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Strictly Confidential
MINUTES OF A MEETING OF THE BOARD OF DIRECTORS OF POST OFFICE LIMITED HELD ON TUESDAY 25
SEPTEMBER 2018 AT 20 FINSBURY STREET, LONDON EC2Y 9AQ AT 11.30 AM
Present: Tim Parker Chairman (TP)
Paula Vennells Group Chief Executive (PV)
Ken McCall Senior Independent Director (KM)
Tom Cooper Non-Executive Director (TC)
Tim Franklin Non-Executive Director (TF)
Shirine Khoury-Haq Non-Executive Director (SK)
Carla Stent Non-Executive Director (CS)
Alisdair Cameron Group Chief Financial and Operating Officer (AC)
In Attendance: Jane MacLeod Company Secretary (JM)
Veronica Branton Head of Secretariat (VB)
Owen Woodley CEO — FS&T (OW) (item 7)
Debbie Smith Chief Executive Retail (DS) (items 8, 9 and 10)
Martin Kearsley Banking Director (MK) (item 8)
Tom Moran Network Development Director (TM)
(items 8, 9 and 10)
Andrew Clatworthy Retail (ACL) (item 8)
Mark Siviter MD Mails & Retail (MS) (item 9)
Rob Houghton Group Chief Information Officer (RH) (item 12)
Apologies: None ACTION
1. INTRODUCTION AND CONFLICTS OF INTEREST
a) A quorum being present, the Chairman 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.
2. I MINUTES OF PREVIOUS BOARD AND COMMITTEE MEETINGS INCLUDING STATUS.
REPORT
The minutes of the meeting of the Board held on 31% July 2018 were APPROVED and
AUTHORISED for signature by the Chairman.
3. CEO’s REPORT
a) Paula Vennells updated the Board on the following recent issues:
e the Annual Report and Accounts 2017/18 had been published. The coverage had
been predominantly positive. One negative story on pay had appeared in Private
Eye and a couple of emails had been received following that. The Guardian had
published an article on “scruffy” POs to which we had responded
Rob Houghton had taken charge of resolving the PCI Compliance issue. Some of
our credit card data was not encrypted end-to-end. This information included
some personal data such as names. 33,000 of our terminals were out of licence
but there were reasons not to replace them at this stage. A full report setting out
proposed solutions was going to be provided to the ARC in October 2018
e the price reduction on Verify and its impact had been discussed the previous day
but a briefing could be provided for any Board Director who had not been at the
session
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b)
c)
a)
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© anumber of new staff had been appointed to the Retail Business Unit, bolstering
skills within the organisation, including digital skills
* our negotiations with WH Smith were progressing well. A further payment would
be made to WH Smith subject to them meeting their customer service targets
© progress with the acquisition of the Payzone bills payment business was on track
and work was taking place to ensure that all necessary arrangements were in
place on day 1 of running the business. Ideally, we would complete the
acquisition on a month end and were hopeful that this would be the end of
October 2018.
A number of points were raised, including:
© our position on charging for the use of ATMs. It was reported that ideally we
would want ATM use to remain free
* whether there was a systemic issue resulting in our not meeting the ATM target.
It was reported that we were achieving the target now but that our partner was
not committed to the longer term delivery of this service. We needed a new
partner and new ATMs which would require investment, the proposals for which
would need to be considered by the Board
e the session on the development of the Identity Business line held the previous day
had been worthwhile. It had been helpful to consider the strategic choices we
would have to make but a continuation of that discussion would be useful. Itwas VB
AGREED that another session would be scheduled
e The importance of developing our market in the private sector had been noted.
There had also been discussion about whether we had sufficient customer focus
currently. The test and learn approach we were taking was seen as appropriate.
Consideration should be given to how the development of the Banking Framework
might tie in the use of our Identity service by the banks. Board Members discussed
whether we were expanding our Identity services business as rapidly as we should.
The executive thought that the current approach was correct because we needed
to get the front end of the service right
® competition appeared to be increasing in many areas of the business e.g. Travel
insurance. Market disruptors were slashing margins and changing the shape of
some markets. The attractiveness of a particular business proposition could,
therefore, change very quickly. It was thought that we needed to spend more
time generally assessing our competitors to provide a thorough understanding of
our relative position
e The organisation structure chart would be sent to the Non-Executive Directors. vB
The Board NOTED the CEO’s report.
FINANCIAL PERFORMANCE REPORT
The CFOO introduced the report and highlighted a number of issues:
© we were £4.7m ahead on EBITDA but expected this to reverse in the second half of
the year because of the cut in fees for Identity and the cost reductions in IT not
coming through in the second half of the year. The latter was partly due to delays
in the Belfast exit negotiations. The parcels market had been resilient
e Travel money had underperformed against the plan; this was in part because of
period specific issues such as the extended period of warm weather and Brexit
that had affected the whole market but we were conscious of market disruptors
whose margins were minimal
e Insurance was not achieving the volumes or the returns planned in all areas. There
were some specific reasons: the difficult summer in travel and delays in Customer.
