Post Office Limited — Strictly Confidential
POLB 15(2"*)
POLB 15/24 — 15/44
POST OFFICE LIMITED
(Company no. 2154540)
(the ‘Company’)
Minutes of a Board meeting held at 9.45am on 25 March 2015
at 20 Finsbury Street, London EC2Y 9AQ
Present:
Alice Perkins Chairman
Neil McCausland Non-Executive Director
Tim Franklin Non-Executive Director
Virginia Holmes Non-Executive Director
Alasdair Marnoch Non-Executive Director
Richard Callard Non-Executive Director
Paula Vennells Chief Executive
Alisdair Cameron Chief Financial Officer
In Attendance:
Alwen Lyons Company Secretary
Jane MacLeod General Counsel
Nick Kennett Director, Financial Services (minute POLB 15/26 & 15/27)
Martin George Director, Commercial (minute POLB 15/30 only)
Geoff Smyth Head of Telecoms (minute POLB 15/30 only)
Mark Davies Director, Communications & Corporate Affairs (minute POLB
15/32 only)
POLB 15/24 INTRODUCTION
(a) A quorum being present, the Chairman opened the meeting and
welcomed Jane MacLeod, General Counsel, who had been invited
to join the meeting as an observer.
(b) The Chairman asked for recognition and thanks to be passed on to
Chris Aujard, the interim General Counsel and Belinda Crowe,
Head of the Sparrow project, as both were leaving Post Office
Limited (POL).
POLB 15/25 CEO’S REPORT
(a) The CEO introduced her report and focused on the following key
areas:
« POL had signed a framework agreement with the
Government to ensure that POL continued to be one of the
providers of Verify, the new Identity Assurance service.
e The Secretary of State's visit to a Post Office in Hackney on
the 26" March to announce the protocol for future Banking
Services. Whilst POL welcomed this initiative it had made it
clear that the work needed to be properly remunerated.
« POL had signed a new seven year extension to the POca
contract.
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« The engagement survey had shown an improvement in both
employee and subpostmaster results, with a 10 per cent
improvement from subpostmasters running the transformed
local and main branches.
e° The CEO recognised Kevin Gilliland, Network and Sales
Director, for delivering the Network Transformation targets,
and the Board acknowledged the outstanding performance.
e The CEO thanked the General Counsel, the Director of
Communications & Corporate Affairs, and their teams for
the progress with Sparrow.
(6) The first anniversary meeting of the Post Office Advisory Council
(POAC) had taken place on the 19" March, and the CEO thanked
Tim Franklin, the POAC Chairman, for an excellent meeting. Tim
Franklin agreed that the POAC was working well and that there had
been extremely helpful contributions from the Minister and the CEO
as well as a plenary session on the Post Office Vision. It was
agreed that now that POAC was well established, POL should
consider how to get best use out of the Council. Board members
were invited to attend a future POAC and the Company Secretary
ACTION: CoSec would circulate the dates.
(c) The CEO and the Chairman had attended a meeting with
Christopher Fisher, Chairman, and Des Crowley, CEO, of the Retail
UK Division of the Bank of Ireland. Both had been very positive
about the relationship with POL and thinking about the long term
strategy post 2023. The CEO would circulate to the Board the note
ACTION: CEO of the meeting.
(d) The CEO was hopeful, after a more positive meeting between
herself and the CFO with Moya Greene, CEO, and Matthew Lester,
CFO, Royal Mail Group (RMG), that RMG had recognised the
effect on their business of the changes in the retail mails market. It
was made clear that RMG would like to renegotiate the MDA and
discuss exclusivity, and RMG was under pressure from the
regulator as well as from competitors. The POL team had reserved
its position on renegotiating the MDA and would not agree to this
unless and until they were ready to do so.
(€) The CEO reported that David Hussey would be joining POL in the
third week of April as the new Transformation Director, enabling a
handover period with David Ryan. The Board asked for a structure
chart showing how all the Business Transformation activities and
big projects linked together, explaining how they would be
ACTION: managed and resourced in the context of the new change
David Ryan management process.
POLB 15/26 PROJECT HAWK
(a) The Board welcomed Nick Kennett, Director, Financial Services, to
the meeting.
