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Post Office Limited — Strictly Confidential
POLB 16(8")
POLB 16/62 — 16/71
POST OFFICE LIMITED
(Company no. 2154540)
(the ‘Company’)
Minutes of a Board meeting held at 9.30am on 25 October 2016
at 20 Finsbury Street, London EC2Y 9AQ.
Present:
Tim Parker Chairman
Richard Callard Non-Executive Director
Tim Franklin Non-Executive Director I
Virginia Holmes Non-Executive Director I
Ken McCall Senior Independent Director I
Carla Stent Non-Executive Director
Paula Vennells Chief Executive
Alisdair Cameron Chief Financial Officer
In Attendance:
Alwen Lyons Company Secretary
Martin Edwards Director of Strategy (Minute POLB 16/66 and POLB 16/67)
Mark Davies Corporate Affairs Director (Minute POLB 16/66) I
Nick Kennett Group Financial Services Director (Minute POLB 16/67) I
Rob Houghton Chief Information Officer (Minute POLB 16/67) I
Jonathan Hill Head of Risk, Banking, Regulation and Strategy, Financial
Services (Minute POLB 16/67).
Owen Woodley Sales Director (Minute POLB 16/67)
Chrysanthy Pispinis Financial Services Corporate Development & Governance I
(Minute POLB 16/76)
Neil Hayward Group People Director (Minute POLB 16/68)
Natasha Wilson Director of Reward and Pensions (Minute POLB 16/68) I
Apologies: None I
POLB 16/62 INTRODUCTION I
(a) The Chairman noted that a quorum was present and opened the
meeting.
(b) The Directors declared that they had no conflicts of interest in the
matters to be considered at the meeting in accordance with the
requirements of section 177 of the Companies Act 2006 and the
Company’s articles of association. I
POLB 16/63 MINUTES OF THE PREVIOUS BOARD AND COMMITTEE MEETINGS
INCLUDING STATUS REPORT
Minutes
(a) The minutes of the Board meeting held on 29" September 2016
were approved as an accurate record and the Chairman was
authorised to sign them.
(b) The Board noted the Action Status Report.
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Post Office Limited — Strictly Confidential
(c)
_ Irrelevant:
POLB 16/64 CEO REPORT
(a) The CEO introduced the CEO Report, focusing on the following key
points:
(b) Period 6 Results: Performance continued to be challenging and
although the CEO remained reasonably confident that the full year
EBITDAS target would be delivered, the gross income trend
remained a concern.
(0)
(d)
Irrelevant
(e) POca: The CEO explained that the details of the supplier contract
would be presented at the November Board meeting. The Board
asked the CEO to ensure that a wide range of options for payment
provider be considered.
Ql
. Irrelevant
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Irrelevant
Transformation Report
(h) The Board noted the Transformation Report. Transformation risk
would now be included as a standard agenda item for the ARC and
the Board asked that the ARC specifically consider: I
ACTION: e The aggregated cost and burn rate compared with
David Hussey business cases and budgets; and I
¢ The impact of IR35, ‘off payroll’ working, the impact and
risk mitigation.
(i) The Board noted the CEO report. }
POLB 16/65 FINANCIAL REPORT AND UPDATE ON THE DEVELOPMENT OF THE
P6 RESULTS. I
(a) The CFO introduced the Financial Performance Report for Period 6,
September 2016. The CFO was forecasting that the Business would I
hit the EBITDAS target for the year, but good Christmas trading
would be key to delivering the £-10 million.
(b) Cash flow headroom had not improved as predicted in P6 as
additional cash had remained in the network after the strike
contingency planning. However this position had been recovered
during P7.
(c) The Board discussed the Working Capital Facility and the
opportunity to reduce the cash strain on the Government as part of
the funding negotiation. The CFO explained that the most difficult
areas to manage were coin distribution and Foreign Exchange cash.
However if postmasters were incentivised to change their behaviour
this could facilitate another change in supply chain demand and free
up cash to use elsewhere.
(d) The CFO explained the additional pressure on the 2017/18 target of
£28m, which would flow into the baseline for the strategy and funding
plan. The Board agreed that it was important to have a realistic
ACTION: CFO baseline for the plan, and asked the CFO to provide trend income
analysis in the Financial Reports to enable the Board to monitor
the income streams. The Board recommended that the 2017/18
budget should be realistic and based on flow through from the
2016/17 operational outturn, with initiatives to deliver the
contingency to get back to the £28m target.
(e) The Board approved the P6 Income Statement, Balance Sheet,
Cash, Headroom and Forecast positions
(f) The Board noted that external supply chain activities have been
reclassified as discontinued operations subject to Ernest Young’s
(EY) agreement.
(g) The Board agreed that from P7 Actuals v Forecast comparisons
would be monitored.
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POLB 16/66 STRATEGIC PLAN TO 2020/21 AND FUNDING REQUEST
(a) The Chairman welcomed Martin Edwards, Director of Strategy and
Mark Davies, Corporate Affairs Director, to the meeting.
(b) Martin Edwards presented an overview of the 2020/21 strategy,
explaining the financial consequences of the counterfactual case as
opposed to achieving commercial sustainability through funding a
major cost base restructure.
(c) The Board discussed the proposals and stressed the need to I
strengthen the explanation and narrative behind the counterfactual I
case and to include ranges within the projections.
(d) The CEO recognised that because of the good work done to date in I
delivering Network Transformation, and the current stability of the
network, it would potentially be difficult to persuade Ministers that
there was still a cost base crisis which needed to be addressed.
(e) The Board asked for assurance that the necessary evidence was
available to support the funding case. The CFO explained that the
Group Executive had worked though and agreed the assumptions in
the plan, which were supported by market analysis and business
cases. The BEIS team had employed KPMG to review the funding
request and Martin Edwards would work closely with Richard Callard
and his team to present the case.
