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Witness Name: Sir Stephen Lovegrove
Statement Number: WITN11010100
Dated: 14 June 2024
POST OFFICE HORIZON IT INQUIRY
FIRST WITNESS STATEMENT OF SIR STEPHEN LOVEGROVE
I, SIR STEPHEN LOVEGROVE, will say as follows:
1. I make this statement in response to a Rule 9 Request made by the Post Office
Horizon IT Inquiry (the “Inquiry”) dated 2 May 2024. I have sought to address all
the matters raised by the Inquiry in as much detail as possible, notwithstanding the
passage of time since the events with which the Inquiry is concerned. As the Inquiry
will be aware, the events that I describe in this witness statement occurred over
ten years ago and I am therefore reliant, to a significant extent, on the
contemporaneous documentation I have been able to review. I have not had
access to all the documents and e-mails that I would have had at the time. I have
sought to make clear in this statement where I have a direct recollection of the
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matters I describe and where I am relying on the documentation I have seen as
part of this Inquiry, some of which I am not aware of having seen at the time. I have
also sought to make clear where I am applying hindsight rather than describing my
views at the time. My goal is to explain everything I can recall as clearly as possible
to assist the Inquiry.
. In preparing this statement I have been assisted by lawyers employed by UK
Government Investments (“UKGI”), and by Eversheds Sutherland (International)
LLP, the recognised legal representatives for UKGI, a Core Participant (as defined
in paragraph 5(a) of the Inquiry’s Protocol on Witness Statements) in the Inquiry.
. I would like to acknowledge at the outset of this statement the years of suffering
and hardship endured by sub-postmasters and their families. It is difficult to learn
of their ordeals with anything other than a sense of horror and outrage. I recognise
that it will be for the Chair of the Inquiry to determine the root causes of the dreadful
treatment they received and to apportion responsibility. I will try to contribute to this
task by providing as frank and full an account of my involvement in relevant matters
as I am now able to give, bearing in mind the time that has passed and the papers
that are available to me. I have also provided some reflections, informed by
hindsight, about matters that could have been handled differently and about issues
of corporate governance that seem to me to be important contributory factors to
what went wrong at Royal Mail and the Post Office. These are offered tentatively
and in the knowledge that I have seen only a small part of the evidence that the
Inquiry has before it. I hope that my evidence may play some role in assisting the
Inquiry to draw appropriate lessons from these appalling events and helping to
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ensure that nobody in the future has to suffer the enduring injustice, loss and
hardship experienced by so many sub-postmasters and their families.
4. In this statement I will refer to Post Office Limited as “POL”, both in respect of the
company before separation from the Royal Mail Group (“RMG”) and afterwards.
Background
5. Following graduation from university, I worked for approximately three years at a
small management consultancy specialising in the media sector. Around 1993 I left
to join the bank Morgan Grenfell, which had been acquired by Deutsche Bank in
1990, to work in its media sector team as an investment banker. I became the head
of that team and remained so until late 2003, and was involved in a number of
transactions and fund-raisings.
6. In early 2004 I joined the recently formed Shareholder Executive (“ShEx”) — the
predecessor of UKGI — in the Cabinet Office, under the then Chief Executive,
Richard Gillingwater. Reflecting my previous sector experience, I initially worked
almost entirely with the Department for Media, Culture and Sport on issues
concerning the BBC Licence Fee negotiation and Charter renewal, as well as on
Channel 4. In around late 2005 I was asked to become the Director responsible for
RMG, and, by extension, its subsidiary POL.
7. In June 2007 I became the Chief Executive of ShEx, though I stayed closely
involved with the Government's strategy for RMG, given its scale, prominence and
extremely severe commercial problems. In particular, I helped establish the Hooper
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Review , titled “An independent review of the UK postal services sector’,
(RLIT0000206)_in 2007, which, amongst other things, recommended the
separation of POL from its parent RMG in late 2008.
8. I was Chief Executive of ShEx until the end of January 2013, a period of time which
saw an increase in the number of organisations for which ShEx acted as
shareholder and a variety of transactions, including significant sales of and
investments in assets within the ShEx portfolio. I was the Government's
representative on the Board of the London Organising Committee of the Olympic
Games (“LOCOG”) from 2007 to 2013, and a member of LOCOG’s Audit and Risk
Committee.
9. In February 2013 I was appointed the Permanent Secretary of the Department of
Energy and Climate Change, a role I performed until April 2016, when I was
appointed the Permanent Secretary of the Ministry of Defence. I continued in that
role until January 2021, when I was appointed National Security Adviser. I stepped
down in September 2022 and was the Prime Minister's Adviser on Defence
Industrial Strategy until December 2022.
10. Since leaving Government at the end of 2022, I have taken on the following roles:
a. Chair of Rolls Royce SMR (a civil nuclear business);
b. Governor of the Wellcome Trust (a charity);
c. Visiting Fellow at Columbia University’s School of International and Public
Affairs; and
d. Senior Adviser at Lazard Ltd (an investment bank).
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Government, the Shareholder Executive and Arm’s Length Bodies
Government responsibility for RAG/POL
1
.When I joined ShEx, POL was a wholly owned subsidiary of RMG. RMG in turn
was wholly owned at that time by Government (through Royal Mail Holdings Ltd
(“RMH”)). Departmental responsibility for RMG lay with the Department for Trade
and Industry (“DTI”) (which, together with its successor Departments, the
Department for Business, Enterprise and Regulatory Reform (“BERR”) and the
Department for Business, Innovation and Skills (“BIS”), I will refer to as “the
Department”). The Secretary of State held a “special share” in RMH which
conferred certain rights on Government over the activities of RMH and its
subsidiaries. (Further information on the structure and ownership of RMG and POL
in this period is set out in the First Witness Statement of Charles Donald dated 6
February 2024 (“Donald 1”), which I have read and which I consider accurately
reflects the ownership and governance arrangements that were in place for the
period of time in which I worked at ShEx) (WITN10770100).
12. The Secretary of State determined the desired policy outcomes for RMG and POL.
The Secretary of State would effectively charge Junior Ministers and senior officials
within the Department with delivering those outcomes, while remaining at all times
accountable to Parliament for the effective implementation by the Department of
Government policy for RMG and POL. This arrangement was typical of the
approach taken at that time to assets in which Government was a shareholder,
though the department in which responsibility lay varied depending on the nature
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of the asset; for example, the Secretary of State for Culture, Media and Sport was
responsible for Channel 4.
13.Also accountable to Parliament for RMG and POL was the Accounting Officer
(“AO”). AOs were appointed by HM Treasury and in a Ministerial Department, the
role was always taken by the Permanent Secretary. They were responsible for
ensuring the proper management of public funds in accordance with the relevant
rules and guidance (principally Managing Public Money (“MPM”)). I note that there
have been several iterations of MPM since its inception; in this statement, I refer
for the most part to the 2007 version (RLIT0000205) that was in place for most of
my time at ShEx. In practice, the AO’s responsibilities were assessed through
regular reports performed by the National Audit Office and appearances before the
Public Accounts Committee.
14.In this way, accountability to Parliament for RMG and POL ran through both the
Secretary of State and the AO.
15.1 am asked to shed light on the questions being raised at ShEx Executive
Committee (“ExCo”) on 27 April 2010 about the consequences of Chief Executives
of HMG-owned assets being appointed as AOs for those assets (UKGI00016656).
Treasury guidance is that the Permanent Secretaries of central Government
Departments are Principal AOs, and that the CEOs of Trading Funds (a type of
Arm’s Length Body (“ALB”)) are also AOs, who would report to Parliament formally
through the relevant Principal AO. In practice, when it came to giving evidence in
front of the Public Accounts Committee, both would appear. It was possible for
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CEOs of other types of ALB to be AOs, though for the Public Corporations the AO
would remain the Permanent Secretary. This would have been the background to
the appointment of the Royal Mint’s CEO as an AO, which is what sparked the
discussion in ExCo on 27 April 2010. The Royal Mint was directly owned by the
Treasury and I suspect ExCo would have been debating whether a change in
approach was being considered by Treasury. During my tenure as Chief Executive,
the CEOs of RMG and POL were not appointed as AOs and these responsibilities
continued to sit with the Permanent Secretary of the Department.
16.1 am further asked about the extent to which changes to departmental and
ministerial portfolios in the period 1998-2013 affected the level or quality of
Government oversight of ShEx, POL and RMG. I confine my answer to the period
2005-2013 when I had direct knowledge of these matters. In general terms the
quality and extent of oversight improved over that period, but not because of either
ministerial or portfolio changes. I discuss the evolution of oversight throughout this
statement.
ShEx responsibility for RMG/POL
17.As set out in Donald 1 (WITN10770100), ShEx was established as part of the
Cabinet Office in 2003. In 2004, ShEx was transferred to the Department and was
charged with performing central Government functions in relation to a portfolio of
HMG-owned assets (which had previously been performed by the relevant
Government department). That portfolio included RMG, of which POL was a
subsidiary. ShEx’s principal purpose was to ensure that Government was an
effective and intelligent shareholder, working with the boards and management
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teams of HMG-owned businesses to ensure that they were being run in a way that
was commercially effective but that was also within the clear confines of the
Government's policy objectives.