(b) Nick Kennett gave the Board an update on Project Hawk, and
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explained the process undertaken since the Board discussion and
mandate given at the July 2014 Board. He was pleased to report
that the Independent Insurance Expert (IIE) had valued the
insurance business at £43.9m: below the previous valuation
estimate of £45-55m. The CFO explained that the Post Office had
calculated its own updated valuation prior to the IIE process and
that he would have been comfortable with any value up to £60m
and would certainly support anything below £55m.
(c) The Board noted the mandate of £40m given to POL in July 2014
and that the FS Committee had considered the proposition in more
detail. Alasdair Marnoch, Chairman of the ARC, asked for a briefing
ACTION: to give him comfort on the £43.9m price and how POL would
Nick Kennett/CFO measure the delivery of value against this investment.
{d) Nick Kennett explained that opportunities in the investments market
were hampered by the exclusivity in the Bank of Ireland (Bol)
contract. He clarified the proposal for the Bol to buy a small share
in POMS and the effect this would have on Hawk, as explained in
the paper. POL could not progress in the investments market
without the Bol under the current contract.
(e) The Board asked if Nick Kennett believed he could construct and
negotiate a deal which ensured no material restrictions to the
POMS controls and consents. Nick Kennett recognised that as a
result of acquiring a minor shareholding, the Bol would have
protections for minority rights but that this would not in his view
hamper POL control.
(f) Richard Callard asked the Executive to check whether POL has the
authority under the articles of association to ‘sell’ a share of a
subsidiary to a third party without Secretary of State consent. He
also asked the Executive to discuss any proposal for independent
ACTION: CoSec external funding to be discussed with the Shareholder Executive.
(g) The Board recognised the complexity of standing up POMS by the
1" of May whilst negotiating the acquisition of the General
Insurance business from Bol, including, if relevant, the grant of a
small share of POMS to the Bol. Nick Kennett explained that the
two proposals did not need to run consecutively and that Hawk
would continue irrespective of the POMS structure issue.
(h) The Board asked for assurance that the Executive had the band
width and capability to continue with POMS and to negotiate an
acquisition and integration into POMS. Nick Kennett reassured the
Board that he had engaged_KPMG, which _was_providing a
programme manager, and
ACTION:
Nick Kennett
(i) I The Board discussed POMS and the work necessary before May
45" It was agreed that the POMS Board should go ahead with the
appointment of Stephen Ashton as the POMS Chairman and to ask
him to discuss with Julie Hope a possible NED position. It was also
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proposed to invite Colin Stuart, POMS CFO, onto the POMS Board
as an Executive Director. A POL Board call would be set up in April
2015 at which the POMS go live decision could be taken, this
ACTION: CoSec/ meeting would require a paper setting out the working and
Nick Kennett governance relationship between POL and POMS.
(j) I The Board recognised the additional complexity caused by the Bol
ACTION: contract expiry in 2023 and asked that the long term strategy be
Nick Kennett discussed at the Board away day in June 2015.
(k) The Board:
¢ agreed in principle that management should proceed to
acquire the Bank of Ireland’s share of the joint insurance
business (Project Hawk), as set out in the Eagle
Agreement, for £43.9m and that the acquisition be
incorporated into Post Office Management Services Ltd;
e agreed that a clear timeline be established for acquisition
completion; and
¢ noted the alternative solution, as set out in paragraphs 9.1
to 9.6 of the paper, and authorised the Executive to assess
its validity, while continuing to complete Project Hawk.
POLB 15/27 STATUTORY REPORTING REQUIREMENTS FOR POST
OFFICE MANAGEMENT SERVICES LIMITED
(a) Nick Kennett, CEO POMS, presented to the Board the rationale
behind the request to shorten the Accounting Reference Date
(ARD) for the second Post Office Management Services Limited
(POMS) accounting period to 30 November 2014 and then to
extend the ARD for the third POMS accounting period to 27 March
2016.
(b) The Board challenged whether the misaligned year end dates
would add complexity into the financial reporting. It was
acknowledged that this would save on audit fees for POMS. The
CFO supported the proposal.
(c) The Board agreed, pursuant to article 4.3(P) of the Articles of
Association of Post Office Management Services (POMS), that
POMS should:
e shorten its Accounting Reference Date (ARD) for the
second POMS accounting period to 30 November 2014;
and
e extend the ARD for the third POMS accounting period to 27
March 2016.
