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To: Baroness Neville-Rolfe B I S
From: Justin Manson (x4513), Richard Callard (x3814) ES
Innovation & Skills
Date: 22nd December 2015
Purpose: To provide supplemental information to Submission of 11" December, 2015
Timing: Routine.
Recommendation: That you note the issues.
A. Background
1. You asked that we review whether BIS has legal exposure to the restatement of
POL’s 2014/15 accounts and to set out the ownership structure and the role of the
shareholder representative. Following a meeting with Mark Russell and Justin
Manson on 17" December, you also asked about the impact on bonuses, the
disclosure in the accounts, and the size of the error in relation to the network
transformation programme as a whole.
B. The ownership structure and role of the shareholder representative
2. POL is a private company limited by shares set up under the Companies Act 2006
and wholly-owned by the Crown via its holding company (Postal Services Holding
Company Limited (PoSH)). The sole shareholder of PoSH, which in turn wholly
owns POL, is the Secretary of State.
3. POL’s Board and Chair are appointed by the Secretary of State for the Business,
Innovation and Skills or appointed subject to his approval. The directors have a duty
to promote the success of POL for the benefit of its Government shareholder,
although as a matter of company law their duties are owed to the company and not
the shareholder per se.
4. The Shareholder Executive oversees the Government’s shareholder function, and
like many of Government companies, places a shareholder representative on the
Board. It has no executive powers or responsibilities, although it has various rights
e.g. information access, rights to appoint a director to the Board, approval rights on
appointments and remuneration.
5. As an ex-officio member of the Board, the Shareholder Executive representative
monitors and challenges performance of the company and the executive team via
the Board, but also challenges the business from a shareholder team perspective
(POL has not always had a shareholder representative on its Board).
6. It is the responsibility of the Board, and primarily the Executive, to run the business
and ensure its smooth operation. Like many other Government businesses, it has
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been set up in this way with a view to ensuring a better running of the business than
if it were a Government Department, and to put in place measures to distance
ministers from the day to day decision-making responsibility of a commercial
business.
C. Understatement of provision and possibility of legal exposure
7. If POL was a publicly-listed company in which investors had suffered losses as a
result of trading shares based on incorrect information in the accounts, there might
be a concern that it would be exposed to shareholder suits. There is no similar risk
in this case because HMG has not made any investment decisions based on the
accounts which contained the error. Even if POL were to have liability, it is a
company limited by shares and liability would not pass up the ownership chain to
BIS. This view relies on the need for restatement arising from error rather than
fraud.
D. Impact on bonuses
8. The understatement of the provision has not led to anyone at Post Office being
rewarded more than had the provision been correctly stated in the first place.
9. Remuneration at the Executive level, and below, is based on a mixture of financial
metrics (e.g. revenue, operating profit) and operational metrics (e.g. customer
satisfaction, number of branches transformed).
10. From a financial metrics perspective, the provision relating to exiting
subpostmasters is an exceptional charge which falls below the operating profit line.
It has not therefore informed or influenced any of the financial metrics upon which
management are rewarded.
11. From an operational perspective, management were rewarded on the number of
transformed branches opened. However, this error did not impact those figures and
again there was no impact on bonuses.
12. Nevertheless, bonuses are at the Remuneration Committee’s discretion, and there is
a question as to whether such a serious accounting error should be reflected in one
way or another in executive’s pay. ShEx will raise this issue with the incoming
Chair of the Remuneration Committee, Ken McCall, when he arrives in January.
We will also question whether any clawback of the previous CFO’s pay could be
considered and whether such a move would be possible or practical.
E. Disclosure in the Accounts
13. The provisioning error will be disclosed in the accounts with a narrative to explain
what happened. The current wording proposed below will be included in the
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Business Review section which summarises the business’s performance and which
follows the Chair and Chief Executive reports. Items in square brackets reflect
information still to be confirmed:
e “An error was identified in the calculation for postmasters’ compensation within
the Network Transformation programme on the balance sheet and exceptional
items charged in the 2014-15 half year and full year. The March 2015
exceptional charge has been restated by [£86 million] of which [£50 million]
was restated into the September 2014 exceptional charge. This was a timing
error related to recognition of the liability. [It has not impacted payments to
postmasters or the overall cost of the programme].
14. Similar statements are made again under the “exceptional items” narrative, and
within the notes to the accounts. Post Office is seeking to strike the right balance
between appropriate disclosure, and the accounting/non-cash nature of the error.
The interim accounts where the first re-statement will be made is most likely to now
occur in January.
F. Provision error as a proportion of Transformation costs
15. You asked how much an error of this size was in proportion to the network
transformation programme. An £86m error is:
¢ 13.7% of the £630m cost of the network transformation programme to date
© 9.8% of the £976m revenue (excluding subsidy) that POL earned in 2014/15.
Copied to: Perm Sec, Mark Russell, ShEx POL Team
Advice received from:
Finance SpAds Press Legal Analysts
Emma Bye
N/A N/A N/A (sections B & C) N/A
Devolution Issues Post Office is not a devolved
matter.
Equality Analysis N/A