18.In pursuit of that objective the model necessarily adopted by Government was that
of ALBs. ALB is a term that is used to describe a wide range of organisations that
are related in one way or another to Government. The definition given at page 57
in MPM (RLIT0000205) is “[non-governmental departmental bodies], companies in
which the department has a significant shareholding and other sponsored bodies”.
A number of corporate models fall into this definition, including trading funds and
statutory corporations, but it is the second of those descriptors — “companies in
which the department has a significant shareholding” — that is relevant to RMG and
its 100% subsidiary, POL.
19.1 explain below how the ALB model was employed generally and specifically in
respect of RMG and POL, including what this meant in terms of the matters that
were considered to be for RMG and POL and the matters that were for ShEx or
Government.
20.When I joined ShEx, Government policy was (and remained throughout my time
with the organisation) that, where public goods and services could be delivered by
appropriately regulated private owners with access to private capital and bringing
private sector disciplines, then that should be the course pursued. However, there
has always been a clear acknowledgement that some services provided by ALBs
could not be outsourced to the private sector. This might be because they touched
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upon issues of vital national interest (often security-related), or because their
operation was closely tied to Government policies, or because the asset in question
could not realistically provide a service that offered sufficient returns to make it
attractive to the private sector, or for a combination of these reasons. The
Government therefore retained a controlling interest in organisations providing
such services.
. Traditional departmental and civil service structures, rooted as they are in issues
of policy, are not the most effective ways of managing organisations owned by the
Government which are fundamentally commercial in nature. Instead, ALBs are
used to allow for a degree of distance from Government and freedom from civil
service structures, as set out in Chapter 7 of MPM (RLIT0000205). As explained
in MPM (at page 47), different forms of working partnerships, including the ALB
model, are utilised by public sector organisations in order to “deliver their objectives
more effectively than they could acting alone”. This was intended to create an
environment in which the suitably qualified and experienced specialists needed to
run these entities effectively could be recruited and retained by them.
To give anon-RMG/POL example, the Nuclear Decommissioning Authority (“NDA”)
could not be outsourced to the private sector due to the sensitivity of its work, the
enormous size of its liabilities and the impossibility of a private sector owner being
capable of shouldering this type of nuclear risk. However, the need for a highly
specialised and skilled workforce means that placing managerial and operational
responsibility for the NDA within a Government Department staffed by generalist
civil servants is clearly completely implausible. Instead, the NDA operates as an
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ALB (technically a non-departmental body created by the Energy Act 2004). It is
sponsored and funded by a Government department, but has more freedom in
terms of remuneration, recruitment and working culture than would be the case if
the usual civil service structures applied, and has much of the corporate apparatus
of a company. ShEx was responsible for managing the Government's shareholder
relationship with the NDA.
23.POL was an unusual organisation in that it clearly had its own status and identity
as an ALB, but was a wholly owned subsidiary of another ALB: RMG. As an ALB,
POL had a vital social role in maintaining branches in remote and rural locations,
providing Government services as well as postal services, and playing an important
role in financial inclusiveness. The network would always require significant
subsidy if it were to be maintained at the size Government policy dictated.
However, significant elements of POL were commercial, including the financial
services that it offered and the retail element of most Post Offices. As a company
it was best run by professional executives with relevant commercial experience,
allied to a clear understanding of the social role the Post Office was expected to
play.
24.POL was a 100% owned subsidiary of RMG. In normal circumstances there would
not have been any supplementary Government oversight of a subsidiary of a
Government-owned company; indeed, POL was the only subsidiary where this was
the case. This was a recognition of the clear and vital social function the POL
network was expected to perform. By way of example and contrast, GLS, a very
large and successful logistics business owned by RMG, had no separate oversight
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from Government. RMG, in turn, was expected to discharge its ownership
responsibilities towards POL, not only in a conventional corporate sense, but also
in a manner consistent with the Government's policy objectives. RMG itself,
meanwhile, was overseen by ShEx by reference to different objectives than those
in place for POL: it was expected to make a profit, within the confines of its
regulatory responsibilities. Although, as I describe below, the company faced
formidable difficulties, it was certainly possible to envisage it operating as a
privately owned entity, as a number of foreign mail services already were. That was
not the case with POL.
Policy vs Commercial Priorities
25.HMG's interest in its ALBs comprised two elements, referred to as the shareholder
function and the policy function. The shareholder function concerned matters that
would be of concern to any shareholder, whether state or private sector: company
governance, commercial strategy, profit and loss and so on. The policy function
was specific to HMG and concerned the desired policy outcome that the
responsible Government Department sought to achieve through the ALB.
26.In general, ShEx would oversee the shareholder function and usually the
Department (or another department if that was where the policy objectives sat)
would oversee the policy function, though in some cases this would sit with ShEx
instead. I understand that today UKGI does not have responsibility for oversight of
the implementation of policy objectives across HMG’s portfolio of assets. Things
were not so cut-and-dried in the early days of ShEx. For instance, postal services
regulation and RMG’s Universal Service Obligation were originally transferred to
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ShEx along with shareholding responsibilities, though they were moved to another
directorate of the Department during my tenure. By contrast, policy with respect to
POL did stay with ShEx.
27.A ShEx summary on POL from February 2012 illustrates the kind of POL policy
issues that were overseen by ShEx: network size, network access, key service
availability, the Government subsidy for the network, the delivery of POL’s
commercial strategy, and the potential mutualisation of POL (UKGI00018222). The
same document also sets out POL’s commercial objectives (also overseen by
ShEx), including strengthening POL’s Board, separating POL from RMG,
eradicating losses made by Crown Offices, achieving growth in Government
services income, and maximising profitable revenues from other areas, especially
financial services.
28.The Inquiry has asked me to comment on a passage in the minutes of the ShEx
Board meeting of 15 September 2010 (UKGI00001339). These record [§2.2]:
“Members commented that there may be situations where the Board disagrees
with policy decisions, and therefore ShEx’s involvement in some cases which
could compromise ShEx’s capability or affect its reputation. Stephen stated
that ShEx would always start from a commercial position but would overlay
policy priorities in order to get a settled and agreed position.”
29.1 discuss the role of the ShEx Board further below. Part of that role was to ensure
that ShEx maintained a commercial outlook in its dealings with both ALBs and
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Government departments, and to guard against a danger that the balance of
ShEx’s activities would tilt too far away from the interests of the taxpayer. To put it
in other terms, the Board here was seeking to ensure that priority given to the
shareholder function and the policy function remained in the correct proportion, a
concern that was particularly prevalent at the time of the meeting with the new
Coalition Government's emphasis on efficiencies. My response was intended to
reassure the Board that I was aware of the concern. The emphasis here was on a
“settled and agreed” approach that could be pursued by the ALB. The commercial
and policy positions had to be in appropriate balance, a balance that would be
different from situation to situation, and ShEx would consider both to get to the
settled and agreed position.
Independence of ALBs
30.All ALBs enjoy a degree of functional independence; indeed, that is typically the
main reason for setting them up. For commercial ALBs such as RMG and POL, it
was necessary and desirable to leave the running of the company to the executive
teams overseen by their Boards. This was done on the basis that they were in a
better position than the sponsoring Department or ShEx to make the decisions that
were right for the companies, subject to conformity with any overriding Government
policy for the ALB, and acting in a way that was financially and economically
sensible, and in accordance with principles of good governance (on which, see
below). As explained in guidance published by HM Treasury, the aim was to give
“appropriate levels of freedom to exercise commercial judgement, within
appropriate delegated authority arrangements that protect Departments”
(UKGI00043214).
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31. The types of decisions that were for ALBs to take rather than ShEx or Government
would include matters that are sometimes described as “operational” or
“contractual”. Although this is convenient as a shorthand, and accurately reflects
the way in which decisions were left to the management of the ALB, I am not sure
that this terminology always helps to distinguish between those matters in which
Government became involved and those in which it did not. It is not the case, for
example, that Government simply set the “strategy” for an asset and the
management of the asset operationalised that strategy. The Board and executive
team of a commercial ALB were central to developing that company’s strategic
aims, knowing, as they would, their markets, opportunities and cost bases by an
order of magnitude better than Government. The Government clearly had a role in
establishing what the policy goals were and monitoring the ALB’s operational
performance (as is discussed in more detail below). Further, while most contractual
matters would have been left to the Board and executive team, Government would
have been involved in some of the more major contracts, such as the appointment
and removal of senior figures (for example, the Chair of the Board) or major
Government contracts.
32.Horizon was, of course, a major Government contract worth hundreds of millions
of pounds and of great significance to POL’s business. As such, Government
necessarily would have had an important role in the procurement of that contract
(which preceded ShEx’s inception). However, matters concerning the day-to-day
running of Horizon — as a highly complex IT system — would have been left for POL
on the understanding that they would be dealt with by individuals within the
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business possessing the necessary technical expertise to do so, with appropriate
oversight from the POL Board. It would have been implausible for Government to
directly involve itself in such matters, or in the wider day-to-day operations of POL.
33. There were a number of ways in which Government, through ShEx, communicated
with and influenced the actions of commercial ALBs. The relevant Secretary of
State appointed, and could dismiss, Board members and the Board Chair. The
practice developed of sending a letter from the relevant Secretary of State (or
Permanent Secretary) to the Chair of an ALB containing instructions on the
Government's priorities for the asset. The Chair's letter was generally sent annually
and could be refreshed within the year if required. I would not have expected the
Chair of POL, as a subsidiary of RMG, to receive such letters and objectives for
both could have been contained in the same letter. However, I am aware that a
letter was sent to Alice Perkins in January 2012 following her appointment as Chair
of POL (UKGI00041966). This was shortly before separation and Ms Perkins had
been appointed with a view to the establishment of an independent Board, which
explains why a separate letter was sent at that time, and would continue to be sent.
