15 July 2024 – Stephen Lovegrove
(12.00 noon)
Announcement re Phase 7
Ms Price: Good morning sir, can you see and hear us?
Sir Wyn Williams: Yes, I can. Before we start hearing evidence, Ms Price, I have an announcement to make about evidence gathering relating to the final phase of this Inquiry, so I propose to make this announcement now, all right?
Ms Price: Yes, sir.
Sir Wyn Williams: As Core Participants and members of the public will be aware, the final phase of the Inquiry, Phase 7, is concerned essentially with the here and now. I will be enquiring into such questions as:
How does the Post Office treat its subpostmasters? What is the culture of the Post Office like now?
How does that culture compare with the culture prevailing before the Group Litigation?
How do those who are entitled to compensation view their experiences of making claims?
Has the Post Office and Government delivered on its promise to provide compensation which is full and fair?
In order to help me answer these questions, I have commissioned YouGov, an independent research and data analytics firm, to conduct two surveys. One survey is aimed at current subpostmasters, the second survey is for those who have applied for compensation under the Horizon Shortfall Scheme.
I want to hear from all of those persons to whom these surveys will be sent. As people with direct experience of the topics covered by the surveys, they are best placed to provide me with invaluable information about key issues relating to current practices within the Post Office and how the largest compensation scheme has operated in practice.
To current subpostmasters, let me make one thing clear: I know full well it can be difficult to speak about the challenges you have faced, or still face at work, or in your claims for compensation. Let me assure you that these surveys are in no way connected to the Post Office; they are anonymous and no individual will be identified when the findings are published.
Some of the applicants to the Horizon Shortfall Scheme will have negotiated compensation payments with Post Office on a without-prejudice basis. I am pleased to be able to report that Post Office has agreed to waive the legal privilege which attaches to such negotiations, specifically for these surveys. This means that those applicants who conducted negotiations on a without-prejudice basis can share their experiences when responding to the surveys without fear of repercussions.
I want to make public too that Post Office, at the Inquiry’s request, will shortly be writing to all applicants to the Historic Shortfall Scheme inviting them to may have their legal privilege in respect of certain information about the scheme.
The Post Office is taking that step so as to enable it to answer requests for information which the Inquiry has requested it should provide. I urge all applicants to the scheme to respond positively to this letter so the Inquiry is given as much information as possible on how the scheme is running.
The answers which are provided to the surveys will be treated as formal evidence to the Inquiry and they will be analysed by YouGov in a report. Such a report will, I have no doubt, help to make sure valuable lessons can be learnt.
From this week, some 16,000 people will be contacted directly via email. The surveys can be completed online or over the telephone for those who need reasonable adjustments. If you are both a current subpostmaster and you applied for compensation understanding the Horizon Shortfall Scheme, you will receive two separate survey links, one for each survey.
Let me conclude by saying this: human stories are at the heart of this Inquiry. As will be obvious by now and as I have said from time to time, I have been deeply affected by the accounts of hardship and suffering endured by many. I urge all those who are contacted to complete the surveys and I offer my heartfelt thanks now to all those who take the time and trouble to do so.
Now, Ms Price, we can now resume with the evidence on Phases 5 and 6.
Ms Price: Thank you, sir.
Please may we call Sir Stephen Lovegrove.
Sir Wyn Williams: Yes, of course.
Sir Stephen Lovegrove
SIR STEPHEN AUGUSTUS LOVEGROVE (affirmed).
Questioned by Ms Price
Ms Price: Could you confirm your full name, please, Sir Stephen?
Sir Stephen Lovegrove: Stephen Augustus Lovegrove.
Ms Price: As you know, my name is Emma Price and I will be asking questions on behalf of the Inquiry.
Thank you for coming to the Inquiry today to assist it with its work, and for providing the detailed witness statement which you have in advance of today. You should have a hard copy of that witness statement on the desk in front of you; do you have that?
Sir Stephen Lovegrove: I do.
Ms Price: It is dated 14 June 2024. If you could turn to page 56 of that document, please.
Sir Stephen Lovegrove: Yes.
Ms Price: Do you have a copy with a visible signature?
Sir Stephen Lovegrove: I do.
Ms Price: Is that signature yours?
Sir Stephen Lovegrove: It is.
Ms Price: Are the contents of that statement true to the best of your knowledge and belief?
Sir Stephen Lovegrove: They are.
Ms Price: For the purposes of the transcript, the reference for Sir Stephen’s statement is WITN11010100.
Sir Stephen, your witness statement is now in evidence and will be published on the Inquiry’s website in due course. As such, I will not be asking you about respect of that statement, just certain specific issues which are addressed within it. Okay?
Sir Stephen Lovegrove: Understood.
Ms Price: I’d like to start, please, with your professional background and the roles you have held which are relevant to the matters being explored by the Inquiry. You explain in your statement that, upon graduation, you worked as a small management consultancy specialising in the media sector, where you remained for around three years; is that right?
Sir Stephen Lovegrove: That’s correct.
Ms Price: Then from 1993 to 2003 you worked in investment banking at the bank Morgan Grenfell, working in its media team?
Sir Stephen Lovegrove: That’s correct.
Ms Price: In early 2004 you joined the Shareholder Executive, working under the then Chief Executive Richard Gillingwater; is that right?
Sir Stephen Lovegrove: That’s correct.
Ms Price: Given your media experience, you say you initially worked almost entirely with the Department for Media, Culture and Sport; is that right?
Sir Stephen Lovegrove: That’s correct.
Ms Price: Then in around 2005, you were asked to become the director responsible for Royal Mail Group and, by extension, its subsidiary, Post Office Limited?
Sir Stephen Lovegrove: That’s correct.
Ms Price: Was this the first time you were involved in Royal Mail Group matters?
Sir Stephen Lovegrove: It was.
Ms Price: In June 2007, you became the Chief Executive of the Shareholder Executive?
Sir Stephen Lovegrove: Yes.
Ms Price: But you say at paragraph 7 of your statement that you stayed closely involved with the Government’s strategy for Royal Mail Group, given you describe as its scale, prominence and extremely severe commercial problems?
Sir Stephen Lovegrove: That’s correct.
Ms Price: In particular, you say you helped to establish the Hooper Review in 2007, which ultimately recommended the separation of Post Office Limited from its parent company, Royal Mail Group, in 2008?
Sir Stephen Lovegrove: Yes.
Ms Price: You remained Chief Executive of the Shareholder Executive until the end of January 2013; is that right?
Sir Stephen Lovegrove: That’s right.
Ms Price: In February 2013, you were appointed the Permanent Secretary of the Department of Energy and Climate Change –
Sir Stephen Lovegrove: Yes.
Ms Price: – a role you performed until April 2016 –
Sir Stephen Lovegrove: Yes.
Ms Price: – when you were appointed Permanent Secretary of the Ministry of Defence?
Sir Stephen Lovegrove: Yeah – yes.
Ms Price: You continued in that role until January – let me just check my dates on that – until January 2021, when you were appointed as a National Security Adviser?
Sir Stephen Lovegrove: The National Security Adviser, yes.
Ms Price: You stepped down that role in September 2022?
Sir Stephen Lovegrove: Yes.
Ms Price: You were then the Prime Minister’s Adviser on Defence Industrial Strategy until December 2022?
Sir Stephen Lovegrove: Correct.
Ms Price: Since leaving Government, you have held number of roles including being Chair of Rolls-Royce SMR?
Sir Stephen Lovegrove: Yes.
Ms Price: Governor of the Wellcome Trust?
Sir Stephen Lovegrove: Yes.
Ms Price: Visiting Fellow at Colombia University’s School of International and Public Affairs?
Sir Stephen Lovegrove: Yes.
Ms Price: And a Senior Adviser at an investment bank?
Sir Stephen Lovegrove: Yes.
Ms Price: I’d like to turn, please, to the Shareholder Executive’s responsibility for Royal Mail Group and Post Office Limited. Could we have on screen, please, paragraph 17 of Sir Stephen’s statement, which is on page 7, towards the bottom. You explain the Shareholder Executive’s principal purpose, starting in the penultimate line on this page, and you say:
“ShEx’s principal purpose was to ensure that Government was an effective and intelligent shareholding, working with the boards and management teams of HMG-owned businesses to ensure that they were being run in a way that was commercially effective but that was also within the clear confines of the Government’s policy objectives.”
In your view, what was required to ensure that the Government was an effective and intelligent shareholder?
Sir Stephen Lovegrove: In the first place, there needed to be a clear and well articulated set of policy objectives for the companies in question. In the second place, there needed to be clear and well articulated set of commercial objectives also and, to the extent where – that we possibly could, we wanted to ensure that the corporate apparatus and the corporate governance of the assets for which we were responsible as nearly approximated best practice in the private sector as we could as well.
And in that regard, a lot of the focus was making sure that the Board was properly constituted, it had the right kind of skills on it, that the Chair was responsive to the shareholder and that we kept a constant dialogue with the management of the asset and the directors of the asset, such that we would know what was going on and whether or not Government’s objectives were being fulfilled.
Ms Price: In the context of government-owned assets, did this require a balance between ensuring commercial effectiveness and ensuring that the asset operated within the parameters of Government policy objectives?
Sir Stephen Lovegrove: Yes, it did. If there were no policy objectives at all, typically what would happen is that the Government would seek to privatise the business. That would often come with a degree of regulation because, clearly, that’s important in many businesses but, if there were no policy objectives that the Government had for the business, we didn’t think that it was a very – or the Government at the time did not think that it was a particularly sensible thing to hold.
A good example of that would have been the Tote, which was a betting business, which, for a variety of historical reasons, the Government held. There was no reasonable policy objective in the Government owning a string of betting shops and, as a result of that, it was sold.
Ms Price: You go on at paragraph 18 to say that, “In pursuit of that objective the model necessarily adopted by Government was that of ALBs”, arm’s-length bodies. Why do you say “necessarily” there?
Sir Stephen Lovegrove: Because the assets and the companies that fell into the Shareholder Executive portfolio were typically very complicated and often quite large, and the idea that they would be capable of being managed and – or managed mainly, actually, within central Whitehall would have led to very, very inefficient practices. There were some very specialised businesses in there where the skills to run them and to recruit the right people to perform the assets’ business would simply not have been able to have been done within central Whitehall, so we would set up a – or typically there would be an organisation set up at arm’s length from Government, in order to be able to recruit the right people to do that and often to have certain types of pay freedoms, which would allow for private sector executives to be attracted to work for these assets in the national interest.
Ms Price: Could we go, please, to paragraph 23 of the statement, that is page 10 and, in this paragraph, you describe Post Office Limited’s social role. You say this:
“POL was an unusual organisation in that it clearly had its own status and identity as an ALB but was a wholly-owned subsidiary of another ALB: RMG. As an ALB, POL had a vital social role in maintaining branches in remote and rural locations, providing Government services as well as postal services, and playing an important role in financial inclusiveness. The network would always require significant subsidy if it were to be maintained at the size Government policy dictated. However, significant elements of POL were commercial, including the financial services that it offered and the retail element of most post offices. As a company it was best run by professional executives with relevant commercial experience, allied to a clear understanding of the social role the Post Office was expected to play.”
Was the maintenance of Post Office Limited’s social role a Government policy objective?
Sir Stephen Lovegrove: Yes, it was.
Ms Price: Put simply, was it the case that, even if it did not make financial sense to keep Post Office branches open in rural areas, the social value of doing so justified that?
Sir Stephen Lovegrove: That is definitely the case and there were – well, there was at least one very wide public consultation on the size of the Post Office Network, which happened while I was at the Shareholder Executive, to ascertain the exact size of that network. And I should say it required a Government subsidy to keep the network at the size that Government policy dictated.
Ms Price: Would it be fair to say that subpostmasters running branches in rural areas, as well as their staff and Post Office employees employed in such branches, played an integral part in delivery of Post Office Limited’s social role?
Sir Stephen Lovegrove: Yes, it certainly would.
Ms Price: In other words, the social role was not possible without people willing to run and staff Post Office branches across the country?
Sir Stephen Lovegrove: Correct.
Ms Price: Would you agree, therefore, that how those people were treated by Post Office Limited was directly relevant to a key Government policy objective for Post Office Limited?
Sir Stephen Lovegrove: Yes, I would.
Ms Price: Post Office Limited was a 100 per cent owned subsidiary of Royal Mail Group pre-separation, and you observe in your statement that, in normal circumstances, there would not have been any supplementary Government oversight of a subsidiary of a government-owned company. Do I summarise your evidence at paragraph 24 of your statement correctly in this way: the fact that there was, unusually, direct oversight of Post Office Limited pre-separation was a consequence of the social function that Post Office Limited Network was expected to perform?
Sir Stephen Lovegrove: Yes, you would be correct in saying that. I should say that the oversight of the Post Office was a mixture. Because of the nature of its – its subsidiary nature, it was a mixture of oversight of POL directly, and conversations with POL Management and Board directly, and conversations with the Royal Mail Group’s management and Board members as well because, of course, as the parent – as the corporate parent – they had responsibility for the Post Office.
Ms Price: Indeed, you say in your statement that Royal Mail Group was expected to discharge its ownership responsibilities towards Post Office Limited in a manner consistent with the Government’s policy objectives?
Sir Stephen Lovegrove: That’s correct.
Ms Price: You observe at paragraph 31 of your statement that the types of decisions that were for ALBs to take, rather than ShEx or the Government, would include matters which are sometimes described as “operational” or “contractual” but you say that, in your view, this terminology does not always help to distinguish between those matters in which Government became involved and those in which it did not; is that right?
Sir Stephen Lovegrove: That is correct.
Ms Price: You also make clear that the Government had a role in establishing policy goals and monitoring operational performance, so, in short, it would not just set the strategy for an asset and leave it to it?
Sir Stephen Lovegrove: That is correct. I mean, the strategy for an asset would be set in cooperation with the executives and board of the asset, in most instances, and we would use much of the management information that the executives and the board of the asset were using to run the company, to assist us in our own oversight of the asset.
Ms Price: Would you agree that the reason for this – and that is the fact that there is monitoring of operational performance and there isn’t a clear-cut distinction between operational and policy – is that there may be times when the way in which an ALB conducts itself at an operational or contractual level can cause concern for ministers at a policy level?
Sir Stephen Lovegrove: Yes.
Ms Price: Particularly where, as a matter of policy, there is a social role performed by a Government-owned asset, or in this case a subsidiary of a Government-owned asset, would you agree that it is vital that there is effective oversight of key operational and contractual matters?
Sir Stephen Lovegrove: Yes.
Ms Price: Would you also agree that, in order for oversight to be effective, the Government must have access to adequate information about key operational and contractual matters?