(f) The Board discussed the revenue projections and agreed that the
business had to aim to be sustainable without relying on FS growth.
ACTION: The Board asked Martin Edwards to consider how the size of
Martin Edwards the network could be used to deliver income through an access
fee, similar to that for paid for the banking framework or identity
products.
(g) The Board recognised the uncertainty within the income projections
included in the plan, but stressed that the cost base remained more
in the control of the business. The funding narrative needed to make
it clear that it would be impossible to change legacy IT systems and
reduce the cost base without funding support from the Government.
(h) The Board discussed the segmentation of the network into
commercial and social branches and possible changes to how these
could be-funded. It recognised that product simplifications and a
reduction in postmaster remuneration would put pressure on some
postmasters, but believed that there could be an opportunity to
restructure the franchise to sell it more as a footfall generator.
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(i) The Board agreed with the four success criteria set out in the
narrative document, namely that by supporting funding the
Government would secure:
e Agrowing, flourishing network — although not with any binary
network number to hit;
« Permanently lower funding; I
e Indispensable service to customers and communities; and
* Options on ownership — without referring to a mutual option.
0) It was recognised that there would need to be more detail in the I
funding request with analysis on £320m investment and the resulting
deliverables. The Board advised that the funding request had
different audiences and would require different explanations to align
with their priorities accordingly. The Board recommended that
greater focus be given to SME customers.
ACTION: (k) The Board supported the direction and funding proposal and
Martin Edwards asked for more information on the investment and returns to be
presented at the next Board meeting. I
ACTIONS: (0) The CEO: suggested that Martin Edwards could provide }
Martin Edwards additional information on a one to one basis if any Board I
member required.
(m) The Board approved the strategic plan to 2020/21 and funding I
request prior to submission to the Government in early November. I
(n) Mark Davies left the meeting. I
POLB 16/67 FINANCIAL SERVICES GROWTH STRATEGY
(a) The Board welcomed Nick Kennett, Group Financial Services
Director, Jonathan Hill, Head of Risk, Banking and Strategy
Financial Services, Chrysanthy Pispinis, Financial Services
Corporate Development and Governance, Owen Woodley, Sales
Director, and Rob Houghton CIO to the meeting.
(b) Nick Kennett reminded the Board of the strategic direction for Post
Office Money (POM) approved at the June meeting, with the
interdependent key components of:
* The New Normal customer proposition;
* The ‘Strong Integrator’ business model; and
« The re-negotiation with the Bol.
(c) Nick Kennett stressed that the FS strategy meant a change to focus
on the customer relationship and lifetime value, and a move away
from the primary delivery in branch to a digital channel. He added
that the delivery of the strategy required a significant change in how
the business was run, with enhanced capabilities, risk management
and governance structures, changed relationships with suppliers
and partners, supported by agile technology.
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(d) Nick Kennett explained that investment, which had been included in
the wider 2020/21 strategy plan and funding, would be required for
IT development in support of the new model. The CIO stressed that
the investment should focus on delivering one product at as low a
cost as possible to test the proposition with both customers and
revenue earning protection. Further products could then be added
incrementally. The ClO believed that the initial investment could be
around £8-10m but needed further definition as it depended on the
product chosen and the level of systems integration required with
the product provider. The Board supported this initial investment.
(e) Nick Kennett confirmed that the overall funding request was £72.3m I
over five years, of which £37.4 related to capex. This investment was I
targeted to deliver gross income in 2020/21 of £156m and EBITDAS
of £68m, an increase of £30m. The overall NPV was £181m over I
five years.
(f) The Board asked for assurance that the development would not I
complicate the IT transformation currently underway. The ClO I
assured the Board that the system would be developed separately
and only integrated into the Post Office systems if tests proved it
could be incorporated without causing issues. I
(g) The Board agreed to plan to make the full investment as proposed,
depending on the success of the initial investment, and discussed
the most appropriate structure and governance for its delivery.
(h) Nick Kennett advised that the paper did not include recommended
changes to the organisation structure and regulatory position as this
had not been discussed at GE. CS explained that, based on her
experience with FinTech companies and major banks, for this new
business to work effectively the Board and management should
think in a new way, enabling a separate innovation hub supported
by people and a new governance environment. Ring-fencing the
team working on the business development would assist faster
change, particularly if the project deployed a compartmentalised,
“test and learn” methodology. There was support of this from across
the Board.
(i) The Board discussed the FS sales model and the move from
Financial Specialists in Directly Managed branches to a CRM model
training postmasters’ staff to use a portal and tablet to capture
customer data. Owen Woodley explained that the CRM model was
underway as a trial which would need to prove it was profitable for
the business and the postmaster.
(()) The Board supported the recommended options and direction of
travel principles in relation to technology structure, the distribution
model and the shape of the funding and emphasised to the
executives that it would be important to build momentum into the
change programme.
(k) Nick Kennett, Martin Edwards, Owen Woodley, Jonathan Hill,
Chrysanthy Pispinis and Rob Houghton left the meeting.
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POLB 16/68
ACTION:
Natasha Wilson
Irrelevant
POLB 16/69 I
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POLB 16/70 ITEMS FOR NOTING
Sealings
(a) The Directors resolved that the affixing of the Common Seal of the
Company to the documents numbered 1451 to 1453 inclusive in the
seal register was confirmed.
(b) Future Meeting Dates
The Board noted the future meeting dates.
(c) Health and Safety
The Board noted the Health and Safety report.
POLB 16/71 CLOSE
(a) There being no further business, the Chairman declared the meeting
closed.
(b) The Board attended a session presented by Linklaters covering, I
‘The changing regulatory environment — The impact of the senior
manager and certification regime, on the Financial Services sector.’
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