Ministers and senior civil servants also had regular scheduled meetings with the
Chair, the CEO and other members of the senior management team to review and
discuss the asset's performance. Further meetings could be arranged to deal with
specific issues on an ad hoc basis, and the relevant Department could request
information or updates from the asset about those issues. As is discussed below,
ShEx monitored the performance of the company through quarterly and annual
reviews. Finally, Government could insist on taking a seat on the Board itself,
through the appointment of a Shareholder Non-Executive Director (“NED”), though
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this was very far from common practice in the early years of ShEx, as I discuss
below. I discuss the arrangements in respect of RMG and POL specifically in
paragraphs 57 to 62 below.
Prevailing Governance Codes
34.During my time as Chief Executive, ShEx’s dealings with commercial ALBs were
undertaken with regard to:
a) The Combined Code on Corporate Governance (“Combined Code”), now the
UK Corporate Governance Code (the current and previous iterations of the
Combined Code/Corporate Governance Code are available on the website of
the Institute of Chartered Accountants in England and Wales). As explained in
the 2007 ShEx Handbook (UKGI00044314), the Combined Code contains
general principles and more detailed provisions relating to the corporate
governance of listed companies. Recognising that it may not be suitable to use
a “one size fits all” model, ShEx expected assets to: (i) be compliant with the
Combined Code, unless there were specific reasons to deviate in individual
cases; (ii) fit the needs of the shareholder and the business; (iii) provide clarity
on roles and responsibilities; and (iv) be based on an ethos of informed dialogue
between all parties.
b) MPM. This sets out the main principles for dealing with resources used by public
sector organisations in the UK. As explained above, it contains guidance on,
among other things, the role of an AO and working partnerships such as ALBs.
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c) The Companies Act 2006 (the “Act”). The Act underpins company law in the UK
and has, since its commencement, applied to both RMG and POL (save to the
extent disapplied by, for example, the Postal Services Act 2011).
Comparison of Government companies with other types of company
35.1 am asked by the Inquiry to compare the governance of a publicly owned company
(such as RMG or POL) operating under the ALB model and a publicly listed
company. Some elements of ownership are the same: both companies will be
governed by a Board of Directors that will include a Chair, NEDs, a Senior
Independent Director (SID), and members of the executive team. The companies
will both be bound by the Act and other relevant law and regulations. The Board
will be bound by its fiduciary duties and will be expected to appoint key executives,
determine the strategic direction of the company, oversee its performance and
manage its risk. The executive team will be responsible for meeting the objectives
set by the Board and for the day-to-day running of the company. The Board is
entitled to expect accurate and full information to be provided to it by the executive
team in order to discharge its functions.
36.An institutional shareholder in a publicly listed company has considerably less
oversight and influence on governance than Government does in a commercial
ALB. An institutional shareholder will rely on their own analysis, as well as other
factors such as, for example, indexation, when deciding on whether to invest in a
company. Once it does so, it will largely expect the Board and executive team to
make appointments and run the company and will usually not take a seat on the
Board (save in the rare cases when institutional investors become activist
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shareholders). Its rights to information will be curtailed. If the institutional
shareholder is unhappy with the company’s performance or direction its solution is
to sell its shares and invest elsewhere. If enough shareholders take this course of
action, the company’s share price will go down and, possibly, pressure will be
brought on the strategy, management, or Board to change. Selling shares in this
way is not typically an option that is open to Government, unless its holding is in a
publicly listed company.
37.A closer comparison, though not perfect, is between Government as sole
shareholder in an ALB and private equity ownership of a company, as recognised
in the ShEx Handbook (UKGI00044314): ‘the government’s position as a
Significant (in most cases 100%) shareholder means that many features of the
private equity model are relevant to the management of government
shareholdings.”
38. The private equity owner will appoint the Chair and NEDs, and may include its own
officers in those roles. The Board members will be expected to appoint the key
executives and determine the company strategy, but will do so in close consultation
with the shareholder. It is a model in which the shareholder will have full control
over appointments and company strategy, including eventual exit. If the Board or
the executive team does not meet the shareholder's expectations, they can be
removed and replaced.
39.The ShEx model is closer to private equity ownership, but in attenuated form. It
had some of the same levers available to it, but they had to be operated more
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delicately. Although the position varied depending on the ALB, HMG would usually
be involved in the appointment of the Chairs of assets and might hold approval
rights over other Board members, but in general it would not appoint key
executives. Unlike private equity owners, and as discussed earlier, HMG would
usually have to set objectives that would have policy elements as well as economic
ones. A clear example would be the requirement placed on POL to maintain a size
of network which in unsubsidised form would be completely uneconomic.
. The distinction between governance of HMG-owned ALBs and other companies
(whether publicly listed or privately owned) is particularly pronounced when
considering the nature of the relationship between the shareholder and the senior
management teams. ShEx and the responsible department had to sustain and
manage a close, working relationship with the Chairs, Boards and executive teams
of its assets. This was not always easy. At the time when I was Chief Executive,
many senior executive teams were used to a culture in which they had a high
degree of autonomy in how they ran the companies, as they had become used to
a formerly very hands-off approach adopted by policy officials. They saw the
relationship with Government as being akin to that between a publicly listed
company and an institutional shareholder, not that between a company and its
100% owner, or sometimes seemed to feel that they had been appointed by a
Secretary of State to do a job and should be left alone to get on with it. As is
discussed below, there was considerable resistance in some ALBs to greater
involvement from ShEx, including RMG and POL, in particular with regard to the
appointment of Shareholder NEDs.
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41. Institutional investors in publicly listed companies do not have such a close working
relationship with the senior management of the companies in which they are
shareholders and so do not face such difficulties. Private equity owners will be
closely involved in the everyday management of their assets but enjoy
considerably more freedom of action than ShEx had. Many HMG-owned assets,
including POL and pre-privatisation RMG, are public institutions that combine a
commercial and a social element, involve a degree of political direction, are subject
to constraints on remuneration in line with Treasury guidance and attract a great
deal of media attention. Recruitment to the senior management of such
organisations is more challenging than for privately owned companies. It is not as
easy to replace members of the Board and it can be highly destabilising to do so.
For these reasons, ShEx had to approach its relationships with senior management
in ALBs carefully and diplomatically. This was particularly the case for RMG and
POL for the reasons I have described in the previous paragraph and will expand
upon below.
Governance within ShEx
42.ShEx was led by a Chief Executive, now CEO, whose role was to lead the
organisation, set its strategy, structure and resourcing requirements, give direction
on the biggest decisions faced in respect of assets and transactions, and play a
significant role in ShEx’s interaction with the Department. The Chief Executive was
a Director General level civil service appointment who reported to the Permanent
Secretary, and as such was expected to play a full part in the running of the
Department.
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ShEx Board
43.1n 2007 a non-Executive Chair of ShEx was appointed. The first holder of that post,
Philip Remnant (now Lord Remnant), was tasked with establishing an Advisory
Group, which he did by the end of that year. In his words, in a paper written in
August 2010 setting out his view of the Board’s terms of reference in light of the
experience of the previous three years (UKGI00041953), in 2009 the Advisory
Group “metamorphosed into a Board” principally because the Prime Minister
announced two new members of the “ShEx Board”. These were advisory rather
than fiduciary roles, and their purpose was to provide the Chief Executive and other
senior managers within ShEx with support and advice. The Chief Executive or CEO
continued to be appointed through normal civil service rules and reported to the
Permanent Secretary. The Chairs of the Board had no formal reporting line to
anyone, though clearly they would consult closely with senior members of the
Department and their performance was reviewed by the Permanent Secretary.
44.1 have read the paper written by Philip Remnant (UKGI00041953) and it reflects
how I remember the situation at the time. In particular, I agree with the following
observations:
“The very nature of ShEx, operating as we do within Government / the Civil
Service and as a group within a Department, means that our governing body
cannot have the same powers and responsibilities as a corporate board,
whether or not we choose to style that body a “Board” or an “Advisory Group”,
for instance, policy is decided by Ministers and our budget is set by the
Department, not in either case by the Board. On the other hand, the Board’s
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role goes well beyond - putting it baldly to emphasise a point - offering a few
words of advice which the Executive is free to take on board or ignore as it feels
fit.
Paragraph 7 of the existing Terms of Reference sets out the Board’s overall
remit: “The Board has an advisory role in relation to the work of the Shareholder
Executive as a whole. This will include setting strategic direction in the light of
Ministerial objectives, periodically reviewing the delivery of objectives as set out
in the Business Plan and considering any specific issues referred to it by the
Executive Committee.
This still holds true, but, more specifically, the Board should expect to:
whilst not responsible for policy formulation, give advice on the
operational implication and effectiveness of policy proposals having a
significant impact on ShEx’s work
provide independent support, guidance and challenge on the progress
and implementation of the business plan
ensure the sound financial management of ShEx in the context of the
business plan
review the progress and status of big projects, with particular focus on
value for money for the tax payer
be consulted on the cost/benefit analysis for all major initiatives
protect, promote and enhance ShEx’s reputation both within Whitehall
and in the wider business and financial community.”