Sir Stephen Lovegrove: Yes.
Ms Price: In particular, it was important, wasn’t it, that operational or contractual matters which gave rise to risk were identified and monitored at every level of the governance structure?
Sir Stephen Lovegrove: Yes.
Ms Price: So those levels being: the Post Office Limited Executive level; the Post Office Limited Board level; the ShEx level; and the Government Departmental level?
Sir Stephen Lovegrove: All of those, although you miss out the Royal Mail Group in that. You would have expected risks and operational performance measures for POL to have been included in the Royal Mail and risk registers and, you know, management packs as well.
Ms Price: Indeed. Can you help at all with what, if any, training was given to ShEx employees about the circumstances in which operational or contractual matters might be relevant to wider policy or strategic considerations?
Sir Stephen Lovegrove: I’m not sure that, in the precise terms in which you talk about it, we had specific training like that. There would certainly be an induction period when a civil servant would find themselves being assigned to a particular asset, they would learn about it, they would learn about the policy objectives, they would learn about the commercial objectives, they would learn about the asset in general and, clearly, there were plenty of people in Shareholder Executive, certainly towards the end, who had experience of helping people through.
So it was more of a conversation, really, than a specific programme.
Ms Price: Do you believe that ShEx’s employees understood that the distinction between operations and strategy or policy was not always clear-cut?
Sir Stephen Lovegrove: Yes. I mean, there was a very fuzzy line between these things sometimes and there continues to be in every organisation I’ve ever been involved in.
Ms Price: Before we come to the information sharing and risk identification and management mechanisms, which were in place for Post Office Limited, I’d like to deal, please, with the question of who held the shareholder role relating to Post Office Limited and who held the policy role relating to Post Office Limited. Could we have on screen, please, paragraph 26 of Sir Stephen’s statement, that is page 11. At the start of paragraph 26, you say this:
“In general, ShEx would oversee the shareholder function and usually the Department (or another department if that was where the policy objectives sat) would oversee the policy function, though in some cases this would sit with ShEx instead.”
Why was the general position as you describe it?
Sir Stephen Lovegrove: The Shareholder Executive was aiming to bring a distinctive capability to Government which did not exist before 2003/2004, which was that there was a level of commercial, professional expertise overseeing these assets. So, on the whole, what we would try to do would be to look at both the policy function and the commercial function, in a way that had not happened before, where civil servants, policy civil servants, would typically really just look at the policy function.
That gave quite a lot of latitude to the boards of the ALBs who were then effectively allowed to run the commercial functions as they saw fit, and it was attempting to redress that kind of balance that – for which the Shareholder Executive would be – was set up.
I mean, on the whole, we wanted policy objectives, though, to be set and discussed with ministers, who ultimately set those policy objectives, by policy officials because it was not for us to decide, for instance, whether or not the purposes of Channel 4 were going to be met by Shareholder Executive oversight or, indeed, the purposes of the Post Office, size of the Network, were going to be discharged by a purely commercial approach’s. So we wanted, on the whole, where we could, to get the policy objectives out of Shareholder Executive. We weren’t always successful with that and we weren’t wholly successful on Royal Mail and Post Office.
Ms Price: Is it right that, for the whole time you were at the Shareholder Executive, ShEx held both the shareholder and policy roles relating to Post Office Limited?
Sir Stephen Lovegrove: Yes, it is.
Ms Price: Is it right that this was in contrast, as you refer to at paragraph 26 a little further down, to other assets where the policy role may have been with ShEx in the early days but it transferred to the relevant Government Department thereafter?
Sir Stephen Lovegrove: That’s correct and, in the Royal Mail’s case, we inherited – when there was a lift and shift, effectively, of the whole of the Royal Mail and postal services team into Shareholder Executive, along with that came the team that looked after the things such as the requirement for a six-day universal service in the Royal Mail. We felt that gave rise to complications that were difficult to reconcile within Shareholder Executive, so we moved that back into the main part of the Department.
Ms Price: As far as you’re aware, why did the policy role for Post Office Limited stay within the Shareholder Executive?
Sir Stephen Lovegrove: I’m afraid I don’t really recall, at this time, and I wouldn’t like to speculate, actually. I don’t quite recall. Clearly, we were thinking that there, in an ideal world, should be a separation between policy and commercial, otherwise we wouldn’t have done what we did with Royal Mail. Why we didn’t do that with the Post Office at the time I’m not sure.
Ms Price: Could we have on screen, please, UKGI00001339. These are the minutes of a Shareholder Executive Board meeting, which took place on 15 September 2010. This is a meeting at which you were present and you comment on these minutes, if you wish to refer to it, at paragraph 28 of your statement.
Looking, please, to the second page to paragraph 2.1, this paragraph comes under a heading which was at the bottom of the previous page “ShEx Board Governance”, and the minutes at 2.1 say this:
“Philip went through his paper on the ShEx Board’s remit, particularly alerting members to the following considerations …”
The first bullet point there:
“Policy restraints – the Board will give advice on the operational implications and effectiveness of policy proposals …”
Then at 2.2, there is this:
“Board members went on to discuss the Board’s role, effectiveness and accountability. The Board saw itself as an advisory group to help ShEx fulfil its role in Government and escalate issues when necessary, with accountability to ShEx. Members commented that there may be situations where the Board disagrees with policy decisions, and therefore ShEx’s involvement in some cases which could compromise ShEx’s capability or affect its reputation. Stephen …”
Was that you?
Sir Stephen Lovegrove: That was.
Ms Price: “Stephen stated that ShEx would always start from a commercial position but would overlay policy priorities in order to get a settled and agreed position.”
The concern raised here was that there may be occasions when the ShEx Board disagrees with the policy position in relation to an asset. With this concern in mind, where ShEx holds both the shareholder and the policy role in relation to an arm’s-length body, is there a risk of a conflict between the two roles?
Sir Stephen Lovegrove: There could be the risk of a conflict between the two roles, yes. I mean, I should say here – I mean it wouldn’t have found its way into these minutes because they wouldn’t have been written like that, but the statement where – situations where the Board disagrees with policy decisions is a peculiar one because we’re talking there about the Board of Shareholder Executive and it’s not really in – not really the Board’s role or place to disagree with policy decisions which have been signed off by ministers. So that is a slightly strange formulation, which I think is – in hindsight, doesn’t look right to me.
I mean the point that I was trying to make in the rest of this paragraph was that in most situations, the size of the Post Office Network being a very good example, there was going to inevitably some form of compromise between a policy objective and a commercial objective and it was our role to try and bring out where the trade-offs were likely to be and then to end up with a settled and – I think I say settled and –
Ms Price: Settled and agreed.
Sir Stephen Lovegrove: – a settled and agreed position. And that was really about getting an agreed position between the policy imperatives and the commercial imperatives. I mean, clearly, for instance, if you wanted – if the policy imperative had been that we need a Post Office Network of 20,000 branches, rather than 11,500, which I think was the position at the time, that would have required a very much greater Government subsidiary and, clearly, the trade-offs there had to be discussed and analysed properly.
And it was often, I should say, easier to start from a commercial position and then work with the policy, sort of, afterwards, and it was an iterative process.
Ms Price: Could we have on screen, please, paragraph 29 of Sir Stephen’s statement. That’s page 12, towards the bottom of page 12, please. You say here:
“I discuss the role of the ShEx Board further below. Part of that role was to ensure that ShEx maintained a commercial outlook in its dealings with both ALBs and Government departments, and to guard against a danger that the balance of ShEx’s activities would tilt too far away from the interests of the taxpayer. To put it in other terms, the Board here was seeking to ensure that priority given to the shareholder function and the policy function remained in the correct proportion, a concern that was particularly prevalent at the time of the meeting with the new Coalition Government’s emphasis on efficiencies.”
So you’re referring back there, aren’t you, to the minutes we’ve just looked at – and do look at the paragraph above if you need to, for context, in terms of the timing of the meeting –
Sir Stephen Lovegrove: I am, yes.
Ms Price: – and that coinciding with the new Coalition Government’s emphasis on efficiencies?
Sir Stephen Lovegrove: Yes.
Ms Price: Did ShEx ever feel under pressure in light of the new Coalition Government’s emphasis on efficiencies, to give greater priority to the shareholder role than the policy role?
Sir Stephen Lovegrove: No, I don’t think we ever felt we were under a new type of pressure, there was – I mean, managing public money, for instance, which was one of the core documents that civil servants have to abide by, and accounting officers in particular have to abide by, talks about affordability, for instance. So affordability is always something that civil servants have to think about when they are assessing policy proposals. A new Government – new ministers and a new Government are perfectly entitled to shift the balance of policy in one direction, and if that brings affordability kind of issues along with it, then so be it. You do what you can to make sure that this new policy would be workable.
It may have been the case at the time – I mean, I think it probably was the case at the time – that the Coalition Government’s emphasis on efficiencies did mean that affordability constraints were tighter but they were maybe slightly different in degree than in kind from a normal conversation that you would have.
Ms Price: The Inquiry has heard evidence from Mark Russell, who became the CEO of the Shareholder Executive in 2013, that an advantage of the shareholder and policy roles being held separately for an asset is that it provides another set of eyes on key issues. Would you agree with that?
Sir Stephen Lovegrove: Yes, I would.
Ms Price: In your view, is it better practice to keep the shareholder and policy roles separate?
Sir Stephen Lovegrove: Yes, I do agree with that.
Ms Price: Are there any other reasons, apart from the reason given by Mark Russell, which I’ve just referred to, for that?
Sir Stephen Lovegrove: As I said, the – reaching a settled and agreed position for a particular asset or a particular policy is going to be a function of negotiation between the various differing, completely legitimate, agendas that people bring to bear on it. And, in some ways, I think the clarity that is brought to those potentially differing perspectives is enhanced if the teams who are looking at the policy issues, as opposed to the commercial issues, are separate.
Ms Price: I’d like to move, please, to information sharing within the governance structure for Post Office Limited. You say at paragraph 35 of your statement that the Board is entitled to expect accurate and full information to be provided to it by the Executive Team in order to discharge its functions. You are referring to the Post Office Limited Board here, is that right?
Sir Stephen Lovegrove: I’m referring, actually, to the board of any company, whether or not it’s privately owned, publicly owned, or a publicly listed company. The board has the principal responsibility for the proper running of the company and, if it is not getting the right kind of information from the Executive, then that is a very serious matter.
Ms Price: You explain at paragraph 39 of your statement that Her Majesty’s Government would usually be involved in the appointment of the chairs of assets operating as arm’s-length bodies and might hold approval rights over other board members but, in general, it would not appoint key executives; is that right?
Sir Stephen Lovegrove: That is correct.
Ms Price: In these circumstances, how did ShEx satisfied itself that the Executive was up to the task of, and was in fact providing, accurate and full information to the Post Office Limited Board?
Sir Stephen Lovegrove: The principal role of – well, no, that’s not – let me rephrase that.
One of the principal roles of the Board is to ensure that the Executive of the company is properly constituted to be able to effectively run the company. There are lots of bits of corporate governance around that which have evolved over the years and continue to evolve but, basically, they go through the Remuneration and Nominations Committee and appointments of Executives are made by the Board.
Now, we would, as Shareholder Executive, have wanted to have, if at all possible, participated in the discussions around the Executive’s appointments, and we would have given our views if we felt that there were any particular names that we didn’t think were especially suitable or were suitable, but we wouldn’t try and interpose ourselves into what would be standard corporate governance.
In terms of information, which is a slightly different matter, the principal responsibility of how the information comes up to the Board is that of the Board, and you expect to have experienced Non-Executive Directors and chairs who would know whether or not the kind of information that they were getting was the right kind of information, whether or not anything was being elided or missed out, and this a panoply of different types of things that would assist them in that, most notably internal audit, and the company secretary, and the other risk functions, effectively, in the board.
As I say, for us, in Shareholder Executive, we would, by and large, work through that type of mechanism, rather than trying to interpose a sort of totally different information regime on companies because that would have been duplicative and unhelpful.
Ms Price: Can we have on screen, please, paragraph 40 of Sir Stephen’s statement. That’s page 19. About four lines down, at paragraph 40, you say this:
“ShEx and the responsible department had to sustain and manage a close working relationship with the Chairs, Boards and executive teams of its assets. This was not always easy. At the time when I was Chief Executive, many senior executive teams were used to a culture in which they had a high degree of autonomy in how they ran the companies, as they had become used to a formerly very hands-off approach adopted by policy officials. They saw the relationship with Government as being akin to that between a publicly listed company and an institutional shareholder, not that between a company and its 100 per cent owner, or sometimes seemed to feel that they had been appointed by a Secretary of State to do a job and should be left alone to get on with it. As is discussed below, there was considerable resistance in some ALBs to greater involve from ShEx, including [Royal Mail Group] and [Post Office Limited], in particular with regard to the appointment of Shareholder NEDs [Non-Executive Directors].”
Starting with the senior Executive Team at Post Office Limited, when you were the Chief Executive of ShEx, did you see or were you aware of, this resistance to greater involvement from ShEx, leading to the Executive Team at Post Office Limited being resistant to sharing information about operational and contractual matters with ShEx?
Sir Stephen Lovegrove: I did not. I was aware of that kind of dynamic at the parent, with the Royal Mail Group but – because that was where my focus primarily was. That’s not to say that it didn’t exist at POL but I was not aware of it.
Ms Price: Now, in relation to the Post Office Limited Board, did you see or were you aware of this resistance to greater involvement from ShEx leading to the Post Office Limited Board being resistant to sharing information about operational and contractual matters with ShEx?
Sir Stephen Lovegrove: Again, I think my answer to that is similar to my answer from the previous one. From the papers that I have seen and have been reminded about, clearly there was a degree of reluctance towards the end of my time at ShEx for Susannah Storey to go onto the Board as a Government Non-Executive Director, and that may have been indicative of the kind of thing that you are talking about.
Ms Price: You refer at paragraph 76 of your statement a submission that you made to the Secretary of State in December 2006. Could we have that on screen, please. It is UKGI00045962. The title of this submission is “Royal Mail Board Composition: Non-Executive Directors”. Appended to this submission as annex B is an earlier submission. So the date of this one is 6 December 2006 and it’s from you to the Secretary of State; the earlier submission, which is appended to it, is dated 21 June.
Could we go to that, please, it’s page 5 of this document. We can see there, tucked underneath, your name and role, 21 June 2006, to the Secretary of State.
Going over two more pages, please, to page 7. Paragraph 9 of the submission deals with “Our relationship with the Board”, this was the Royal Mail Holdings Board; is that right?
