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Board Meeting
MINUTES OF A MEETING OF THE BOARD OF DIRECTORS OF POST OFFICE LIMITED HELD ON
THURSDAY 24 MAY 2018 AT 20 FINSBURY SREET, LONDON EC2Y 9AQ AT 11.15AM
Present: Tim Parker Chairman (TP)
Alisdair Cameron Chief Financial and Operations Officer (CFOO)
Tom Cooper Non-Executive Director (TC)
Tim Franklin Non-Executive Director (TF) 1
Shirine Khoury-Haq Non-Executive Director (SK) I
Ken McCall Senior Independent Director (KM) I
Carla Stent Non-Executive Director (CS)
Paula Vennells Group Chief Executive (CEO)
In Attendance: Jane MacLeod General Counsel & Company Secretary (JM)
Veronica Branton Minute Secretary (VB)
Debbie Smith Chief Executive, Retail (DS) item 9
Martin Kearsley Banking Director (MK) item7
Owen Woodley CEO — FS&T (OW) item 8
Rob Houghton Group Chief Information Officer (RH) items 9 &
10 I
Martin Hopcroft Head of Health and Safety (MH) item 13
Apologies: None ACTION
1, DECLARATIONS OF CONFLICTS OF INTEREST }
Tim Franklin noted, in relation to the item requesting a capital injection into
PO Insurance (item 5.), that he sat on the PO Insurance Board.
2. PO LIMITED BOARD APPOINTMENT AND COMMITTEE APPOINTMENTS
The Board RESOLVED to appoint Shirine Khoury-Haq as a Non-Executive
Director of Post Office Limited for an initial period of three years with effect
from 24 May 2018, subject to the usual clearances.
The Board RESOLVED, on the recommendation of the Nominations
Committee:
© to appoint Tom Cooper as a member of the Remuneration
Committee
© to appoint Shirine Khoury-Haq as a member of the I
Nominations Committee and the Remuneration Committee. I
3. MINUTES OF PREVIOUS BOARD AND COMMITTEE MEETINGS INCLUDING I
STATUS REPORT
Minutes of the meeting of the Board held on 27" March 2018 were APPROVED
and AUTHORISED for signature by the Chairman.
4. CEO’s REPORT
41 The Board NOTED the CEO’s report.
Post Office Limited Is registered in England and Wales. Registered No. 2164540 ,. .
Registered Office Finsbury Dials, 20 Finsbury Street, Taiticls Eapfidential PostOffice.co.uk
Post Office and the Post Office logo are registered trade marks of Post Office Limited T
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Board Meeting
5. FINANCIAL PERFORMANCE REPORT
5.1 The Board NOTED the Financial Performance Report.
52) The CFOO reported that:
¢ our figures were better than budget by about £1m but that some of the
Telco error would need to be reflected in our figures
e Easter cash was coming back in
e the rate of change we needed to deliver this year was behind but we
would be focussing on that at the next Investment Committee meeting
© Bol was seeking to exit the ATM market and we would need to consider
the strategic issues linked to this for us.
5.3 A number of issues were raised:
¢ whether the parcels market was robust. It was reported that the only
significant risk flagged to us by RM was GDPR but this mostly affected junk
mail and this was not where PO generated trading profit
(see 8.
Below)
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6.2
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© that it would be helpful to receive more information and graphs that CFOO
showed the indicative growth and profitability of the business looking at
performance for the previous period and where we were heading. It was
suggested that this could be
structured like a balanced scorecard looking at each product group.
Irrelevant
ANNUAL REPORT & ACCOUNTS 2017/18 (ARA)
Firstly, it had been agreed with the ARC that we would not seek to finalise the ARA
until the end of June given the delay in POLSAP migration and the further post
balance sheet event work required. I
The CFOO updated the Board on the work required to complete the ARA. I
Secondly, we were still confirming with EY that we remained correct in holding the
NCS borrowing off balance sheet.
Thirdly, and most seriously, the day after the ARC, an issue had been identified by
the Telco Team in which we had overstated accrued, unbilled income by c. £5.2m:
£0.4m in 2016-17 and £4.8m in 2017-18. The error had been made within reporting
received from Fujitsu, who ran the billing systems. We believed that £5.2m was a
prudent figure but revised reporting from Fujitsu was expected within the next few
days and the number might change.