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45.During my time as Chief Executive the majority of the members of the Board were
drawn from business, though there were also members with civil service,
particularly Treasury, experience. As I have explained above, part of the Board’s
role was to ensure that ShEx continued to take a suitably commercial approach
when striking the balance between the shareholder function and the policy function.
I found them an extremely helpful source of advice during my time in post.
ShEx Executive Committee
46.The ExCo was a body comprising the Chief Executive and senior Directors from
within ShEx. As set out in the Philip Remnant paper referred to above
(UKGI00041953):
“The Executive Committee is responsible for the day-to-day running of the
Shareholder Executive across the three strands of corporate finance, corporate
asset management and property. The Committee will regularly review progress
with meeting objectives as set out in the Business Plan. It will determine policies
and procedures for the Shareholder Executive within the framework of BIS
policies and the direction set by the Board.”
47.Examples of matters discussed by the ExCo include the deployment of resources
within ShEx, the adoption of new mandates and how to respond to spending cuts
or recruitment freezes.
48.Although ExCo was not primarily designed to discuss major strategic or policy
issues concerning individual assets, it did review a summary Risk Register of ShEx
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assets, which would record the top risks for core assets. It was not designed to
determine action with respect to each of these risks but was a means by which the
most senior officials in the group could keep an eye on any significant changes in
the known major risks the assets were running. Much fuller Risk Registers were
maintained by the relevant shareholder teams and would be discussed at the
regular asset reviews, and were captured in the associated traffic light analyses
(discussed further below). Towards the very end of my tenure as Chief Executive
(January 2013), we took the decision to increase the formality of risk appraisal at
Group level (i.e. ShEx level), despite the fact that the requirement to do so had
been dropped by the Department.
49. The Chief Executive did not require “approval” from either ExCo or the Board when
making decisions, but I looked upon running ShEx as a team effort and discussed
almost all major issues with senior colleagues in one forum or another.
ShEx’s Oversight Model
50.The methods and processes that ShEx adopted, through individual shareholder
teams responsible for particular assets such as RMG and POL, to monitor and
report on those assets in the portfolio evolved over time, as would be expected,
and will have continued to evolve. A system developed of Quarterly Reviews and
Annual Reviews, informed by standardised traffic light analyses. An example is at
(UKGI00017395). The reviews would be prepared by the relevant shareholder
teams overseen by the lead Director of that team and would be discussed at
meetings attended by the ShEx colleagues, often including at least one of the Chief
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Executive/CEO and the Deputy CEO, as well as other members of senior
management. The meetings at which the reviews were examined were lengthy and
detailed, and designed to subject the teams to a degree of challenge, as well as
make sure that senior management were sighted on performance and issues. The
shareholder teams also reported to me on an ad hoc basis as and when the need
arose; if something required my attention, we would not wait for a Quarterly or
Annual Review to discuss it.
5
-An important part of the Reviews was examination of the Risk Register. Risk
Registers are a necessary device within businesses and Government
departments. They are intended to identify the most significant risks to the
organisation and then score them by reference to their impact and probability using
standardised criteria. While I was Chief Executive of ShEx, there was a Top Level
Risk Register maintained by the Department, an ExCo Risk Register on key issues
relating to individual assets and Individual Team Registers covering individual
assets (including each of RMG and POL) in more detail. An example of one such
contribution is the register prepared by the Post Office Network Team on 20 June
2007 (UKGI00042173). It is a matter of judgement for those compiling the register
as to whether a risk is sufficiently significant to justify inclusion. As one goes higher
up the chain of accountability the question of whether a particular risk should be
escalated continually arises.
52.Risk Registers also contained information about mitigating actions for each risk, a
timeline for their resolution and who was responsible for the action to be taken.
Within a business, the Risk Register is typically owned by the Audit and Risk Sub-
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Committee of the Board (ShEx, as a directorate of a Government department, did
not, however, have a Risk and Assurance Committee until after I left the
organisation). As the 20 June 2007 Departmental Risk Register (UKGI00042173)
shows, it was the job of the Post Office Network Team to compile the POL Risk
Register within ShEx, relying on their analysis of the information that was provided
to them by POL, informed by further data from RMG, its parent company, and
officials’ own appreciation of the risks being run. The effectiveness of the Risk
Register is therefore largely dependent on the flow of information from the asset in
question (though certain risks of which the asset was not necessarily aware — for
instance, concerning Government processes or potential departmental decisions —
would also be included in the ShEx or Departmental registers).
53.Looking back now, with the benefit of hindsight and acknowledging that I have not
seen all of the evidence, it seems to me that the failure to identify and socialise the
risk posed by, first, errors in the Horizon system and, second, POL’s power to
prosecute sub-postmasters using Horizon data, was central to what followed. This
is so both in terms of the initial wrongful prosecutions and the subsequent delay in
acknowledgement and rectification. Those two risks should have appeared on the
Risk Registers of, in ascending order, POL, Royal Mail, ShEx and the Department.
54. The order is important. It was for those in POL, who were most closely associated
with the company’s work and practices, to identify the risk associated with them.
That should then be formalised through the Risk Register so that other concerned
bodies — not only RMG, ShEx and the Department, but also external auditors,
investigators and advisors — could form their own views about those risks and the
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actions to take in respect of them. It appears that information did not flow as it
should have done, so that those charged with overseeing the governance of POL,
starting with officers in POL itself, were unaware of the risk, or even in some
instances that POL was responsible for prosecuting sub-postmasters using
Horizon data. If a risk is not identified, it cannot be properly monitored, mitigated
and managed.
55.Clearly, Risk Registers were not the only forms of accountability and scrutiny ShEx
used. Where appropriate, the asset team would also raise specific issues with the
Ministers or the Permanent Secretary through submissions or meetings.
Submissions raise specific issues for Ministers to give decisions on or of which
they need to be made aware, and could be written by almost anyone in ShEx.
There was no set pattern for the creation of a submission. For matters of sufficient
importance, a submission would be seen and signed off by a member of the Senior
Civil Service. In the case of submissions relating to POL, I would have expected
this to have been done by the Deputy Director within the shareholder team (subject
to arrangements to cover circumstances where this could not be arranged in good
time). It would be open to those in the shareholder team to escalate the submission
to the Director or, if necessary, to me as Chief Executive. I might also be informed
about a sensitive submission if it was thought helpful to share that knowledge with
me. The question of when to escalate a submission in this way was a matter of
judgement, drawing on the experience and practice of those working in ShEx at
the relevant time.
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56.1 did not expect, nor did I want, all submissions to Ministers and the Permanent
Secretary to require my sign-off. A regular criticism of the civil service, both from
within and without, was that there were too many levels of sign-off required for
submissions, reducing clarity and introducing delay, as well disempowering more
junior staff. Both would have run counter to the practice increasingly encouraged
by both the Department and within ShEx. It would also have been impractical given
the volume of submissions being written and my wider departmental
responsibilities.
Oversight arrangements for RMG and POL in particular
57.For each of ShEx’s assets, there would be teams in place to oversee different
aspects of the asset's function. The RMG team was the largest of all such teams,
given the scale of the company and the challenges it presented. It was led by a
Director (the grade below Director-General), who was accountable to me as Chief
Executive. The Director was supported by two Deputy Directors. One Deputy
Director was responsible for oversight of Royal Mail (and increasingly the progress
of the Postal Services Bill through Parliament) and had a team of nine or ten civil
servants with a blend of civil service and private sector expertise dealing with the
various aspects of the business and preparing it for life as a privatised entity. The
other Deputy Director was responsible for oversight of POL. This was a smaller
team of five or six, and again had a blend of different experience within it, though
tending to a preponderance of civil service experience given the more prominent
social mission of POL. Within this team were the civil servants who provided advice
to Ministers on issues to do with the network and the sub-postmasters, including
responses to the Justice for Sub-Postmasters Alliance (“JFSA’).
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58.As I discuss in more detail below, my own focus on matters relating to RMG was
predominantly on the parent company, RMG, and increasingly on implementing the
conclusions of the Hooper Review of 2008.
59. I had very little personal role on issues specific to POL. As I have already
described, there was a separate team dealing with POL policy issues reporting
through the ShEx Director responsible for oversight of RMG. A dedicated and
refocused shareholder team was in place after separation and this is discussed
further below.
60.My knowledge of Horizon during the time in which I was involved with POL and
RMG related matters in ShEx was extremely limited: I understood that it was the
Post Office’s point-of-sale system and that it had been a complicated procurement
some years before, but I knew little beyond this. I do not recall the May 2009
Computer Weekly article (POL00041564) being brought to my attention during my
time at ShEx. Nor do I remember being made aware of complaints made by sub-
postmasters as to the integrity of the Horizon IT system.
6
. The Inquiry has asked separately about, first, how matters of POL’s strategy were
fed back to the Department by ShEx and, second, how matters of POL’s operations
were fed back to the Department by ShEx. I do not think that there was any
difference in practice between the two. If an “operational” matter was deemed to
be of sufficient importance that it required notification to or a decision from a
Minister, this would be done through the same routes (submissions and/or
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meetings) as would be done for a matter of “strategy”. It was, though, perhaps
more likely that strategic rather than operational matters would require the attention
of the most senior people in the Department. It was also the case that, particularly
in respect of the period before separation, reporting on RMG and POL was heavily
focused on financial performance (as reflected in ShEx’s reporting for this period,
including traffic light analyses and Quarterly/Annual Reviews) and ShEx did not
have a representative on the Board of RMG or POL, meaning that risks arising
from operational matters were less likely to appear in ShEx’s reporting for this
period.