(d) Nick Kennett left the meeting.
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POLB 15/28 FINANCIAL PERFORMANCE
(a) The Chief Financial Officer (CFO), updated the Board on the
2014/15 financial performance and the scorecard for period 11. He
reported ‘that he was slightly more positive about hitting the
EBITDAS target of £99m, subject to the period 12 trading number
and the final audit. This was predicated on delivering some of the
risks and opportunities,
(b) The Board discussed the period 11 results and asked that future
reports include: a greater focus on non-staff costs as well as staff
costs; a summary high level analysis on cash; and the inclusion of
ACTION: CFO product profitability when it becomes available during the year.
(c) The Board noted the update on the 2014/15 financial performance
and the scorecard for period 11.
POLB 15/29 APPROVAL OF 2015/16 FINANCIAL PLAN AND SCORECARD
(a) The Chief Financial Officer (CFO), presented to the Board for its
approval the financial plan for 2015/16 and the key performance
indicators (KPI) scorecard and short term incentive plan (STIP)
bonus measures for 2015/16.
{b) The Board was disappointed by the proposed plan and expressed
its preference for a budget which included a flat year on year
income target. There was concerned that the plan no longer
aligned to the growth strategy. The CFO noted that in his view this
was a realistic and stretching budget.
(c) The CFO reminded the Board that the current year had seen
significant variance against plan and that the Board had asked for a
more realistic budget for 2015/16. However, the Board asked the
CFO to reconsider the income target and to hold it flat against this
year’s outturn, if necessary using some of the contingency in the
plan. The CFO accepted the challenge and would revert on the
matter after period 12 income results were available.
ACTION: CFO (a) Richard Callard explained that continued failure to hit budget would
be problematic and harder to explain to the Minister than a slight
year on year decline in income. In his view EBITDAS was the more
important measure.
(e) The Board recognised that EBITDAS was the most significant
measure for commercial sustainability and that the income target
was being set on the current strategy.
(f) I The Board noted that it would discuss the three year operating plan
in May and asked the CFO to consider a target of a zero EBITDAS
and a flat cost base for 2016/17 as part of that plan.
ACTION: CFO (g) The CFO also explained that POL was preparing for the new
government and the possible requirements of a funding review.
This work would form part of the first afternoon of the June away
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day and would consider the options if the current funding was
threatened, and any new funding requirement post 2018. He
promised to circulate the review plan for discussion at the June
Away day.
ACTION: CFO ({h) The Board questioned the slowdown of NT conversions in 2015/16.
The CEO explained that the Executive had wanted to continue with
the current run rate, but had been asked by the Shareholder
Executive to protect the promise made by the Minister that the ‘cliff’
would not be enforced until September 2015, Richard Callard
confirmed that this was the case. It was acknowledged that an
opportunity might exist with multiples and non-NFSP branches and
that this would be investigated, and. a note justifying the NT target
circulated to the Board.
ACTION:
Kevin Gilliland 2015/16 SCORECARD
(i) I The Board discussed the scorecard measures and proposed bonus
worthy targets. The Executive had proposed threshold targets for
Income and EBITDAS. It was acknowledged that whilst some ©
businesses had threshold targets, these were not normal in the FS
Industry and were becoming less prevalent in other organisations.
Richard Callard understood why the Executive would like threshold
targets but explained that Minsters and the Treasury did not like the
concept as it was perceived as paying for failure. The Executive
agreed to reconsider the use of thresholds in the scorecard.
ACTION: CFO (j) IThe Board supported the inclusion of a cash measure in the
scorecard and asked the Executive to define the measure and to
introduce a clear report on the movements in working capital,
although there would not be a specific improvement target in
2015/16. The Board asked that cashflow target be included as one
of the personal objectives for the CFO.
ACTION: CEO (k) The Board acknowledged that the digital net income measure
would be an extrapolated figure based on volume and that the
Executive would clarify the target.
ACTION: CFO (I) The Board asked that the FS compliance score be included as one
of the personal objectives for Nick Kennett and Kevin Gilliland.
ACTION: CEO (m) The Board accepted that the subpostmaster engagement score
should not be included as part of the bonus worthy targets until the
number of surveys completed increased and the measure was
more robust. The Board asked that an effective subpostmaster
survey be included as one of the personal objectives for Neil
Hayward.