The 2016-17 error was small and EY had already identified a larger credit adjustment: as a I
result so no change was required to previously published financial statements. I
For 2017-18, AC noted that we had identified some credits in our work relating to
2017-18 trading that might, at least in part, offset the impact of the error. He
recognised that this was uncomfortable although the Board would also remember
that we had been explicit about managing our judgements prudently because of the
risks we ran.
The Board asked a number of questions and AC clarified that:
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and agents’ pay accruals, where the situation had been changing
towards year-end and we now had more information to base our judgements
on
* this was not a general round of small judgements I
* — old credits or provision releases retained because of risk in POLSAP would not I
be released and if they were, there would be no impact on 2017-18 EBITDAS
because they could not be considered part of last year’s trading
* the process for all adjustments would be for the executive to write a paper on
each proposed item. EY would reach its own judgement. Management, ARC,
Board and EY would all need to agree our 2017/18 trading figure which was
specifically disclosed in our audited financial statements.
For the other outstanding items, the POLSAP work was underway and given the I
Telco issue, we were working through all the balance sheet accounts to identify and I
work through any further high risk items.
A call had been arranged with the Bank of England for the following week to discuss
whether NCS borrowing should be included on our balance sheet or not.
7.2 The issues raised were discussed in detail, including the following: I
«© — what controls existed on checking and testing accruals. AC reported that
there were several controls to ensure that we accrued the number in line
with the reporting, supported by monthly business and financial balance
sheet reviews. The increase in unbilled income had been questioned and
had been attributed to a number of factors including the New Call
acquisition, price increases and increases in customer numbers. This had
not been proven and we should have spotted the issue on the balance
sheet well before the £5m accrual had been reached
how we would assure ourselves that we were still holding appropriate
provisions if we were stripping some of our prudence out. A question
was asked about whether this was an instance of weak controls and }
systems for which we had been holding the provisions. AC re-confirmed I
that old provisions etc. relating to POLSAP were fully retained. We would
only adjust for items that were directly related to 2017-18 trading where
the evidence was improved
e it was noted that we were comfortable having a prudent approach but
our incentive plan was based on trading performance and if that had
been overstated that needed to be considered when determining the
bonus payments to be made. The Chair of ARC would need to be
comfortable that the figures were right and that all the necessary work
had been done to support using some of our provisions. AC agreed — our
core bonus measure was EBITDAS which would be agreed by the Board
and EY as part of finalising the financial statements. Any related bonus
payments should flow from that published, audited measure. Clearly, I
with an opportunity to make changes to the personal element of I
bonuses as required
e the Board then discussed how accountability for the error should be
reflected in bonus payments to specific individuals, noting that there was
a chain of responsibility. Board Members were broadly comfortable with
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the trading figure in the ARA being the basis of bonus payments for staff
other than those identified as having specific accountability for the error
but this would be a matter for discussion at the Remuneration
Committee once further work had been done, considering both
causation and fairness. It was noted that EY had concerns about the risks
associated with the migration from POLSAP and would be more
comfortable to sign-off the accounts post migration in the autumn to
make sure we understand the full picture
independent review of our controls was supported in addition to
management actions and learnings but there was concern that this might
not be quick enough if we waited for a new firm. It was agreed that we
should we do a deep dive into certain areas that could be more targeted
with the current Internal Audit team leading
everyone agreed that there were lessons that needed to be learnt. We
were a business with a billion pound turnover but which did not
generate significant trading profit currently so an over accrual of £5m
was a significant issue.
The next steps AGREED were:
1.
the extended post balance sheet events reviews of POLSAP balances,
which were already underway, would be completed to ensure we had not
missed any liabilities or had unsupported assets on our balance sheet
a review would take place of any other high risks accounts that might exist
we would prove and document the loss of income for prior years on the
Telco error
assess and separately document potential credits for two items:
[IRRELEVANT } profit share and agents’ pay. Before recommending any
adjustment the documentation would need to prove not only that credit
should be taken but that it developed late in 2017-18, was trading and
that we were more comfortable with it now post balance sheet than we
had been at the time
the meeting would take place with BoE to discuss whether NCS should be
on or off balance sheet
a series of reviews to provide further assurance over the financial control
framework — for example, on revenue recognition, would be agreed with
Internal Audit
an additional ARC call and Board call would be set up for the end of June
or very early July
a RemCo meeting would be set up, with the timetable and structure
agreed with the Chair of RemCo. The issues noted in relation to the
RemCo discussions on bonus were that:
- we were not seeking to unfairly penalise individuals or “set an
example” but those with some accountability in the process needed
to understand that controls for which they were partly responsible
had led to a significant failing
- the Committee would need to receive recommendations on the
approach it should consider taking informed by the work being
undertaken to understand the error.