62.An example of the type of information pack produced in this period is the RMG
Group Finance Director's Report of December 2007 (UKGI00041838). This would
have been provided by POL to the ShEx shareholder team. The key performance
indicators at the start of the document focused on figures relating to the
transformation programmes in place for RMG and POL, the share value, data
concerning productivity and personnel issues, and metrics measuring the quality
of service to customers. There followed several pages of detailed figures and data
on group results, segmental results, the profit and loss statement, revenue
streams, operations, cashflow, balance sheets, delivery data and measures
relating to personnel and customers. The section on risks was dominated by
RMG’s commercial and financial position, perhaps unsurprisingly given that this
was a report from the Finance Director.
The evolution of ShEx's oversight model
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63.During my time working in ShEx, the organisation grew and evolved considerably
from the approximately seven or eight individuals with whom I initially worked. It
was a new and innovative body within Government and once it had proved its value
it was quickly asked to take on more assets, including those resulting from
Government intervention during the global financial crisis of 2008. Generally, it was
the relevant Department that would suggest an asset should be brought within
ShEx's portfolio, though sometimes we, at ShEx, proactively identified HMG-
owned assets that we thought would benefit from ShEx oversight. Inevitably ShEx’s
approach and structures developed incrementally during this time.
64.In 2011 Anthony Odgers produced a paper for the ShEx Board entitled “Portfolio
Unit Development” (UKG100043224), which was an important waypoint in the
development of ShEx’s operating procedures. As is stated at the start of the paper,
Anthony had been recruited the previous October into the new role of Head of
Portfolio “with an objective to improve and move forward the performance regime
for the ShEx portfolio of companies.” The paper was the result of focused
conversations about our work in Anthony's first six months and how it could be
improved. At that time in ShEx’s development we were getting busier and we were
keen to develop more formal and consistent structures.
65.Anthony’s paper made a number of initial observations. The first of these was that
ShEx “does not have the level of resources necessary to give all our companies
the ideal level of attention.” I agreed with that observation, though I would note that
it is not unusual for any busy organisation to have this concern. Resource
pressures were at that point compounded by the recruitment freeze that the
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Government had introduced. Anthony's paper proceeded, correctly, on the basis
that it was not realistic to expect significant additional resource, meaning that ShEx
would need to manage what it had carefully. He also noted that we would need to
recruit more senior people if we were intending to place ShEx Directors on the
Boards of a number of ShEx’s larger assets.
66. Another of Anthony's observations was that ShEx “doesn’t always have the position
it needs to monitor and challenge effectively.” As Anthony went on to make clear,
this was principally directed to ShEx’s presence on the Boards of its assets:
“A Board seat, or at least an ability to attend Board meetings, is likely to be
important to understand the business in detail, to be able to point out the
government related issues to the Board as a whole, and to have the most
credibility with executive management. We do not sit on the Board of some of
our biggest portfolio companies (e.g. Royal Mail, Post Office, NDA).”
67.1 strongly supported Anthony's analysis and his proposed solution of taking seats
on the Boards of ShEx’s core assets. The extract above identifies the three main
reasons for doing so: to understand what was happening in the asset, to
communicate the Government's position to the asset and to maximise ShEx’s
credibility with the executive management. To my mind, the first of these was the
most important, not least as it emphasised the role of Government as the owner of
the asset, rather than its role as customer. I also agreed with Anthony's proposal
for the Shareholder NED to take a seat on the remuneration committee in order, in
his words, to “help drive the link between ownership, objectives and management.”
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This would be done by ensuring that the Government's preferred objectives were
suitably incentivised.
68. It had, in fact, long been my view that the Government (through ShEx) should be
taking seats on the Boards of its main assets and I thought it anomalous that it had
often not done so when it was the sole owner of these companies. However, there
was resistance to this proposition both within the Government and the assets in
the early years of ShEx’s existence. From the Government's side, this was due to
concerns that a Government Board member might be associated with politically
controversial decisions. From the asset's side, a Shareholder NED was often seen
as an unwelcome innovation that risked political or inexpert interference in
commercial decisions (as I reference at paragraph 40 above).
69.In my initial years in ShEx, my view that we should have been taking Board seats
did not prevail. For a company such as RMG, in which management had a deeply
engrained culture of independence from Government, it would have been
extremely difficult to even raise the issue. Had ShEx attempted to force the point,
I am entirely certain that there would have been extremely strong pushback, which
may well have become public, and would have resulted in increased conflict in an
already strained relationship. This would have been destabilising commercially and
politically and was certainly not what the Ministers responsible for RMG wanted,
particularly given the policy goal, after 2008, of privatisation. Had, for instance, the
Chair resigned, recruiting a replacement in the aftermath of such a public
disagreement would have been highly challenging. As I describe below, RMG’s
culture of independence carried over into POL. There was resistance from the
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Chair to the appointment of a Shareholder NED that continued well into 2011, when
plans for separation from RMG were being finalised. This was the case despite the
social/policy element of POL’s business model forming a greater proportion of the
whole than it did with RMG. However, by the time of separation the position of HUG
and ShEx had shifted in favour of representation on the Board. I think this was
because, as Anthony's paper showed, by May 2011 the problems associated with
not having a Board seat were becoming manifest. It also reflected how ShEx had
evolved from a relatively small organisation with shallow roots in Government to
an established body that could more readily develop and advance positions that it
considered to be important in managing HMG’s shareholder interest in ALBs.
70.Anthony’s central proposal was to develop two levels of ShEx involvement with
assets, “Core” and “Light Touch”. As Anthony explained:
“Core involvement for ShEx would usually include a seat on the board;
providing direct advice to Ministers; acting as the primary company (as opposed
to policy) driver within Government; and having the ability to incentivize
management — i.e. having the key input on management targets and any linked
remuneration” (UKGI00043224).
71.“Light touch” involvement would, as the name suggests, consist of ShEx adopting
a less direct and intense role.
72.An asset would be identified as Core or Light Touch depending on its size and
complexity. RMG and POL were Core assets on both counts and they were so
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identified in Anthony's paper. He also wrote that, as POL separated from RMG,
ShEx would take “a more significant direct role” in its governance. This was an
inevitable consequence of POL becoming an independent company that was
wholly owned by the Government, with ShEx monitoring the Government's
shareholding. That relationship would now be direct, rather than through RMG. It
also reflected the fact that the development of the independent structures for POL
represented an opportunity for ShEx to influence the governance model of the
newly independent company, for example by establishing from the outset that POL
would have an effective set of Board committees, and that a ShEx NED would sit
on the Board. I discuss later in this statement the further observations made in
Anthony’s paper about ShEx’s relationship with POL.
ShEx oversight of RMG and POL before separation
RMG
73.For the first year or two of my career with ShEx I had no involvement with RMG or
POL. In, I believe, late 2005, I was asked by the then Chief Executive, Richard
Gillingwater, to take on responsibility for RMG. At that time RMG was in extreme
corporate difficulties. There were near constant concerns about whether it would
remain a going concern, it had an unsustainable pension fund deficit and ongoing
industrial relations problems. The wider business environment was hostile, with a
clearly correct expectation that mail delivery services would be increasingly eroded
by new technologies. New delivery services were being established without Royal
Mail’s legacy problems and without the requirement to provide a universal postal
service to every part of the UK. The regulatory relationship was extremely poor. So
difficult was the company’s commercial condition, that Government was obliged to
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inject £2.1 billion additional capital into the business in 2006, a transaction for
which I was the responsible senior official.
74.\t was against this background that I provided advice in 2007 to the Secretary of
75.
76.
State recommending that a properly funded independent review into the future of
postal services sector be established. This was agreed and undertaken by Richard
Hooper, who published his Report in 2008 (‘Modernise or Decline: Policies to
maintain the universal postal service in the UK’) (RLIT0000206), and an update,
published in September 2010 (‘Saving the Royal Mail's universal postal service in
the digital age’). Its main recommendations were to:
a.
b.
Cc.
change the regulator from PostCom to OfCom;
absorb the pension fund of Royal Mail into the Government finances;
separate the Royal Mail from the Post Office;
take legislation through Parliament to enable the above, as well as give the
Government the legal ability to sell shares in the Royal Mail; and,
prepare for the privatisation of the Royal Mail (ultimately implemented after my
departure from ShEx).
Both the Labour Government until 2010 and the subsequent Coalition Government
under Prime Minister David Cameron adopted these recommendations as policy.
Relationships with RMG and POL
The relationship between ShEx and the management of RMG was, at points,
difficult in the first part of this period. In very large part, this was the natural product
of the extremely challenging circumstances the company was wrestling with and
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difficulties of reaching agreed courses of action to stabilise its finances and
modernise its operations. In addition, the senior management team, including the
then Chair (Allan Leighton) and Chief Executive (Adam Crozier) of RMG had been
used to a high degree of autonomy in the way that the company had been run.
