Williams: Yes. I want you to go, please, to page 30, paragraph 87. Then over the page to page 31. Reading that paragraph, as I will now:
“I have read Rod Ismay’s statement dated 13 January and note that he says that he was asked to summarise existing conclusions.”
Then you say this:
“This is simply not my recollection and I do not believe that this is inferred by the email correspondence”, and then I interpose which we have looked at.
Which is it, Mr Smith?
David Smith: What I mean by that is that the questions that I laid out for him or for Sue, Mike and Mike, which was the Channel 4 questions, I didn’t think that they had been visited and written down and laid out anywhere, previously, and so that’s why I mean that it wasn’t just pulling together what we’d already done. I was asking for the specific answers to these questions –
Sir Wyn Williams: Well, I follow –
David Smith: – and so that’s all I – we may be – you know, semantics of words here but my view of what happened was here’s a set of questions and here’s also what we are getting from ShEx, I would like you to report back to me, talking to all of the relevant people in the business, to give me a summarised position of the answers to those questions.
What I didn’t say was, “Go and do a fresh investigation, go and do a detailed investigation”, or anything at all as to how he should carry out that investigation; I didn’t give him that instruction.
Sir Wyn Williams: But what I draw from that, and this is what I want to be sure that I’m entitled to draw from that, that you did intend that he should effectively draw together conclusions which had already been arrived at. It was not an exercise in testing those conclusions.
David Smith: That is correct. It was not. I did not intend us to go and do a full forensic investigation, for example.
Sir Wyn Williams: So, if you like, so that I’m absolutely clear about this, there were a number of reasons already held in senior levels of the Post Office as to why Horizon was robust, and what you were asking him to do, in effect, was to reduce those into writing in one document so that everybody knew what they were?
David Smith: Largely, yes. Yes.
Sir Wyn Williams: Right. Okay, I’ve got it now, thank you.
Mr Stevens: Sir, we mentioned a short break before lunch.
I think it’s probably a good time to take that.
Sir Wyn Williams: All right, let’s have a few minutes, at least.
(12.35 pm)
(A short break)
(12.44 pm)
Mr Stevens: Sir, can you see and hear me?
Sir Wyn Williams: Yes, I can, thank you.
Mr Stevens: Please can we turn to your witness statement, page 30, paragraph 86. You’re talking here about after receiving the Ismay report. You say:
“At the time, I do not think that we thought that there was any merit in commissioning a further report by an IT expert or a forensic accountant or similar to test the reliability of Horizon as the report was clear-cut in its position. There was nothing in it which suggested we should investigate Fujitsu or Horizon further.”
That can come down. Who was “we” when you say that?
David Smith: I’m talking here about a combination of the Post Office senior management team. So this would have been Paula and would have been –
Mr Stevens: Paula Vennells?
David Smith: Paula Vennells, Mike Young, Mike Moores. It would also have been a set of conversations with the Royal Mail Group, so certainly the Chair and Chief Exec and I, I would expect, would have had a conversation about it. So they are a set of conversations rather than a set piece meeting to draw a conclusion.
Mr Stevens: Your evidence earlier was that you hadn’t asked Rod Ismay to do a forensic investigation into the Horizon IT System?
David Smith: Yes.
Mr Stevens: Well, we repeat your evidence but the evidence you just gave, this wasn’t going to be a report that did a deep dive into whether or not Horizon was available?
David Smith: Yeah.
Mr Stevens: So how on earth could you take comfort from that report that a further investigation by an IT expert or forensic accountant wasn’t required?
David Smith: Well, at the time, the fundamental piece was that we believed the system was tamper proof so the Fujitsu position that was laid out was quite clear. We had not seen in any of the recent cases any issues that would suggest a problem and, in fact, a few weeks later, as we now know wrongly, but at the time, we saw the Seema Misra case as a test of the Horizon system, and it had come through that, and so those were the fundamental reasons.
Mr Stevens: Could we bring up the Ismay report, please. The reference is POL00107129. Apologies if I said the wrong reference. If you could go to page 10, please. 4(c), it says, “Independent Review and Audit Angles”:
“[Post Office Limited] has actively considered the merits of an independent review. This has been purely from the perspective that we believe in Horizon but that a review could help give others the same confidence that we have.”
Then the penultimate paragraph says:
“It is also important to be crystal clear about any review if one were commissioned – any investigation would need to be disclosed in court. Although we would be doing the review to comfort others, any perception that POL doubts its own systems would mean that all criminal prosecutions would have to be stayed. It would also beg a question for the Court of Appeal over past prosecutions and imprisonments.”
Was this the reason why you chose not to do an independent review?
David Smith: No, it wasn’t.
Mr Stevens: Why do you say that?
David Smith: I’ve given you the reasons why. The fundamentals were we believed that the system was sound, that it couldn’t be tampered with and that that was tested a few weeks later in the Misra case as the latest example of a series of those, tests of the system. So those were the reasons that we made it. It wasn’t this particular point.
Mr Stevens: Did the reason given there of the issue of disclosure, did that have any effect in your mind on whether or not –
David Smith: No, no.
Mr Stevens: That document can come down. Thank you. You say the Misra case was seen as a test case. What, if any, steps did you take to oversee the conduct of that case by Post Office Limited?
David Smith: Well, you may recall that the case started some time before I joined and was well in hand before I joined the business. So my own conduct in the case was limited. I was aware of it through its sort of April to September time frame. The relative importance of it obviously became clearer to me, so I became a little closer to understanding what the case headlines were. But I didn’t review the case in detail, didn’t have any conduct over the case and was really looking at it from the perspective of I’m keen to see what the results are rather than having any conduct of the case.
Mr Stevens: Could we look at POL00169170. The email at the very bottom, it’s sent from Jarnail Singh. I don’t need to read it out. It’s an email that’s been read out in the Inquiry several times before. It states what the result of the Misra trial was and that she’d been convicted, and your response is, on 21 October 2010:
“Rod
“Brilliant news. Well done. Please pass on my thanks to the team.”
Why was this brilliant news?
David Smith: This is – well, first of all, I’d just like to place on record an apology to Seema Misra and family because of the way this has been perceived and portrayed subsequently and, looking at it through their eyes rather than through mine, you can see that it may have caused substantial upset, and I really do apologise for that. At the time, what I’m doing here is what I would do generally with lots of things in business: I’m saying to the team “Thank you for all your hard work, it’s terrific that you got the result that you got, and I’m really happy that we have progressed”. It’s nothing more or less than that and, in the context of probably receiving 200 to 300 emails a day, which would have been typical at that time, I would literally have gone “Brilliant news. Well done. Thanks very much”, send, and that would have been it.
In the benefit of hindsight and looking through the 2024 lens not the 2010 lens, at best, from Seema Misra’s perspective, you can see this is really poorly thought through and I do apologise again for that.
Mr Stevens: You referred earlier to it being a test case and did you place any reliance on the fact that Ms Misra was convicted in how to deal with the question of whether there should be an independent review in future?
David Smith: I can’t be sure, to be honest, because it’s a way back in the mists of time. I do know that, from this point forwards, we didn’t really think about whether we should have an inquiry again while I was at the Post Office and, certainly, if you look from board minutes from the month after and the month after that, which had been shared with me, we’re not talking about Horizon at all. So it must have played some part in the thinking but I can’t be sure what part.
Mr Stevens: Sir, I’m looking at the time and we have to finish Mr Smith’s evidence this morning. There are one set of questions from Core Participants. I propose at this point not to ask any further questions and hand over to the Core Participants.
Sir Wyn Williams: All right let me unmute myself. Yes. That’s fine. Who is going to ask some questions?
Mr Stevens: It’s Hodge Jones & Allen team.
Sir Wyn Williams: Right.
Ms Page: Thank you.
Sir, I would invite you to give this witness the warning against self-incrimination.
Sir Wyn Williams: Well, I think I’m entitled to be told in very brief terms, without making your cross-examination ineffective, the basis for that, and I’m literally asking just for a few sentences, Ms Page.
Ms Page: We say that the Ismay report was a cover-up.
Sir Wyn Williams: Right. All right.
Well, Mr Smith, under our law, a witness at a public inquiry has the right to decline to answer a question put to him by Counsel to the Inquiry or by any other legal representative or, for that matter, put to you by me if there is a risk that to answer that question would incriminate the witness. The legal principle is known in shorthand form as the privilege against self-incrimination.
It’s been suggested to me that I should give you a direction about that and I think it probably is appropriate, given what Ms Page has had to say. It is for you to make clear to me, in respect of any question put to you, that it is your wish to rely upon the privilege against self-incrimination. If, therefore, Ms Page, or, for that matter me, if I intervene, asks you any questions which you do not wish to answer on the ground that to answer such questions might incriminate you, you must tell me immediately after such question is put to you. At that point, I will consider your objection to answering the question and thereafter rule upon whether your objection should be upheld.
Mr Smith, are you assisted by a solicitor or barrister in the hearing room today?
David Smith: Sir, yes, I am.
Sir Wyn Williams: Right. So if the point arises where you wish to take advice about a question, please alert me to that and then I will afford you the opportunity of taking advice and then we will go from there. So do you understand all that?
David Smith: Yes, sir, I do. Thank you.
Sir Wyn Williams: Thank you very much.
Over to you, Ms Page –
Ms Page: Thank you.
Sir Wyn Williams: – or Mr Henry, as the case may be.
Questioned by Ms Page
Ms Page: You’ve heard what I’ve already said, I don’t propose to go over the Ismay report in any greater detail but, in short, the first question I ask is whether you deliberately had your team produce a report for you which would cover up the fact that you knew, and everyone in your senior leadership team knew, that Horizon’s integrity was very much in doubt and that you wanted to cover that up?
David Smith: No, absolutely not.
Ms Page: Well, then, if I may, I’m going to ask some questions about the Seema Misra trial and that case.
This Inquiry has seen a document which shows that, not long before the trial, there was a meeting between Post Office and Fujitsu in which the receipts and payments mismatch bug was discussed. Have you seen any of the evidence or seen that document?
David Smith: I –
Ms Page: You should have seen the document at least?
David Smith: I have seen a document around the bugs and mismatch report, yes.
Ms Page: Gareth Jenkins, a witness at Seema Misra’s trial, was in that meeting. Have you seen that?
David Smith: Yeah, I believe – yeah, I believe, yeah.
Ms Page: Various options resolving that bug were discussed, one of which made it perfectly plain that Fujitsu had the power to remotely alter branch accounts. That was put forward as a way to resolve the consequences of the receipts and payments mismatch bug; did you see that?
David Smith: Yes, I did see that.
Ms Page: Now, your Legal Department, your Criminal Law Team, knew about that on the Friday before Mrs Misra’s trial started on the Monday, because we have evidence which shows that that document that you’ve read was emailed to them and it was printed out by Jarnail Singh on the Friday before the Monday start.
What sort of culture were you presiding over where a legal department receives evidence of a bug in a trial which was about Horizon and they do not disclose that bug? What sort of culture were you presiding over?
David Smith: Firstly, to say that the only reason that I know about the bug and mismatch report was because it was presented to me in the bundles that I’ve seen. So, at the time, I was unaware. It’s also fair to say that it was not pulled out in the Ismay report as one of the Horizon bugs; the others were listed but it was not. So I was not aware of it and I did not know, until you have just told me, that Mr Jarnail had the information that you have laid out at the time that he had it.
In terms of the culture of the organisation, I’m shocked and frankly appalled if that is, in fact, the sequence of events and I didn’t know about it.
Ms Page: Well, one of the points that was made in the Ismay report was that there were no backdoors into Horizon accounts; that’s right, isn’t it?
David Smith: Yes.
Ms Page: Did you know about the fact that your staff, a little bit after the report was finished, sent emails to one another, including to Rod Ismay, in which they said that they knew about the backdoors? They knew about the backdoors because of that meeting about the receipts and payments mismatch bug; did you know that?
David Smith: No, I didn’t know any of this.
Ms Page: Nevertheless, during the trial, as we’ve seen, because of your response to the famous bandwagon email, you were keeping an eye on that trial, weren’t you?
David Smith: Only in overview terms. I didn’t know anything about the detail of the case.
Ms Page: Well, let’s bring it up again. It won’t take long. This is the last thing we need to look at. POL00169170. So if we just look at that second paragraph from Rod Ismay:
“Dave and the ET …”
That’s the Executive Team, isn’t it?
David Smith: Yes.
Ms Page: “… have been aware of the significance of these challenges …”
That meant challenges to Horizon, didn’t it?
David Smith: I think so, yes.
Ms Page: “… and have supportive of the excellent work going on in so many teams to justify the confidence that we have in Horizon and in our supporting processes.”
So this trial was being used, wasn’t it – it was being used not as a criminal trial to determine whether somebody was guilty or not guilty of a crime but it was being used to justify the confidence that you had in Horizon?
David Smith: No, that’s not the case. It was being carried out through the normal course of events.
Ms Page: Why then did Mr Ismay, the man you say was in high regard across the business and therefore you chose him to write your report, why was he saying that the excellent work in that trial was to “justify the confidence that we”, POL, “have in Horizon”?
David Smith: I don’t know. You’d have to ask him. I don’t know why he chose those words.