Sir Stephen Lovegrove: That’s correct.
Ms Price: You say here at paragraph 9:
“The shareholder/Board relationship has been far from ideal. It is expected that there will always be some elements of tension between the two parties but at various times over the last three years the company has indulged in gaming and has tried to apply pressure on the shareholder without taking due consideration of the fact the shareholder is the Government and has to work within certain constraints (albeit that we strive to act as a commercial shareholder). This has manifested itself in the company refusing or being slow in providing information; threats of resignations and insolvency; and the playing out of issues in the media. There has been no shared vision of the ideal profile of members of the Board, with difficulties arising over the appointment of Baroness Prosser and the need for at least one Board member to have regulatory experience. There has also been poor consultation over key executive appointments in letters, POL and the finance function. In a word, ‘trust’ is missing from the relationship.”
Focusing first on the reference to the company indulging in gaming and trying to apply pressure on the shareholder, what did you mean by “gaming” in this context?
Sir Stephen Lovegrove: Well, I give a couple of examples later on, possibly being slow to provide information, using the media to get a particular point of view across which would have been better shared privately. Generally not – not having the kind of trusting and straightforward relationship that we aspired to have.
Ms Price: What was done to ensure that the Board was no longer inclined to game the shareholder?
Sir Stephen Lovegrove: Well, we had a number of, probably at the time – I mean I can’t remember, it was a long time ago – rather difficult conversations with members of the Board. I mean, as I say in my evidence, I’m not – I wouldn’t want to say that this was a sort of broken relationship because everybody was at each others throats for no particularly good reason. That wasn’t the case. This was a business which was in extremely challenging circumstances indeed, and we were on the verge of having to make a very significant investment in the business to keep it solvent and modernise its operations. It had a very, very large pension fund deficit.
There were different visions of how the ownership of the company that is Royal Mail Group should develop. On the one hand, the management wanted there to be very significant employee share ownership. Ultimately that wasn’t the Government’s policy.
So the context at the time, was that this was quite a fraught environment. We – I think I say, later on in the document, or possibly in some of the other documents later on, that the relationships became better but it was – there was no question, it was a fraught relationship at the time and we had to work pretty hard to make sure that ministers’ objectives were fulfilled.
I mean, what made things better – I mean there’s been a suggestion, I think, at some points that ministers didn’t have that much agency in the running of the businesses. I don’t really agree with that. One of the things that made it better, for instance, was the appointment of Baroness Prosser, so that de facto, there was a board member who was more capable of reflecting what would have been the Government’s objectives in – around the Board table.
Ms Price: Thinking in particular of the reference in this paragraph to resentment manifesting itself in the company refusing or being slow in providing information, do you consider that there was a cultural resistance in Royal Mail Group to the shareholder having access to potentially sensitive commercial information?
Sir Stephen Lovegrove: I think that would be a fair characterisation, yes, although I should say here this the Royal Mail I’m referring to here, rather than Post Office.
Ms Price: Indeed. That document can come down now. Thank you.
You say at paragraph 69 of your statement that Royal Mail Group’s culture of independence carried over into Post Office Limited, and you cite the example of resistance of the Chair of Post Office Board to the appointment of a Shareholder Non-Executive Director.
You say that that continued well into 2011, when plans for separation were being finalised. To what do you attribute Post Office Limited’s resistance to the appointment of a Shareholder Non-Executive Director?
Sir Stephen Lovegrove: I think that Alice Perkins was pretty clear about her objections to having a Shareholder Non-Executive Director on the Board, and I think she gave three reasons: one of them was that there were – there was another non-executive who didn’t want to serve; one was that they thought that there would be a potential for conflict; and there was another reason as well.
Ms Price: We will come on to that –
Sir Stephen Lovegrove: Okay.
Ms Price: – correspondence in due course. But from your perspective – forgive me for interjecting – quite apart from the reasons given, what did you think the reason behind Post Office Limited’s resistance to the appointment of a Shareholder NED was?
Sir Stephen Lovegrove: A desire for independence from Government –
Ms Price: Was a –
Sir Stephen Lovegrove: – to the extent that it was manageable.
Ms Price: Was a cultural resistance to information sharing something which also carried over from Royal Mail Group into Post Office Limited?
Sir Stephen Lovegrove: I’m afraid I don’t know the answer to that. I wasn’t closely enough associated with the information coming out of Post Office to know.
Ms Price: While we are on the topic of the Shareholder Executive taking seats on the Boards of its main assets, could we have page 33 of Sir Stephen’s statement on screen, please, and at paragraph 68 you say this:
“It had, in fact, long been my view that the Government (through ShEx) should be taking seats on the Boards of its main assets and I thought I anomalous that it had often not done so when it was the sole owner of these companies. However, there was resistance to this proposition both within the Government and the assets in the early years of ShEx’s existence. From the Government’s side, this was due to concerns that a Government board member might be associated with politically controversial decisions. From the asset’s side, a Shareholder NED was often seen as an unwelcome innovation that risked political or inexpert interference in commercial decisions.”
Then at paragraph 69, you say:
“In my initial years in ShEx, my view that we should have been taking Board seats did not prevail. For a company such as [Royal Mail Group] in which management that a deeply engrained culture of independence from Government, it would have been extremely difficult to even raise the issue.”
Just as a matter of clarification, did you or anyone else at ShEx ever take practical steps to explore with Royal Mail Group whether ShEx could or should have a NED on the Royal Mail Group’s Board at any time prior to Post Office Limited’s separation from Royal Mail Group?
Sir Stephen Lovegrove: We didn’t take practical steps to try and put somebody onto the Board. If we had done that, there would have been evidence in submissions to ministers that that was a position that we wanted them to endorse and follow through. I’m entirely sure that we would have had conversations with Executives, with the Chair, where we – I would have said something like “It is odd that Government doesn’t take board seats”. But we never actually did anything about it.
Ms Price: Do you recall that actively being discussed with the Royal Mail Group Board?
Sir Stephen Lovegrove: No, I don’t, to be honest. So that would have been – that is speculation on my part.
Ms Price: Were any of the reasons you have cited in the remainder of paragraph 69 – so, namely, strong pushback which might become public; destabilisation commercially and politically; and the potential resignation of the Chair of the Royal Mail Group Board – given to you at the time as reasons for ShEx not to have a NED on the Royal Mail Group’s Board?
Sir Stephen Lovegrove: I’m not sure that the conversation would have been had with the degree of precision that you’re talking about. I think it was so much the case that the policy was not to have non-executives on the boards, that these issues would have been kind of internalised in support of that, that position, rather than a conversation as “We ought to have a Shareholder Executive Non-Executive Director on this particular Board. Well, we can’t because we’re going through all these things”.
I mean, these things are all referenced, I think, in my submission that you put up a few minutes ago, which I sent to the then Secretary of State. So they were in the air and, as I think I say here, I think the idea of even raising it would have been wasted breath, to be honest.
Ms Price: So just seeking to understand, these were in your consideration that they weren’t necessarily reasons given to you by the Royal Mail Group Board for why this couldn’t happen?
Sir Stephen Lovegrove: That is correct, though I don’t rule out that there was a conversation where I might have mentioned this to one of the Board, but I don’t remember it specifically.
Ms Price: Sir, we are approaching 1.00, I wonder if we could keep going until 1.15, if that’s all right by you, and have a 45-minute lunch given that we only started at 12.00 today.
Sir Wyn Williams: Yes, certainly, yes.
Ms Price: Thank you, sir.
Could we have on screen, please, UKGI00017395. This is the April 2008 ShEx quarterly report; is that right?
Sir Stephen Lovegrove: Yes.
Ms Price: I’m taking that from a description where you’ve dealt with it in your statement, as I think that is accurate.
Sir Stephen Lovegrove: Yes.
Ms Price: If we could go to the Royal Mail tab in this spreadsheet, please. It’s tab 27, if that assists with finding it. That’s it. So this is April 2008, and it is two years on from your submission to the Secretary of State, which we’ve looked at, containing concerns about the relationship with the Royal Mail Group Board. This was the state of play by this point, and we can see, just to put it in some context, the heading “Shareholder Executive: Traffic Light”. Under the first section “Shareholder Relationship”, there are questions posed and then we have columns, a “Yes” column and a “No” column, and there is a code for what type of issue the “Yes” or “No” relates to. So number 1 is in the summary above as the shareholder relationship. So all of those items in that first table, section 1, relate to shareholder relationship.
Just looking at some of the questions and answers that we have here, the first one is:
“Do we have regular and informative contact with non-execs?”
The answer to that is “Yes” and, on the comment, if we can just click in the box, please, we can’t see the context in the box but if we look at the formula bar, if I’m using the right terminology, we see:
“Annual plus frequest ad hoc. New programme of meetings now commencing.”
Now we have the second question:
“Do we have regular and informative contact with the Chair and senior execs?”
The answer is “Yes”, and there’s “Quarterly and frequent ad hoc”.
The third question:
“Does the Chair respond to shareholder concerns?”
The answer is: “No” and the comment is:
“Yes and no. Often extreme. Recently some improvement. Chairman’s response to [Secretary of State] Chairman’s letter acknowledges importance of monitoring and reporting the company’s performance.”
Then we have at 1.4:
“Does the company operate a ‘no surprises’ approach to communication (includes media)?”
The answer is “No” and the comment is:
“Inconsistent: some off record, briefing of media; no pre-warning of high profile press releases. Getting much better, however.”
It says:
“Is the overall relationship satisfactory?”
The answer is “Yes”, but the comment is “Satisfactory. Just”.
At the next box down, we have as “Red”, we have:
“Relationship with Chair can be mixed. Other issues consensus can be reached. Board refresh now being undertaken – New MD letters now appointed; and new settlement with the Board being slowly established. Some friction experienced over bonuses which have still not been agreed for the (now previous) financial year of 07/08.”
Just looking down, please, to section 3, which is “Quality of Management Team & Board”, and under “Do we have a suitable and strong Chair?”, the answer is “Yes”, and we have some comments there:
“Chair re-appointed for further year to oversee review and POL …”
The answer is also “Yes” for whether we have a suitable and strong CEO:
“Relationship with CEO has been strained but is improving. He is looking to move on in 12-24 months’ time.”
“Suitable and strong FD”, is that Finance Director?
Sir Stephen Lovegrove: It is, yeah.
Ms Price: “Yes. [Finance Director] now in post for 18 months … performance … okay but not great. New initiatives to improved reporting are often met with resistance initially, but then gradually overcome.”
Then looking at some of the Nos:
“Do we have a suitable and strong line management (including other executive directors, heads of business units?”
The answer is “No”:
“[Royal Mail] undertaking ‘refresh’ programme. Major concerns about bench strength of team.
“Is there a strong NED team?”, two down.
“No. Strategy for reappointment/recruitment being implemented, interviews for NEDs have been undertaken recently.
“Is the Board compliant with the Combined Code …
“Yes”, but with the comment:
“But seeking to reduce Board size.”
Then we have this:
“Do we have appropriate Board dynamics?
“No. Need to ensure that future NED appointments are truly independent and expect to do so through NED recruitment.”
The last one:
“Has there been a Board performance review recently?”
“No. Last Review in 2005. Since then there have been changes to the Executive Team and NED refresh under way. Do not expect full Board Review until new chair appointed March 2009.”
So looking at all of those answers taken together, would you agree that it appears from this document that the relationship with the Board was still poor at this point, two years on?
Sir Stephen Lovegrove: It’s certainly problematic. I wouldn’t remotely want to deny that. I think it shows some signs of improvement from my earlier submission where I described the general atmospherics around this relationship, but it is absolutely clear from this that we had not been completely successful in resetting the relationship.
Ms Price: What was preventing improvement or at least making it slow?
Sir Stephen Lovegrove: It is difficult to make these kinds of improvements if the Chair and the Board are – have set their face against some of them. If, for instance, as I think I said in the earlier submission, the Chair does not want to do a Board review, then it is very difficult to do a Board review and, if I remember rightly, although this was before my time in Shareholder Executive, I think that the Chair here had brought in many of his – many people he knew personally to be non-executives on the Royal Mail Group.
So there was quite a tight group of non-executives who would have been making improvements probably a little bit more difficult than we would have ideally liked.
Ms Price: Were there, at this point, still concerns that insufficient information was being shared with ShEx?
Sir Stephen Lovegrove: I would imagine that there probably was. I mean, bear in mind that the reporting packs, the requests for information, the formality and length of the meetings that we were having were changing all the time, admittedly possibly from a relatively low base, but I am guessing that we would probably have still wanted to see more types of information than occasionally we got.
Ms Price: What were the concerns about the strength of the Executive Team which were referred to in this review?
Sir Stephen Lovegrove: Well, we clearly felt that we had a strong CEO, although these “Yes/No” binary judgements are indeed just that: rather binary. And the Finance Director, I think, gets a tick in that box as well. I can’t remember at this distance –
Ms Price: If I can help you, with 3.4, “Do we have a suitable and strong line management, including other executive directors/heads of business units?”, and then in the comment, “Major concerns about bench strength of team”; it was that specifically that I was referring to.
Sir Stephen Lovegrove: Okay. So I don’t remember in any great detail but, clearly, this was a comment which was recognised by the Chief Executive in the main, who was obviously undertaking an exercise to improve the quality of his Executive Team.
Ms Price: There were stated to be concerns about the independence of the Non-Executive Directors on the Board. Is that linked to what you have just told us about who had been selected and how or the –
Sir Stephen Lovegrove: Yes, I think it was, and I think it goes to the point here about needing to ensure the future Non-Executive Director appointments are properly independent, as opposed to anything else.
Ms Price: That document can come down now. Thank you.
Sir, I have reached the end of one topic and, before turning to the next, I wonder if that might be a convenient moment to break for lunch?
Sir Wyn Williams: Yes, certainly. So we’ll resume at 2.00, yes?
Ms Price: Yes, please, sir.
Sir Wyn Williams: Right, see you all then.
Ms Price: Thank you.
(1.10 pm)
(The Short Adjournment)
(2.00 pm)
Ms Price: Good afternoon, sir.
Sir Wyn Williams: Good afternoon.
Ms Price: Sir Stephen, would you agree that information sharing is an integral part of risk identification, monitoring and management?
Sir Stephen Lovegrove: Yes, I would agree with that.
Ms Price: You deal directly with the link between the two at paragraph 52 of your statement. Could we have that on screen, please. It is page 26. Three lines down, you say:
“As the 20 June 2007 Departmental Risk Register shows, it was the job of the Post Office Network Team to compile the POL Risk Register within ShEx, relying on their analysis of the information that was provided to them by POL, informed by further data from RMG, its parent company, and officials’ own appreciate of the risks being run. The effectiveness of the risk register is therefore largely dependent on the flow of information from the asset in question.”