There was, in my view, a degree of resentment about perceived interference from
ShEx which is reflected in my submission to the Secretary of State in December
2006 (UKGI00045962) where I state:
“The shareholder/Board relationship has been far from ideal... at various times
over the last three years the company has indulged in gaming and has tried to
apply pressure on the shareholder without taking due consideration of the fact
the shareholder is the Government and has to work within certain constraints
(albeit that we strive to act as a commercial shareholder). This has manifested
itself in the company refusing or being slow in providing information; threats of
resignations and insolvency; and the playing out of issues in the media. There
has been no shared vision of the ideal profile of members of the board ... There
has also been poor consultation over key executive appointments in letters,
POL and the finance function. In a word, "trust" is missing from the relationship.”
“More broadly, at one stage, Allan Leighton opposed our proposal for a series
of regular meetings between the shareholder and the NEDs.”
“It was also a requirement of the letter of 17th May that Royal Mail institute a
proper independent Board audit process, strongly resented by Allan
Leighton.”
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77.This dynamic is reflected in a Traffic Light analysis of RMG dated 14 April 2008, on
which I signed off as Director of the relevant team (UKGI00017395). The
Shareholder Relationship was classified as Red (the most concerning of the three
options). In response to the question, “Does the Chair respond to Shareholder’s
concerns”, the analysis records (§1.3):
“Yes and No. Often extreme. Recently some improvement. Chairman’s
response to [the Secretary of State’s] Chairman’s Letter acknowledges
importance of monitoring and reporting the company’s performance.”
78.The overall relationship was described as being “Satisfactory, just” (§1,2). The
same document contains comments that the “Relationship with the Chair can be
mixed” (§1), and that the “relationship with CEO has been strained but is improving”
(§3.2). These were, so far as I can recall, all aspects of the tension with ShEx that
I have described above. On their part, I suspect that the Chair and CEO felt that
they had been appointed to run the company, and to deal with its many interlocking
problems with a relatively free hand and that this was now being curtailed by the
imposition of the ShEx model. (The parlous state of RMG at that time is shown by
other entries in the traffic light analysis: Strategy, Financial Performance, and
Balance Sheet & Risk are all rated as Red.) On our part, there was a sense that
the management of a company wholly owned by the Government did not consider
itself sufficiently accountable and would not always share information with ShEx.
In that context, and for the reasons I have discussed above, the prospect of ShEx
taking a Board seat at RMG was remote.
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79.The tension between RMG and ShEx was not unique. There was a spectrum of
receptiveness among ShEx’s assets to its involvement and RMG was at the more
reluctant end.
80. The Traffic Light analysis (UKGI00017395) does show, however, that progress was
being made. As well as the indications to this effect in the quotations cited above,
the assessment of the implementation of the (ShEx) shareholder model was
assessed as Green. A shareholder relationship paper was in place (though it was
noted that it might need refreshing). A recent Chair's letter had been written and
there was a clear statement of the Government's objectives for the business.
Within ShEx the postal policy and shareholder functions had been split into
different teams and work was underway on improving monitoring. Monthly (and
timely) financial information was being provided. These were among the measures
that ShEx was seeking to implement across its assets to try to formalise and
regularise its relationships with them. As time went on, relationships with the
management and Board became noticeably less fraught as faces changed and the
shareholder model became more established and accepted.
POL
81.As I have stated, from the time at which I took over responsibility for RMG until the
time at which it was privatised, my focus was very much on RMG, its problems
and, later, the steps needed to give effect to the conclusions of the Hooper Review.
Because of this I had very little direct role in matters relating to POL.
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82.It was recognised that POL would have to be separated from RMG before
privatisation. The main issues concerning POL were inter-related policy questions:
How big was the Government subvention for POL? What size of branch network
did the Government wish to maintain? How would the Government's strategy for
the branch network be successfully executed? The team I describe at paragraph
27 was where this work was undertaken.
83. Neither this team nor anybody else in ShEx was in any way in charge of the conduct
of prosecutions by RMG prior to separation, or POL after it. It seems from the
documentary evidence that knowledge of the prosecutions was very limited. I was
not personally aware that RMG/POL had the power to conduct prosecutions, nor
was it a power that I would in any way have expected a company to have.
84.1 am asked about the extent to which ShEx oversaw contractual and personnel
management at POL prior to separation. Responsibility for these matters would
have rested with the executive team and the Board of POL, overseen by the RMG
Board. As such, ShEx had no role in overseeing contractual or personnel
management in POL at that time. The only exception of which I am aware was the
role played by ShEx in the appointment of the first independent Chair of POL, a
matter that I discuss further below.
85.1 am also asked about the extent to which ShEx oversaw POL’s investigation and
response to allegations made by sub-postmasters concerning the reliability of the
Horizon IT scheme. I do not recall being made aware of these complaints at the
time. From the papers I have seen when preparing this statement, it can be seen
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86.
87.
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that some concerns began to be raised with the Department by Parliamentarians
in 2009. On 13 October 2009, Alan Cook, then the Managing Director of POL, wrote
to Brooks Newmark MP in response to a Parliamentary Question Mr Newmark had
put to the Minister of State at BIS about reports of errors in the Horizon IT scheme.
Mr Cook explained that he had been asked to reply directly, presumably on the
basis that this was seen as an operational matter for POL rather than a policy
matter for the Minister (UKGI00000028).
A similar approach was taken to later Parliamentary Questions, for example in a
draft answer prepared for Ed Davey MP, then the Parliamentary Under Secretary
of State for Employment Relations and Postal Affairs, in response to a series of
questions asked by Michael Weir MP in October 2011 (UKGI00014000). Ministers
and officials would have expected the Managing Director or CEO of POL to have
been in a better position to provide the relevant information and would have
anticipated that a full and accurate answer would be provided to Parliamentarians.
Mr Davey told Mr Weir that a copy of the letter sent to him would be placed in the
House of Commons Library, so that it would be available to other Members. The
draft answer was prepared by an official within the ShEx POL team and, in line with
the processes I have set out above, it was approved by the Deputy Director in
charge of that team. I would not expect the ShEx Chief Executive to have been
involved in this process for the reasons I have given above at paragraph 55.
In addition to Parliamentary Questions, I can see from the papers provided to me
that Mr Davey was scheduled to meet with Alan Bates of the JFSA in October 2010
in response to letters that Mr Bates had written. It appears from the
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correspondence that Mr Davey had initially declined to meet Mr Bates, before
reconsidering in light of further correspondence. The briefing prepared for the
Minister ahead of this meeting reiterated the position that Horizon was then
considered to be an operational matter for POL in line with the ALB model
(UKGI00000062). I have no recollection of being involved in the production of this
submission and advice or of seeing it at the time, and I would not have expected
to have been involved or copied in for the reasons I have described. It would have
been signed off by a member of the Senior Civil Service (probably the Deputy
Director) in the way described above, and it was open to the Shareholder Team to
raise the submission with the Director or with me if they thought that necessary. I
was not due to attend the meeting, where the Minister was to be accompanied by
the member of the ShEx POL Shareholder Team who had prepared the briefing,
Mike Whitehead. I am confident that Mike would have presented the Minister with
an accurate representation of the facts as he understood them and relayed the
advice of the ShEx POL team based on those facts. I did not work closely with Mike
in my role as Chief Executive, but knew him well and had a great deal of confidence
in him; I considered him to be a conscientious, diligent, sensible and experienced
civil servant, and I have seen nothing in the documents provided by the Inquiry that
would change my views on this.
.I do not know what steps Mike took to obtain and interrogate information provided
by POL to him, though he seems to have asked the main sub-postmasters’ trade
union, the National Federation of Sub-Postmasters (“NFSP”) about it, and been
told their view that there should be no lack of confidence in the Horizon system.
Mike was in regular contact with the NFSP and so it would not surprise me if he
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had spoken to them about Horizon. He was not, nor could he have been expected
to be, an expert on POL’s IT system. Any official in his position would have been
entitled to expect POL to provide a truthful answer to the questions posed about
Horizon. There had to be a degree of trust between ShEx and those who had been
appointed to the job of running an ALB.
89. Based on the papers that I have seen to date, concerns about the Horizon system
were not escalated on to ShEx’s Risk Register entry for POL prior to separation, or
indeed at any point during my time as Chief Executive. Nor do they appear to have
been discussed at the ShEx Board or in any POL review meetings that I attended.
This accords with my memory. As I have said earlier in this statement, whether an
issue was escalated in these ways was a matter of judgement for those preparing
the risk registers and reviews, in this case the POL Shareholder Team. With
hindsight it is clear that it would have been better to have escalated the concerns
about Horizon, but it seems that at the time the officials in question, having sought
assurances from POL and the NFSP, did not perceive fully the possibility of failings
of the system or the magnitude of the issue.
90.1 do not know the extent to which, if at all, ShEx oversaw the pilot or rollout of
Horizon Online. From what I understand of this system, this sounds like an
operational matter that would clearly have been the responsibility of the executive
team of POL, overseen by the Boards of POL and RMG, but I do not know whether
issues concerning Horizon Online were escalated to ShEx or the Department at
the time. I was not directly involved in this matter, nor would I have expected to
have been involved. I would only have expected issues concerning Horizon Online
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to have been escalated to ShEx or the Department if they were considered by
RMG/POL to be sufficiently serious. As I have noted above, in the pre-separation
period, given the financial focus of reporting prior to POL’s separation from RMG
and the lack of a ShEx seat on the Board, it was less likely that operational matters
would have been brought to the attention of ShEx or the Department.