Ms Page: In the aftermath of the Ismay report, this trial of Seema Misra was being actively used by Post Office as part of your campaign to claim that Horizon was robust, wasn’t it?
David Smith: I don’t believe so, no.
Ms Page: You were deliberately closing your eyes to problems with the integrity of Horizon that, weren’t you?
David Smith: No.
Ms Page: You were encouraging your staff to pursue a trial as another method of shoring up a problem system which you knew had serious question marks over it?
David Smith: Absolutely not. As I said to you before, the Seema Misra case started long before I joined the business, and –
Ms Page: You were watching it closely, weren’t you?
David Smith: We were watching it, yes.
Ms Page: You were encouraging your staff to pursue that trial as a test of Horizon?
David Smith: Not to pursue it as a test of Horizon, no. To pursue it, if it was appropriate to do so, like all other cases.
Ms Page: Thank you. Those are my questions.
Sir Wyn Williams: Thank you, Ms Page.
That’s it, is it Mr Stevens?
Mr Stevens: Yes, sir, that is it.
Sir Wyn Williams: Right.
Thank you, Mr Smith, for making a witness statement and for answering all the questions put to you. I’m grateful to you.
The Witness: Thank you, sir.
Sir Wyn Williams: Right. We’ll adjourn until – if we give ourselves a full hour, 2.05, we should get through the afternoon, Mr Stephens, yes?
Mr Stevens: Yes, thank you, sir.
Sir Wyn Williams: Fine, that’s what we’ll do.
(1.05 pm)
(The Short Adjournment)
(2.05 pm)
Mr Blake: Good afternoon, sir, can you see and hear me?
Sir Wyn Williams: I can. Thank you.
Mr Blake: Thank you very much. Sir, this afternoon we’re going to hear from Sir Michael Hodgkinson.
Sir Michael Hodgkinson
SIR MICHAEL STEWART HODGKINSON (sworn).
Questioned by Mr Blake
Mr Blake: Thank you very much. Can you give your full name, please?
Sir Michael Hodgkinson: Yeah, Michael Stewart Hodgson.
Mr Blake: Sir Michael, you should have in front of you a witness statement.
Sir Michael Hodgkinson: Yeah.
Mr Blake: Is it dated 27 February 2024?
Sir Michael Hodgkinson: Yeah.
Mr Blake: Could I ask you to turn to the final page, please. Can you confirm that this is your statement?
Sir Michael Hodgkinson: Yeah.
Mr Blake: On the final page, that’s page 26, can you see a signature?
Sir Michael Hodgkinson: I can.
Mr Blake: Is that your signature?
Sir Michael Hodgkinson: It is.
Mr Blake: Is that statement true to the best of your knowledge and belief?
Sir Michael Hodgkinson: Yes.
Mr Blake: Thank you very much. That witness statement, which has the URN WITN10660100 will be uploaded onto the Inquiry’s website shortly. Your career history is set out in your statement at length and, for today’s purpose, I think all we need to know is that you were the Senior Non-Executive Director of Royal Mail Holdings in January 2003 until August 2007; is that right?
Sir Michael Hodgkinson: That’s correct.
Mr Blake: And also the Chairman of Post Office Limited from May 2003 to March 2007?
Sir Michael Hodgkinson: Correct.
Mr Blake: Thank you. Can I ask if possible for you to come slightly closer to the microphone?
Sir Michael Hodgkinson: Sorry.
Mr Blake: Thank you. After leaving Royal Mail and Post Office, you held a variety of positions: you were Deputy Chairman of TUI Travel until 2018; and you also had various involvement with Transport for London, rail and airport interests and companies; is that correct?
Sir Michael Hodgkinson: That’s correct.
Mr Blake: For those who aren’t aware, can you explain what Royal Mail Holdings was and its relationship to Post Office Limited, and also where Royal Mail Group fell in with that?
Sir Michael Hodgkinson: Right. The structure of the company was Royal Mail Holdings was the main company and under it had several subsidiary companies: it had GLS, which was the parcel business in Europe; it had Parcelforce; it had Royal Mail Group; and then Post Office.
Mr Blake: Your involvement with Royal Mail Holdings was principally because of your involvement with Post Office Limited, was it –
Sir Michael Hodgkinson: Yeah.
Mr Blake: – albeit that you had some degree of oversight of the whole group.
Sir Michael Hodgkinson: Correct.
Mr Blake: Can you assist us with how decisions and strategies of the Post Office Limited Board informed or affected the goals of the Royal Mail Holdings Board and vice versa?
Sir Michael Hodgkinson: Right, obviously, the Royal Mail Holdings was a much bigger company, much bigger sums of money but, nevertheless, the Post Office was still a significant part of the business and, unfortunately at that time, it was still loss-making. So one of the strategies which was applicable to both the benefit of Royal Mail Holdings and for Post Office Limited is could we actually devise a strategy that would be much more financially viable for the Post Office company, and obviously that would have fed into Royal Mail Holdings.
Mr Blake: How were the two boards related in respect of that?
Sir Michael Hodgkinson: Right, the Post Office Board reported in to the Royal Mail Holdings Board and both the Chief Executive and the Chairman of Post Office were on the Royal Mail Board.
Mr Blake: Thank you. We’ll see in due course some minutes of various board meetings from both Post Office Limited and Royal Mail Holdings. I want to ask you some general questions about the governance of Post Office Limited and I’m going to start in respect of board composition and various committees.
Could we bring up on to screen POL00423140, please. POL00423140. Thank you very much. I believe this is your first board meeting as Non-Executive Chairman of Post Office Limited?
Sir Michael Hodgkinson: Correct.
Mr Blake: Just pausing at the very beginning, actually, where you’re listed as Non-Executive Chairman, can you assist us with why you were a Non-Executive Chairman, as opposed to an Executive Chairman?
Sir Michael Hodgkinson: Just basically, that was the title I had when I started. I don’t think there was anything specific, it was just that we were part of the Royal Mail Board’s Non-Executive Team and that just naturally carried down to Post Office.
Mr Blake: Thank you. Can you take us through, if we zoom out slightly, the general composition of the board when you first joined, in terms of executives, non-executives.
Sir Michael Hodgkinson: Would it be helpful if I discussed what the company was looking like –
Mr Blake: Absolutely.
Sir Michael Hodgkinson: – because it wasn’t a fully integrated company. It still was taking significant numbers of services from Royal Mail, so I think that’s quite an important point to make before I get into the individuals.
Mr Blake: Why is it?
Sir Michael Hodgkinson: Basically because we were part of an integrated company and one of the reasons that they wanted someone like myself to join as Chairman of the Post Office was the thought that, in the next three or four years, that the Royal Mail Letters business would be privatised and you would then need to build up this separate Post Office company, not just to be what it was of the day but to eventually bring in and onboard all of the other aspects of services that the Royal Mail supplied and bring in full traditional corporate governance.
Mr Blake: So at this stage, May 2003, was it a company without full traditional corporate governance?
Sir Michael Hodgkinson: Absolutely, there were no Non-Executive Directors other than Allan Leighton and, for a brief period of time, there was Elmar Toime, who was doing an assignment with Royal Mail from New Zealand.
Mr Blake: Sir Michael, could I ask, if possible, for you to speak slightly louder, if possible.
Sir Michael Hodgkinson: Sorry, okay.
Mr Blake: We see on the Board there apologies from, for example, the Chairman and the Executive Deputy Chairman of Royal Mail Holdings. Did they automatically have a seat on the Board of Post Office Limited?
Sir Michael Hodgkinson: Yeah.
Mr Blake: Was it regular that they would attend or not attend?
Sir Michael Hodgkinson: I think David Mills was always there and Allan attended for quite a lot of the time.
Mr Blake: Was that one way in which there could be feedback from the developments at the Post Office Limited to the Royal Mail Holdings or was there some other route to –
Sir Michael Hodgkinson: I think it was two things. I think one, yes, feedback back to Royal Mail Holdings but I think Allan was quite keen to have a direct input into the Post Office as well.
Mr Blake: Thank you, we can zoom out of that. I’m going to bring up on the screen, and perhaps actually at the same time side by side, some minutes from later in your time at the Post Office Limited. Can we look at POL00021495, please. Thank you very much. That’s from October 2006. If it’s possible to have those both on screen side by side, please. Thank you very much. Perhaps if we’re able to zoom in to the top half of both of those pages, slightly more, if possible.
Zoom out slightly, so it has the full list of those present. Can you assist us with any significant changes that occurred in respect of the composition of the board between, say, 2003 or 2006, or even when you left?
Sir Michael Hodgkinson: Well, the most significant change was the change in Chief Executive. David Mills retired at the end of 2005 and Alan Cook joined in, I think it was March 2006. So that’s the biggest change. But, in addition, there had been several other retirements so David Miller had left Operations and we had new people on board there. We had – just looking through there, there was a new Personnel Director, Human Resources, so there was a significant amount of change over that what is three and a half year period.
Mr Blake: Taking Alan Cook, he was brought on originally as a Non-Executive Director –
Sir Michael Hodgkinson: Yeah.
Mr Blake: – but by 2006 he had become Managing Director. By 2006 was the Board any different in terms of Non-Executive Directors or was it similarly an executive-led board?
Sir Michael Hodgkinson: It was basically still an executive-led board. We had in the interim, we had Brian Goggin, who was the Chief Executive of the Bank of Ireland, on the Board as a Non-Exec, for about a two-year period.
Mr Blake: Can you assist us with the reasons behind that? Was it something of that particular time, that was routine, or was that something that was special to the Post Office or a little bit different?
Sir Michael Hodgkinson: The Post Office had never had a Non-Executive Director before I’d actually joined it. We took Alan Cook on as a Non-Exec because I thought we desperately needed some realtime, live, experienced person for selling financial services, which was the big business we were actually entering and that’s why we hired Alan Cook as a Non-Executive Director, and also, with a little bit hope that he might eventually become the Chief Executive because, again, I felt it was really important that we had someone who was very experienced, knowledgeable, about selling financial services.
He also had another very important feature and that is he had been well known to government and well respected by government.
Mr Blake: We often see nowadays Senior Independent Directors. Was that a thought that was considered in respect of the composition of the Post Office Board?
Sir Michael Hodgkinson: Not at that time but that was in the back of my mind all the time because one of the reasons that it was important that I had joined when I did was I, in the 18 months run-up to any form of privatisation would have to decide, first of all, what kind of corporate governance structure we needed for the Post Office going forward and also what kind of individual experience would be helpful, so that we would be ready to set up a high-quality, standalone business.
Mr Blake: We see here also, on the left-hand side we have the Chairman and Executive Deputy Chairman of Royal Mail Holdings. By 2006, it seems to be the Chairman of the Royal Mail Group. Can you assist us with that at all?
Sir Michael Hodgkinson: I don’t think that is significant. I think it’s just the way the secretary noted the meeting minutes.
Mr Blake: Thank you. We have Alan Barrie listed as IT Director, and that’s on the left-hand side.
Sir Michael Hodgkinson: Yeah.
Mr Blake: I believe he left in 2004?
Sir Michael Hodgkinson: Yeah.
Mr Blake: But we later see, on the right-hand side, David Smith as IT Delivery Director.
Sir Michael Hodgkinson: Yeah.
Mr Blake: That’s not the David Smith that is in this phase; we heard from – we know him as David X Smith because of his email address, he’s listed as David X Smith.
Sir Michael Hodgkinson: Yeah.
Mr Blake: He was the IT Delivery Director. Is there a difference there? So in 2003 it looks as though you had an Information Technology Director as a full member of the Board, whereas by 2006 it seems as though the IT Delivery Director, David Smith, was only in attendance rather than a full member?
Sir Michael Hodgkinson: I think that’s true.
Mr Blake: We do see, however, Ric Francis, we can see apologies on the right-hand side, who is the Operations Director, and he seems to be a full member?
Sir Michael Hodgkinson: Yeah, and he took over, really, the day-to-day management of IT.
Mr Blake: So are we to read into this that, actually, the Information Technology Director was replaced at a higher level by a new Operations Director?
Sir Michael Hodgkinson: Well, the Operations Director was really replacing the old Dave Miller role.
Mr Blake: So that was the Chief Operating Officer?
Sir Michael Hodgkinson: Yeah.
Mr Blake: So he had a much wider remit than just –
Sir Michael Hodgkinson: Yeah, yeah.
Mr Blake: – the delivery of information technology?
Sir Michael Hodgkinson: Yeah, yeah.
Mr Blake: Can you see any issue in that, in that presumably the Information Technology Director has a more hands-on dealings with, say, the Horizon system than possibly somebody at a higher level of Operations Director?
Sir Michael Hodgkinson: I mean, that’s a fair comment but I think everybody had quite a high degree of confidence in David Smith, and then it would be really up to Alan Cook, as he came in, to decide whether he wanted to make more changes to the Board.
Mr Blake: On the right-hand side, you’re now listed as Chairman rather than Non-Executive Chairman. Was there a formal change over that period or, again, is that just the minutes?
Sir Michael Hodgkinson: Just the minutes.
Mr Blake: Looking at the structure of both in 2003 and later on, do you consider that the structure of the Board of Post Office Limited provided sufficient challenge to the executives?
Sir Michael Hodgkinson: I mean, I think there was a fair bit of challenge on this Board but also the Post Office Chief Executive and myself were challenged quite strongly on things at the Royal Mail Holdings Board because it was quite a significant subsidiary of the Holdings Board. So there was definitely some external challenge to what was going on.