ACTION: CEO (n) The Board asked that Richard Callard, Neil McCausland, Neil
Hayward and the CFO reconsider the scorecard and targets in the
light of the discussion and the 2014/15 outturn. Their proposal
would be circulated to the RemCo and Board before formal
submission to the Shareholder Executive.
ACTION:
RC/NM/NH/CFO
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POLB 15/30 TELEPHONY STRATEGY
(a) The Board welcomed Martin George, Commercial Director, and
Geoff Smyth, Head of Telecoms, to the meeting and received an
update on the progress in reviewing the alternative strategic
options for the telecommunications business (telco).
(b) The Board discussed the telco business and the relationship with
Fujitsu. Geoff Smyth explained that the service had lost 25k
customers during the change of service provider in 2014/15, but
that it had now stabilised and had grown by 5k customers in recent
was rack to win back an iti 20k in 2015/16.
(c) The Board recognised the value of the telco income and discussed
the proposal to launch a trial of a mobile, sim-card only,
proposition. Geoff Smyth explained that this would test the trading
capability for a very simple product and POL’s ability to respond
effectively to a very dynamic market. The CFO reported that the
contract with EE included termination costs of £7m, a similar figure
to the dilution of the EBITDAS over the next two years before the
product became profitable. He stressed the importance of the trial
to test the proposition before any decision to roll] out to the whole
network, as this rollout could significantly increase the exit costs.
(d) The Board:
e noted the update on strategic options for the
telecommunications business as set out in the paper; and
¢ agreed the proposed next steps as set out in the paper.
(e) Martin George and Geoff Smyth left the meeting.
POLB 15/31 BOARD EFFECTIVENESS REVIEW
(a) The Chairman updated the Board on the evaluation of its
effectiveness carried out in January and February 2015.
(b) The Board discussed the quality of the Board papers and the CEO
stressed that those members of the Group Executive (GE)
presenting papers realised that they were responsible for the
quality of those papers. She acknowledged that there were
inconsistencies in the quality and that papers were not always
clear.
(c) The Board asked that papers be more balanced, explaining the
options available as well as the recommendations from the GE.
Papers should not be presented for noting if they required a
decision or comment from the Board.
(d) The General Counse! proposed that that she and the Company
Secretary take responsibility for the structure of the papers,
ACTION: GC/ ensuring clarity of purpose, an audit trail to previous Board
CoSec discussions and links to the Board risk appetite.
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(e) The Company Secretary would also provide a rolling forward
agenda with each Board pack and detailed agendas for the next
ACTION: CoSec two meetings.
(f) The Board discussed the proposal to disband the FS Committee
once the full POMS Board was up and running and to move the
Committee's respons: s to the POMS Board, the ARC_and the
Board_as_appropri
to be based on best
practice in other companies which had a FS business as part of a
wider portfolio of businesses. These recommendations, validated
by a third party, would be presented to the Board at its April 2015
ACTION: GC meeting when it would consider the POMS go live decision.
ACTION: CoSec/ (g) In due course, the Terms of Reference for the ARC would be
Alasdair Marnoch amended to reflect the changes.
ACTION: (h) Other issues which had been identified as part of the review would
Chairman/CoSec be taken forward by the Chairman and Company Secretary as
appropriate.
POLB 15/32 SPARROW UPDATE (VERBAL)
(a) The Board welcomed Mark Davies, Director of Communications
and Corporate Affairs, to the meeting and received a verbal update
from him and the General Counsel on Project Sparrow.
(b) The Board thanked the Executive for progress being made and
noted the verbal update on Project Sparrow.
(c) Mark Davies left the meeting.
POLB 15/33 IT PROCUREMENT
(a) The CFO explained that a paper would be presented at the May
Board requesting authority for a significant 1T procurement project
and that the proposal in the noting paper had been for NED
engagement to help the Executive understand any questions or
concerns before the Board meeting.
ACTION: CoSec/ (b) The Board agreed that it would prefer a short written update
Chief Information followed by an optional call which NEDs would join if they wanted
Officer further clarification.
(c) The Board noted the IT Procurement report.
POLB 15/34 PENSIONS
{a) Virginia Holmes, Chairman of the Pensions Committee, asked for a
discussion on the Pensions paper presented to the Board for
noting.