Hub. A review of marketing efficacy was underway
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© Telco was likely to miss its income targets but meet its trading profits. We would
be returning to the Board to discuss the longer term strategy for Telco. Pricing was
higher out of contract and was going to be increased, while we remained
competitive on in-contract pricing. The strategic work would consider a variety of
options including sales, partnering, removing Fujitsu and the product range.
b) A number of points were raised, including:
e The position on former agents’ losses was discussed. It was noted that we were not
bringing prosecutions currently where these related to the Horizon system because
of the ongoing litigation. The increase in cash in branches further increased the
risks. We had improved our ability to identify branches with potential fraud issues
and target them for audits. Prosecutions could potentially start again after the
Horizon Trial (assuming a positive outcome), however as matters go “stale” after c6
months, it is unlikely that we would be able to prosecute retrospective cases
e Security in branch and in the supply chain was discussed. Introducing CCTV in high
risk branches had been and continued to be considered but there were costs
associated with this. Analysis had been done to identify high risk branches but this
covered a range of factors such as a branch handling high volumes of cash;
however, the correlation between high risk indicators and the location of thefts and
fraud was not high in practice
The physical management of cash in branches was going to be critical to the
business and it was thought that we should consider whether security provisions
such as CCTV were simply the cost of doing business. ATMs and closed cash systems
also formed part of this conversation on security measures and the safety of staff as
POs became increasingly the place to go for cash. It was reported that while we hac
experienced health and safety improvements overall we had suffered a spate of
ATM rip outs. A Business case was being considered to roll out fogging devices to
many more branches. It was AGREED that an update on security measures would
be included in the Health & Safety Report to the Board. We needed to recognise AC
that this was an investment discussion where there was no immediate prospect of
return
e It was reported that a project was being run on closed cash where the safe and till
were combined. Feasibility and cost were key issues and to be achievable might
require co-funding from the banks. An approach to the banks on investment would
have to be considered very carefully as we were proposing a significant increase in
fees through Banking Framework 2. We might consider a segmented approach
where equipment such as closed cash cartridges could be deployed in the top
branches for cash, with cameras for other branches
© Our cash borrowing was discussed. We had made efficiency improvements in
branches on cash management but we were borrowing more than we had
expected.
¢) The Board NOTED the Financial Performance Report.
5. FUNDING BEYOND 2021
a) The CFOO introduced the report and highlighted a number of issues:
® we were six months into a three year funding plan and would not normally be
starting a conversation about the period beyond that plan at this stage; however,
UKGI and BEIS were preparing for the anticipated Government Comprehensive
Spending Review and we wished to provide them with some sensible placeholders
notwithstanding the significant degree of uncertainty in our plans beyond 2021.
Our baseline assumptions were:
- we should not need substantial investment funding if we are achieving our
trading profit targets
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b)
¢)
a)
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- network subsidy would continue to be needed to keep unprofitable branches
open. Network subsidies were currently provided at around £50 m per annum
and we had to provide evidence of the costs required to meet the Services of
General Economic Interest (SGEI) set out in our Funding Agreement with
Government
- that we would need a borrowing facility.
work was being done on the costs of running the unprofitable branches, our
IT costs, the cost of re-investment in the network and regulatory changes etc.
A number of points were raised, including:
that there were a number of moving parts with IT transformation, investment
requirements for business developments such as Identity, the need for funding for
loss making branches but with the prospect of the EBITDA figure being significantly
higher with the increase in fees with Banking Framework 2
*® we would need to consider whether we should be asking Government for a
contingency fund, how that conversation should be structured and the fund level
required
© that we could not expect indefinite funding from the taxpayer other than to run
unprofitable branches but that meant we needed to have the capability to borrow.
The preference would be to be able to access external funding. We needed to
consider our capital investment requirements, the returns we thought we could
get from these and any assets we might sell
e whether we should consider a symbolic drop in what we sought as the network
subsidy to show our intended direction of travel. It was noted that the reverse
argument was that inflation and the cost of managing cash in branches meant that
a £50m network subsidy was less in reality anyway and that there should be a fee
attached to providing an unprofitable service. To understand this better the Board
asked to see the costs associated with running the unprofitable branches. AC/ DS
The scope to retain the network subsidy but look at dividend payments was
discussed.
The Board NOTED the Report and endorsed the proposed approach of having open
conversations with BEIS and HMT to seek longer term alignment around future
government support.