Mr Blake: Whose job was it in particular to feed back to the Royal Mail Holdings Board?
Sir Michael Hodgkinson: Basically, if I remember correctly, there was a Chief Executive’s report to each of the Royal Mail Holdings Board meetings.
Mr Blake: So, in terms of responsibility, I know that both of you, the Chairman and the Chief Executive, attended that board. Did you principally see it as the Chief Executive’s role –
Sir Michael Hodgkinson: Yeah.
Mr Blake: – to feed back, rather than your role?
Sir Michael Hodgkinson: Well, he can be reporting back in much more detail, yeah.
Mr Blake: Can you assist us also with the dynamics between various individuals involved, were certain members more active or more open and more able in the list that we see here? Did you have any particular concerns about any of those individuals?
Sir Michael Hodgkinson: I mean Peter Corbett was always a very solid Finance Director and always very sensible. We had split, I think, the Sales and the Operations Director because we were feeling we desperately needed more input to selling the new financial services. But, generally speaking, I would say it was a relatively harmonious team who were working very solidly through the key objectives that we actually had, and the main objective we had was to have a credible plan for government by the end of 2006 for future funding, and that was the main focus of the Board and had been the main focus of the Board over the previous three years.
Mr Blake: How would you describe your approach to your style of chairmanship of this particular board? Were the meetings, for example, very prescribed; were they very open: a free-for-all, or something else?
Sir Michael Hodgkinson: The meetings were clearly geared around achieving the core objectives that we had. So, if you go back to the beginning, then the core objectives we had were to do the first round of Post Office rationalisation; to improve or reduce the loss-making Crown Office branches; to judge over that period of time, myself, the quality of the management; and, as I say, to generally reduce costs over the operation.
And those objectives stayed pretty much the same over the period and I think you’ll see a common theme with the big new theme coming in, which was the introduction of financial services.
Mr Blake: So the overall theme being reducing costs, increasing profitability?
Sir Michael Hodgkinson: And introducing new products because we were at the time when the traditional product streams that were going through the Post Office were dying. So, you know, we knew that, eventually, pensions would be paid directly into pensioners’ bank accounts, the things like the TV licences, the car licences, a whole range of the traditional products were actually moving away from the traditional Post Office. So it was absolutely vital that new services were brought in, if there was to be any form of viable future.
Mr Blake: We’ll see in due course some serious problems expressed at the Board level about the solvency in 2006. Was that heightened in 2006 or was it a constant theme throughout your time?
Sir Michael Hodgkinson: It was a constant theme throughout the whole period, where the Directors had to constantly be looking at this, for fear of becoming vulnerable themselves, for overtrading and being liable for creditors.
Mr Blake: When you started in your role, I think you were told that it was going to take two days a week to act as Chairman of the Board. Whilst you were Chairman, you were also involved in a number of other companies?
Sir Michael Hodgkinson: Yeah.
Mr Blake: I think you were Non-Executive Director of something called FKI Plc, which is an engineering and manufacturing company –
Sir Michael Hodgkinson: Yeah.
Mr Blake: – until July 2008; is that right?
Sir Michael Hodgkinson: Yes.
Mr Blake: You were a board member of Transport for London and Chairman of their Finance Committee between 2001 and 2012?
Sir Michael Hodgkinson: Yeah.
Mr Blake: Non-Executive Director of First Choice Holidays, later TUI, including as Chairman from March 2004?
Sir Michael Hodgkinson: Yeah.
Mr Blake: Non-Executive Director of Dublin Airport between 2004 and 2010?
Sir Michael Hodgkinson: Yeah.
Mr Blake: The Post Office Limited Nominated Director on the Board of Bank of Ireland because of that link between the two –
Sir Michael Hodgkinson: (The witness nodded)
Mr Blake: – between May 2004 and July 2006; is that correct?
Sir Michael Hodgkinson: Yes, that’s correct.
Mr Blake: Taking, for example, the role of First Choice Holidays. How many days a week did you tend to dedicate to that role?
Sir Michael Hodgkinson: Basically, the First Choice Holidays was a unique situation, insofar as I really only needed to dedicate a day a week because we had a very unique situation that worked very well, in that we had a lot of Non-Executive Directors that had proper jobs during the week, and one of the things that we did was, before the board meeting, we would actually always have a Non-Executive Directors dinner which enabled the Non-Executive Directors to discuss offline all of the kind of issues that they thought we needed to be addressing at the board, and then the next day we would actually have the board meeting and all the committees, so that these Non-Executive Directors were effectively only taking out one day for the process and then, in addition to that, I always had a dinner ten days before the board meeting with the Chief Executive, to get up to speed with what was going on and to decide the issues we need to put forward for the next board.
Mr Blake: Just pausing there, in respect of the Post Office, we see or we’ve seen a lot of formal board minutes and committee minutes, things like dinners and social meetings, did they take place with, for example, the Chief Executive of the Post Office?
Sir Michael Hodgkinson: Not on a regular basis. Occasionally, we would have a dinner, but basically no.
Mr Blake: Was most of your business on the Post Office done in the formal structures of –
Sir Michael Hodgkinson: Yeah.
Mr Blake: – committees –
Sir Michael Hodgkinson: Yeah.
Mr Blake: – boards. Yes.
Do you consider that, given the large number of other involvements you had at the time, that you had enough time to dedicate to the role of Chairman.
Sir Michael Hodgkinson: Well, I thought at the time I did. I thought that I had planned my workload so that I had between a three-quarters of a day and a day a week spare, because I knew things would turn up, they always turn up, and that was where I was able to fit in the non-executive role of the Bank of Ireland because, otherwise, I couldn’t have done it.
Mr Blake: Do you think a part-time Chairman was the right approach for Post Office during this period?
Sir Michael Hodgkinson: Given what people knew at the time, yes.
Mr Blake: How do you distinguish that from what people know now?
Sir Michael Hodgkinson: Well, I guess the kind of big issues with Horizon, which just were not known.
Mr Blake: So do you think a full-time chairmanship would have made a difference in respect of or could have made a difference?
Sir Michael Hodgkinson: Well, I mean, it could possibly have made a difference. I can’t say definitely.
Mr Blake: What is it that you would have done personally differently if you had been a full-time Chairman of Post Office?
Sir Michael Hodgkinson: I think, based on the information that we actually had at the time, we – I would probably have spent more time with the joint venture company between the Bank of Ireland and the Post Office for developing the financial services, because that was the key product, and that was where we had the troubles, or the problems.
Mr Blake: Thank you. Those can come down. I’m going to ask you about committees. You’ve said in your statement at paragraph 31 that Post Office didn’t have any of its own subcommittees when you joined and you introduced the Risk and Compliance Committee. You say that wasn’t unusual for a subsidiary.
Is that right, even in respect of a subsidiary of the size of Post Office Limited?
Sir Michael Hodgkinson: I think, if you look at things like, you know, Nominations Committee, Remuneration Committee, they can be done through a committee that is based on something the size of the Royal Mail Holdings. But I think again, when you go down into things like risk and day-to-day stuff, which is why we set up the Risk and Compliance Committee, we should have our own starting point of understanding what we might need going forward.
Mr Blake: Did it surprise you when you joined that the Post Office didn’t have that kind of a committee in place?
Sir Michael Hodgkinson: No, knowing the knowledge of the business when I joined, because the business when I joined was very clearly that each individual company was using the committees of the central services, so remuneration, audit, nomination, so all the conventional board committees, and it was only going to develop its own committees as it went forward.
The main lurch forward would have been when we finally got to the point of a privatisation and, in the run-up to the privatisation, that’s when the new corporate governance processes would be introduced.
Mr Blake: Given the size of the company, though, not necessarily profitability but certainly national importance, do you think that dealings with things at the higher level the Royal Mail Holdings level, was actually too high?
Sir Michael Hodgkinson: Probably. Which is why, as I say, we introduced the Risk and Compliance Committee to start looking at things more locally.
Mr Blake: How about a company that is involved in the prosecution of people? Do you think that special rules should apply in respect of those kinds of committees?
Sir Michael Hodgkinson: I think that’s fair comment.
Mr Blake: Were you aware of the significance of, for example, prosecutions when you joined the Post Office?
Sir Michael Hodgkinson: No, definitely not.
Mr Blake: One of the reasons you introduced that committee, you’ve said in your statement, was because the plan was for the Post Office to progress into the financial market, and need for greater corporate governance in respect of the financial market. Can you tell us why the financial market aspect was seen as particularly important?
Sir Michael Hodgkinson: Right. I mean that was very important. First of all, it was new products for us, so there was no real history. Secondly, these products were becoming more and more regulated and each product had to be not only designed to meet the regulation but sold in a way that matched the approved selling processes for those financial regulated products, and we were looking at bigger and bigger, wider and wider ranging of those products. So, in order to keep some form of control, we had to have our own Risk and Compliance Committee purely for financial services.
Mr Blake: Does it strike you as interesting that a company would approach its involvement in financial markets as perhaps more serious from a risk perspective than a company that prosecutes people or is involved in the prosecution of people?
Sir Michael Hodgkinson: Yeah, I mean, that’s fair comment.
Mr Blake: You also say in your statement, paragraph 32, that with privatisation of Royal Mail Holdings, further committees would eventually be required?
Sir Michael Hodgkinson: Yeah.
Mr Blake: Why would privatisation change the position?
Sir Michael Hodgkinson: I think fundamentally the cost base of the business and obviously setting up your own complete new corporate governance processes was going to be quite expensive, and if you could still use the Royal Mail Holdings ones, then that was a sensible way to go forward, until there was clarity of what was going to happen, then.
Mr Blake: Post Office was wholly owned by Government. To what extent did you consider the corporate governance rules of, say, a commercially listed company to be applicable to a wholly Government owned company?
Sir Michael Hodgkinson: Well, the private listed company rules were pretty stringent, and you had to follow pretty strict guidelines, so there was nothing wrong with the corporate governance principles of a Plc. The issue, when you were part of government was you needed to get involved in other areas for which the government might want to deviate from a conventional private profit related company, and the classic case in the case of the Post Office was the funding of the rural network, and so we always were having discussions not just about running the profit side of the business but also making sure that the social responsibility side of the business could be met.
Mr Blake: I hope this isn’t too technical a question but, corporate governance rules that applied to private companies such as financial reporting counsels combined code, did you see those as applying to Post Office Limited or was it something different because it was government owned?
Sir Michael Hodgkinson: I think we were aiming to replicate, over time, the Plc corporate governance codes.
Mr Blake: So when you started, did you inherit a company that was or was not closely aligned to those guidelines?
Sir Michael Hodgkinson: In the Post Office?
Mr Blake: Yes.
Sir Michael Hodgkinson: Yeah, no, it didn’t have all those corporate governance procedures there.
Mr Blake: By the time you left, do you consider that there was an improvement and how significant was that improvement?
Sir Michael Hodgkinson: Well, there was an improvement, insofar as we had the Risk and Compliance Committee, which was the basis of moving forward, and that committee was evolving all the time, as we tried to broaden its scope. So that was the start but it could by no means be the end.
Mr Blake: So are we to take it that you didn’t see that kind of a committee as mandatory but you were building it up in order to try to closely replicate the private sector?
Sir Michael Hodgkinson: Yeah.
Mr Blake: Yes?
Sir Michael Hodgkinson: Yeah, and also that we knew we would absolutely have to have it in, you know, maybe one, two years’ time. So getting it going sooner rather than later was a sensible proposition.
Mr Blake: What difference did you see in respect of the governance of a publicly listed company and a publicly owned company?
Sir Michael Hodgkinson: I need to think through that in two stages. The first stage was that Post Office was not, as I say, a fully fledged company, so didn’t have a suite of corporate governance processes that you would have expected to see in a Plc. So that is a fairly significant difference from when you start.
When you move to the next stage, when that’s all set up, then I think the only major difference would be, if you’re fully owned by the Government, then, obviously, you have one shareholder to agree your corporate strategy with, so that is quite different from the private sector.
Mr Blake: What role did you see for Government and for the Civil Service playing in that overall governance picture?
Sir Michael Hodgkinson: Well, the biggest role in the – for the Post Office was really twofold: (1) there was this whole question about funding the social network and which was an absolutely crucial part of the debate and discussions with Government; and then the second issue, which you referred to earlier, which comes up time and time again, is, given that we would require money from the Government going forward, then there was constant debate about how could we actually get the money, what security did we actually have over the commitments and how did that result in the issues we had to face with day-to-day trading?
Mr Blake: What, if any, conflicts of interest did you see in the ownership of the Post Office by the Government?
Sir Michael Hodgkinson: I don’t think there was any particular conflict and I – I’ll be honest, I never thought it was ever going to be a private company. I thought it would be a standalone, fully government-owned company.
Mr Blake: Why did you think that?
Sir Michael Hodgkinson: I thought that the social issues surrounding the size of the network were probably never going to go away and were always going to be up for constant debate, and when you need a substantial sum of money, other than from private markets who can see a return, you’re always going to be vulnerable, and that never struck me as being a thing that would be capable of being a private company –
Mr Blake: I want to ask you about –
Sir Michael Hodgkinson: – on its own.