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(b) The CFO explained that the pension trustees were due to
undertake their triennial evaluation of the scheme and that this was
likely to show a significant worsening of the fund and a likely deficit
position within the next two to three years. POL could not
materially increase its contribution to enable the scheme to remain
fully funded and therefore needed to work through the options. The
ACTION: Executive was asked to ensure there was sufficient capability and
Neil Hayward resource to manage the pension changes.
(c) The Board noted the Post Office Pensions update.
POLB 15/35 MINUTES OF THE PREVIOUS MEETING AND MATTERS
ARISING
(a) The minutes of the Board meeting held on 28 January 2015 were
approved for signature by the Chairman.
POLB 15/36 COMMITTEE MEETING MINUTES FOR NOTING
(a) The Board noted the minutes of:
e the meeting of the Audit, Risk and Compliance Committee
held on 12 January 2015; and
« the meeting of the Remuneration Committee held on 25
February 2015.
POLB 15/37 STATUS REPORT
(a) The Status Report, showing matters outstanding from previous
Board meetings, was noted and the Chairman asked that any late
ACTION: CoSec actions be followed up by the Executive.
POLB 15/38 UPDATE FROM THE NOMINATIONS COMMITTEE
(a) The Board agreed to the revised terms of reference for the
Nominations Committee, as provided.
POLB 15/39 UPDATE FROM THE REMUNERATION COMMITTEE
{a) The Board agreed to the revised terms of reference for the
Remuneration Committee, as provided.
POLB 15/40 UPDATE FROM THE FINANCIAL SERVICES COMMITTEE
(a) The Board received an update from Virginia Holmes, Chairman of
the Financial Services Committee.
(b) Following Alisdair Cameron’s appointment as Chief Financial
Officer, the Board agreed that he should be appointed to the
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Financial Services Committee with immediate effect. The Board
authorised the Company Secretary to make any necessary
amendments to the Committee’s terms of reference to reflect this
ACTION: CoSec appointment.
POLB 15/441 UPDATE FROM THE PENSIONS COMMITTEE
{a) The Board received an update from Virginia Holmes, Chairman of
the Pensions Committee. The Committee had undertaken an
effectiveness review and the main issue raised had been that the
Committee was over reliant on the expertise of the Chairman. The
Executive was asked to source training opportunities for the other
Committee members. It was agreed that the outcome of the
ACTION: effectiveness review did not require the Committee to refresh its
Neil Hayward terms of reference.
(b)
Following Alisdair Cameron’s appointment as Chief Financial
Officer, the Board agreed that he should be appointed to the
Pensions Committee with immediate effect. The Board authorised
the Company Secretary to make any necessary amendments to the
ACTION: CoSec Committee’s terms of reference to reflect this appointment.
POLB 15/42 ITEMS FOR NOTING
(a) The Board noted the Significant Litigation report.
(b) The Board noted the Health and Safety report.
(c) The Board noted the Report on Sealings and resolved that the
affixing of the Common Seal of the Company to the documents
set out against items numbered 1262 to 1286 inclusive in the
seal register was hereby confirmed.
(d) The Board noted the information regarding publication of
POL’sReport and Accounts for 2014/15, and asked the
Executive to ensure that the Board was given enough time to
contribute to the key messages. Richard Callard asked for the
ACTION: ShEx to be given sight of the Report and Accounts as early as
Mark Davies possible.
POLB 15/43 ANY OTHER BUSINESS
(a) The Company Secretary circulated the proposed agenda for the
Board away day in June.
(b) The Board proposed that the POMS NEDs be invited to join the
ACTION: CoSec Board for lunch and the afternoon sessions of the away day.
(c) It was agreed that the day would start with Mails and FS strategies
and conclude with the Network and Channel session.
(d) The NEDs were asked to let the Company Secretary have their
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thoughts on what would make the discussions at the away day
effective from their perspective and how the Executive could
ensure the NEDs were confident about the outputs and proposed
ACTION: NEDs strategy.
(e) There being no further business, the meeting closed.
POLB 15/44 DATE OF THE NEXT MEETING
(a) _ It was noted that the next Board meeting would be held on 21 May
2015.
(b) It was further noted that prior to May there would be an additional
Board meeting at 8.00am on 22 April 2015, to discuss POMS.
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