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9. a decision would need to be reached by 6 June 2018 on whether bonuses
should be paid at our best view for June explaining that more might be
payable later or to defer payments. This decision would need to reflect
the possibility that the ARC might wish to defer the signing the accounts
until we had migrated from POLSAP, which would probably be
IRRELEVANT
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Ti The Board would need to be assured that appropriate security
measures were in place, including in branches in rural communities which I
could be more vulnerable
«it was noted that a visit to Norway was taking place in a couple of weeks
to see the equipment in place in their branches to minimise the handling
of cash and improve security. It was reported that a business case was
being developed around investing in improved security in branches but
thought would be given to how to join this up with the development of
the Banking Framework and the costs we should be asking the banks to
meet
whether we had the right range of skills and experience in the team to get I
the best possible deal or if any additional support was needed both on
negotiating and landing the deal. For example, did we need external
advisers who had expertise in determining costs and charges? i
e whether the figures included in the paper were sufficiently robust. It was i
noted that the costs might be understated currently, noting the earlier
discussion on investment in improved security, but that we had not yet
looked at how we should charging the banks for the capex investment.
The development of the Banking Framework was a growth area for the
business and needed to address how costs would be covered in the long
term without a subsidy
© that the deal struck with the first party was critical because it would
provide the benchmark for subsequent deals
* we had to be clear what we were asking from Postmasters offering a
banking service and what we were offering them in return. Agents’ pay
was Clearly an issue
© that it would be helpful to have a refresher on ATMS and the history of
POCa before coming back to the Board on our developing strategy on
these issues.
MK
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9.3
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10. EVEREST
10.1 Rob Houghton introduced the paper, highlighting a number of issues:
we had a fixed price contract with Fujitsu over the next five years but were
trying to get better value from this by trying to offset some opex spending
with capex spending. To make the best use of the options available to us
we needed to increase our total contract spend by around £10 m
we did not think there were significant procurement risks because the
additional spend related to hosting services which were within the existing
scope of the “Trinity” services. Anything outside this would have to be
tendered for and Fujitsu would need to be competitive to win any
additional work
the relationship with Fujitsu had been developing positively but we still
had concerns about their capability delivery in some areas, especially
digital. They had not performed well on agile delivery but some capable
individuals had been assigned to our account and the situation was
improving (e.g. the acknowledgement that our cloud service should be on
the Azure platform and not K5)
RH was comfortable with the Azure platform but was going to link in more
with Government ClOs who had more experience of the platform. Shirine
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Khoury-Haq also offered to introduce RH to people to Lloyds who worked
with Azure
© RH had been concerned about recent outages. Around 2,500 branches
had been down for part of the afternoon of the previous day. The problem I
had been a digital certificate that had been configured incorrectly due to
human error. In response to this we had sought assurance on the control
measures they had in place and the reasons that the problem resolution
diagnosis had taken longer than it should have
© there had been Verizon failure this morning. This was more concerning to
us than the Horizon outages. There were two core hubs in London and
Manchester but a third NetWare hub was being built that came on stream
in June. However, the failure that had occurred would not have been
prevented by a third hub and the fit for service check that was issued each
morning had been green. It was noted that the contract had been signed
in 2013/14 when the trading situation had been different and had been
significantly cheaper than the next provider in the tender process. We had
already warned that we would consider going out to tender if
performance did not improve
© we were also concerned about the potential loss of senior technical
people as Fujitsu switched more of its business offshore
© the June IT strategy discussions would give these issues a fuller airing.