Mr Blake: – prosecutions and the Horizon system and we’re going to come back and look at specifics, but where did you consider oversight and accountability in respect of the investigation and prosecution functions to lie within the company?
Sir Michael Hodgkinson: I think there was an underlying assumption that there was a secure chain with several people’s involvement, insofar as everybody at the time thought Horizon data was accurate. You then had the – well, you then had the audit process, you then had line management, who had to make a decision, there was then a separate investigation process and then, finally, there was a legal process, if it got that far. So there were many, many people in the chain that needed to be convinced that the process was reasonable.
Mr Blake: Was there a specific mechanism for feedback to the board or to the Chair in respect of the investigation and prosecution function?
Sir Michael Hodgkinson: No, there wasn’t.
Mr Blake: Who would you have expected to have fed back to the board in respect of that function?
Sir Michael Hodgkinson: I would have expected the Chief Operating Officer and the Chief Executive to have reported that back.
Mr Blake: Same question but for contractual and personnel management of subpostmasters. So where do you consider the oversight and accountability for those to lie?
Sir Michael Hodgkinson: Well, that was clearly in the Chief Operating Officer’s area.
Mr Blake: Again, was there a specific mechanism for feeding back or was that –
Sir Michael Hodgkinson: That was very much delegated.
Mr Blake: Where did you consider oversight and accountability for issues relating to the Horizon system itself to lie?
Sir Michael Hodgkinson: That would be with the Post Office Board.
Mr Blake: The Post Office Board?
Sir Michael Hodgkinson: Yeah.
Mr Blake: Do you recall any specific mechanisms for reporting and feeding back on that to the Board?
Sir Michael Hodgkinson: There were constant reports to the Board on how the system needed to be developed going forward, and there were kind of three phases there. There were lots of individual projects that would come up, like for example I remember the foreign exchange had been done on a separate terminal and we wanted to get it on to the Horizon terminal, so that there was a project that asked for money to do that, and that was not unusual, to get products doing that.
There was then the two major projects which occurred during my – well, one occurred and one was being planned. One was IMPACT and the other was Next Generation, so there was a lot of feedback to the board, generally, about Horizon but mainly on a forward-looking basis, because, as I say, there was a very strongly held view that Horizon was good.
Mr Blake: Who was it that you would expect to feed back to the board in respect of that information?
Sir Michael Hodgkinson: Well, that would be both the IT Director in the early days, then the IT Director and the operations guy and then also the Finance Director.
Mr Blake: Why the Finance Director?
Sir Michael Hodgkinson: Well, because he really was the main driver behind the IMPACT project.
Mr Blake: Putting those three together, did the Board, so far as you recall, ever receive notice of concerns about prosecutions relating to Horizon or problems with the Horizon system itself?
Sir Michael Hodgkinson: I was not made aware of those.
Mr Blake: I’d just like to read paragraph 38.1 of your statement, which addresses the legal department. It says:
“I do not believe the Board had direct oversight or involvement with the Legal Department and I do not recall the structure of the Legal Team. This was ultimately the responsibility of the CEO and COO.”
We saw when we started today the Board composition. It doesn’t seem as though there was what you might see nowadays, a General Counsel –
Sir Michael Hodgkinson: Yeah.
Mr Blake: – someone of an equivalent position.
Was there, in your view, any gap in relation to oversight of the Legal Department at the Post Office?
Sir Michael Hodgkinson: I think there was and I think that was part of the fact that some of the functions remained central.
Mr Blake: Can you expand on that, please?
Sir Michael Hodgkinson: I think we had a subset of the Royal Mail Legal Department.
Mr Blake: What was the problem with that?
Sir Michael Hodgkinson: I think then it wasn’t represented on its own right on the POL Board.
Mr Blake: Did that change at all during your time?
Sir Michael Hodgkinson: No.
Mr Blake: Was that something you were aware of at the time or is that looking back now?
Sir Michael Hodgkinson: I think more looking back.
Mr Blake: More broadly, how would you see the experience of subpostmasters reach board level? Was there data collection, surveys, one-on-one discussions with, for example, the NFSP or the CWU?
Sir Michael Hodgkinson: There were, as far as I’m aware, regular discussions of the operations team with the NFSP and one would have assumed that, if they had big problems, they would have been feeding back, which I was not aware of.
Mr Blake: Was there any way to directly feed back the experience of subpostmasters, for example?
Sir Michael Hodgkinson: I’m not aware of surveys that were done.
Mr Blake: No. Do you think, in some way, that might have been affected by the nature of the contract with subpostmasters where, for example, a subpostmaster wasn’t necessarily considered to be an employee of Post Office and they weren’t necessarily treated in the same way; they were something else, something outside of –
Sir Michael Hodgkinson: We were certainly doing very big surveys of our own internal staff, and you’ll probably see all the way through, both Royal Mail and the Post Office Board minutes, the “Have your say”, results. As far as I know, they were not done with the external postmasters.
Mr Blake: Can you assist us with really how the Board saw subpostmasters and saw the role of the subpostmasters?
Sir Michael Hodgkinson: I think the Board saw the role of the postmasters as a very important part of the overall package. They were going to be very important in actually selling the financial services that we hoped would form the basis of the company’s future profitability. They were also crucial in supporting the social obligations that the Post Office had. So I think they were a pretty important part of the business.
Mr Blake: In those circumstances, you’ve said that there was a lot of feedback provided by employees of the Post Office?
Sir Michael Hodgkinson: Yeah.
Mr Blake: In circumstances where subpostmasters were seen as important, why do you think it was that there wasn’t that level of feedback being obtained from subpostmasters?
Sir Michael Hodgkinson: I can’t answer that question properly because it wasn’t discussed at the time. But I personally think that it was because people saw the subpostmasters as highly motivated individual businesses, whereas our employees, we had a major responsibility to motivate them and, with all of the headcount reductions that were taking place, obviously morale was quite a challenge and we were constantly trying to keep in touch with how we felt the vast majority of the staff felt.
Mr Blake: If I may pick up on a particular word that you used, you said “businesses”. Was it that subpostmasters were seen as businesses rather than individuals, humans?
Sir Michael Hodgkinson: I think they were probably, yeah.
Mr Blake: I’m going to move on to the Risk and Compliance Committee that you set up and I’d like to start with some board minutes that refer to its establishment. Can we look at POL00021486. This is a board meeting of 15 December 2004, and we see there, just while we’re on this page, we can see David Smith, that’s David X Smith Delivery Director, Acting IT Director at that stage.
Can we turn to page 6, please. I’m just going to read to you from the bottom of that page and over to the next page. This refers to the Risk and Compliance Committee being established:
“Peter Corbett provided a short presentation to highlight the work of the newly formed Risk and Compliance Committee.”
Then it goes on to show the various things that the Board noted:
“The Risk and Compliance Committee chaired by Sir Michael Hodgkinson. Graham Halliday and David Miller regularly contribute to it;
“The scope of its activity included audit, compliance and legal issues …”
Just pausing there, did you expect that major litigation risks would be raised in this forum?
Sir Michael Hodgkinson: Not initially, but it’s something that one would have expected to move forward when we developed the Committee.
Mr Blake: Why not initially?
Sir Michael Hodgkinson: I think just because there was just time to get the thing going. This was an entirely new process, we had entirely new lots of information flow to understand.
Mr Blake: So one of its long-term purposes would be to have major litigation risks brought to that committee?
Sir Michael Hodgkinson: Eventually, yeah.
Mr Blake: Eventually:
“Its primary aim was to ensure the service and conformance elements of the business were working together properly. Rod Ismay … was working closely with Lynn Hobbs … and Tony Marsh … to help ensure this is achieved;
“The next quarterly meeting would be on 5 January 2005 to discuss Branch Control, Vital Few Controls, Audit Reports, Anti-Money Laundering measures, Crime and Fraud and the work of the Group Audit Committee.”
It then says:
“The Risk and Compliance Committee had found that although the overall trend of losses due to fraud had fallen from an annual rate of £29 million to £20 million, this area still represented a significant risk.”
If there were concerns about Horizon, problems with the integrity of Horizon, was this the committee to bring those kinds of problems to?
Sir Michael Hodgkinson: It would certainly have been one of the committees, I think if people had thought there were big problems with Horizon, they would have come first of all to the board but they could also have come, and should also have come, to this Committee.
Mr Blake: So would this Committee have a wider or narrower remit? You say they should have gone to the Board?
Sir Michael Hodgkinson: Well, I think they would go to both because of the importance.
Mr Blake: We see a number of names there, Rod Ismay, Lynn Hobbs, Tony Marsh. Were they tasked with bringing risks to the committee setting agenda, or was that somebody else?
Sir Michael Hodgkinson: They were tasked with bringing, you know, the risk to the Committee, the agenda would be set by Peter Corbett and myself, and then each person that attended would have, you know, their own right to talk about what they wanted to talk about so that we had a fairly open agenda.
Mr Blake: We just recently spoken about the role of subpostmasters. Where did subpostmasters, if at all, fit in with the company’s consideration of risk? I mean we see there reference to fraud. Was it concerned principally with the risks that subpostmasters posed or did it consider risks to subpostmasters?
Sir Michael Hodgkinson: It considered risks to the whole business. So it was considering risks to the company for fraud, which would have included postmasters, but it also included crime risks in other areas of fraud, such as the Crown Offices and also the Cash-in-Transit Network. So it was, you know, fairly broad in its thought processes on fraud.
Mr Blake: In terms of major projects, so something like Horizon Online, was this a committee that would deal with that or was there a separate major projects committee?
Sir Michael Hodgkinson: The Horizon, you know, for example IMPACT, that would not have – the way that project would have been approved and developed would not have come through this committee until it was operational.
Mr Blake: Was there a separate major projects committee or equivalent?
Sir Michael Hodgkinson: There was not a separate committee, as such, but there were groups of people who were formed to judge, you know, projects, viability, et cetera, et cetera, and they would then report to the Board.
Mr Blake: Finally, how about whistleblowing? Where did that fit in to the overall picture?
Sir Michael Hodgkinson: Whistleblowing was just generic and they would have – any whistleblower would have had the right to blow the whistle to any single Board member, me, or wherever they thought would get the best, you know, listening.
Mr Blake: Do you recall any particular processes being in place at that time?
Sir Michael Hodgkinson: No.
Mr Blake: Can we please look at POL00021420, please. These are some minutes from a Risk and Compliance Committee. If we scroll down, please, we can see there, at the very bottom of this page, it says:
“Following appointment as Managing Director, Alan Cook to resign from this Committee.”
This is the Committee that addresses risk. Am I right to say that, if you held the position of Managing Director, it wasn’t seen as somehow appropriate for you to be on that committee?
Sir Michael Hodgkinson: Right, there was a big debate which went backwards forwards as to whether Alan should be off this committee because this committee was independent and governance, or whether he should be on it because all of the stuff that was being talked about was quite important. And eventually, I think, and I think the record will show, that Alan decided it was important enough for him to continue attending. But there was an iteration when we were debating how appropriate that was, and that’s what this refers to.
Mr Blake: So, ultimately, during the course of your time at the Post Office, the Managing Director in some capacity was attending those meetings?
Sir Michael Hodgkinson: At the beginning, the Managing Director did not attend, so I don’t think David Mills ever attended. As I say, this would have been Alan’s almost first week, and he I think – I can’t remember did he actually attend? If you scroll down or up.
Mr Blake: If we look at the top it says he sent his apologies.
Sir Michael Hodgkinson: Right, okay, but he was actually debating whether he should or should not come.
Mr Blake: Thank you. I’m now going to turn to some Board minutes. Can we please look at POL00021482, please. We’re now on 19 June 2003, so this is likely to be the second Board meeting that you attended.
Sir Michael Hodgkinson: Yeah.
Mr Blake: We have Alan Barrie there as Information Technology Director.
Sir Michael Hodgkinson: Yeah.
Mr Blake: So this is at a time where the Information Technology Director was a full board member, it seems; is that right?
Sir Michael Hodgkinson: Yeah.
Mr Blake: Do you recall who reported to him? Was it a particular team, individuals or something else?
Sir Michael Hodgkinson: I can’t remember the teams.
Mr Blake: Would you have expected him to have been apprised of any issues with Horizon?
Sir Michael Hodgkinson: I would have thought so.
Mr Blake: If we look over the page, page 2, please. We have “Chairman’s Business”?
Sir Michael Hodgkinson: Yeah.
Mr Blake: The second entry there is “Horizon”, and it says:
“The Chairman expressed a particular interest in furthering his understanding of the capabilities and limitations of the Horizon system. Meetings would be arranged with the appropriate managers to provide the Chairman with a detailed overview …”
Can you assist us with why Horizon was a particular interest of yours so early on in your time?
Sir Michael Hodgkinson: Right. I, by that time, had formed or – based on all the conversations and visits that I’d had, that, in fact, Horizon was a well regarded, well performing system. However, we were just about to launch into a whole new array of new products and it didn’t necessarily mean for me, coming into the business, that, in fact, the system was first of all capable of adapting to those new products and, secondly, was it suitable for those products? So I said it would be very important for me to at least gain an impression as to whether people in the development of Horizon had actually thought through the future, rather than just today. So that was the purpose of this particular question.
Mr Blake: We have there Alan Barrie’s name under “Action”. Was there a number of people that you spoke to about Horizon at this time?