You go on at paragraph 53, a little further down the page, please, to say this:
“Looking back now, with the benefit of hindsight and acknowledging that I have not seen all of the evidence, it seems to me that the failure of identify and socialise the risk posed by, first, errors in the Horizon system and, second, POL’s power to prosecute subpostmasters using Horizon data, was central to what followed. This is so both in terms of the initial wrongful prosecutions and the subsequent delay in acknowledgement and rectification. Those two risks should have appeared on the Risk Registers of, in ascending order, POL, Royal Mail, ShEx and the Department.”
The implication here, by reference to “ascending order” and taken with your comments in the previous paragraph, is that you attribute the failure to identify and socialise those two risks primarily to inadequate information flow from Post Office Limited; is that right?
Sir Stephen Lovegrove: I think it is right. I think it’s difficult for officials to identify, with sufficient gravity, the types of risks that we’re talking about here, if the organisations that are actually responsible for them – Post Office and then subsequently Royal Mail – haven’t identified them as risks themselves, which is why I say at 54 the order is important. And it’s certainly the case that this kind of issue should certainly have been identified by internal auditors and quite possibly external auditors as well.
I don’t think, however, that is quite the full picture because, clearly, there were people in Shareholder Executive who were aware of the complaints of the subpostmasters. They had received letters from the JFSA, there had been meetings, there had been subsequent meetings where they had quizzed the Post Office on what all this was about. So it was not the case that there was absolutely no knowledge of this issue within Shareholder Executive but it didn’t come through the normal ascension of the risk through the various risk registers, and that was wrong.
Ms Price: You refer in paragraph 53 to Post Office Limited’s power to prosecute subpostmasters using Horizon data and you do so again at paragraph 83 of your statement. Could we go to that, please, it’s page 40. You say:
“Neither this team nor anybody else in ShEx was in any way in charge of the conduct of prosecutions by RMG prior to separation, or POL after at. It seems from the documentary evidence that knowledge of the prosecutions was very limited. I was not personally aware that RMG/POL had the power to conduct prosecutions, nor was it a power that I would in any way have expected a company to have.”
In fact, Royal Mail Group and later Post Office Limited did not have any special statutory power to bring prosecutions. It brought private prosecutions against individuals, something which any ordinary individual or company can do. Were you aware that such private prosecutions were taking place when you were at ShEx?
Sir Stephen Lovegrove: Like any large company, there were going to be instances of crime committed by employees. I mean, I can remember that there was a moment at which, in the Royal Mail, there was considerable concern about post going missing/being stolen, and I would have expected, in a normal – in the normal course of events, that people would have been prosecuted for theft. I mean, it wouldn’t have surprised me that, on occasion, Post Office prosecuted subpostmasters because they felt that there had been and – and could prove and had evidence – that there had been some kind of theft. But I wasn’t – it wasn’t something that I thought about very much at all, to be honest.
Ms Price: So the distinction I’m drawing is between the implication in your statement that there is a special, perhaps statutory, power for the Post Office, in particular, to bring such prosecutions, as opposed to private prosecutions which are not brought by the CPS but can be brought by anyone. Do you see that distinction?
Sir Stephen Lovegrove: I do. I am – my knowledge of the law is limited here. So if a private prosecution can be bought by anybody, can that private prosecution mean that the person who is found guilty, as it were, can they end up in prison?
Ms Price: The question at the moment is simply whether you, drawing that distinction, were aware that it was the Post Office, or before that Royal Mail Group, as opposed to the CPS, bring prosecutions?
Sir Stephen Lovegrove: I am sorry, I misunderstood. I certainly was not under – I did not know that it was not the CPS.
Ms Price: Okay. The Inquiry has received evidence that there were over 800 prosecutions brought by Royal Mail Group and Post Office Limited between 2000 and 2015. How can it be that the Shareholder Executive and Departmental knowledge of these prosecutions was so limited in the period you were at ShEx; can you help with that?
Sir Stephen Lovegrove: I haven’t seen any evidence that we were told that that was the volume of prosecutions and, indeed, I think I remember seeing some evidence from other witnesses who were much more closely associated with it, such as Chairs of Post Office themselves, that they weren’t aware of it, either. So I think it was one of those facts that was not widely – was not widely known and was not widely noised.
Ms Price: Were you aware that criminal enforcement proceedings were also being used by the Post Office to obtain confiscation orders against some of those it prosecuted?
Sir Stephen Lovegrove: No, I wasn’t.
Ms Price: In terms of your own knowledge of the Horizon system, you address this at paragraph 60 of your statement. Could we have that on screen, please, it’s page 29. Here you say this:
“My knowledge of Horizon during the time in which I was involved with [Post Office Limited] and [Royal Mail Group] related matters in ShEx was extremely limited: I understood that it was the Post Office’s point of sale system and that it had been a complicated procurement some years before, but I knew little beyond this. I do not recall the May 2009 Computer Weekly article being brought to my attention during my time at ShEx. Nor do I remember being made aware of complaints made by subpostmasters as to the integrity of the Horizon IT System.”
Just picking up, first of all, on the complicated procurement some years before, what did you understand was complicated about the procurement?
Sir Stephen Lovegrove: The negotiations with Fujitsu had been lengthy and fraught. Little more than that.
Ms Price: We will come shortly to the submission to Edward Davey from ShEx in October 2010, which addressed claims that endemic flaws in Post Office Limited’s Horizon system had resulted in wrongful termination of subpostmaster contracts and prosecutions for false accounting. But, in general terms, can you help with how it came to pass that the Chief Executive of ShEx was unaware of allegations being made by subpostmasters about the integrity of Horizon?
Sir Stephen Lovegrove: This is speculation, to a certain extent, so I’d like that caveat to be noted. But I was clearly not made aware of these – of this situation, and I don’t see my name on any of these submissions and I wasn’t copied into many of the documents or emails about it.
I would imagine that the team in charge, and I think the documentation does prove this out, would have taken account of what were forceful and repeated and detailed denials that there was anything wrong coming from the – from Post Office, that those – those denials were supported in full by the Post Office trade union.
There had been meetings with the Minister and, indeed, subsequent ministers as well. There had been further questions which had been asked by Shareholder Executive officials, detailed questions, which largely went to the matters being raised by the wronged postmasters and, ultimately, the Board of the Post Office had appointed Second Sight to do an inquiry.
Now, in those circumstances, I would – in that context I can see that the officials in question would have thought, “Well, what else is there that can be done in this kind of situation? Is it something that we need to bring to the Chief Executive’s mind – to Stephen’s attention? Do we want him to intervene? Will he change anything?” And I would have asked questions which would have gone to the issues I’ve just mentioned.
And if all of those things were in place I would have probably said, “Okay, well, crack on. You know, I’d like to know about the progress of this”. But clearly that was not the view that was taken at the time and it had been through the ministerial channel as well, but I can’t – that is speculation, and I’d just like to make that clear.
Ms Price: You refer to the ShEx handbook at paragraph 34(a) of your statement. Could we have that on screen, please. The reference is UKGI00044314. This document is from 2007; is that correct?
Sir Stephen Lovegrove: Yes, I think so.
Ms Price: That’s the date that you give it in your statement.
Sir Stephen Lovegrove: Yeah.
Ms Price: Going to page 4 of that document, please, section 2 deals with “What Government expects of its businesses”, and the first sentence there says:
“Government set out nine key principles which the government expects to govern the behaviour of businesses in government ownership.”
The principles set out below include:
“Principle 1. Businesses should seek an honest, open and ongoing dialogue with the government as shareholder. They should clearly communicate the plans they are pursuing and the likely financial and wider consequences of those plans. Ideally, goals, overall plan and progress should also be made public and discussed in the annual report and accounts.
“Principle 2. Businesses should operate a ‘no surprises’ policy ensuring that the government as shareholder is informed well in advance of anything potentially contentious in the public arena.
“Principle 8. Businesses should have and continue to develop coherent strategies for each business unit. The approach to reviewing strategy should be a dialogue between the Board and the shareholder.”
With those principles in mind, it appears from the evidence the Inquiry has received so far that, at least during the time when you were at ShEx, ShEx was unaware of a number of important matters. To take some examples:
First, Post Office Limited’s knowledge of a bug called the Falkirk bug, since 2006, and the receipts and payments mismatch bug since 2010;
Second, that a joint expert report prepared for the civil action brought by the Post Office against Julie Wolstenholme in 2004 had challenged the proposition that Horizon was robust, and the case was, as a result, settled by the Post Office;
Third, that there had been acquittals of subpostmasters in prosecutions brought against them after the operation of the Horizon system had been raised by them; and
Fourth, that Fujitsu had the capability to access subpostmasters’ terminals without their knowledge or consent.
Taking those examples and combined with the failure as you see it, for the Post Office to identify and socialise risks of errors in the Horizon system and relating to prosecutions, do you consider that Post Office Limited complied with the principles we are looking at here, namely open and honest dialogue, operating a “no surprises” policy and engaging in strategy dialogue?
Sir Stephen Lovegrove: The way that you have just described that would certainly indicate that there were serious failings in that area. The thing I would say, though, by way of context, is that, by and large, the shareholder, the Shareholder Executive, was engaging less with the executives who were close to the kinds of issues that you are talking about, and more with the Board and the senior executives, and it’s not clear to me whether or not the senior executives and the Board were aware of those issues either.
In fact, actually, from what I have seen of the previous evidence, there is a surprising lack of knowledge of some of those kinds of issues at the executive of the Post Office and I think, in those circumstances, where the communication breakdown actually occurs is an interesting question.
Ms Price: That document can come down now. Thank you.
Is it right that the IT risk, that is the risk of errors in Horizon, and the prosecution risk, were two distinct risks, neither of which were identified or socialised in the relevant risk registers from the Post Office Limited level upwards.
Sir Stephen Lovegrove: Yes. From what I have seen.
Ms Price: As a matter of principle, should all risks on the Post Office Limited risk register also be identified as risks on the ShEx risk register?
Sir Stephen Lovegrove: Not as a matter of principle, no. I think the matter of principle should be that all risks on the Post Office risk register should be looked at and considered, and a decision – a conscious decision should be taken by sufficiently senior people as to whether or not they should go on to the Shareholder Executive risk register.
Ms Price: It is possible, isn’t it, that something might be identified as a risk by ShEx which is not on the POL risk register?
Sir Stephen Lovegrove: It is, yes.
Ms Price: Could we have on screen, please, UKGI00000062.
This is the submission I referred to earlier prepared by Mike Whitehead in advance of Edward Davey’s meeting with the Alan Bates. It is dated 5 October 2010, and you address this at paragraph 87 of your statement, if you wish to refer to it.
Mike Whitehead was a member of the ShEx POL shareholding team; is that right?
Sir Stephen Lovegrove: That’s correct, he came from the policy side.
Ms Price: That POL team, you say in your statement, had five to six members and was headed up by a Director. That was your description at paragraph 57.
Sir Stephen Lovegrove: Yes. The Royal Mail and Post Office team was headed up by a Director. Underneath that Director there was – there were two Deputy Directors, one for the Royal Mail and one for the Post Office.
Ms Price: I see. The Deputy Director headed up the five to six individuals in the team?
Sir Stephen Lovegrove: Correct.
Ms Price: Accepting that you do not think you saw this submission at the time, I’d like to look, please, at some of the issues that were being raised in it. First, under the heading “Purpose” there is this:
“(Rescheduled) meeting with Alan Bates (JFSA) on Thursday, 7 October at his request to discuss the JFSA’s claims that endemic flaws in [Post Office Limited’s] Horizon system have resulted in a number of subpostmasters having their contracts wrongly terminated by [Post Office Limited] and in many cases prosecuted for false accounting.”
Then under “Background to the meeting”:
“Mr Bates has written twice requesting a meeting with you. In response to his first letter of 20 May, the request was declined on the grounds that the issues raised were operational and contractual matters for [Post Office Limited]. His second (more confrontational) letter of 8 July was followed by reports that Channel 4 were planning to run a news item on the JFSA campaign. We then recommended offering a meeting in response to this 2nd request for presentational reasons against the background of potential publicity ([Channel 4] News item) playing heavily on Government Minister, ‘refusing to meet victims of [Government] owned Post Office Horizon IT system which has systemic faults resulting in wrongful accusations of theft/false accounting’. The JFSA has also mounted a substantial lobbying campaign with MPs and several [named individuals written there] have written to you or tabled PQs on behalf of constituents who are members of the JFSA.”
“Our objectives” underneath:
“Tactically we would advise that you seek to establish at a very early stage whether legal action against POL is imminent/planned. If so, it would be prudent to adopt a ‘sub judice’ approach in the comments you make.”
Then bullet points:
“Emphasise that the issues raised by the JFSA are operational and contractual matters for [Post Office Limited].
“Make clear that, as the shareholder, Government has an arm’s-length relationship with the company and does [not] have any role in its day-to-day operations.
“Establish whether, as reported, the JFSA is committed/planning to initiate legal action against [Post Office Limited].
“If so, note that it will be for the relevant legal process to decide on the JFSA case and that the issues are effectively sub judice.”
Over the page, please, two more bullet points:
“Demonstrate that you’re prepared to hear the JFSA’s side of the story … but make clear that you are not in a position to offer substantive comment.
“Avoid committing to set up an independent external/review of Horizon.”
The “JFSA objectives” are summarised below there, and they include:
“To press for an independent investigation into the reliability and integrity of the Horizon system …”
At the last point:
“To press for the establishment of a new representative body for subpostmasters as an alternative to the cosy relationship between [Post Office Limited] and NFSP.”
Then starting about halfway down under the bold font there are some what seem to be key points:
“Avoid any commitment to adopting any of the JFSA’s objectives in the terms these are set.
“Substantial changes to subpostmasters’ contracts and the branch operating model are a key element of POL’s 2011-16 business strategy.
“An independent review/audit of the integrity of Horizon would be expensive (and time consuming). POL’s view is that if there were systematic integrity issues as claimed by JFSA, there would have been a higher incidence than is claimed, there would have been instances of Crown Offices being affected as well as sub post offices as identical system is used.”
And:
“Subpostmasters are contractually entitled to be accompanied at appeal hearings by an NFSP representative or friend.”
Over the page, please, is a more detailed document. I don’t intend to take you through it all because I’m aware you have read this before but, just scrolling down, please, to see what is here. It sets out the Post Office Limited position in relation to the integrity of the Horizon system. Then, over the page, please, the Post Office position, scrolling further down, in relation to action taken with subpostmasters for accounting irregularities.