FS&T PERFORMANCE REPORT
OW introduced the report and highlighted a number of issues:
Telco —we were set to deliver on plan on a net basis but were having to account
for the FD11 error. The market place was very competitive, with significant
customer retention activity, and our assumed net numbers would go down slightly
because of the costs associated with implementing project Galaxy. We were
considering deploying marketing spend and had engaged consultants to consider a
number of issues such as what we might do at the end of the Fujitsu contract
e PO Insurance — the environment was difficult but with signs of encouragement in
recent sales. We still needed to build our market capability and were
restructuring of our marketing and digital capabilities. We also needed to build
our analytics capability
e Ancile — the firm had appointed advisers and would be going to auction; however,
we were exploring the possibility of a non-binding bid and would have exclusive
access to the data room associated with the sale for a period of time
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b)
POST OFFICE LIMITED BOARD MEETING
Strictly Confidential
Customer Hub — we were building capability and considering a customer home
proposition as we had a number of constituent parts which others in the market
did not
* there had been a session on Brexit planning at PO Insurance Board more detail of
which could be provided to the Board.
A number of points were raised, including:
© whether the price increase proposed in Telco was sensible. The executive
confirmed that their view was that we should continue to stay in line with the
market and that the increase would maintain our income line while treating
customers fairly
e that Non-Executive Directors would find it helpful to understand the customer
research we had by product. PO was seen as less relevant to the younger
demographic and the executive was thinking about increasing this through
financial education positioning. Our culture change was directed at having greater
focus on customers, which was broader than a product focus. The approach to
attracting younger customers was discussed and it was reported that a digital
forum was being set up which would help us gain insight and that the on-line
registration process for Customer Hub app also gave us insight into customer
requirements
e the growth of the insurance business and the investment in marketing related
spend was discussed and it was AGREED that this would be included as an item on
a Board agenda. The newly appointed Chief Marketing Officer (CMO) would be
invited to join this discussion
the CMO’s role was discussed and whether this involved looking at customer
acquisition across the piece. It was confirmed that this was the case but that we
needed to adjust the way we worked to maximise these opportunities
© the shortfall in the Customer Hub volumes against plan and whether we had dealt
with the issues which had generated this result were discussed. It was reported
that we now thought that the original assumptions had been unrealistic but that
we had established the case for a digitally integrated proposition and needed to
drive the ongoing business. A number of lessons had been learnt in the process.
We had not appreciated the operational difficulties of working within a Joint
Venture Agreement (JVA) sufficiently nor of migrating from an existing app. Our
targets had been too ambitious. Work was taking place to review the CHUB
investment and learnings formally. These learnings and the next stage of
development of CHUB, including the mails proposition that was due to be
launched during the current financial year, would be brought back to the Board.
PEREGRINE UPDATE
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Ow/ vB
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IRRELEVANT
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¢)
a)
b)
10.
a)
b)
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IRRELEVANT
The Board NOTED the report and supported the option of allowing the banks until 31
March 2019 to confirm or terminate their inclusion in the Banking Framework 2.
PROJECT SOLAR
The Chairman welcomed Tom Moran and Rob Houghton to the meeting. TM
explained that Project Solar was a strategic initiative to deliver greater access to Post
Office products and services through a range of devices owned and operated by
retailers, customers and the Post Office. To date, we had been working most closely
with McColls on this project.
The Board:
© RESOLVED to APPROVE the £5.995m spent on the project to date to deliver HNGT
Lite
NOTED that a costed paper would be provided for the Board on the next phase of
the Project once the product roadmap had been developed.
MAILS STRATEGY UPDATE
Mark Siviter introduced the report and highlighted a number of issues:
¢ discussions with Royal Mail (RM) would begin formally in October 2018, which
would start to confirm our priorities and RM’s for the contract. The relationships
with RM had strengthened and there was trust between the two parties. We had
been having informal discussions about the contract since March 2018
our main priorities were acquiring the ability to sell Online and freedom to open
up the network up for click and collect
© our early view was that RM wanted a fixed fee reduction and the continued
benefit of business efficiencies
e the Board would be updated on the discussions with RM and Board approval
sought on our final contract proposals.
A number of points were raised, including:
e what our current arrangements were for click and collect. It was reported that
returns could be made to a PO but not then collected for re-delivery by a
competitor of RM. Our view was that at this point RM had already lost the sale to
a competitor so it did not make sense to stop consumers using PO for re-delivery
via another provider
© what RI’s focus was on cost efficiency. It was reported that we had held
discussions on aligning up our end-to-end processes and that RM was likely to
seek a reduction in the price for the overall contract; however, we did not think it
likely that RM would seek a signing fee. RM and PO were in a mutually dependent
position without viable alternative partners
e that there had been significant change in the RM leadership team. Nick Landon
would be leading the negotiations and was the consistent figure from RM in these
discussions
that we should consider what developments in technology might mean for the
supply chain. For example, whether investment would be needed for self-drive
vehicles
« that we should be helping RM to understand the benefits of the contract to them
to assist their CEO in explaining this to the market
¢ whether online flexibility included all online options. It was noted that we wanted
to be able to create apps and sell online
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© whether retaining exclusivity in some areas of the contract could cause
competition challenges. It was reported that we were discussing the relevant
clauses of the contract with Linklaters but would not want to lose exclusivity in all
areas
« that we needed to avoid locking ourselves into a contract for too long a period as
the market was changing so quickly. It was reported that we were considering
carefully the break clauses in the contract.
c) The Board NOTED the update, the progress made to date and the intent to enter the
first round of formal negotiations.