Sir Michael Hodgkinson: On this particular issue?
Mr Blake: Well, it seems as though there’s going to be a meeting with appropriate managers?
Sir Michael Hodgkinson: Yeah.
Mr Blake: Do you recall who you met with?
Sir Michael Hodgkinson: Right. The answer is I can’t recall who I met with, I assume, but I can’t prove it, that Alan Barrie set it up. We could not get any minutes from the archive to see who had actually attended but I do remember that between three and five people attended this meeting and that was when they went through their view of what the future capabilities were.
Mr Blake: Were they all from the Post Office?
Sir Michael Hodgkinson: Well, I had thought that there was someone from Fujitsu but there is no way that we could prove that one way or the other, and they – that may have not been the case, but that’s what I thought.
Mr Blake: Now, the way that you’ve explained it seems to be that the focus is on the future rather than –
Sir Michael Hodgkinson: Yeah.
Mr Blake: – the past?
Sir Michael Hodgkinson: That was the future, yeah. I wanted to know because not only were the new products quite different, but if you go down – let’s say the system goes down for an hour with some products, it’s a nuisance, but if – and you see it all the time, if the banking system goes down it’s a crisis. And, given, you know, that we were government owned, I wanted to understand whether we not only had the ability of the system itself to handle the new products but the resilience to actually handle them. So that was the purpose of the questions.
Mr Blake: Was it a single meeting? Were there a series of meetings?
Sir Michael Hodgkinson: That was a single – well, it was a single long meeting, if I remember.
Mr Blake: Do you recall in the early days of your time as Chairman more meetings than this relating to Horizon?
Sir Michael Hodgkinson: Not that particular issue, as I think I said earlier, Horizon was a constant issue because there were constant requests for money to upgrade the thing to handle this particular new product, that particular new product, and then the big products of IMPACT and New Generation.
Mr Blake: During this particular meeting or any other meetings around this approximate time, did anybody raise any concerns about the integrity or reliability of Horizon?
Sir Michael Hodgkinson: No, not at always.
Mr Blake: I want to take you chronologically up to 2007, and we’ll be looking at some board minutes – not just board minutes but contemporaneous documents – to see the kinds of things that were known to some people within the business. I’d like to start with POL00028438, please. This is a document that we saw in Phase 2 of the Inquiry. Phase 2 related to the procurement of the Horizon system and the early days of the Horizon system.
Sorry, it’s POL00028439. We have it. This is a letter from Ernst & Young to Mr Miller. It’s dated 23 August 1999. David Miller at that stage, I think, was the Managing Director of the Post Office Network until 2001. We heard from him in Phase 2. He became the Operations Director, which in 2004 was renamed the COO and we’ve seen him appear in a number of those board minutes. I’m just going to read to you a few extracts from this letter.
This is at the acceptance testing phase of Horizon and Ernst & Young wrote in the following terms. They say:
“As auditors of the Post Office we have been asked by Post Office Counters Limited to provide you with our views in respect of certain accounting integrity issues arising from tests performed by [Post Office Counters Limited] on Horizon data in the live trial.”
I’ll skip down where it says:
“The following issue, as described to us by [Post Office Counters Limited] gives us concern as to the ability of [Post Office Counters Limited] to produce statutory accounts to a suitable degree of integrity. We understand that [Post Office Counters Limited] has attributed a severity rating of ‘High’ to this matter.
“Incident 376. Data integrity – In order to test the integrity of weekly polling of Horizon cash account transactions, [Post Office Counters Limited] are reconstructing a weekly total by outlet from daily Horizon pollings. At present this control test is showing discrepancies in that certain transactions do not record the full set of attributes and this results in the whole transaction being lost from the daily polling.”
During your enquiries into Horizon or at any time, did anybody tell you about the history of the acceptance process and matters such as this, concerns about data integrity, during that period?
Sir Michael Hodgkinson: No, never.
Mr Blake: If we go back, please, to POL00021482 – these were the minutes of 19 June 2003 – we see there David Miller, who was the addressee of that Ernst & Young letter, sat on the Board as Chief Operating Officer as a full board member; is that correct?
Sir Michael Hodgkinson: Yeah.
Mr Blake: Can we please look at POL00021485. These are the Board minutes from 13 October 2004. We, again, have Mr Miller attending as a board member. If we could please look at page 10. We have there a presentation relating to “Horizon Next Generation Business Case”. David Smith presented the Horizon Next Generation Business Case to the board and it details there the presentation that was received by the board.
Could we turn over the page to page 13. We have a presentation there under “Human Resources”. There is a report:
“The board agreed that in situations where fraud had been perpetrated against the Company, the appropriate civil orders would be used immediately and in advance of any criminal proceedings. This would help recovery efforts by ensuring that the assets of those involved in criminal activity were quickly secured. David Miller would verify the current procedures and report back to the Board.”
So did Mr Miller, who, as we see, is present and involved in matters relating to, for example, criminal proceedings at that Board meeting, did he ever raise at those board meetings, where the topic of Horizon was addressed, any concerns about Horizon integrity, Horizon reliability or any concerns about the impact or potential impact on prosecutions?
Sir Michael Hodgkinson: As I say, I never heard any serious concerns about the Horizon integrity raised when I was there at the Board.
Mr Blake: Thank you. I’m going to move on in time to one of our case studies from Phase 4, and that’s the case of Julie Wolstenholme. Can we please look at WITN00210101, please. I don’t expect you to have looked at this document at all during your time at the Post Office. But I’m just going to take you to a couple of paragraphs just to give you a flavour of this particular case.
This is a joint expert report that was obtained in the case of Mrs Wolstenholme, and I’m just going to read to you from page 2, please. If we scroll down page 2, Mr Coyne, the expert, says as follows, he says:
“This, in my opinion, is not a true representation of the evidence that I have had access to. Of the 90 or so fault logs that I have reviewed, 63 of these are without doubt system related failures. Only 13 could be considered as Mrs Wolstenholme calling the wrong support Helpdesk requesting answers to ‘How do I …?’ type training questions.
“The majority of the system issues were screen locks, freezes, and blue screen errors which are clearly not a fault of Mrs Wolstenholme’s making, but most probably due to faulty computer hardware software, interfaces or power.”
If we scroll down, please, over the page, he gives there further opinion. If we scroll down to the final couple of paragraphs, just to give you a flavour of this case that the Inquiry has heard a lot about already, it says:
“From 31 October … there seems to be a number of logs which talk of ‘large discrepancies’ in stock figures, trial balances with ‘all sorts of figures showing minus figures’.”
Next paragraph says:
“Although the documents do not list an upgrade taking place it seems that these ‘large’ reported discrepancies occur very frequently and shortly after the noted upgrade.”
If we please go on to POL00118229. This is again a document that we saw back in the beginning of Phase 4 of this Inquiry. It’s the advice from counsel in that particular case, and I’m just going to read to you some very short extracts on page 3, please.
Counsel summarises the case as follows:
“Mrs Wolstenholme has defended the proceedings, claiming that the computer system installed by the Post Office was defective and this was, in fact, the cause of the losses recorded within her accounts.”
The next paragraph says:
“The trial of this matter is now about one month away. A joint computer expert’s report has been obtained. This report concludes, from the limited records available, that the computer system installed by the Post Office did appear defective.”
If we go over to page 15, please. The bottom of page 15 has counsel’s conclusions. He says:
“On the basis of the above, it can be concluded that the Post Office claim against Mrs Wolstenholme will fail, save for her return of the equipment which she has possibly retained. Her claim against the Post Office in respect of failure to give proper notice is likely to succeed. What is the appropriate course of conduct in the circumstances, particularly given the desire of those instructing me and the Post Office to avoid, if possible, publication of the negative experts’ report in the public arena?”
So it seems as though counsel has been instructed, if possible, to avoid publication of that report that we have just seen.
A final document in relation to this matter. Can I take you to POL00142503, please. This is an email from Rod Ismay, relating to the settlement of that case. You can see the subject “Legal case – Cleveleys”, Mrs Wolstenholme. He says:
“In summary we suspended Mrs Wolstenholme in 2001 after apparent discrepancies in her cash accounts. We claimed for the value of these losses and she counterclaimed for loss of earnings. Within her claim was an ‘experts opinion’ which was unfavourable concerning Horizon and Fujitsu.
“We have lodged £25,000 in court but Mrs Wolstenholme has no legal representation and is pursuing the full amount of her claim (£188k). It goes to court next month.”
Then it says:
“Mandy – Peter Corbett is on holiday now.”
So Peter Corbett was the Finance Director who we have seen attended the board meetings.
Sir Michael Hodgkinson: Yeah.
Mr Blake: “I am therefore escalating this to Dave Miller.”
Again, Chief Operating Officer, also attended Board meetings:
“Do you have a copy of the IT ‘expert’s opinion’?”
So they were both, Peter Corbett and David Miller, members of the Members of the board.
Mr Miller’s evidence to the Inquiry is likely to be that he did sign off the settlement of that claim and he’s likely to say that he questioned whether there were problems with Horizon arising from this case and was told by Tony Marsh that there weren’t. But did he ever raise, for example, at Board level or with you personally, a significant payment relating to a Horizon related case?
Sir Michael Hodgkinson: I really don’t remember that.
Mr Blake: Would you have expected significant settlement sums to have been raised at board level?
Sir Michael Hodgkinson: I would have thought so.
Mr Blake: Can I please turn to POL00119895, please. We’re now moving to December 2005. Again, this is not a document that you would have seen at the time. It is a meeting. Present is Keith Baines, do you recall Mr Baines?
Sir Michael Hodgkinson: I don’t recall.
Mr Blake: We have Mandy Talbot the Litigation Team Leader. I’m just going to read a few extracts from this document. “Findings”, it says as follows:
“There is no generally understood process for identifying emerging cases in which the integrity of accounting information produced by Horizon may become an issue.
“There are a number of channels by which such cases may enter Post Office [and it refers to a flip chart list] and there is no process for making information about them available to all relevant functions. This increases the risk that different parts of the business may be dealing with the same issue and not coordinate responses.”
Go over the page, please. Paragraph 5 says:
“To date, the number of cases in which the integrity of Horizon data has been an issue is small; however, recent correspondence in the SubPostmaster may well cause an increase; also there may also be an effect from the introduction of transaction corrections, replacing error notices.”
If we scroll down, please, to paragraph 8. It says:
“If all potential cases were to require Horizon data to be analysed early in the process, then the workload would be considerable – and much would later prove unnecessary; currently there are around 12 suspensions per week, and a significant proportion of them will relate to financial discrepancies. Most of these are subsequently settled by agreement, or are not contested.
“Where a case does go to court, it is essential that Post Office is able to refute any suggestion that Horizon is unreliable (in general) or that it could have caused specific losses to the subpostmaster bringing the case. The evidence needed for these 2 points will be different.”
Just pausing there, it seems, from a reading of this document, that there are a growing number of cases relating to Horizon, and there is a concern amongst the business to coordinate those and to assure that the Post Office is able to refute any suggestion that Horizon is unreliable. Do you agree with that as a fair summary?
Sir Michael Hodgkinson: That’s what this seems to say.
Mr Blake: If we go over the page, please, to page 3 “Recommendations”:
“A coordination role should be established to maintain a list of all current civil cases and potential civil cases where accuracy of Horizon accounting information may be an issue, and ensure that all relevant business functions are made aware of these cases.”
If we scroll over, please, to page 5 we have there under “Specific actions”:
“KB [Keith Baines] – to brief Dave Smith on the meeting’s recommendations.”
That’s David X Smith, who we saw previously regularly attended Board meetings?
Sir Michael Hodgkinson: Yeah, the IT, yeah.
Mr Blake: Can we please look at RMG00000131. These are minutes of the Board meeting. This is two months earlier, so 19 October 2005. We see, if we scroll down, we have the names Derek Rocholl and David Smith IT Delivery Director.
If we turn to page 9, halfway down there is a presentation to the Board on a Horizon proposition. It says:
“Ric Francis introduced Dave Smith and Ian O’Driscoll. A presentation was provided on the Horizon Next Generation”, and it notes various things from the board.
So around the time, slightly before that meeting that we just saw, Mr Smith was presenting to the board on matters relating to Horizon. Did Mr Smith ever raise any concerns with Horizon integrity, Horizon reliability or the growing number of cases challenging Horizon, either with the board or with you personally?
Sir Michael Hodgkinson: No, I don’t think so.
Mr Blake: While we’re on this document, if we could just turn to the first page, we see there the name Ric Francis, now Operations Director, as a full member of the Board. That’s October 2005.
Can we please look at POL00081928, please. Now, this is a series of emails, again not ones you will have seen at all. Can we look at page 5, we’re in February 2006. If we zoom out slightly, we can see that this is an email chain, and on that chain we have somebody called Gary Blackburn, who is listed as Resolution Manager, Operations, and also, if we scroll down the page we have Lynne Fallowfield, Problem Manager, Operations.
Would they have fit – I took you just now to Ric Francis, Operations Director. Were those roles we see there of Operations, did they fit under him?
Sir Michael Hodgkinson: Could you go back to the previous one?
Mr Blake: The previous document or the –
Sir Michael Hodgkinson: No the previous name.