In relation to the second of these headings, it is explained at the second paragraph under the heading that:
“In certain cases, following consultation with legal advisors, a decision may be made by [Post Office Limited] to pursue a criminal case. Since 2005 there have been 230 criminal cases that have proceeded to Court. Of these 169 have been found guilty and 18 defendants cautioned. Of the remaining 43, 1 was found not guilty but this was nothing to do with any Horizon challenge. 42 cases were not carried forward for a variety of reasons (but there are no suggestions that any of these reasons were related to concerns about Horizon).”
Setting aside for a moment the question of advice that was given to Edward Davey by Mike Whitehead, would you agree that this document shows that, by at least document 2010, ShEx and the Minister were aware of allegations that there were endemic flaws and systemic faults in Horizon and that hundreds of people had been prosecuted based on Horizon data?
Sir Stephen Lovegrove: That’s undeniable.
Ms Price: You say at paragraph 89 of your statement that you believe concerns about the Horizon system were not escalated on to the ShEx risk register entry for Post Office Limited prior to separation, or during your tenure as Chief Executive. At paragraph 106, you acknowledge that it would clearly have been vastly preferable if Horizon and POL’s prosecutorial function had appeared on internal risk registers in ShEx.
Looking at this document, which was from Mike Whitehead, shouldn’t the ShEx officials involved in the production of this submission have immediately identified: first, the risk of there being endemic flaws and systemic faults in Horizon; and, second, the risk of there being unsafe convictions and other wrongful action taken against individuals based on unreliable Horizon data?
Sir Stephen Lovegrove: I think it is absolutely undeniable that this whole situation should have been on Shareholder Executive’s risk register, just as it should have been on the Post Office’s risk register, just as it should have been on the Royal Mail’s risk register, and I should say that I think if it had been on those two companies’ risk registers, that would have made it vastly more likely that it would have appeared on the Shareholder Executive’s risk register as well.
I can’t answer for colleagues’ state of mind or exact thinking from this period of time. I wasn’t copied in on this particular document. I fear I probably have to repeat what I said earlier on, which is that I would speculate that, in the face of the very forceful and detailed denials from the Post Office, supported by the subpostmasters’ trade union, although I accept that the JFSA don’t – made it clear in this document that they didn’t particularly trust their trade union. There had been a meeting with the Minister, questions had been asked later by Mike Whitehead specifically of the Post Office, about a month after this, I think, again going very much to the concerns that Mr Bates was raising. I mean, I think in those circumstances, clearly the decision was taken that it did not warrant escalation, and that is – that is – that was wrong. But I speculate here because I didn’t write this submission and I didn’t see it.
Ms Price: Indeed. But these were officials who were at ShEx when you were Chief Executive, so in terms of –
Sir Stephen Lovegrove: They certainly were.
Ms Price: – how you would expect those operating under you to behave, would you not have expected both a recognition of the risks, an escalation of those risks?
Sir Stephen Lovegrove: I very much wish that it had been escalated. I am not resiling from that position at all. The point I’m trying to make is that, in the context of the time, I can just about see how a decision might have been taken not to escalate and, to be clear, it was escalated to the Minister –
Ms Price: Yes.
Sir Stephen Lovegrove: – and consequent ministers, all of whom met Mr Bates.
Ms Price: There is in place, though, as you set out in some detail in your statement and we have heard some information about from others, of identification and management of risk, which relies on things being recorded so that they can be considered by, for example, the ShEx Executive Committee or the ShEx Board?
Sir Stephen Lovegrove: Yes.
Ms Price: So it is important, isn’t it, notwithstanding that things that should be considered by the Executive Committee and the Board are raised, notwithstanding that there might be a separate line of reporting to the Department?
Sir Stephen Lovegrove: Yes, indeed, and I am very clear in my witness statement that I – they should have been put on the risk register. But I’ll repeat, they should have been on the Post Office risk register and they should have been on the Royal Mail risk register as well.
Ms Price: That document can come down now. Thank you.
At paragraphs 57 to 59 of your statement, you explain that separate teams at ShEx dealt with Post Office Limited and Royal Mail Group policy issues, respectively. Do you think that this may have inhibited effective flows of information and oversight of Post Office Limited?
Sir Stephen Lovegrove: I’ve given this matter some thought and reflect on it at the end of my statement. I think, honestly, the answer is – well, it’s clearly unknowable. Honestly, I think no, though. The fact that there were policy officials in the Post Office team as well as, as it were, commercial officials in the Post Office team. Once the information had come into Shareholder Executive, I don’t think that the fact that they were in the same team sort of inhibited a flow of information. I think the issue about separating those two functions is more about being clear where the perspectives are.
Ms Price: Were there any checks in place within ShEx to control or govern the flow of information coming through from assets and throughout ShEx?
Sir Stephen Lovegrove: Yes. I mean, each quarterly review and then annual review had a set – and they weren’t exactly the same, there wasn’t complete commonality but there were a set of expectations about the kinds of – the bits of information that the companies and the assets were meant to provide, and there would be questions asked if that information was not being provided. I mean, I think we’ve seen from earlier evidence that, certainly in the early days of Shareholder Executive, sometimes it was difficult to get that kind of information from the assets in question but we knew, in large part and certainly as we went, you know, as time went on, what we wanted to know, and we were perfectly happy to ask for it.
Ms Price: You say at paragraph 87 of your statement that you are confident that Mr Whitehead would have presented the Minister with an accurate representation of the facts as he understood them, and that’s a reference back to his submission to Mr Davey. You address this further at paragraph 88 of your statement. Could we have that on screen, please. It’s page 42. Here you say this:
“I do not know what steps Mike took to obtain and interrogate information provided by [Post Office Limited] to him, though he seems to have asked the main subpostmasters’ trade union, the National Federation of SubPostmasters about it, and been told that their view that there should be no lack of confidence in the Horizon system. Mike was in regular contact with the NFSP and so it would not surprise me if he had spoken to them about Horizon. He was not, nor could he have been expected to be, an expert on [Post Office Limited’s] IT system. Any official in his position would have been entitled to expect [Post Office Limited] to provide a truthful answer to the questions posed about Horizon. There had to be a degree of trust between ShEx and those who had been appointed to the job of running an ALB.”
Dealing first with the reliance placed on the National Federation of SubPostmasters’ position on the issues, were you aware at the time that you were Chief Executive, that the JFSA considered that the National Federation of SubPostmasters had a “cosy relationship” with Post Office Limited? That was the – one of the bullet points that we just looked at.
Sir Stephen Lovegrove: No, I wasn’t.
Ms Price: Should that fact, that the JFSA considered there to be a cosy relationship between the NFSP and Post Office Limited, not have made Mr Whitehead and the POL shareholder team more wary of reliance upon the NFSP position?
Sir Stephen Lovegrove: I’m not sure that you can infer that they were reliant on the NFSP position. I think that it’s much more relevant that, on – I think it’s 10 November – this was in the Rule 10 material – sorry, 4th November 2010, which was subsequent to the JFSA meeting with Edward Davey, Mike had a clearly a long conversation with the Post Office covering matters such as whether or not the contract had changed, the lack of audit trail, whether or not POL can access the system remotely, frequency of software updates, and it goes on.
I mean, these are all of the issues which Mr Bates had raised a few weeks before and had received answers which he was entitled – detailed answers and forceful answers – which he was entitled to rely on. I think that the fact that the National Federation of SubPostmasters were, as it were, rowing in behind that position would have been a factor, but it would have not been as much of a factor as the very long conversation, by the sounds of things, that he had in November with the Post Office itself.
Ms Price: I see. I’m simply taking from your statement the suggestion that this was another source of information that Mr Whitehead might have used to probe the POL position and –
Sir Stephen Lovegrove: That is perfect – I don’t know. It is perfectly possible that he did, and maybe he did have in mind the fact that – I mean, it was him who wrote that there was a cosy relationship. So I don’t know exactly the cast of mind that he brought to that conversation, I’m afraid.
Ms Price: My question is whether, given that he’s recorded the NFSP position in his submission and recorded that there is a view that there is this cosy relationship, that should in some way have made Mr Whitehead slightly more wary of finding that reassuring?
Sir Stephen Lovegrove: Indeed. That is a perfectly reasonable position to take and, as far as I know, that may well have been the position that Mike did take. I don’t know.
Ms Price: In general terms, did ShEx seek assurances, before placing reliance on information provided to it by assets?
Sir Stephen Lovegrove: No, we didn’t, because that would have been an admission that we didn’t really – if we asked a question, we weren’t necessarily expecting an honest, truthful and full answer. And we did not operate along those lines. The Shareholder Executive handbook, the Shareholder Executive annual guidance, the framework agreements, the chairman’s letters, all made it absolutely clear that we expected full and frank, honest, well-founded, detailed responses to questions that we might be asking. If we had had to go through that process every single time that we had communication with an asset, that would have been very, very wearing indeed, as well as wasting a lot of time.
That was not the kind of relationship that we sought to develop.
Ms Price: That document can come down now. Thank you.
It may follow from your last answer, but was it part of the role of ShEx officials to interrogate information provided by the Post Office to ShEx or query any gaps in information provided before conveying it to ministers?
Sir Stephen Lovegrove: Certainly. If there was a sense that either information had been unhelpfully presented or misleadingly presented, or incompletely presented, then I would certainly have expected Shareholder Executive colleagues to have pressed and challenged on that. I mean, I used to do that kind of thing all the time myself.
Ms Price: So you draw a distinction between seeking assurances when, on the face of it, there’s nothing to question, and where there is, on the face of it, something that needs explaining?
Sir Stephen Lovegrove: I think the –
Ms Price: – exploring?
Sir Stephen Lovegrove: – distinction that I would draw is that we expected, as a matter of course, and made explicit at the beginning of a relationship, that we expected a full and frank and open, honest, straightforward relationship with appropriate responses. That does not mean to say that we would always necessarily get that, nor does it mean to say that if we didn’t get that, that was necessarily always – we didn’t get it because there was a lack of good faith.
It might have been just that people misunderstood. So I would have expected a constant dialogue, challenging dialogue, rather in the same way as a Board is meant to have a challenging dialogue with the Executive, to take place. I hope that’s clear.
Ms Price: In a situation like this, where a submission is summarising an increasing number of people challenging the integrity of the Horizon system, with the implication for prosecutions and other action taken against subpostmasters, wasn’t there a requirement, in those circumstances, to be more probing? Where there is an increasing body of accounts that there is something wrong with the system?
Sir Stephen Lovegrove: I think there is evidence that officials were more probing, as time went on. Now, I think it’s difficult to say that they shouldn’t have probed even further but I think the evidence does show that, increasingly, questions were being asked and that went alongside, increasingly clearly, questions being asked at the POL Board, as well, ultimately culminating, at least in my tenure, in the appointment of Second Sight to do an independent review.
So, clearly, the questions were becoming more pointed and acute and, clearly, there was a response to that. I think it is perfectly open for anybody to say it should have happened quicker.
Ms Price: Do you agree that the risks posed by errors in the Horizon system and action against subpostmasters, including prosecutions, were not simply operational issues that should have been left to Post Office Limited?
Sir Stephen Lovegrove: By the time that the volume of those prosecutions and cases had reached a very high level, yes, I do agree with that. But this is not – again, it’s not a completely binary issue. If this had been kind of one or two cases in a five-year period then I think I probably would have said yes, well, this is an operational matter. It’s catching this when it became clear that there was a systemic problem should have been done earlier.
Ms Price: We’ve seen in the submission these issues being described as operational and contractual issues, and the first position being that the Minister wouldn’t meet with Alan Bates for that reason. Given what you’ve just said, do you consider that the issues were incorrectly presented to the Minister as being for Post Office Limited, as operational and contractual?
Sir Stephen Lovegrove: I find that a difficult question to answer because I don’t know what – going back to the point about the volume, I don’t know what was the understanding of the volume of those cases known to the officials at the time.
Ms Price: Well, we saw the numbers, didn’t we, of prosecutions that were relevant to the question of challenges to the integrity of Horizon –
Sir Stephen Lovegrove: Yeah.
Ms Price: – in the several hundreds.
Sir Stephen Lovegrove: Yes, and you’re saying that, as a result of that, that becomes sort of kind of more than merely operational?
Ms Price: Well, my question is, in circumstances where, if they were right – if those challenging the integrity of the Horizon system were right – that there were systemic and endemic problems with the system, that was the number of prosecutions which might have been affect by it, brought in reliance on –
Sir Stephen Lovegrove: Yes.
Ms Price: – Horizon data.
Sir Stephen Lovegrove: Yeah.
Ms Price: So just looking at the information in the submission alone, wasn’t that enough to take it out of the territory of operational and contractual purely for Post Office Limited?
Sir Stephen Lovegrove: I don’t know, is the honest answer. I don’t know whether or how those numbers compared against the historical record of prosecutions by the Post Office or Royal Mail. I would guess that officials at the time might have taken some degree of comfort from the fact that there had been a process which had been gone through sort of British courts and there had been a particular answer.
So I find it difficult to answer the question very clearly for you because I can’t put myself in their shoes. I can imagine some of the things that they might have been thinking but I can’t give you a very definitive answer, I’m afraid.
Ms Price: Could we have on screen, please, paragraph 61 of Sir Stephen’s statement. It’s page 30, please. Starting three lines down, you say:
“It was also the case that, particularly in respect of the period before separation, reporting on [Royal Mail Group] and [Post Office Limited] was heavily focused on financial performance (as reflected in ShEx’s reporting for this period, including traffic light analyses and Quarterly/Annual Reviews) and ShEx did not have a representative on the Board of [Royal Mail Group] or [Post Office Limited], meaning that risks arising from operational matters were less likely to appear in ShEx’s reporting for this period.”
Was achieving financial profitability the foremost aim of ShEx for Royal Mail Group and, by extension, Post Office Limited in this period to which you refer?
Sir Stephen Lovegrove: I think it would be fair to say that that we were very heavily focused on not so much achieving profitability but whether or not the Royal Mail itself was sustainable at all as a business. We had, as I mentioned before, an enormous pension fund deficit, which could have sunk the company. There was huge industrial change associated with e-substitution going on. There was very, very considerable industrial unrest so it wasn’t so much achieving profitability, it was more about ensuring that the Royal Mail Group continued to survive.
Did that mean that we were focused on those kinds of metrics at that time? Yes, it did mean that. And we wouldn’t have had, as you pointed out in this bit of the evidence, we wouldn’t have had, as it were, an organic sense of the operations of some of these things because we weren’t so close to the business, by sitting on the Board or whatever, that it would have – we would have picked that up in the normal course of events.