Developing POL’s Governance Model
91.In terms of wider governance, Anthony Odger’s paper for the ShEx Board meeting
on 5 May 2011 (UKGI00043224) set out the position of ShEx’s relationship with
POL at that time and the approach that he proposed to take, which was in line with
his wider proposals for the evolution of ShEx’s shareholder role. On the existing
situation, Anthony wrote that:
“POL is a subsidiary of Royal Mail Postal Services (RMPS). It is
heavily subsidised by HMG, but overall policy objectives are unclear
other than a requirement to maintain a national work of over 11,500
branches and to avoid a post office closure programme. POL does
provide services to a number of government departments but often
finds itself undercut by competitors who are able to look at the
government services on a marginal cost basis. There is a significant
change programme to be undertaken — bringing down the costs of
the large Crown post offices, and changing the relationship with the
franchised post offices move more from fixed to commission based
pay. HMG has committed that POL will remain in Government
ownership and may be mutualised.
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ShEx has no Board seat (on either POL or RMPS) and the
management information provided to ShEx doesn’t always provide
us (or, we suspect the company) with the early warning mechanism
to understand where financial problems are developing.”
92. Anthony went on to explain ShEx’s proposed new approach:
“As POL disengages from RMPS, we would look to take a more
active role, and have already agreed with minister and RMPS to
take a Board seat once the business separates from Royal Mail. We
have also agreed with the Chair of RMPS that we will jointly select
a new Chair for POL.
As part of our increased focus, we will look to help the company and
policy holder within BIS define what the policy objectives are with
greater clarity and we are developing a proposal to [Other
Government Departments] for an umbrella agreement with UK
government departments that seeks to avoid the situation where
individual government departments are incentivised to reduce their
individual costs — only for a larger cost to be borne by the rest of
Government to support the network.
We will also work to improve the quality of management information
on, for example, contracts coming up for renewal, on cost
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benchmarking and on a set of metrics to understand if the change
programme is going to plan. We have agreed with the current
finance director of POL to review the information the Board gets to
allow us a better ‘dashboard’ of indicators, and will use the arrival of
a new finance director within the next 3 months to make sure we
(and the Board) have the right level of information.”
93.1 agreed both with Anthony's analysis of the existing situation and with his
proposals for the future. The establishment of POL as an independent company
allowed ShEx an opportunity to reshape the shareholder's role in its governance.
As Anthony had indicated, the first independent Chair, Alice Perkins, was jointly
appointed by RMG and the Secretary of State.
94.The appointment of a Shareholder NED was met with resistance from the new
Chair, despite what Anthony understood to be RMG’s agreement. A submission
from the ShEx Post Office Network Team to Ed Davey dated 24 October 2011
(UKGI00042604) that I have seen while preparing this statement indicate that Ed
Davey and Vince Cable decided in spring 2011 that a Shareholder NED would be
appointed. However, when Alice Perkins met the Permanent Secretary in
September 2011 in the first of a series of meetings she undertook with senior
figures in the Department, she indicated that she had some concerns. These were:
first, that ShEx joining the Board was inconsistent with the policy of future
mutualisation, where the relationship between POL and Government would be
purely contractual; second, that it would “in some way prevent Government
insulation from the impact of operational decisions”, and third, that “one Board
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member had indicated that they would be reluctant to serve on a Board where a
ShEx appointee was also a director” (UKGI00042604).
95.Those concerns were relayed to Ed Davey, but he reiterated his “strong feeling”
that ShEx should take a Board seat. The papers show that I “spoke to Alice in
advance of her meeting with [the Secretary of State, Vince Cable] to pass on [Ed
Davey’s] views.” I do not now recall this meeting, but I have no reason to think that
this record is incorrect. Subsequently, the Secretary of State resolved the situation
by writing to the Chair on 25 October 2011 to confirm his initial decision that a
Shareholder NED would be appointed (UKGI00042604). In that letter he wrote that:
“This practice embeds constructive, candid and open
relationships between the Shareholder Executive and the boards
of its portfolio businesses, and the vast majority of portfolio
business now have a_ Shareholder Executive board
representative. I firmly believe that the already extremely positive
relationship that exists between Post Office management and the
Shareholder Executive team would therefore be further
enhanced by this move. Importantly, such an appointment would
also ensure necessary Government accountability for the
investment it is making in the business over the spending review
period.
! would also like to reassure you that any Shareholder Executive
appointee would be subject to the full range of legal duties
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applicable to other directors. So there would be no risk that such
an appointment would lead to any diminution of the arm’s length
relationship between Government and the business.”
96. This exchange shows how deeply embedded the reluctance to the appointment of
Shareholder NEDs was at POL even in the second half of 2011. The Secretary of
State’s reply reflected the need to explain why the decision had been made to take
a seat on the Board while assuaging fears that this would undermine the
independence of the company and the ALB model. Susannah Storey was
subsequently appointed but, as I understand it, following discussion with the Board
she did not share Board papers with the ShEx POL team out of concern that this
would create a conflict of interest or otherwise undermine the independence of
Board discussions. I do not recall being aware of this arrangement at the time when
I was Chief Executive.
ShEx oversight of POL after separation
97. As I have stated, the separation of POL from RMG was regarded by Government
as an opportunity to reset the relationship with a now directly owned POL and to
introduce the governance that was appropriate for an independent company rather
than a subsidiary, with appropriate Board members and committee structures. This
was reflected in the Chair's letter, which was sent to Alice Perkins by the Secretary
of State, Vince Cable, on 11 January 2012 (UKGI00041966). The letter also set
out the Department's wider interests and priorities in respect of POL.
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98.In my role as Chief Executive, I had limited involvement in POL’s separation from
RMG. The governance arrangements and ShEx’s performance of the shareholder
role post-separation are set out in Donald 1 (WITN10770100). In brief, ShEx’s
shareholder role in respect of POL was performed in two ways: first, via a dedicated
Shareholder Team within ShEx; and second, via the appointment of a new
Shareholder NED to the POL Board (who initially was not part of the Shareholder
Team, but became head of the Shareholder Team in March 2014, after I had left
ShEx). The responsibilities of and types of information provided to the Shareholder
Team and the Shareholder NED are described in Donald 1 (paragraphs 26 to 32).
99.In the months that followed separation, and Susannah’s appointment as
Shareholder NED, there seemed to be a positive working relationship between
ShEx and the Board. The traffic light analysis that formed part of the August 2012
Quarterly Review recorded that there was a “good and constructive relationship
with the new Chair’ and a “strong relationship” with the CEO (UKGI00001439). The
NEDs were assessed to be challenging management. It was thought that there had
been a “generally strong application of the shareholder modef’, although the policy
and shareholder roles continued to be combined. Some reservations were
expressed about the quality of the management team. While they had a strong
record of defending revenues and managing costs, it was not known whether they
had the right “skillsets / capabilities” to achieve the transformational strategy that
the business model required.
100. In this context, the traffic light analysis recorded that: “ShEx are working closely
with management to monitor the performance of the business, and provide support
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where appropriate/possible.” I am asked what work ShEx were carrying out in this
respect. I cannot now recall the specifics, and I can see from the minutes of the
meeting of 13 August 2012 at which the Quarterly Review was discussed that I was
not in attendance (though the Deputy CEO, Mark Russell, was) (UKGI00001448).
I suspect, though, that this was a reference to ShEx taking the opportunity to
influence the direction of the newly separated POL to better align it with the
interests of its stakeholders and in particular with HMG’s policy objectives.
Although I do not know what the author of this document meant by the phrase, the
standard ways of doing this would be to work with the company on the contents of
board packs (which guided the discussions and focus of the Board) and the
selection and presentation of key performance indicators (“KPIs”). I can see from
an earlier section of the document (UKGI00001439) that ShEx was working with
management to ensure that POL had a “credible plan aligned to the needs of the
Spending Review and State Aid processes’, in other words a strategy that would
reduce the size of the Government subsidy and comply with State Aid rules in the
context of tight financial settlements across Government. The paper also recorded
that ShEx had been working with management to develop a series of KPI
dashboards to provide accessible data about its performance in key areas. Finally,
the paper included reference to ShEx engaging with POL and the POL Stakeholder
Forum on the initial stages of work towards the mutualisation, which was emerging
as HMG’s preferred approach for future ownership.
101. Having reviewed the minutes of the 13 August 2012 meeting I can see that
Susannah had reported that she was “gaining traction with other directors and that
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the board is generally running welf (UKGI00001448). This would have been
welcome news.
102. Much of the analysis contained in the Quarterly Review was echoed in the
report for the Annual Review, dated December 2012, where it was noted that
concerns were emerging about some areas of POL’s future strategy and the
capabilities of the management team to navigate the challenging period that lay
ahead (UKGI00017385).
103. The August 2012 Quarterly Review did not mention the instruction of Second
Sight to carry out an investigation into Horizon and I do not remember being told
about this at that time, or indeed at any point before I left ShEx at the start of 2013.
However, I can see from papers provided to me now (which I do not think I was
copied into at the time) that Ed Davey’s successor as Minister, Norman Lamb MP,
was informed of the instruction of Second Sight in a briefing ahead of a meeting
with Alan Bates in June 2012 (UKGI00014165). In a later submission Mr Lamb’s
successor, Jo Swinson MP, was also briefed on the concerns raised about Horizon
and the Second Sight inquiry in a note sent to her Private Office on 4 October 2012
(UKGI00001457) (UKGI00001458).