11. © PROJECT EDGWARE
RRELEVAN
12. BACK OFFICE TRANSFORMATION
a) The Chairman welcomed Rob Houghton to the meeting. AC introduced the paper and
reported that testing through TRANSAP was taking longer than through SAP. We had
considered carefully whether we could migrate off POLSAP and go live in November
2018. However, this would have disrupted the cash forecasting solution before
Christmas. We were confident that we could go live with the new system in January
2019 and that the training requirements would have been completed. The only
reason we would have considered migrating earlier, given the risks of doing so, would
have been experiencing deterioration in POLSAP. The cost of the work from Autumn
2018 to January 2018 was in the region of £10m and the incremental cost from
November 2018 to January around £2m.
b) The Board noted that the work was necessary to the running of the business and
RESOLVED to APPROVE the additional £9.4m drawdown.
13. I MODERN SLAVERY ACT
a) JM introduced the paper:
* we had an obligation to publish a statement on our compliance with the Modern
Slavery Act (MSA) within six months of the end of the financial year. ARC
members’ comments had been reflected in the statement
© we had taken a range of steps to comply with the MSA, including reviewing
agents’ contracts, which contained a general obligation to comply with the law
and had also provided training for agents
the agency network risk was our principal risk so the ownership of the MSA policy
was likely to sit with the CEO — Retail in future.
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b)
c)
14.
a)
b)
15.
15.1
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The number of points were raised, including:
« that we needed traction in the next year on the actions we had identified so clear
ownership of the policy was important
© whether we could audit our compliance with the MSA when our network was
predominantly operated by agents running their own businesses.
¢ that we should change the wording of the statement to refer to due diligence for JM
on boarding but not for the subsequent operation of the business
© whether we carried out subsequent checks when we visited agencies. It was
reported that there was a vetting check when PMs took on staff. In order to
access Horizon, those checks had to have been completed and included checking
that the individual was a real person and eligible to work etc.
e whether there was as retail consortium which produced a standard on modern
slavery which we could sign up to. It was noted this would be investigated
¢ that raising awareness through training was important. It was noted that we
would consider whether there was scope to strengthen our existing arrangements.
The Board RESOLVED to APPROVE the 2017/18 Modern Slavery Act Statement,
subject to incorporating the change agreed at the meeting, and endorse the proposed
actions for the business to take forward in the 2018/2019 financial year.
POSTMASTER LITIGATION (Confidential and subject to legal privilege)
JM updated the Board on the Postmaster Litigation. The first hearing for the Common
Issues would start on 5 November 2018. It was thought that the judgement was likely
to be published at the end of December 2018 or the beginning of January 2019. We
were preparing in parallel for the second trial on the Horizon system. Two experts
(one for each party) had been appointed to provide their view of the Horizon system
and had a series of questions to answer from the Judge. In effect the judge’s decision
would reflect which expert he believed.
We were preparing our communications approach and material. One Freelance
journalist was seeking crowd funding to be able to attend the trial.
Work on contingency planning was happening in parallel.
The Board NOTED the update.
ITEMS FOR NOTING
Sealings
The Board RESOLVED that the affixing of the Common Seal of the Company to the
documents set out against items numbered 1697 to 1710 inclusive in the seal
register was confirmed.
Health and Safety
AC reported that accident levels had decreased but incidents of violence had increased.
We were looking at options to mitigate these risks including the roll out of fogging
devices in many more branches. There had also been an upsurge in attacks, particularly
on crews in Liverpool. Body cameras did not appear to have improved the situation
and we were not yet sure of the right response to the increase in ATM rip outs.
KM asked whether we have considered doing more in-night deliveries. It was
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reported that this might be beneficial if it happened some of the time but could prove
more dangerous for crews if night time delivery replaced day time though further
consideration would be given to the issue.
The Health and Safety report was NOTED. An update on security measures in branches
and in the supply chain would be included in the Health and Safety report for the Board. ac
15.3. Future Meeting Dates
The future meeting dates were NOTED.
15.3 Forward Agenda
The forward agenda was NOTED.
Meeting closed at 3.00 pm.
Chairman
Date
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