I mean, this is a very, very stressed period indeed, in the history of Royal Mail Group, which is why the Hooper Review had to be written and all of the very significant changes that flowed from that were ultimately taken.
Ms Price: The statement can come down now. Thank you.
Your time as Chief Executive of ShEx finished not long after the separation of Post Office Limited and the privatisation of Royal Mail Group. Do you agree that separation and privatisation was a top policy priority for the Department of Business, Innovation and Skills?
Sir Stephen Lovegrove: It was an important – it was an important priority. I mean, there were a number of key conclusions that the Hooper Review came to, of which that was one. There were others. He recommended that the existing regulator was abolished and the duties were taken on by Ofcom. He recommended that the pension fund was absorbed into the public finances and he recommended that the Royal Mail, in that situation – separated from the Post Office – was privatised and that required a change in the law and we had to take primary legislation through.
We did all of those things. They were all extremely difficult, as it turns out, but we did all of those things. One of them was certainly the separation of the Royal Mail Group from the Post Office.
Sir Wyn Williams: Ms Price, can you hear me?
Ms Price: Yes, sir.
Sir Wyn Williams: I have lost the screen. I can’t see what’s going on at the moment.
Ms Price: Sir, we’ll investigate that, if you just give us a moment.
Sir Wyn Williams: I can hear perfectly, but I can’t see.
(Pause)
Ms Price: Sir, I’m being told it might be an idea to have a 10-minute break so this can be resolved at this point.
Sir Wyn Williams: All right that’s fine. I’ll remain near the screen so that you can let me know what’s happening if necessary, all right?
Ms Price: Yes, sir. Thank you.
(2.54 pm)
(A short break)
(3.01 pm)
Ms Price: Hello, sir. Can you see us now?
Sir Wyn Williams: Yes, I can, thank you.
(Pause)
Ms Price: Hello, sir.
Sir Wyn Williams: Hello.
Ms Price: Can you still he and hear us?
Sir Wyn Williams: Yes, I can, very much.
Ms Price: Is my microphone working now?
Yes, okay. I think we really are now ready to continue.
Sir Wyn Williams: Right. Very good.
Ms Price: Sir Stephen, we were just talking about the plans for separation and privatisation and I had asked you first of all about the priority of that for the Department. In terms of ShEx’s priorities, were readying Post Office Limited for separation and readying Royal Mail Group for privatisation important priorities for ShEx?
Sir Stephen Lovegrove: Yes, they were.
Ms Price: Was that something that the Directors of both Royal Mail Group and Post Office Limited would have known?
Sir Stephen Lovegrove: Yes, it is something they would have known.
Ms Price: Did you ever get any sense that this influenced the willingness of Royal Mail Group or Post Office Limited to share information with ShEx and the relevant Department?
Sir Stephen Lovegrove: I did not get that feeling at all, no. In fact, in some ways, quite the opposite because readying a company – I’m talking about Royal Mail now, rather than the Post Office, readying a company for a major listing on the London Stock Exchange is an extremely exhaustive process where enormous quantities of data have to be provided to satisfy the lawyers, the accountants, the bankers, you name it. It’s an extremely complicated and exhaustive undertaking.
Ms Price: Did you ever get any sense that the plan for separation and privatisation, and the importance of that, affected the appetite of ShEx to challenge the Post Office Limited position on Horizon?
Sir Stephen Lovegrove: No, I never encountered that at all.
Ms Price: The Inquiry has heard evidence relating to Post Office Limited’s culture, ethics and conduct. What mechanisms were in place, if any, when you were at ShEx to enable oversight of those things?
Sir Stephen Lovegrove: The principal mechanism for that was through our engagement with the Chair and the Board of the Post Office, you know, British UK corporate governance is ultimately in the hands of, for these kinds of things, in the – in the hands of the Board. So our role, in order to make an influence on or have an influence on the culture of the Post Office, would have been to make sure that it had the right kind of Board that would be able to drive that through the – and Executive that would be able to drive that through the organisation in time. We wouldn’t have sought or been able to influence the culture of an organisation of that size ourselves in any other way.
Ms Price: Were concerns about culture, ethics and conduct in relation to Post Office Limited ever raised with you when you were at ShEx?
Sir Stephen Lovegrove: No, they weren’t. I don’t recall them anyway.
Ms Price: I’d like to come, please, to the pushback that you say there was by Post Office Limited to having a Shareholder Non-Executive Director on the Post Office Limited Board. Could we have on screen, please, paragraph 94 of Sir Stephen’s statement. It’s page 46. You say here:
“The appointment of a Shareholder NED was met with resistance from the new Chair, despite what Anthony understood to be RMG’s agreement.”
So the new Chair, is that Alice Perkins?
Sir Stephen Lovegrove: Yes.
Ms Price: And Anthony, that was Anthony Odgers?
Sir Stephen Lovegrove: Odgers, yes.
Ms Price: Odgers, forgive me:
“A submission from the ShEx Post Office Network team to Ed Davey dated 24 October 2011 that I have seen while preparing this statement indicate that Ed Davey and Vince Cable decided in spring 2011 that a Shareholder NED would be appointed. However, when Alice Perkins met the Permanent Secretary in September 2011 in the first of a series of meetings she undertook with senior figures in the Department, she indicated that she had some concerns. These were …”
These are the ones you were referring to earlier, I think?
Sir Stephen Lovegrove: Yes.
Ms Price: “… first, that ShEx joining the board was inconsistent with the policy of future mutualisation, where the relationship between [Post Office Limited] and Government would be purely contractual; second, that it would ‘in some way prevent Government insulation from the impact of operational decisions’; and third, that ‘one Board member had indicated that they would be reluctant to serve on a Board where a ShEx appointee was also a director’.”
At paragraph 95, you explain that Vince Cable and Edward Davey decided to impose a Shareholder NED on Post Office Limited, despite the pushback and, it seems, a threat from one NED to quit the Board if it happened.
Is it right that, to your mind, the most important reason for having Shareholder NEDs that a Board seat or at least the ability to attend Board meetings was likely to be important to understand the business in detail?
Sir Stephen Lovegrove: I think there are a few reasons, actually. One is certainly to understand the business in more detail and to feel – have a better sense of the business as a sort of living organism, as it were, and to be inevitably exposed to different types of information and perspectives than you would if you had not had a Board seat.
Another crucial element of it – and this goes to the slightly dual-hatted nature of a Shareholder Non-Executive representative – is to make sure that the Board, in a very immediate way and a sort of very formal way, is aware of the 100 per cent shareholder’s views and objectives for the business.
A third, less important to my mind, but a reason, is improve and deepen the relationships between the Board and executives and the shareholder. As I’ve said at various stages in this statement and as has come up on a number of occasions, these relationships do need to – they require a degree of trust to work properly and greater familiarisation with each other enabled that.
Ms Price: I should have referred to the other reasons you include at paragraph 67, that, in paragraph 67, you describe that first reason, that is it was likely to be important to understand the business in detail, as being the most important. So in the context of there being other reasons as well, do you still consider it to have been, to your mind, the most important?
Sir Stephen Lovegrove: Yes, those the others are – this is a matter of degree. In particular, the transmission of Government objectives in a clear and straightforward fashion is, you know, very nearly as important.
Ms Price: Looking to paragraph 96, please, over the page about five lines down, you say:
“Susannah Storey was subsequently appointed but, as I understand it, following discussion with the Board, she did not share Board papers with the ShEx POL team out of concern that this would create a conflict of interest or otherwise undermine the independence of Board discussions. I do not recall being aware of this arrangement at the time when I was Chief Executive.”
Do you agree that an inability to share Board papers undermines a key purpose of the Shareholder NED role, ie the transmission of potentially important information back to Government?
Sir Stephen Lovegrove: I don’t think it’s helpful and I note that that particular prohibition was lifted in due course, and I think it’s right that it was lifted. Whether or not, in practice, at the time when the prohibition was in place, it prevented proper conversations between the shareholder team and Susannah about the Board discussions, I rather doubt and my understanding is that Susannah arranged specific meetings so that she could inform the team as to the basic substance of the discussions.
I think that’s unfortunate that she had to do that. I think it would have been easier if the Board papers had been made – capable of being made available to the team, but it was what it was. And I think clearly people were feeling their way. This is one of the very first Board seats that Shareholder Executive had taken, which is now pretty common practice, frankly, and I think people were feeling their way and maybe this was a compromise that it was felt needed to be made.
Sir Wyn Williams: I was going to ask you, Sir Stephen, was the attitude taken by the Post Office Board, to having a Non-Executive Director who is a member of ShEx, unusual but I think you’ve answered it by saying that this was one of the first boards in which that situation arose. Have I got that correctly?
Sir Stephen Lovegrove: You have absolutely got that correct, Sir Wyn.
Ms Price: Would you have expected to have been consulted on the decision not to share papers?
Sir Stephen Lovegrove: Would I have been expected? I would have liked to have been consulted. “Expected” is probably putting it too strongly.
Ms Price: Would you have agreed with the prohibition, had you been aware of it?
Sir Stephen Lovegrove: I would have wanted to have had a conversation about it. If I had been told, “Look, this is new territory for us, they’re very, very unhappy about it, it’s not going to make a massive practical difference, let’s go with it in the interests of making sure that we get off on the right foot, rather than the wrong foot”, I would have probably gone along with that. There would have been other conversations that – in different circumstances but, if that was the situation, I would have probably gone along with that.
Ms Price: Had you been aware, would you have considered that ministers should have been informed of that?
Sir Stephen Lovegrove: That, I think, would have been a function of the judgement that I would have made as to whether or not the arrangements were capable of being effective and if they – if I’d thought that they were effective, then I wouldn’t have probably felt that that raised them to the level of needing to seek guidance from a minister. If I thought that this was actually genuinely really unhelpful, obstructive behaviour – and it’s difficult for me to see from these documents where that line was – if I’d thought it was really genuinely obstructive behaviour, then I may well have taken that to a minister.
Ms Price: Do you find any strength in the argument that sharing Board papers with the ShEx POL team and/or the shareholder may have created a conflict of interest?
Sir Stephen Lovegrove: No, I don’t, actually. The Shareholder Executive NED was a part of the Shareholder Executive, by virtue of the fact that he or she was going to have seen those, that conflict, if it was likely to have arisen, would have arisen. Widening the circle of knowledge wouldn’t have fundamentally altered that particular principle. The only issue, really, would have been whether or not there was a concern about the confidentiality of the papers, which I would have hoped nobody would have really taken very seriously because I take that kind of thing very seriously myself.
Ms Price: Do you find any strength in the argument that sharing Board papers with the ShEx POL team and/or the shareholder may have undermined the independence of Board discussions?
Sir Stephen Lovegrove: No, I don’t. That leads you on to a series of questions, which you may be about to ask, about how one handles conflict in a Board and, if it does, then I will stop there but, otherwise, I will carry on.
Ms Price: No, if you can simply explain why you don’t find strength in that argument, that would be helpful.
Sir Stephen Lovegrove: It is very, very common practice for shareholders to sit on Boards. In fact, it is almost always the case that they do. When I sat on the Board of the Olympics, LOCOG, for the Government, I was the Government’s representative – effectively the shareholders of the Olympics were the Government, who was paying all the money, the Mayor, in whose town it was happening, and the British Olympic Association. Each one of those entities had the right to put a Board member on LOCOG’s Board and I was the Government’s representative.
It is certainly the case that, on occasion, you will find that, in those kinds of situations, there are conversations or discussions which could potentially represent a conflict of interest. In the case of the Olympics, the budgets were going up quite a lot and the only place where the budget was going to be met from was going to be Government and, at that point, I would have to take a view as to whether or not I could participate in a discussion or not participate in a discussion.
Typically, I would try and stay in the conversation as long as I possibly could because it was important to do so but there’s a moment when it’s clear that the interests diverge and then you would recuse yourself, you would ask not to see the papers relating to it that other Board members would see, and you would not attend that discussion, and these are very well trodden paths.
I mean, most of the time conflicts of interest don’t raise themselves to that level of materiality and it is the job of the Chair to make sure that they don’t and that the conversations can happen in a sensible way. But, as I say, these are not complex mechanisms, they’re not uncommon mechanisms, and I remain very much of the view that it is much better for the Government to have shareholder representatives on the Boards of companies like this that they own.
Ms Price: Moving, please, to the mechanisms which were in place to ensure that adequate information about Post Office Limited was provided to ministers, you explain in your statement that one method for keeping ministers informed about Post Office Limited was submissions and meetings. What other mechanisms were there and, in particular, when you were Chief Executive of ShEx, what went to ministers by way of risk registers and quarterly or annual reviews relating to Post Office Limited?
Sir Stephen Lovegrove: Well, the two principal mechanisms for communicating with ministers certainly were submissions and meetings, and the job of a civil servant is quite often to hang around the door of the relevant minister and try and apprise him or her of a particular situation and what kind of line they would like to take with it and maybe doesn’t rise to the level of importance that it needs a submission, or possibly it might say, well – the minister might say “Send me a submission on that, please”, and then you would do so.
Obviously, conversations on the telephone, not texts, because that kind of thing didn’t really exist back in the day, but there were lots and lots of conversations, both formal and informal, by which information could be distributed and socialised.
Sorry, the second part of your question was?
Ms Price: In addition to those submissions and meetings, the Chair would like to understand what in the relevant documents assessing risk and the annual reviews and quarterly reviews, what would have made its way to ministers from those documents and how?
Sir Stephen Lovegrove: I don’t remember precisely. It would have been unlikely, I think, that the quarterly traffic lights reviews or general reviews would have made their way to ministers. The annual reviews, I think, did. The ministers had to sign off annual report and, of course, I can’t remember exactly when it was but there was a minister ultimately specifically given responsibility for Shareholder Executive itself, and that minister would have spent a good deal of time thinking about not the assets within Shareholder Executive, but the running of Shareholder Executive and the information that we were using to organise the business.
So there would have been a range of things, but exactly which of the various risk registers, traffic light reviews, and so on, I’m afraid I don’t fully recall.
Ms Price: Do you think that the mechanisms that there were were adequate to keep the Department appraised of key operational and contractual matters which might be relevant at policy level?
Sir Stephen Lovegrove: I think it’s impossible to say, against the background of this disaster, that they were fully adequate. They were certainly better than they were when the Shareholder Executive was established and they are no doubt better today than they were when I was running it. But I think it’s impossible to say that they were fully adequate because, if they had been fully adequate, this dreadful situation would have been raised much, much more quickly and, I hope, would have been dealt with with much greater expedition.