In order to secure net operating expense reductions of £30m over the period
2018/19 to 2022/23, the Board RESOLVED to approve that the executive
continue with negotiations to:
1. sign contract change notes, in June, with Fujitsu to “switch” £30m of
operating expenses to capital investment and
2. sign incremental contracts change commitment of up to £10m (subject
to telecoms review and negotiation).
11. BACK OFFICE TRANSFORMATION
11.1 The CFOO introduced the paper and highlighted a number of issues:
¢ — the plan had been late, over budget and a number of things had not
worked first time. We now had suitably skilled people in post and were
being thorough in our approach. Migrating from POLSAP entailed risk
and we were taking on lessons learned from previous exercises and I
reporting back on this to the ARC. A fundamental learning for us was the
need to do much more testing as we went and include much more user
acceptance testing, including front line uses
© we had been taking more people out of the business from cash and
finance and back filling these roles to allow more testing deploying
people who understood the business. All the changes had been made
and end to end re-testing was taking place
* at best the migration would be delayed until September 2018, at worse
we would need to defer migration until after the Christmas period, if we
could not migrate safely enough or quickly enough. There were
concerns about using POLSAP for longer than absolutely necessary. The
funds being sought today were to make the existing infrastructure as
secure as possible
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¢ — Internal Audit and Deloitte had been re-testing the plan
e that we would need to know by July whether we would be proceeding
with the migration in September/October 2018.
Anumber of issues were raised, including:
© that it was a programme management issue as well as a testing issue and
whether we had the right Programme Management resource in place. It I
was reported that we had considered this issue seriously and had hired I
the best resource we had been able to in December 2017 I
e that while we had changed our approach to testing it might not cover I
everything, for example, we had not yet fully tested our interfaces with
HMRC. I
Rob Houghton and Shirine Khoury-Haq would discuss the migration in more
detail outside the meeting.
The Board RESOLVED to APPROVE an additional £4.9m drawdown and a
potential further £1.7m to enable the completion of Phase 1 of the Back
Office Transformation.
12, CONTRACTS
Irrelevant
13. POSTMASTER LITIGATION — LEGALLY PRIVILEGED
13.1 Jane MacLeod provided an update on the Postmaster Litigation and the I
Subcommittee meeting held on 15 May 2018, including the sequence of trials
and the focus of each: I
* the first trial (November 2018) would focus on the meaning of the
contract and the second (March 2019) on how Horizon operated
* apiece of work was being led internally on contingency planning
* we would get an updated view from the QCs in September 2018 I
¢ £3m had been spent on the case last year and forecasting £9m for this
year.
It was noted that the case had reputational implications and that while there
were 560 claimants in this case, in absence of a conclusive judgment, there
was nothing to stop there being further cohorts of claimants in the future.
14. Performance Report — Health & Safety, including review of Robbery Risk and
Violence
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14.1 The CFOO introduced the report and Martin Hopcroft provided an overview of
the work being done to increase security in branches, including that:
e violence and robbery risks were growing, even where there were limited
goods to shop lift I
* — we did not have a lot fogging technology in branches currently but would I
like to invest more here because it had been very effective where it had
been used I
* our guidance to Postmasters was not to fight back if provoked but
people sometimes did when placed in that situation
© we were working with the British Retail Consortium on safety initiatives
* we had rated 4 out of 5 on our H&S audit. Our systems were robust and
we were taking a proactive approach to investigating low level incidents.
A number of points were raised, including:
© that it would be helpful to understand how branches were classified as
high risk
«that we should be over protecting rather than under protecting and it
would be helpful to have a count on safety measure like how many I
cameras were in branches I
© it would be helpful to understand the costs associated with putting I
cameras in rural branches I
© that a statistic of 0.3 Lost Time/ Hours Worked (LTIFR) per 1000 employees I
would be considered world class. The figure for our supply chain was 0.6. I
I
It was AGREED that the Board would receive a review of robbery risk and AC/ MH
violence in the network twice a year. (to do)
15. ITEMS FOR NOTING
15.1 Sealings
The Board RESOLVED that the affixing of the Common Seal of the
Company tothe documents set out against items numbered 1658 to 1681,
inclusive in the seal register was confirmed.
15.2 Future Meeting Dates
The future meeting dates were noted.
15.3 Forward Agenda I
The forward agenda was noted.
Meeting closed at 14.37 pm.
12019
Date
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