Mr Blake: The previous name, yes. If we scroll up, it’s Gary Blackburn, Resolution Manager, Post Office Limited, Operations.
Sir Michael Hodgkinson: I’m honestly not sure where they would have figured in the organisation.
Mr Blake: If Ric Francis’ title was Operations Director, is it likely or unlikely that they would have fit under him, or are you not able to assist?
Sir Michael Hodgkinson: I honestly can’t answer that question. I don’t know. They could be in finance but I just don’t know.
Mr Blake: Would they be reporting to somebody who attended the Board in some way?
Sir Michael Hodgkinson: They would certainly be part of a chain of people reporting to the Board but they may not have been the immediate next report.
Mr Blake: Who is, in your view, the likely Board member that they would have reported to or are you not able to assist?
Sir Michael Hodgkinson: I honestly can’t tell you. I really don’t know. I don’t recognise the names.
Mr Blake: Well, if we scroll over the page, I’m just going to briefly read to you from this email chain. It’s one that the Inquiry has seen before, it relates to what’s known as the Callendar Square bug, and this is an email from Anne Chambers. It relates to a problem at the Callendar Square branch and Anne Chambers says as follows, she says:
“Haven’t looked at the recent evidence, but I know in the past this site had hit this Riposte lock problem 2 or 3 times within a few weeks. This problem has been around for years and affects a number of sites was weeks, and finally Escher say that they have done something about it. I am interested in whether they really have fixed it which is why I left the call open – to remind me to check over the whole estate once S90 [that’s a particular release] is live – call me cynical but I do not just accept a 3rd party’s word that they have fixed something!
“What I never got to the bottom of, having usually had more pressing things to do, was why this outlet was particularly prone to the problem. Possibly because they follow some particular procedure/sequence which makes it more likely to happen? This could still be worth investigating, especially if they have continuing problems, but I don’t think it is worthwhile until [that particular fix has taken place].”
She says:
“Please note that the [Known Error Logs] tell the [Helpdesk] that they must contact sites and warn them of balancing problems if they notice the event storms caused by the held lock, and advise them to reboot the affected counter before continuing with the balance. Unfortunately in practice it seems to take SMC several hours to notice these storms by which time the damage may have been done.”
If we scroll over the page, very, very briefly at the bottom of that page, there’s an exchange there that refers to various reports that have been made, and it says:
“At the bottom of this email re a magical £43,000 appearing and disappearing the [postmaster] is male. He reports:
“You may recall that in September the above office had major problems with their Horizon system relating to transfers between stock units.
“The [subpostmaster] has reported that he is again experiencing problems with transfers, which resulted in a loss of around £43,000 which has subsequently rectified itself”, the subpostmaster is concerned, et cetera.
Now, I certainly don’t expect you to have seen this particular correspondence but, just like my questions relating to Mr Miller and Mr Smith, did Mr Francis or whoever may have been the ultimate line manager to those individuals in the Operations Department, ever raise any concerns about the integrity or reliability of Horizon with the Board at this particular time?
Sir Michael Hodgkinson: No.
Mr Blake: Mr Miller, Mr Smith, Mr Francis, all attending board meetings, no mention of Horizon integrity or reliability issues, no mention of –
Sir Michael Hodgkinson: No.
Mr Blake: – a growing number of court cases that we’ve seen. What do you think went wrong, in terms of the ability to report these kinds of things to the board?
Sir Michael Hodgkinson: It’s difficult to answer that question. One would have thought that they would have been reporting those kind of things but they didn’t and I can’t give an answer.
Mr Blake: Thinking about the documents you’ve seen, the experience you’ve had subsequently, is there something in particular that you can pinpoint that you think went wrong in that reporting line to the board?
Sir Michael Hodgkinson: Well, there are three people involved, as you said, so you’d have thought that one way or the other it would have got to the board. I just got no idea.
Mr Blake: Sir, might that be an appropriate moment to take our mid-afternoon break?
Sir Wyn Williams: Yes, of course. Sir Michael, just pursuing one aspect of that, I can understand how the more senior these people are, the more discretion they may have to act, and they make a judgement about whether to bring things to the board, et cetera. But, going back to Mrs Wolstenholme’s case where she is claiming £188,000 from the Post Office, which in 2003/4 is a substantial amount of money, and I don’t know precisely how much Mrs Wolstenholme was paid but all the indications are that it was a very significant sum of money.
I’m intrigued as to how that could have happened without the Board being involved. Can you help me with that?
Sir Michael Hodgkinson: I’ve got no idea. I would agree with you: it was a very large sum of money in any day, and particularly in those days. I mean, you can speculate but I can’t –
Sir Wyn Williams: That’s fine but am I right in thinking that, in terms of corporate governance, it should have been brought to the attention of the Board and signed off at that level?
Sir Michael Hodgkinson: A potential legal case of that size, in my opinion, should have been reported to the board.
Sir Wyn Williams: Fine. Thank you.
All right, yes, let’s have our break, Mr Blake. What time shall we start?
Mr Blake: If we could return at 3.45, please.
Sir Wyn Williams: Fine.
Mr Blake: Thank you.
(3.28 pm)
(A short break)
(3.45 pm)
Mr Blake: Thank you, sir, can you see and hear me?
Sir Wyn Williams: Yes, I can, thank you.
Mr Blake: Thank you very much.
Sir Michael, I only have a few more documents to take you to. The first that I’m going to take you to is actually to go back to a document we looked at earlier. It’s POL00021420 and it’s the minutes of the Risk and Compliance Committee. Just out of absolute fairness to you, if we look at the final page of this particular meeting, there is, in an appendix, a discussion about the status of the IMPACT Programme.
Sir Michael Hodgkinson: Yes.
Mr Blake: I think we discussed earlier about what level the IMPACT Programme was discussed at –
Sir Michael Hodgkinson: (The witness nodded)
Mr Blake: – and it does seem to at least have been discussed at this meeting?
Sir Michael Hodgkinson: Yeah, this one.
Mr Blake: Just reading those first three paragraphs, “Executive Summary”:
“IMPACT and the POLFS accounting system have moved on significantly since the last report …
“The system is not yet processing all transactions correctly and so the end state of POLFS ledgers which automatically interface to the main business account has not yet achieved. However, manual adjustments can and are being made to the ledgers for the year end.
“The adjustments include several mispostings which individually are very large, but which in most cases are substantiated. Where full substantiation has not yet been provided, there is clear ownership to ensure that they are evidenced for the year end.”
So it does seem as though there was some touching on an issue during the early stages of the IMPACT Programme within this committee but is that really the height of issues relating to Horizon being brought to your attention and to the attention of those senior committees?
Sir Michael Hodgkinson: Right, yeah, I mean this was a particular issue which, to be fair to Peter Corbett, he had flashed up right at the early stage, that he wasn’t satisfied with the quality of some of the balances in the Post Office ledgers. But, also, the difficulty they had in getting that sorted out was far greater than they thought. In my understanding, this is all inside Post Office, not outside Post Office.
Mr Blake: Thank you. This is March 2006. We saw those earlier emails and documents relating to ongoing litigation relating to the Horizon system. I assume that nobody put two and two together in relation to problems with the Horizon system and ongoing litigation?
Sir Michael Hodgkinson: I don’t think this was the outside of the Post Office business bit of Horizon. This was the stuff inside the Post Office, in the internal accounting systems.
Mr Blake: So this didn’t affect subpostmasters?
Sir Michael Hodgkinson: I was told it didn’t. But, you know …
Mr Blake: Thank you. I’m going to now turn to a new document, that’s POL00329630. This takes us to 9 February 2006. It’s minutes of the Post Office Board. This is a few months after we saw the discussion regarding the growing number of Horizon cases and the coordination of those cases. Could we please turn over the page to page 2. We’d mentioned one committee already, the Risk Committee. It looks as though, at this point, there’s a further committee being set up. It says:
“Sir Michael Hodgkinson reported that the Board would need to maintain its focus on sales, and a significant part of the April Board would be devoted to this issue;
“In the light of the continuing need to focus on sales in the context of other important strategic developments … the Board agreed to the formation of a subcommittee of the board which would be chaired by [you] and include all Executive Directors.”
Can you assist us with the purpose of this particular Board?
Sir Michael Hodgkinson: Right, the issue at this point in time was a lot of the – the home telephone and the currency had actually started to go quite well but the pick-up on the insurance products and the other new products was much slower than everybody had thought and so it was felt that if we really were going to get to the point where we could do the presentation to the Government in a credible way of showing that the financial services businesses were capable of arriving at certain levels of profitability, we really had to work very, very hard to ensure that the sales picked up and, therefore, we formed a committee to discuss all sorts of ways that we might be able to do this.
Mr Blake: So is there, by this time, essentially, two committees that –
Sir Michael Hodgkinson: There would be two, there would be two.
This was more of an operations committee rather than a governance committee. You know, this was trying to get things done.
Mr Blake: Thank you. If we look further down the page there is a section on “Business Sales and Performance Review”. If we scroll over the page, we see there at (c):
“Operating profit … was a loss of £104 million …
“(j) The current proposal for the 2006/07 budget was for a £190 million loss (£65 million worse than 2005/06).
“(k) Traditional income was project to fall by £100 million …”
Then we have a section on “Solvency” below, and it says:
“It was reported that the Board had been advised that, given the concern over the solvency of the Company and the Board’s legal duty to run the business with a view to minimising loss to the Company’s creditors, it was appropriate that the Board should keep the company’s solvency under regular view with a view to satisfying itself that creditors were not likely to be prejudiced by the Company continuing to trade; in other words that the Company was not likely in the foreseeable future to go into insolvent liquidation leaving creditors unpaid. The Board meeting was an opportunity for the Directors to carry out such a review …”
Is this what you were talking about very early on in your evidence –
Sir Michael Hodgkinson: Yes.
Mr Blake: – about real financial problems at this stage?
Sir Michael Hodgkinson: As I said right at the beginning, the company desperately needed government money to fund, in particular, the rural network and, at the same time, the loss of income from its traditional products, and we therefore spent a lot of time trying to make sure, two things: one, that we could legally carry on trading vis-à-vis the creditors; but, secondly, thinking of all sorts of creative ways that we could get money into the business, including things like letters of comfort from government, so that, in fact, we could legitimately sign off the accounts.
Mr Blake: How bad were things? I mean, in the history of your career?
Sir Michael Hodgkinson: Oh, I mean, this was a disaster by most companies’ standards. You know, by most companies’ standards would – you know, the business would have folded but you’ve got the government money coming in for the rural Post Office, which makes life, you know, much more complicated, and so we knew the business at this stage was not viable as a standalone business. But we had to make sure that we could still have access to the cash to carry on trading.
Mr Blake: Can we look at page 6, please. It says there in that first substantive paragraph, it says:
“It was also noted that negotiations with Fujitsu were ongoing with a view to amending and extending the current IT outsourcing agreement for the Horizon system until 2015. It was agreed that the contract extension should not be formally signed until the directors were satisfied that the company would be likely to be able to meet its liabilities to Fujitsu for the full extended term of that agreement.”
Can you assist us with that, then? What was the concern about –
Sir Michael Hodgkinson: Right, well, we had, with one hand, if you like, the need to carry on in trying to get a much more cost effective Horizon system. That was going to cost money, but, on the right-hand, we hadn’t got the money. So the question was, how do we balance this? And I think in the end, a contract, a provisional contract was signed with Fujitsu that depended upon actual validation, dependent on Government money. So it was trying to find a way through the minefield and keep the discussions going on the Next Generation.
Mr Blake: On the subject of a more cost effective Horizon system, if we look at page 14, please, page 14 into page 15, there’s a section in these minutes that addresses “Horizon Next Generation Business Case”. It’s at the bottom of that page, and it says:
“Ric Francis introduced David Smith to the Board …”
So that’s the same David X Smith that we’ve been seeing throughout this afternoon.
Sir Michael Hodgkinson: Yeah.
Mr Blake: “… and the Horizon Next Generation Business Case was discussed. The Board noted that:
“It was essential that the Post Office achieved significant reductions in IT costs to return the business to sustainable profitability. The major opportunity to do this resided with the Horizon system that was provided by Fujitsu Services under a contract that expired in March 2010;
“In March 2005 Fujitsu Services proposed a major investment in application, branch and data centre hardware which would simplify the solution enabling significant reductions in recurring operating costs on the basis that the terms of the existing contract was extended to March 2015. However, this proposition gave no scope for further reductions once the benefits of the upfront investment had been realised;
“Post Office Limited had negotiated a new deal with Fujitsu that delivered significant guaranteed cost reductions on radically different terms to those in the current contract. Under these revised terms Post Office Limited would be able to market test all components of the contract and Fujitsu Services were incentivised to achieve further year on year [cost reductions].”
If we look at (f), it says:
“… the Board agreed a further £4 million investment (in addition to the £6 million already authorised) to continue development work in order to maintain the necessary progress to meet the Post Office Business Plan. The Board agreed the deal with Fujitsu in principle, but the Board noted that it would be necessary to make the next investment decision in the April-May time frame when the overall position on the potential to sign the long-term contracts would be clearer.”
Is a fair interpretation of this that, at this time, the focus was on a cheaper Horizon, one that led to cost savings?