Ms Price: After April 2012, when Susannah Storey started as the first Shareholder NED on the Post Office Limited Board, was there any mechanism for matters being fed back to the Department directly via the Shareholder NED?
Sir Stephen Lovegrove: Yes, I think Susannah – I mean, this was very much towards the end my time at Shareholder Executive, so my knowledge is perhaps less reliable than others’ would be but I know that Susannah met with the Shareholder Team very regularly to make sure that the information that she thought was important was being fed back into the Shareholder Team.
Ms Price: Coming, finally, please, to your reflections provided towards the end of your statement to the Inquiry, could we have on screen, please, paragraph 111 of Sir Stephen’s statement. That’s page 55. You say here:
“Notwithstanding the multiple failures of governance, starting at ground level in [Post Office Limited], that have been a major contributory factor in the perpetuation of the Horizon scandal, I do not believe that an inference should be drawn that the models of corporate governance employed by ShEx or UKGI on behalf of the Secretary of State as owner of the Royal Mail and, after 2012, [Post Office Limited] were flawed in conception. Modern codes of corporate governance are fit for purpose and should drive proper and honest company behaviours when implemented.”
You go on at 112 to say that:
“Evolving a more effective Government ownership lies, therefore, not in a complete redesign of governance arrangements or ownership structures, but in a more effective implementation of the highest standards of existing corporate governance, with systems and practices that promulgate and enforce those standards right through the organisation. Its operations need to be fully understood by the Board and executive, its risks need to be identified accurately and honestly, its issues and problems need to be escalated appropriately, and the shareholder needs to be properly apprised of the most significant issues and developments in the company. This is particularly the case where there are complex policy issues at play as well as commercial ones. The evidence that this Inquiry has heard of the devastating effects on the lives of so many blameless people is, at least in part, witness to the human cost of governance failure.”
Can you explain, please, what you mean at the end of paragraph 111 – and if we can just scroll up a little so Sir Stephen can see it – by “fully implemented”; so “the modern codes of corporate governance should drive proper and honest company behaviours when fully implemented”?
Sir Stephen Lovegrove: Um, corporate governance evolves all the time. There had been multiple codes of best practice over my career, and improvements made at various stages, and there was a very, very big change in the way in which corporate governance was approached after the great financial crisis of 2008 and 2009, when the concepts, for instance, of first, second and third lines of risk management were rolled out very widely in the corporate world, in a way that they hadn’t been before, precisely because there were corporate failures; the wrong things appeared on risk registers; management and Boards were not told about things that needed to happen, or were happening; the risks were not properly analysed and then were not properly calibrated afterwards; remediation was not put in place; risk owners were – all of this kind of stuff it’s not perfect now, nothing is ever going to be perfect, but it gets better.
I mean, I think, looking at the evidence here and looking at the papers that I have seen, it seems to me that, at various points, working up from the Post Office through Royal Mail, through Shareholder Executive, there were moments at which this could have been caught. Principally, I think this is around internal audit, this around Audit and Risk Committees, this around the Boards, particularly of POL, because I think it starts there and then it comes up. Now, as I say, some of this information came in from the side, as it were, into Shareholder Executive and that arguably should have been picked up in a different way than it was. But it really start witnesses implementing fully the best practice of corporate governance as it has evolved and I think, if that had been done in this case, we would have hopefully had a different outcome.
Ms Price: Do you consider that the governance framework of Post Office Limited was fit for purpose and drove proper and honest company behaviours?
Sir Stephen Lovegrove: On the surface, it looked – certainly, at the time of the separation, there was a specific attempt to bring the Board and the governance of Post Office up to the standards of an independent, large organisation with proper corporate governance, the appropriate number of independent Non-Executives, the appropriate number of NEDs, the right balance of experience on the Board, the apparatus of Board committees, all of those things were improved at the time of separation.
I think by inference you can say that those things were not in place before separation, and I’m afraid I don’t know the details of whether or not they had a Risk Committee which looked at things in the appropriate detail. I’m not sure about the nature of that or the effectiveness of their internal audit process. All of these things, however, go to, and should have picked up on, on the problems that we have here. So I suspect that there are things to look at.
Ms Price: You refer in paragraph 112 to “systems and practices implementing the highest standards of existing corporate governance”. How do you suggest those systems and practices should be enforced?
Sir Stephen Lovegrove: The enforcement mechanisms for these – for systems and practices of this type lie in the first place with the Board and the Chair of the Board and the Chair of the Audit and Risk Committee, the Chair of the Remuneration Committee and any other Chairs that happen to – any other committees that happen to pop up.
Now, if it is the case that it is those – that that corporate apparatus is not in place, or is in place and not doing their jobs properly – its job properly, then the Chair needs to, in the first place, make sure that that is in fact happening properly. If that doesn’t happen, the Chair and other senior members of the Board don’t force that through, then I think the shareholder needs to take action to ensure that that is the case, and it can do.
I mean, there’s an example, for instance, earlier in this evidence where Patricia Hewitt felt that it was important to have some form of trade union representative on the Board of the Royal Mail and, obviously, they didn’t like that but, ultimately, Baroness Prosser was put on the Board of the Royal Mail. It doesn’t have to be the nuclear option of, you know, firing the Board and getting a new Chair, and all the rest of it. There is considerable authority just invested in being the minister in charge.
Ms Price: The lines of communication and accountability in between Post Office Limited itself and the Government Shareholder at the top were, it might be said, complex and multi-layered. Did those arrangements run the risk that responsible people – so across Government, civil servants, RMG, POL Boards and the POL senior team – would act on the basis that someone else would or should or could grip problems?
Sir Stephen Lovegrove: There’s an argument that the fact that there was an intervening parent in the form of the Royal Mail Group, between the Post Office and Government, did complicate matters. We, as I say in my statement, there was another actually bigger subsidiary, certainly in financial terms bigger subsidiary, where we didn’t have any kind of direct relationship with it at all because we worked entirely through the Royal Mail Group.
I think that there was a good degree of oversight of the Post Office, given that it was a subsidiary but whether or not the complications that you allude to made it more difficult to pick up this problem is a possibility. I think it is a possibility. Certainly I think it became easier when the Post Office had been separated and there was a very – there was a singular, solo direct line from Post Office to Government.
Ms Price: Scrolling down, please, just to the bottom of 112, “the devastating effects of governance failures”. Are these due to the inadequacies of individuals or is it the governance systems which don’t make sufficient demands of individuals to ensure appropriate behaviour?
Sir Stephen Lovegrove: I find that a difficult question to answer, except to repeat what I said before, really, which is that the full implementation of proper governance systems would have picked these things up and picking these things up would have made their resolution quicker and more equitable.
Whether or not that is specifically because people decided not to put in place governance systems that were state-of-the-art and up to the task, or whether or not – I mean, I guess, at the end of the day, those are personal decisions.
Ms Price: Sir, those are all the questions that I have for Sir Stephen. There are some from Core Participants. I’m just looking around the room.
I think two sets of Core Participants have questions. Is it Mr Henry asking on behalf of the HJA team and then I think we have Ms Patrick.
Sir Wyn Williams: All right. Thank you.
Ms Price: Thank you, sir.
Questioned by Mr Henry
Mr Henry: Sir Stephen, do you think it would have been helpful to have more prescriptive guidance for NEDs who were Government appointed, so that there wasn’t a danger of them losing objectivity and becoming, as it were, cheerleaders or interlocutors for the business but rather, actually, being an objective, critical and discerning eye for Government?
Sir Stephen Lovegrove: Well, I think a distinction needs to be drawn between a Shareholder Non-Executive and an Independent Non-Executive. The Independent Non-Executive – as you know, all directors of all companies have fiduciary duties and they have duties towards the shareholders, the employees, the creditors, the regulators, if that is appropriate, and all directors have that. Clearly, if you’re a Shareholder Non-Executive, you have a – there is going to be a greater weight, inevitably, on the shareholder interest for sort of kind of obvious reasons.
I would have expected that the Non-Executive Directors of any of the companies that we were involved in would have had the fully rounded sense of what a Non-Executive Director ought to be doing, and I think that it is arguable that we could have, at the very beginning of this process, back in 2005 or so, when I started getting involved, have reiterated what the fullest duties of the Non-Executive Directors were, because there was a degree of tension which I think was unhelpful.
Mr Henry: That tension sometimes being resolved in, paradoxically, a relaxation of actually looking after the shareholder, it appears, that the shareholder and particularly Government ministers, were not properly sighted on significant risks?
Sir Stephen Lovegrove: I don’t know whether or not you can jump from the one to the other. The risks that were being run that we’re talk about here should have come up through any number of different routes but, in the main, through the executive information, which was going into Board papers, which was going into papers that were being sent over by the Shareholder Executive. It’s not clear to me whether or not the Royal Mail Non-Executive Directs of the time knew about this risk themselves.
Mr Henry: That risk, of course, involved their historic legacy of prosecutions?
Sir Stephen Lovegrove: Yes.
Mr Henry: Now, your background, of course, in strategic communications and media, the destructive repercussions of it becoming known that hundreds of subpostmasters had been wrongly prosecuted would have been enormous, that must be obvious?
Sir Stephen Lovegrove: Well, I don’t have a background in strategic communications and media. I was an investment banker before I became a civil servant. I happened to do a lot of deals in the media industry but I –
Mr Henry: Forgive me, I thought –
Sir Stephen Lovegrove: That’s fine. That’s neither here nor there. Clearly, the reputational implications of a disaster like this are terrible. I mean, they’re not as terrible as the impact on personal lives and livelihoods but, yes, they are very bad.
Mr Henry: Of course, compounding that atrocious injustice, if it had also been known that, as opposed to hundreds, thousands of subpostmasters had been wrongly milked for cash, in respect of fictitious Horizon created debts, that, would also have been a scandal, wouldn’t it?
Sir Stephen Lovegrove: Certainly, that was a scandal. I mean, that’s why we’re here.
Mr Henry: Yes, exactly. Now, your focus throughout your tenure from 2007 to the end of January 2013, was very, very much on the Royal Mail Group, among other considerable responsibilities you had, because, of course, your portfolio was getting bigger and bigger?
Sir Stephen Lovegrove: That’s correct. My focus was much more on the Royal Mail Group than it was on POL.
Mr Henry: Yes, and presumably that is because of the Bill, the Act, the Postal Services Act of 13 June 2011. Once that passed, it made the roadmap to separation and RMG privatisation clear, did it not?
Sir Stephen Lovegrove: It did. It was the enabling act that allowed for the recommendations of the Hooper Review to be enacted, yes.
Mr Henry: Now we’re all agreed that, without going into the detail of it, but you unreservedly accept that the risk posed by wrongful prosecutions and the risk posed by the unlawful civil pursuit of debt that did not exist, serious reputational repercussions and it ought to have appeared on the ShEx risk register, not preferable, really, but mandatory?
Sir Stephen Lovegrove: It certainly should have appeared on the ShEx risk register, yes –
Mr Henry: Now –
Sir Stephen Lovegrove: – for POL.
Mr Henry: Yes. For POL definitely but also because, by extension, it would have been a considerable risk to your assets, so, therefore, it ought to have appeared on your risk register as well?
Sir Stephen Lovegrove: Yes, I – during my time, we didn’t have a risk register for Shareholder Executive, per se. I think that did come into account after but we didn’t have one at that time. It would have appeared – it should have appeared on the specific risk registers for Post Office and, while Post Office was owned by Royal Mail, it should have appeared on the Royal Mail risk register as well.
Mr Henry: Yes. Now, I want to return to the fact about your focus and we all accept that you would have been looking principally at the Royal Mail Group because that was your immediate priority, together with, of course, number of other complicated and complex enterprises that fell under your control.
But just probing paragraph 60 of your witness statement, you say you were not aware of the complaints made by subpostmasters in respect of the integrity of the Horizon system –
Sir Stephen Lovegrove: That’s correct.
Mr Henry: – and that you’re not aware of the Computer Weekly article being shown to you. I just want to explore with you – and, forgive me, I’m not trying to be facetious – but were you, as it were, in a bubble of unknowing, in other words genuine ignorance about this or is it a case of, “I don’t recall, I may have been made aware of this but I don’t remember now”?
Sir Stephen Lovegrove: I have absolutely no memory of reading – I’ve never heard an article in Computer Weekly, and I have no memory of reading this one or having it being brought to my attention.
Mr Henry: Now, that, of course, is perhaps entirely correct but, of course, it was replicated in Private Eye and also, in Government, you do have services where media is distilled and relayed to ministers and so, therefore, it would go through your hands as well, don’t you; you have services where media is looked at and digested?
Sir Stephen Lovegrove: There are services such as that. I didn’t use them particularly at all.
Mr Henry: I see. So, again – and this is probably inadvertence, but I have a list in front of me of the articles in Computer Weekly that occurred during your watch. There were ten of them:
The May 2009 one entitled “Bankruptcy, prosecution and disrupted livelihoods: Postmasters tell their story”, the one that you’ve actually specifically referred into paragraph 60.
September 2009, “Postmasters form action group after accounts shortfall”.
November 2009, “Post Office theft case deferred over IT questions”. That was Mrs Misra’s case.
May 2010, “A pilot of the new Horizon Online system at the Royal Mail has been scaled back after connectivity problems and outages.”
February 2011, “post Office faces legal action over alleged accounting system failures.”
October 2011, “85 subpostmasters seek legal support in claims against Post Office computer system.”
That was obviously another one. So October 2011.
One in June 2012, “Post Office launches external review of system at centre of legal disputes”.
Then three in January 2013, “Post Office admits Horizon system needs more investigation”; “Post Office announces amnesty for Horizon evidence” and “Post Office wants to get to the bottom of IT system allegations”.
So Sir Stephen, I mean none of these impacted you.
Sir Stephen Lovegrove: I’m afraid I have no knowledge of any of those at all. By the same token I, you know, don’t read publications which are to do with the nuclear decommissioning industry or, you know, the data industry. I’m afraid the Computer Weekly articles completely passed me by and they were not drawn to my attention.
Mr Henry: But what about the media? I mean, for example, Channel 4 and also the fact that the MPs were beginning to agitate for affected subpostmasters in their constituencies? All of this was going on in tandem or in parallel. Was none of this permeating your office?
Sir Stephen Lovegrove: It wasn’t permeating my office. It clearly did permeate the Shareholder Executive and there is plenty of evidence in the bundles that everybody has seen that people are referring to the Computer Weekly articles, the BBC programmes, the Channel 4 programmes, and so on. But it was being dealt with in the way in which it was being dealt with. It didn’t come to me.
