Governance questions for the Post Office Horizon Inquiry
A couple of weeks ago, Sir Vince Cable was interviewed about the Post Office scandal. Cable was Business Secretary from 2010 to 2015, with overall political responsibility for the Post Office.
Of course, justice demands that the victims should be compensated and absolved. But to say that individual accountability is not of great importance is disingenuous to say the least. Without accountability, especially of the Board, there will be little trust in the system going forward, and no confidence that the lessons of this scandal have been learned.
Sir Wyn Williams’ statutory Inquiry into the Post Office Horizon scandal is now in its third year of operation, and will not complete its work until later this year. As well as representing a monumental miscarriage of justice, the scandal may well turn out to be the most significant failure of governance in recent decades.
The inquiry has yet to focus on governance and the role of the Post Office Board. The earlier phases have been about the impact on victims, compensation and the shortcomings of the Horizon IT system. Phase 6 of the enquiry, due to begin in the Spring/Summer, will turn to governance. This phase is entitled: “Governance: monitoring of Horizon, contractual arrangements, internal and external audit, technical competence, stakeholder engagement, oversight and whistleblowing”.
The role of the Board is not explicitly mentioned in the above description. This is a surprising omission as the Board of Directors is the central feature of any governance framework. As important as other aspects of governance may be, it is essential that the Board dimension is not ignored or given insufficient attention by the Inquiry.
Despite our imperfect knowledge of the detail, there are some general observations that can be made about the Post Office’s governance. An obvious one is that it was too complex.
Post Office Limited was (and is) a state-owned private limited company. Over the years, there has existed a complex chain of accountability between external suppliers, employees, senior management, the Board, the shareholder representative of the government (currently UK Government Investments, and prior to 2016, the Shareholder Executive), civil servants at the sponsoring government department, ministers and regulators. Before separation from Royal Mail in 2012, the Post Office was regulated by Postcomm, and since 2013 it has been at least partly regulated by the Financial Conduct Authority.
A potential risk of this kind of governance complexity is that no one body or individual feels accountable or responsible. Everyone agrees that what happened was terrible. But as the scandal was playing out, no-one presumably felt that it was their job to address the issues. It was somebody else’s problem. It is easy to imagine that such a diffusion of responsibility played a role at various stages of this debacle.
Second, the problems that the Post Office had with Fujitsu, the supplier of the Horizon IT system, are symptomatic of long-standing problems in the governance of public sector supplier relationships. Only two weeks ago, Gareth Davies, the head of the National Audit Office, made a speech in Parliament in which he said “Our work on HS2 and the New Hospital Programme suggests that for the biggest projects, Whitehall has a governance problem. These two programmes are examples of what I call mega projects which are arguably too large for the risks to be manageable by the relevant departments and their arms-length bodies”.
In this instance he was not talking about the Post Office or Horizon, but he could well have been. Even now, after all that has happened, both the Post Office and Police National Computer have extended their IT contracts with Fujitsu because there is no viable alternative. They are locked in and, for a while at least, effectively held prisoner by their supplier.
Currently, we have an incomplete understanding of what the Board knew, when it knew it, and what action it took. Although the role of the former CEO, Paula Vennells, has been widely commented on, the role of the rest of the Board has yet to receive much coverage in the media.
Based on what we do know, it seems likely that the Board was already aware of significant problems with Horizon by 2010. Only a few days ago we heard from a Channel 4 investigation that the Board was informed in 2013 about the insurance risks associated with concerns relating to the Horizon system.
It will be important to examine the influence that UKGI (and before 2016, the Shareholder Executive) had over the Board. UKGI acts as shareholder for the UK government’s arm’s length bodies. According to their website, UKGI take a proactive ownership role, advising on governance, approving strategy, recruiting board members and senior management and acting as the government’s shareholder director at arm’s length bodies, like the Post Office.
A crucial question for UKGI will be whether they demanded (on behalf of the UK Government) that the Board aggressively push back against the subpostmasters. For some time, it has been clear that the Post Office itself is not in a position to meet the compensation claims of wrongly convicted subpostmasters. Taxpayers would have to foot the bill. Did the Government insist that the Board fight on against the postmasters in order to minimise losses to the Exchequer?
The likes of Sir Ed Davey, Sir Vince Cable and other former government ministers have claimed that this was not the case. In his recent interview, Vince Cable said that “the Post Office was using its commercial freedom in a way that it shouldn’t”. In Ed Davey’s words, “the Post Office was lying on an industrial scale to me and other ministers”.
If the Board was being prompted by the Government to pursue a punitive approach, it would not absolve the Board from its ultimate responsibility. But we know that shareholders can exert significant influence over private companies, and a 100% shareholder exercises massive influence (not least because it has the power to appoint or dismiss any director).
In such circumstances, any director who knew about the shortcomings of Horizon and objected to the continued pursuit of subpostmasters should have resigned. The question is: did any of the 80 or so individuals who served on the Post Office board between 2000 and 2023 do so? Or did they even record any objections or misgivings in the minutes of board meetings?
A second hypothesis concerning the Board’s behaviour is that directors did not require any prompting from government to push back against the subpostmasters. They interpreted their personal fiduciary duties in terms of minimising the financial exposure of their shareholder, i.e. the Government. If so, it would suggest that directors were applying a relatively short-sighted interpretation of their duties as defined in the Companies Act 2006, which would be a cause for concern.
Another possibility is that the strategy to pursue the subpostmasters emanated from the Board and senior management itself. A key strategic objective for the Post Office was to become a commercial financial institution that did not rely on government support. By acknowledging that the Horizon system was faulty and had given rise to miscarriages of justice, the Post Office would open itself up to massive financial claims which it would be unable to meet without a government bail-out. This would fatally undermine its case for business autonomy.
Maybe the explanation for the Board’s behaviour will turn out to be much more straightforward. Board members were simply inadequate directors. They failed to ask the right questions or seek the necessary information. They did not respond to red flags. Until we obtain insight into the Board’s deliberations, by gaining access to board minutes, agendas and receive truthful accounts from the key players, we will only be speculating. This should be a key task for the public inquiry.
One consequence of this scandal may be that we need to reform directors general legal duties within the Companies Act 2006 – to make it crystal clear to directors that their role is not to prioritise the short-term financial interests of shareholders. Rather, they should see their duty as promoting the long-term success of the company in a manner that is consistent with its broader purpose, including the interests of all of its key stakeholders.
Another may be to highlight the importance of directors signing up to a code of conduct against which they are held accountable. The IoD has recently launched a commission to develop such a code under the chairmanship of Lord (Iain) McNicol. It plans to publicly consult on a draft code later this year.
Finally, we may need to renew our efforts to better prepare and educate directors. Seasoned directors are often resistant to this. But what the Post Office scandal may highlight is that many directors have not truly internalised what they are there to do – even if they are highly experienced individuals.
Of course, these measures may not have necessarily prevented the Post Office scandal. But they could be seen as part of the response in due course.