Sir Michael Hodgkinson: I would just add one thing: cheaper and no worse. I don’t think there was any thought that the, you know, that the lower cost was in any way going to degrade the functionality or integrity of Horizon.
Mr Blake: But it long-term plan there was to achieve savings –
Sir Michael Hodgkinson: Yeah, there was – yes, well, it’s crucial to make the business viable.
Mr Blake: What we don’t see here is, for example, any mention of the user experience of Horizon, do we? That doesn’t seem to factor into the thinking of certainly, at board level, the –
Sir Michael Hodgkinson: There was a lot of discussion about the fact that this new reduced project for Horizon would not deteriorate anything in terms of quality. So we went forward on the basis that the cost savings were not reducing the quality of Horizon.
Mr Blake: Can you assist us with how the Board was obtaining the information about the quality of Horizon for the user? So can you recall, for example, any internal or independent investigation during that period of renegotiation that looked into the effectiveness of Horizon, and whether it was the right strategy for the user?
Sir Michael Hodgkinson: Right, the only external review that was done was with Gardner, which was looking at and reviewing whether the kind of concepts were reasonable and whether the pricing from Fujitsu was reasonable. I don’t think there was a big survey done about the issues in the field, as it were. Although don’t forget all along, we did have, you know, the big Crown Offices which were our own field testing.
Mr Blake: Do you recall, during these discussions, any questions being asked about the reliability and integrity of the data that is produced by Horizon?
Sir Michael Hodgkinson: Not specifically in those formats.
Mr Blake: We certainly don’t see within these minutes any discussion –
Sir Michael Hodgkinson: No, I agree.
Mr Blake: – of those kind of issues?
Sir Michael Hodgkinson: But there were discussions that the quality would not deteriorate. I mean, that was given.
Mr Blake: Who were those discussions with?
Sir Michael Hodgkinson: Oh, just at the Board level.
Mr Blake: Who would have been presenting a position on that to the Board?
Sir Michael Hodgkinson: That would have been David Smith and Ric Francis.
Mr Blake: Do you see this, the renegotiation of Horizon, as a potential missed opportunity in respect of improving the Horizon system?
Sir Michael Hodgkinson: I think the alternatives we were faced with was do we start again from square one or do we move forward with the New Generation of the Fujitsu contract? And there was a lot of debate about the issue and it was decided that this would be the best long way forward, I mean you can’t say any more than that. It was debated whether we should change.
Mr Blake: During that debate, did anybody raise any issues that subpostmasters had been experiencing with the Horizon system?
Sir Michael Hodgkinson: No.
Mr Blake: Whose responsibility would it have been to have raised those issues?
Sir Michael Hodgkinson: That would now have been David Smith and Ric Francis.
Mr Blake: Who, sorry?
Sir Michael Hodgkinson: Ric Francis.
Mr Blake: Thank you. Can we please look at RMG00000033, please. This is the same matter but now being raised at the Royal Mail Holdings level. It reached the Royal Mail Holdings board on 27 April 2006. I have no idea if I’ve got the number of zeros right but it’s lots of zeros, 33.
So this is the first time that we’ll have looked at Royal Mail Holdings’ minutes during your evidence session. We have there Alan Cook, Managing Director, Post Office, as present. We have yourself listed there as Non-Executive Director. If we scroll down, we also have Mr Francis, Ric Francis, Operations Director.
Sir Michael Hodgkinson: Yeah.
Mr Blake: He’s listed there for RMH06/87 and that’s what I’m going to be taking you to. But if we slowly scroll down to page 9, we get an impression of the kinds of matters that are dealt with at this level, a wide variety of different issues, Royal Mail – if we stop where you are and scroll slightly up an entry about the vehicle replacement programme. If we keep on scrolling down.
Is there a tendency – I know you’ve said that things were dealt with at this level, but for Post Office matters to be slightly overlooked or minimised, given the number of issues that this board had to deal with in relation to all of the work that Royal Mail Holdings was responsible for?
Sir Michael Hodgkinson: I think at the time there was a very strong view that the Post Office was being well run, had made amazing strides forward and that the issues that needed to come to Royal Mail were coming to Royal Mail. I think the reason there’s more letters stuff here is the scale of the investment that was being required in the letters business was much bigger and the issues they were dealing with was much bigger.
Mr Blake: So was a great degree of trust put in Post Office Limited by Royal Mail Holdings –
Sir Michael Hodgkinson: Yeah, I think so.
Mr Blake: – to operate itself independently.
If we could please look, this is “Horizon: Next Generation”. I think that this is the item that Ric Francis attended –
Sir Michael Hodgkinson: Yeah.
Mr Blake: – this Board meeting for. Presumably he didn’t attend on a regular basis the Royal Mail Holdings –
Sir Michael Hodgkinson: No, no, no.
Mr Blake: Right. “Horizon: Next Generation”:
“The Board noted Alan Cook’s paper and Ric Francis’ further explanation of the business case for the replacement of Post Office’s [EPOS] system …
“The proposed deal with Fujitsu offered a replacement system at a significantly lower cost than any of the other available options.”
I mean, did it strike anybody that perhaps lower cost wasn’t necessarily going to lead to improvements in the system itself?
Sir Michael Hodgkinson: Well, this was all done at the time when the general view was that Horizon was producing, you know, good, accurate information.
Mr Blake: “For a total investment of £127 million, the proposed deal would deliver an incremental post-tax NPV of some £90 million compared with continuing with the current system and contract until 2015. Richard handover pointed at that while the scale of cost reduction was commendable, in his experience of dealing with Fujitsu, cost reduction could also be accompanied by service degradation. Ric Francis noted this …”
Now, Richard Handover. He was a non-executive.
Sir Michael Hodgkinson: Yeah.
Mr Blake: Am I right in saying he was the Chair and Chief Executive of WHSmith?
Sir Michael Hodgkinson: Yeah, that’s right.
Mr Blake: Was he somebody who was held in high regard by the Board?
Sir Michael Hodgkinson: Yeah, I agree.
Mr Blake: That seems to be quite a pressing comment that he’s made there.
Sir Michael Hodgkinson: And I think Ric Francis and the IT Team took that on board and, as we went forward, we were told that these kind of issues, you know, service degradation, was currently not likely to happen and that we’d covered it.
Mr Blake: You said, “We were told”. Who was telling –
Sir Michael Hodgkinson: That would be Ric Francis and David Smith.
Mr Blake: They were telling you. Do you recall specific –
Sir Michael Hodgkinson: No the Board, they were telling the Board. Sorry, not me personally.
Mr Blake: So they were telling the Post Office Board –
Sir Michael Hodgkinson: Yeah.
Mr Blake: – or the Royal Mail Holdings Board that it wouldn’t happen?
Sir Michael Hodgkinson: Well, at this particular thing, he had – Ric had just noted this particular thing but, as we progressed further with the contract, that particular point had been noted.
Mr Blake: So it had been noted by Ric Francis, we see there, but it seems – certainly, the Inquiry doesn’t have a note of it being taken forward specifically in relation to Mr Handover’s comment. Do you think that some action actually did take place in relation to reassuring the Post Office that cost reduction wouldn’t be accompanied by service degradation?
Sir Michael Hodgkinson: We were continually assured of that, you know, as I say people are – all the way through the project, people kept asking that kind of question.
Mr Blake: Who is “we”?
Sir Michael Hodgkinson: The Board.
Mr Blake: Reassured by who?
Sir Michael Hodgkinson: Ric Francis and David Smith.
Mr Blake: Were you aware of who they obtained their information from?
Sir Michael Hodgkinson: No.
Mr Blake: If we scroll down, please:
“After further discussion the Board:
“Expressed its support for the business case set out in the paper.
“Authorised release of up to £25m of capital, in addition to £10m already approved, to enable the continued development of the Horizon replacement system.
“Approved [the Post Office’s] concluding detailed contract negotiations with Fujitsu Services as proposed in line with the parameters of the business case. This was subject to the Post Office resolving its funding issues currently being discussed with Government.”
So what do you think went wrong? I mean, why do you think the warnings like that from a Senior Non-Executive Director weren’t heeded, or didn’t lead to greater scrutiny?
Sir Michael Hodgkinson: I mean, we were told on the Board of the Post Office that, in fact, we were guaranteed no deterioration in quality of service, and that question continually got asked as the project proceeded. That’s basically where it left.
Mr Blake: Finally, I would just like to take you to paragraph 54 of your witness statement, it’s WITN10660100. Paragraph 54. You refer there to being provided with information – it’s page 21 – at the end of your time at the Post Office. You say:
“I do not recall hearing about any bugs, errors, defects or concerns with the integrity of Horizon. From recollection, the first time I heard any comment about possible problems with Horizon was in early August 2007, when I called into the office to say farewell to my colleagues. One of the Senior Area Managers [who’s name you don’t recall] had recently received an audit report about a large deficit in one of the post offices in her area. She told me that her team had not been able to, to date, to understand what the problem was, and she said she was wondering whether there could be a problem with Horizon. She said her team were investigating all possible ways that the Horizon system might have caused the issue, but the investigation appeared to be at a very early stage. I trusted that [was all] in hand.”
Do you think at your time in the Post Office that was the general approach of the board: to trust that all was in hand with Horizon?
Sir Michael Hodgkinson: Not in – I think the general view was that the system was working across a vast estate quite well. As far as the Board was concerned, they were not getting lots of, you know, information back saying there was a big problem and, therefore, we thought that Horizon was providing what it was supposed to do, and that is provide good quality information.
I mean, that’s all I can say. I mean, in a way, on this particular case, in a way, it gave me encouragement that, if there were an issue, that it would be investigated in great deal and, you know, there were tools in place where, if someone went to that level of detail, you could actually be satisfied – satisfy yourself. So I think, you know, that was where it was.
Mr Blake: Thank you. Are you able to assist us, I know you’ve said in the statement you don’t remember the person’s name but can you recall the area?
Sir Michael Hodgkinson: South of England. That’s all I know.
Mr Blake: Thank you very much.
Sir, those are all of my questions. Mr Stein has some questions.
Sir Wyn Williams: Yes. Mr Stein?
Mr Blake: Thank you.
Questioned by Mr Stein
Mr Stein: Sir Michael, my name is Sam Stein. I represent a large number of subpostmasters and mistresses and I’m instructed by a firm of solicitors called Howe+Co.
Just to refer to your statement to start off with please. By way of background, when you left university you joined the Ford Motor Company; is that right? After that, you joined British Leyland –
Sir Michael Hodgkinson: Yeah.
Mr Stein: – and then, I think, you became Managing Director of the newly formed Land Rover Limited; is that correct?
Sir Michael Hodgkinson: Correct.
Mr Stein: Did any of those companies prosecute its own staff?
Sir Michael Hodgkinson: Not that I was aware of.
Mr Stein: No, all right. So you moved then onwards to the Grand Metropolitan Group, responsible, initially, for a major section of the Brewing Division and then you became Chief Exec of the European Food Division.
Sir Michael Hodgkinson: Correct.
Mr Stein: What about the Grand Metropolitan Group? Did it prosecute its own staff?
Sir Michael Hodgkinson: No.
Mr Stein: All right. After that, in 1992, you joined BAA Plc, rising to become Chief Executive Officer of that, of BAA in 1999; is that right?
Sir Michael Hodgkinson: Correct.
Mr Stein: Did BAA prosecute its own staff?
Sir Michael Hodgkinson: No.
Mr Stein: Okay. So when you joined the Post Office, as we understand it, I now refer to paragraph 62, sir, of your statement. Sir Michael, that says this, at paragraph 62 of your statement:
“I can recall that SPMs were occasionally prosecuted for fraud, which I think I learned during my induction process.”
That paragraph finishes by saying this:
“I do not have any recollection of these cases being discussed during POL Board meetings.”
Okay. So let’s piece this all together. So after leaving BAA, you join POL and then fairly rapidly become Managing Director, yes?
Sir Michael Hodgkinson: Um –
Mr Stein: In 2003?
Sir Michael Hodgkinson: Yeah, not Managing Director, Chairman.
Mr Stein: Chairman. So in 2003, you take on that responsibility at the Post Office, yes? All right. During the induction process, in relation to the Post Office, you learn that the Post Office prosecutes its own people; is that right?
Sir Michael Hodgkinson: I didn’t learn that particular bit; I learnt that occasionally people were prosecuted. I didn’t – I wasn’t aware of the process of how it went on.
Mr Stein: Well, let’s just re-read this. Paragraph 62:
“I can recall that SPMs were occasionally prosecuting for fraud …”
Sir Michael Hodgkinson: Yeah.
Mr Stein: “… which I think I learnt during my induction process.”
So what did you learn in your induction process about SPMs occasionally being prosecuted?
Sir Michael Hodgkinson: What it says there.
Mr Stein: Well, what bit? That you, the Post Office prosecuted your own staff members? Somebody else did? The police did? Tell us.
Sir Michael Hodgkinson: I didn’t – I didn’t know the process of the prosecution at that stage.
Mr Stein: Right, okay, so when did you learn about the process of prosecution by the Post Office of which you were chair?
Sir Michael Hodgkinson: I think that was much later on.
Mr Stein: Help us, please. You left in, I think, 2007?
Sir Michael Hodgkinson: Beginning of ‘07, yeah.
Mr Stein: So when, during the period of time between 2003 to 2007, did you suddenly get told “By the way we happen to prosecute our own people?”