Mr Henry: Right. I mean, leaving your position aside and now concentrating – and you did refer to this in passing during your evidence – the Inquiry has heard from Sir Mike Hodgkinson, Allan Leighton, Alan Cook, Adam Crozier and, to a greater or lesser degree, all have claimed ignorance of the wrongful prosecutions and wrongful convictions being secured by Royal Mail Group lawyers.
You’ve said that you don’t wish to speak on behalf of other people’s knowledge but that is an extraordinary state of affairs, is it not?
Sir Stephen Lovegrove: Well, I – when responding to the Counsel for the Inquiry’s final questions, I – she asked me about my final observations and I am clear that there are multiple failures of corporate governance, which have – I mean, there may be other reasons for this as well and it will be for the Inquiry to decide what those are, but certainly corporate governance is part of the question here.
Mr Henry: Yes. I mean the question that arises is that: was the Government, the shareholder, in other words, unable to appoint directors capable of gripping the issues, or is it conceivable that those appointed by Government chose to disregard the marginalised SPMs as being unworthy of interest because they didn’t fit the narrative; do you see the distinction there?
Sir Stephen Lovegrove: First, the Non-Executive Directors were not appointed by Government. Certainly at the beginning of my tenure, the Royal Mail Non-Executive Directors were appointed effectively by the Chair and the Chair was appointed by Government.
I would be – I think any right-thinking person would be horrified by the types of stories that have come to light in the last few years and I would hope that that would be the case for those individuals as well. But what was going through their mind at the time, I’m afraid, I’m just not in a position to be able to answer –
Mr Henry: Well, returning to you, sir, and I don’t need to take you to the document, but Mr Patrick O’Sullivan was questioned about UKGI00016739, the minutes of a Shareholder Executive Board meeting from 13 March 2013, and various risks relating to the RMG flotation were discussed but nowhere at all did the ShEx Board recognise the risk that Horizon prosecutions were or may have been to that flotation. There’s a complete absence, it just appeared not to have occurred to them at all.
Sir Stephen Lovegrove: I think – if I may, I think there are two parts in response to that. One is clearly that knowledge of the problems was partial, incomplete, and not sufficiently escalated, and I think we spent a lot of time talking about that this afternoon and I have no problem in admitting that.
I mean, if it had been, however, I would have been surprised if the plight of the subpostmasters would have had any affect whatsoever on the IPO of the Royal Mail. By then, the liabilities would have been resting with the Post Office and the prospectus for the Royal Mail flotation would have been crawled over in unbelievable detail by Slaughter and May and various other corporate lawyers, and if they had felt that there was a liability there, contingent or otherwise, it would have had to have been put into the risk factors.
So I suspect the answer is that they were still not recognising that there was a big problem, but even if they had recognised there was a big problem, I do not think it bites on the success or otherwise of the IPO of Royal Mail Group.
Mr Henry: So two parts to your answer. Are you saying, therefore, that the legacy of prosecutions had, as it were, been hived off and POL had been – the Post Office had been saddled with them? In other words, RMG’s historic liability for prosecutions had been hived off and left with the Post Office?
Sir Stephen Lovegrove: I think – I was not involved in the drafting of the prospectus. I had left the organisation by that point. But I think it is very difficult to believe that, in a flotation of that magnitude and of that profile, which was very, very high profile indeed, as we will all remember, that the legal advice – and I’m fairly certain it was Slaughter and May – would have recommended anything other than leaving reference to the prosecutions in there, if there was a potential liability. It must have been moved across to POL by then.
Mr Henry: So that’s your supposition?
Sir Stephen Lovegrove: That is my supposition but I have done a lot of IPOs in my life and I know what it is like to write a prospectus of this type, and I’ve not heard any evidence to suggest so far that it should have been in the prospectus.
Mr Henry: If your supposition is incorrect – and let’s just go on this is angle, are you saying – and it is, to an extent, a thought experiment – but let us suppose that, between March and the actual flotation, which I think was October?
Sir Stephen Lovegrove: I think you may be right, yeah.
Mr Henry: Let us suppose that something exploded, that surely – I mean, it hadn’t been priced in – that surely would have dampened market confidence and there was a risk that the IPO would become a damp squib?
Sir Stephen Lovegrove: I think that’s – my experience of doing these kinds of things is that’s very unlikely. Unless investigators genuinely believed that there is a financial liability associated with a situation like that, they would look through it and assume that it had been dealt with in POL.
Mr Henry: Well, financial liability undoubtedly exists, and it’s going to be the subject of Phase 7 of this Inquiry.
Sir Stephen Lovegrove: But not for the Royal Mail Group.
Mr Henry: No, not for the Royal Mail Group but, nevertheless – nevertheless – the idea that the Royal Mail Group had been –
Sir Wyn Williams: Can I interrupt you, please –
Mr Henry: Of course, sir.
Sir Wyn Williams: – because I’ve been thinking about this and I may be seeing it too simplistically but my understanding is that the prosecutions were brought by Post Office Limited. The involvement of Royal Mail was simply, in inverted commas, “to provide the legal expertise to do that”. But, if it is right, and I stress if, because I will obviously need to go back over a lot of evidence, if it is right that a limited company, Post Office Limited, prior to separation, so there’s no doubt about it, brought the prosecution, maybe assisted by Royal Mail lawyers, then it’s not difficult to suppose that the liability would be Post Office Limited and, obviously, after separation, there’s no doubt about that.
Mr Henry: No, on reflection, sir, you’re right and I think it follows that the liability in those circumstances would lie with the Post Office.
Sir Wyn Williams: Yes, well at least there’s an argument to be had about it, so debating it with Sir Stephen is probably not going to get us anywhere. That’s the point.
Mr Henry: No, I’m not going to debate it further with Sir Stephen, sir. Thank you very much.
Sir Wyn Williams: Ms Patrick?
Questioned by Ms Patrick
Ms Patrick: Sir Stephen, my name is Angela Patrick. I act with Mr Moloney and Hudgells Solicitors for a number of subpostmasters who were prosecuted and have since had their convictions overturned. You might be glad to know I only want to return to one topic that Ms Price covered this morning – sorry, this afternoon, in fact.
Earlier this afternoon just after lunch she asked you about your state of knowledge of the history of the Horizon contract with Fujitsu, and I just want to turn back to that. I think you said your knowledge was little more than that the negotiations with Fujitsu had been fraught; is that a fair reflection?
Sir Stephen Lovegrove: I think that’s what I said, yes. Long, complicated and fraught, I suspect.
Ms Patrick: Long, complicated and fraught, and I don’t have to turn up for the transcript but for the record and those listening it’s today’s [draft] transcript at page 51, lines 1 to 7.
Were you aware at the time you were responsible for oversight of Royal Mail Group and Post Office, that there had been critical scrutiny during the development of the contract, including by the National Audit Office?
Sir Stephen Lovegrove: I genuinely don’t recall. It would not have surprised me that the National Audit Office would have looked at a contract like that. That’s exactly the kinds of thing that it does but I’m – I don’t recall it.
Ms Patrick: But you don’t recall but, if it had been part of that limited knowledge you had, would it have been relevant to the knowledge that would have informed your – or anybody else’s – performance of a role that involved oversight of that contract?
Sir Stephen Lovegrove: I find it difficult to answer that question because I don’t know what the NAO said in its report, if it did do a report. If it had said something along the lines of “This is a hopelessly negotiated contract and the Government has been taken for a ride”, that’s one thing. If it had said, “This is a dreadful contract for a whole host of reasons, not least of which technical due diligence has not been done properly”, that would be another one. And I don’t know what it said, so I am, I’m afraid I find it a bit difficult to answer the question.
Ms Patrick: Okay. Take a slightly different tack. Last week the Inquiry saw an email indicating that, by February 2015, one minister, Baroness Neville-Rolfe, seemed to be questioning whether Horizon might be another example of a Government IT debacle. I’m not going to turn it up, but for anybody listening the reference was UKGI00019859.
Would reporting on repeated problems in IT contracting by Government and public agencies have been a well-known part of the public discourse by the time you were in post in 2005 through 2013?
Sir Stephen Lovegrove: Yes, it would have been, though the nature of the criticisms are normally – were normally, and continue to be, actually, that they were too expensive and not – and too slow. They weren’t typically that they were subject to third-party remote access that – I mean, it wasn’t that kind of criticism that typically you saw in these Government IT problems.
Ms Patrick: Okay. But if there had been a sort of general dialogue or debate about complexity and failure and risk in the contract management, would that be reason for particularly close scrutiny when you were facing particular allegations about a third-party IT system, which was business critical to a public asset?
Sir Stephen Lovegrove: Well, again, I think I would go back to – there weren’t IT specialists of any sort of kind of sophistication within the Shareholder Executive. We didn’t carry that kind of expertise in-house. We would have relied, in large part, on technical scrutiny, which would have been undertaken by the Post Office themselves and, clearly, we did ask a lot of questions about the Horizon system and took the answers at face value.
Now, I think the argument is more about whether or not we should have taken the answers at face value, rather than whether or not we should have gone in and tried to understand specifically what was going on with Horizon ourselves because we didn’t carry that kind of expertise, I’m afraid.
Ms Patrick: Indeed. Simply taking it again in the general, if you had a set of circumstances where you have a complex history in IT contracting, a particular history of problems in the development of a particular contract, would that be reason to ask for particular due diligence in scrutinising the technical information that you were being given by a particular Government asset?
Sir Stephen Lovegrove: I think that’s a very fair question and I think the answer to that is, in due course yes, and of course that is what happened in the end with Second Sight and the subsequent investigations. I think the question is whether or not those happened fast enough because it did – those did happen in the end.
Ms Patrick: I think it may be a question for the Inquiry in due course as to whether, looking at Second Sight and those inquiries, whether particularly the questions asked by shareholders and others were themselves particularly probing. But I think you address that in your own witness statement about the role and the questions that ought to have been asked.
But, looking at Horizon, there had been a difficult history in IT, an area that was known to be problematic. There was an increasing body of complaints, where the potential for failure in this case was not just about an IT problem making business more difficult but that a state-owned asset had potentially relied on faulty IT to prosecute innocent men and women. Can you accept what a sceptical, or at least a very cautious, approach have been adopted by everyone involved, including Government, to the scrutiny and oversight of Horizon from the outset?
Sir Stephen Lovegrove: So I hope I have answered that earlier on. Officials in Shareholder Executive did ask lots of questions, we did meet with Mr Bates and his organisation, we did then go and ask lots of questions of the Post Office and, ultimately, as I say, Second Sight was appointed. Throughout that period, we got very, very forceful, very – and repeated and detailed answers from the Post Office about the integrity of Horizon.
And on the whole, I would have expected officials to have taken the view that they were entitled to rely on answers like – rely on answers provided by POL, particularly as you point out, when it goes to the livelihoods and indeed liberty of sort of individuals. Clearly, that information was unreliable.
Ms Patrick: One final point, simply picking up on something you said about there being no particular specific technical expertise within ShEx and relying on the technical information being fed up through the asset, is that kind of technical expertise something that you expect is available now to ShEx?
Sir Stephen Lovegrove: I would be surprised if the technical expertise is available to Shareholder Executive – or UKGI now. It would be very expensive to maintain in-house, and it wouldn’t be used probably that much. But what I would hope is that there would have been – there would be now access to independent firms who can – if the need arises to look into a situation like this, there is sort of a roster of independent firms that UKGI could go to very quickly and get the drains up to look at the problem. I think it would be difficult to maintain it in-house but I would hope that there is more capability that they could draw on from outside.
Ms Patrick: When you were in post, was that a thing that you could have asked to have happened yourself, or somebody under you in your team, could you have said to RMG, “Hang on, I’m not really sure that that is really bottoms out” – or to POL – “I think we independently will get our own independent eyes and we will pay for that to look and see how this is working”; was that something you could have done?
Sir Stephen Lovegrove: We could have done it. The information and the context at the time didn’t look from the documentation to sort of kind of quite justify that, but clearly it got to the stage where Second Sight were appointed. I don’t think, as it happens, that – this is a small point – I would have expected the Shareholder Executive to have paid for it. I would have expected POL to have paid for it and the firm in question to have reported directly and to be completely accountable to Shareholder Executive, but I would have expected the company to pay for it, and that is standard practice in this kind of situation.
Ms Patrick: Thank you, Sir Stephen. We have no further questions.
Questioned by Sir Wyn Williams
Sir Wyn Williams: Sir Stephen, just one or two from me.
First of all, just to be clear about an answer you gave to Mr Henry, was there a risk register in being when you first became the Chief Executive of ShEx?
Sir Stephen Lovegrove: To the best of my knowledge, there was not a risk register for Shareholder Executive itself.
Sir Wyn Williams: Right. Can you tell me approximately, obviously, when such a register was created for ShEx?
Sir Stephen Lovegrove: I’m afraid I can’t, off the top of my head, Sir Wyn.
Sir Wyn Williams: That’s all right. Fine. I am sure I can find out from another source, so don’t worry.
Then, finally, back to paragraphs 111 and 112 of your witness statement: although ALBs are not mentioned specifically in those paragraphs, do I take it that they are an endorsement of the concept of ALBs?
Sir Stephen Lovegrove: You do take it as that, Sir Wyn, and indeed at 109 –
Sir Wyn Williams: 109 makes that clear, yes?
Sir Stephen Lovegrove: I hope makes that clear. It is very difficult to imagine a situation, a world where we don’t have ALBs of some type.
Sir Wyn Williams: Right. So I don’t mean this in any disparaging sense, so please don’t take it like that: have you actually been engaged in work since 2013 which involves ALBs?
Sir Stephen Lovegrove: Yes.
Sir Wyn Williams: Right, fine.
Sir Stephen Lovegrove: Many times.
Sir Wyn Williams: Fine. So it’s not just based upon your experience with the Shareholder Executive but on the work you’ve done subsequently as a civil servant since 2013?
Sir Stephen Lovegrove: Yes.
Sir Wyn Williams: That would be –
Sir Stephen Lovegrove: That is correct, both at Energy and in Defence, there are many ALBs that we used to do specialist, important tasks where we needed to be able to get certain types of jobs done.
Sir Wyn Williams: Thank you very much.
So I take it, Ms Price, that there are no further questions?
Ms Price: That’s correct, sir.
Sir Wyn Williams: So thank you very much, Sir Stephen, for making your witness statement and for coming to give evidence before the Inquiry. I am very grateful to you.
The Witness: Thank you very much.
Sir Wyn Williams: So it’s Mr Dunks tomorrow morning at 9.45. Is that correct, Ms Price?
Ms Price: Yes, sir, it is.
Sir Wyn Williams: All right. See you all then.
Ms Price: Thank you.
(4.11 pm)
(The hearing adjourned until 9.45 am the following day)