104. I have been asked about whether there was a particular strategy adopted by
ShEx and the Department in responding to freedom of information requests
relevant to the Horizon IT system. While in general I was not involved in freedom
of information requests at ShEx, I am confident that there would not have been
such a strategy and that each request would have been considered on its own
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terms. The Inquiry has referred me to a submission to the Minister dated 23
October 2012 about one such request, which was seemingly made to the
Department rather than ShEx specifically. I can see that I was not included on the
distribution list (UKGI00018248), nor would I have expected to have been included.
It seems to me, from reading this document now, that this is an example of the
Department considering and responding to the request on its merits. The advice
given to the Minister was that 28 of the 38 items sought should be provided and
relevant statutory exemptions should be applied in respect of the other 10.
Hindsight
105. 1am asked whether there is anything that I would have handled differently with
hindsight. The most obvious thing that falls into this category is the decision,
whether made consciously or not, to retain the POL policy function within ShEx
rather than move it to another part of the Department as we did with postal services
policy. Would this have meant that the officials with sight of the JFSA
correspondence would have handled the issue differently? It is impossible to say
with any certainty, but in truth, my feeling is that it would not have made any
difference. From the papers and submissions that I have now seen, it seems to me
that officials’ response to the JFSA was responsible and measured. The difficulty
with that advice was the reliance that it placed on assurances from POL and, toa
lesser extent, the NFSP. But officials had no particular reason to doubt that the
answers that they had been given were not truthful and complete, and were
assured that they were supported by internal POL investigations. I am uncertain
that, were the POL policy team to have sat in another part of the Department, i.e.
outside ShEx, it would have led to any other outcome.
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106. It would clearly have been vastly preferable if Horizon and POL’s prosecutorial
function had appeared on internal Risk Registers in ShEx. Indeed, the collective
lack of awareness that RMG/POL were mounting their own prosecutions now
strikes me as a very significant oversight indeed. Within ShEx it would have
allowed for a senior discussion of relevant matters that did not happen (though, of
course, successive Postal Services Ministers were sighted on the JFSA
correspondence and received advice on it). From what I have seen, this seems to
be principally (but not solely) the result of the absence of Horizon and prosecutions
from risk registers in POL or RMG. I do not know the reason behind those
organisations’ own failure to realise the problems the system, combined with
behaviours on the ground with prosecutions of sub-postmasters, were causing.
There could be no managerial escalation of a problem that was not in itself
recognised at the lower level. In part, though, there was a failure, during my tenure
at least, to place the issue on our asset risk register given the JFSA was writing to
the Department from 2010 onwards. This I ascribe to the reasons I give in the
paragraph above: knowledge of the integrity or otherwise of Horizon was derived
from POL, and clearly a very imperfect impression of the system offered and
accepted. Information, which it would have been perfectly natural to rely upon, was
wrong.
Final reflections
107. Faced with a miscarriage of justice on the scale of the prosecutions of the sub-
postmasters over many years, and the harrowing and unjustified hardship that they
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caused, it is, of course, wholly right to examine the causes of the disaster and to
make such changes that are necessary so that it does not happen again.
108. With that said, I confine my final reflections to governance, which is the main
subject of my witness statement. In particular, I do not believe that it would be right
to abandon either the model of the ALB or that of UKGI (or ShEx as was).
109. ALBs are an entirely necessary construct in order to attract the right technical
and commercial expertise to work for vital national enterprises. It is not plausible
that the products and services they are expected to provide could be provided if
they were to sit fully within a Whitehall department, closely run by ministers and
officials lacking the right experience and skills to make sense of often highly
complex technical businesses. I have earlier mentioned the NDAin this regard, but
The Met Office, Ordnance Survey, the Hydrographic Office and many others would
be equally good examples.
110. In its turn, some unit — currently UKGI — capable of understanding and
overseeing those ALBs which are essentially businesses in many fundamental
aspects, is necessary for effective Government ownership. The ability to attract
suitably qualified and expert professionals to discharge that function is, in my view,
dependent on maintaining a distinct centre of excellence within Government, and
would be severely impaired by reverting to a position where predominantly policy-
focused civil servants were overseeing complex commercial enterprises, outside
an organisation providing critical mass.
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111. Notwithstanding the multiple failures of governance, starting at ground level in
POL, that have been a major contributory factor in the perpetuation of the Horizon
scandal, I do not believe that an inference should be drawn that the models of
corporate governance employed by ShEx or UKGI on behalf of the Secretary of
State as owner of the Royal Mail and, after 2012, POL were flawed in conception.
Modern codes of corporate governance are fit for purpose and should drive proper
and honest company behaviours when fully implemented.
112. Evolving a more effective Government ownership lies, therefore, not in a
complete redesign of governance arrangements or ownership structures, but in a
more effective implementation of the highest standards of existing corporate
governance, with systems and practices that promulgate and enforce those
standards right through the organisation. Its operations need to be fully understood
by the Board and executive, its risks need to be identified accurately and honestly,
its issues and problems need to be escalated appropriately, and the shareholder
needs to be properly apprised of the most significant issues and developments in
the company. This is particularly the case where there are complex policy issues
at play, as well as commercial ones. The evidence that this Inquiry has heard of
the devastating effects on the lives of so many blameless people is, at least in part,
witness to the human cost of governance failure.
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Statement of Truth
I believe the content of this statement to be true.
ua GRO
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Index to First Witness Statement of SIR STEPHEN LOVEGROVE
No.
Document
Description
Inquiry URN
Inquiry
Control
Number
Modernise or
Decline: Policies to
maintain the
universal postal
service in the
United Kingdom -
An independent
review of the UK
postal services
sector
RLITO000206
RLITO000206
First Witness
Statement of
Charles Hunter
Donald
WITN10770100
WITN10770100
Managing Public
Money — October
2007
RLIT0000205
RLIT0000205
Meeting minutes:
minutes of ShEx
Executive
Committee Meeting
held on 27 April
2010
UKGI00016656
UKGI011468-
001
ShEx POL Review
— February 2012
UKG100018222
UKGI028229-
001
HM Government
Shareholder
Executive Board
Meeting Minutes for
15 September 2010
UKG 100001339
UKG1012153-
001
HM Treasury —
Consolidated
Budgeting
Guidance: 2023-
2024
UKGI00043214
UKGI00043214
Letter from Vince
Cable to Alice
Perkins regarding
Post Office Ltd
dated 11 January
2012
UKG1I00041966
UKGI050861 -
001
Report re: UKGI
Section 3 — Part 5 —
Corporate
Governance
UKGI00044314
UKGI053038-
001
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10.
Report re: ShEx
Board's Remit -
concerning Board's
terms of reference
UKG100041953
UKG1I050848-
001
11.
Shareholder
Executive Portfolio
Monitoring: Traffic
Lights
UKGI00017395
UKGI027402-
001
12.
Department of
Trade and Industry
spreadsheet re: DTI
Risk Register
UKGI00042173
UKGI051068-
001
13.
Bankruptcy,
prosecution and
disrupted
livelihoods -
Postmasters _ tell
their story;
reported by
Rebecca Thomson
POL00041564
POL-0038046
14.
RMG Group
Finance Director's
Report of
December 2007
UKGI00041838
UKGI050733-
001
15.
Protect - Policy and
Management -
ShEx Board
Portfolio Unit
Development
UKGI00043224
UKGI052835-
001
16.
Submission to
Secretary of State
dated 6 December
2006 titled Royal
Mail Board
composition: Non-
Executive
Directors,
recommendation on
the refresh
UKGI00045962
UKGI056927-
001
17.
Letter from Alan
Cook to Brooks
Newmark MP
concerning PQ
asked about errors
in
Horizon system
UKG100000028
VIS00000989
18.
House of
Commons
Parliamentary
Question:
UKGI00014000
UKG1024793-
001
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2010/7392-95
Question
from: Michael Weir
Minister answering:
Edward Davey re:
prosecutions and
investigations of
postmasters
instigated by Post
Office Ltd
19.
Briefing/Update for
Edward Davey
ahead of meeting
with Alan Bates
(JFSA)
UKGI00000062
VIS00001023
20.
Meeting with Alice
Perkins, Chair -
Post Office Ltd
12:45-13:30
Thursday 27
October 2011
UKGI00042604
UKGI051499-
001
21.
Shareholder
Executive HM
Government
PowerPoint: POL-
Quarterly Review
August 2012
UKGI00001439
UKG1012253-
001
22.
ShEx POL
Quarterly Review —
13 August 2012
UKGI00001448
UKGI012262-
001
23.
ShEx Annual
Review of POL,
dated December
2012
UKGI00017385
UKG1I027392-
001
24.
Agenda for
meeting with Alan
Bates to discuss
the JFSA’s claims
its members are
victims of endemic
flaws in POL’s
Horizon system
dated 27 June
2012
UKGI00014165
UKGI024958-
001
25.
Submission from
Mike Whitehead to
Swinson MPST, cc
Will Gibson and
Peter Batten re:
POL Horizon
UKGI00001457
UKG1I012271-
001
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System. Dated 4
October 2012
26.
Note prepared by
BIS summarising
the position on
Horizon IT issues.
Dated October
2012
UKGI00001458
UKGI012272-
001
27.
Submission from
Mike Whitehead to
Jo Swinson re
Freedom of
information
request 12/1362:
proposed Section
36 exemption
regarding
Ministerial briefing
dated 23 October
2012.
UKGI00018248
VIS00011647
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