Sir Michael Hodgkinson: I can’t tell you the precise timing. I don’t know.
Mr Stein: Well, closer to the beginning when you became Chair or closer to the end when you left?
Sir Michael Hodgkinson: I would say closer to the end.
Mr Stein: Right, and did you say to the people around you “Well that’s a bit of a surprise, I’m a bit surprised that we prosecute auditor own staff. I’d like to know a bit more about it”?
Sir Michael Hodgkinson: No, I didn’t.
Mr Stein: Well, you have suddenly been made aware that you’re the Chair of a Prosecution Authority, yes? Yes?
Sir Michael Hodgkinson: Yes.
Mr Stein: Yes. That’s an unusual thing, given your business background, yes?
Sir Michael Hodgkinson: Yes.
Mr Stein: What did you do to investigate that the Post Office was properly prosecuting its own members?
Sir Michael Hodgkinson: I didn’t do anything.
Mr Stein: Now, you’re aware that obviously the branch Post Office system existed, you’re aware of that much –
Sir Michael Hodgkinson: Yeah.
Mr Stein: – and you’re aware that the branch Post Office’s were run by subpostmasters, often living in the branch post offices, yes?
Sir Michael Hodgkinson: (The witness nodded)
Mr Stein: The traditional post office in the countryside, living in their own place, having perhaps a small grocery business at the side, yes? Yes?
Sir Michael Hodgkinson: (The witness nodded)
Mr Stein: You’re aware that they lived there often with their families, yes –
Sir Michael Hodgkinson: Yes.
Mr Stein: – and little businesses that they were. The typical scene for the post office branch that you can think of. Right, okay.
Sir Michael Hodgkinson: Yes.
Mr Stein: So by the time you learn that you’re Chair of a Prosecution Authority, did you say to yourself “Well, we need to make sure that these little people who work in the subpostmaster branches, that are running these places within the community, are dealt with fairly and properly by the Post Office of which I’m Chair”? Did that occur to you?
Sir Michael Hodgkinson: Well, the whole process of prosecution we thought was based first of all on accurate Horizon information. Secondly, there was an audit which was done by a separate group of people. Thirdly, there was then an investigated branch that we had been told objectively investigated the case, and then there was a legal analysis and a decision made whether to prosecute or not. So, in the process, there were several individual people or individual stages of the thing which is a pretty good guise that it’s fairly objective.
Mr Stein: Sir Michael, as I understand your answers to me this afternoon, you’ve said that it was late in the period of time –
Sir Michael Hodgkinson: Yeah –
Mr Stein: – of which you were Chair of the Post Office –
Sir Michael Hodgkinson: Yeah.
Mr Stein: – that you learnt that the prosecution prosecuted its own subpostmasters?
Sir Michael Hodgkinson: Yeah.
Mr Stein: So are you saying that it was late in the time that you were chair of the Post Office that you learnt about all these systems of investigation, all these systems of using the Horizon system? Did that come late in the day?
Sir Michael Hodgkinson: There’s – a separate question is I didn’t know at the beginning the process of prosecution, but we did know the fact that there was a whole series of checks on the way through, whether a prosecution actually took place.
Mr Stein: Right. So you were at least aware that there was an investigation system –
Sir Michael Hodgkinson: Oh, yeah.
Mr Stein: – investigating your own subpostmasters?
Sir Michael Hodgkinson: Yeah.
Mr Stein: Right. Okay. So let’s hold on for the moment to that idea. What did you do to make sure so that the investigation system was carried out properly and fairly? What did you do, Sir Michael?
Sir Michael Hodgkinson: Well, in the Risk and Compliance Committee, we did discuss the processes but they were discussed at a general level.
Mr Stein: So you individually listened to the discussion, did you take part? Did you dwell on the detail? Did you find out what the investigation process was?
Sir Michael Hodgkinson: We knew what the investigation process was and how it went about it.
Mr Stein: Right.
Sir Michael Hodgkinson: We didn’t know about individual cases or anything like that.
Mr Stein: Okay. But you were aware, on the second part of what you said, that the Horizon system data was used to support or part of prosecutions?
Sir Michael Hodgkinson: Yeah.
Mr Stein: All right. Now, I’m going to take you to paragraph 51 and 52 of your statement, Mr Blake has touched on this before. So of the statement WITN10660100. Paragraph 51 at the bottom of page 19. Thank you.
If you go to the bottom of the page, 19, please. Right.
So bottom of page 19, paragraph 51, when you became the chairman of POL, you requested to further your understanding of the Horizon system, okay?
You’ve been asked about the purpose of my request, you say here, and when you talk about the first POL board meeting and, again, you’ve been asked a couple of questions about that by Mr Blake.
At the bottom of that page, it says this:
“I wanted to learn more about Horizon. I was interested in the capabilities of Horizon because of the POL Board’s strategic plans for growth into the financial services market.”
Okay?
Now, I’m going to take you, page 20, to the last five lines of the top paragraph. You’ll see there it says:
“However, we were entering into a completely different world with different products and I wanted to understand whether the system had been designed with these products in mind, whether it was reliable and whether it was capable of handling transaction of much higher value.”
Right. So, piece this together. What seems to have happened is that, when you became chair of POL, you wanted to learn about the Horizon system and, for the reasons you set out, you wanted to know whether it was reliable or not. All right. We know, looking at paragraph 52, page 20, that you recall a meeting was arranged a few weeks after the board meeting to address your queries. You go on to say this:
“I really cannot recall who attended the meeting, but I think it was the senior IT management and members of Fujitsu.”
So you asked to have a meeting and when you made your statement, your recollection was that it was senior IT management and members of Fujitsu that attended the meeting; is that correct, yes?
Sir Michael Hodgkinson: Yeah.
Mr Stein: You’ll need to say “yes” or “no”, so that –
Sir Michael Hodgkinson: Sorry.
Mr Stein: All right. You said earlier in your evidence that you can’t recall the numbers but it was something like three to five people?
Sir Michael Hodgkinson: Yeah.
Mr Stein: Okay. Now, help us a little bit more with that meeting. I’m going to take you to a document, which is FUJ00002037. This document is called at the top “Application Support Service (Fourth Line): Service Description”, it’s got, left-hand side, “Fujitsu”, “Fujitsu Services”, and you’ll see the date which is in August 2006, okay? All right.
Go further down that page to the bottom of page 1, you’ll see who are the approval authorities for the document. You’ve got there name, Dave Hulbert, Post Office Head of Systems Operations. Okay?
Now, Mr Hulbert was a long-term Post Office employee, he had been part of matters before 1999 and had, by this stage, risen to head of systems operations.
Was he, by chance, anyone that was present during this meeting that you had when you were trying to make sure that the Horizon system was reliable or not?
Sir Michael Hodgkinson: I have absolutely no idea.
Mr Stein: Okay. Let’s look further down the page at other people that were around, page 2. Go to page 2, you’ll see there that it’s got “Document History”, “Review Details”, mandatory review. Under “Mandatory review”, it there refers to Post Office Operations Support, Post Office Commercial, those two individuals are Bernadette O’Donnell and then Commercial is Mike Hannon, okay? Then there are the Fujitsu people mentioned, Pam Purewal, James Stinchcombe, Mik Peach, right? So you can see that this is a joint document, Fujitsu and POL, with those individuals there present.
Now, can we go to page 9, please, the very bottom at page 9 of that document. If you look there under “Third Line Support Service”, as you’ve got there at the bottom of page 9, highlighted, thank you very much, it says this:
“The Third Line Support Service works closely with the Application Support Service (Fourth Line) to provide bug fixes to enable the resolution of Software Incidents.”
Okay? Right.
So when you had your meeting with POL staff members and, you think, Fujitsu staff members to check to see if the Horizon system was reliable or not, were you told that there were four lines of support for the Horizon system which included third and fourth line to help with bug fixes?
Sir Michael Hodgkinson: No, I wasn’t told that.
Mr Stein: And the bug fixes were to enable the resolution of software incidents?
Sir Michael Hodgkinson: (The witness nodded)
Mr Stein: Were you ever told that?
Sir Michael Hodgkinson: No.
Mr Stein: Did you ever ask any questions about “Well, what happens with this thing when it goes wrong? How do you fix it?” at that meeting?
Sir Michael Hodgkinson: That – not at that particular meeting. That meeting was purely focused on was the system capable of handling the new project – products that we were about to launch over the next two years?
Mr Stein: Well, it’s a bit more than that, isn’t it, because you say in your statement that you wanted to make sure it was reliable for those purposes?
Sir Michael Hodgkinson: Yeah, but the reliability in my mind was the whole capacity of the thing so that if everybody started drawing the money out of the banking system at the same time, there was capacity in the system to handle it. So that was the reliability thing that we were looking at at that – or I was asking questions about.
Mr Stein: Right, so at that meeting you weren’t told that there was an entire support system that related to bug fixes –
Sir Michael Hodgkinson: No.
Mr Stein: – to make sure that any software incidents were kept under control?
Sir Michael Hodgkinson: (The witness shook his head)
Mr Stein: You said in answer to my questions that “Not at that particular meeting”. When did you learn about the bug fixes?
Sir Michael Hodgkinson: I – as I said all the way through, I’d – I did not hear lot of talk about bug fixes, errors and defects.
Mr Stein: Well, you said to me “Not at that particular meeting”, which seems to imply that you were told later on at some other meeting about bug fixes?
Sir Michael Hodgkinson: No, no.
Mr Stein: Okay. So, in essence, Sir Michael, it comes to this, does it, that you knew that the Horizon system data was being used in the prosecution of subpostmasters –
Sir Michael Hodgkinson: Yeah.
Mr Stein: – yes? You knew that there was an Investigation Department that was investigating subpostmasters, yes?
Sir Michael Hodgkinson: (The witness nodded)
Mr Stein: At some point in your work as chair of the Post Office, you learnt that subpostmasters were actually prosecuted by the Post Office, yes –
Sir Michael Hodgkinson: (The witness nodded)
Mr Stein: – and at no point did you directly try and find out exactly how this system worked in order to make sure that accurate data was used to prosecute subpostmasters? Is that about it?
Sir Michael Hodgkinson: If – in terms of going through a personal audit of it, that’s about it.
Mr Stein: During your time, Sir Michael, people were prosecuted, people were told to pay up for any shortfalls, because apparently it was their fault because the Post Office didn’t look into it. That was during your time, Sir Michael.
Sir Michael Hodgkinson: No, I know.
Mr Stein: Is there anything you want to say to those people?
Sir Michael Hodgkinson: I was going to say something at the end. Is this the appropriate time?
Mr Blake: Yes.
Sir Michael Hodgkinson: Right. I definitely want to say something. I mean, I have been saddened and appalled at the evidence that has come out over the last 15 years since I left, where so many innocent postmasters and mistresses were unfairly prosecuted under the Horizon system and, as a result, suffered most dreadful experiences and devastating consequences, not just for themselves but for their families.
And I just want to put on record that I apologise unreservedly for the fact that, whilst I was Chairman of the Post Office, I did not discover the problems with the Horizon system, and all I can say is that I am very, very sorry for the misery that that then subsequently caused. So I apologise again, unreservedly.
Mr Stein: Sir Michael, I understand you apologise. What part of it was your fault?
Sir Michael Hodgkinson: You just don’t really know. I mean, what else could I have done? I mean, I just – I tried to make sure the business was run as well as I possibly could. Where there were issues reported to us, I tried to make sure that people took action. There’s a – not much you can do. I mean, there are two ways I could have found out about information. One is reporting up from the organisation, and that didn’t happen.
The other thing that surprised me, and still surprises me – and in other businesses I have had this happen – you get letters from outside, from all over the place, that says “You need to investigate this”, and I never got that kind of correspondence or messaging and, as a result, that’s how I operated over the four years I was there.
Mr Blake: Thank you very much, sir.
I think that is all of the questions this afternoon, unless you, sir, have any questions?
Sir Wyn Williams: No. No thank you, Mr Blake.
Thank you, Sir Michael, for making your witness statement and for answering all the questions which have been put to you this afternoon. I’m grateful.
The Witness: Thank you.
Sir Wyn Williams: So we’ll begin again at 10.00 tomorrow, Mr Blake?
Mr Blake: Yes, that’s correct.
Sir Wyn Williams: Can I just check, because people tend to forget these things, normally on a Friday we finish at 3.00, but we’ve got two witnesses of, I guess, comparable length to today, or not?
Mr Blake: Yes. I mean, we certainly have a lot to get through tomorrow.
Sir Wyn Williams: I was just going to ask whether people wanted to start at 9.30 to relieve them of the possibility that they would have to go significantly beyond 3.00 tomorrow?
Mr Blake: I see plenty of nods or people not shaking their heads. Providing all the arrangements can be made with the witnesses, then, absolutely, I think that would be very helpful. Sir, perhaps we could proceed on that basis and, if it’s going to be any different –
Sir Wyn Williams: We’ll proceed on the basis that we’ll begin at 9.30 tomorrow, unless the Inquiry has to send out a message to everyone that it’ll be 10.00 as usual.
Mr Blake: Thank you very much, sir.
Sir Wyn Williams: All right, thank you very much, everyone. Bye.
(4.30 pm)
(The hearing adjourned until 9.30 am the following day)