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The Post Office Horizon Scandal

How bad can corporate governance get?

by Nigel Kendall

The story

The history of the disgraceful events at the UK Post Office has been trawled over many times during the past few years but has received special attention recently since one of the sub-postmasters whose contract was terminated, a leading campaigner for the rights of those affected, featured in a TV drama based on the scandal.

The Board is expected to be the guardian of a company, and it is therefore necessary to scan briefly the major elements in this story in order to analyse the effectiveness of the Post Office’s Board over this period.

In 1996, the UK’s Benefits Agency and the Post Office Ltd set up a joint venture under the Private Finance Initiative to install a new software system to enable post offices to handle benefits and pensions payments, using a swipe card system. They commissioned ICL, a long-standing UK software house, which by 1998 was owned by Japanese company Fujitsu, to build the system, called Horizon. Sadly, after three years, the Benefits Agency despaired of the system ever working as intended, abandoned their role in the project, and wrote off £700m, a huge hit for the UK taxpayer.

In an attempt to recover some value from the time and money spent, the Post Office decided to try to adapt the Horizon system for its own purposes, to replace paper accounting in its c20,000 post offices, notwithstanding the clear unreliability of the system at that stage of its development.

Perhaps inevitably, problems emerged early on, as discrepancies started to appear in the accounts produced for a growing number of sub-postmasters. Interestingly, the Post Office’s previous accounting system had apparently exhibited similar problems in a number of sub-postmasters’ locations. Apparently there were inadequate levels of training for staff when the new system was being rolled out, and when the finger of suspicion was pointed at the sub-postmasters affected, they were unable to challenge the results through identifying the bugs that were emerging in the system.

Worse, the Post Office had powers to conduct its own criminal investigations, resulting in an inevitable bias against the accused, and a growing number of sub-postmasters were “convicted”, fined, often following threatening choices to admit wrongdoing or be sent to jail, as many were. Some even committed suicide. But still the discrepancies arose and the prosecutions continued, numbering hundreds, as did the fines, with the Post Office investigators apparently being paid bonuses for any money they got out of the accused. By 2015 some 900 had been prosecuted, over 700 by the Post Office.

By 2009, the Post Office and Fujitsu were well aware of the bugs in the system and had teams working on fixing these, while continuing to chase sub-postmasters for the apparent discrepancies caused by the bugs. Gradually this escaped into the wider public domain, through such items as an article in Computer Weekly in 2009 and a BBC programme in 2011. Meanwhile, under government privatisation plans for the separation of Royal Mail and the Post Office, the Post Office needed to present a clean and orderly face to the investing world, and clamped down on challenges related to Horizon and its faults. In 2012, two senior, concerned MPs went to the Chief Executive, Paula Vennels to discuss their worries. They were told that the Horizon system had been upgraded, so there were no real problems and that the National Federation of Sub-postmasters had no concerns – a statement which was not an accurate reflection of their views.

She did agree to set up an independent investigation by forensic accountants, Second Sight, which produced an interim report in 2013 identifying problematic IT issues and related victimisation of sub-postmasters, as a result of which Vennells set up a mediations scheme to deal with grievances. However, this quickly stalled, and by 2014 Vennells was claiming that no serious faults had been identified with Horizon. After being chased by sceptical MPs, Vennells sacked the investigating consultants, reportedly telling them to destroy their files.

Meanwhile, the government minister responsible for the Post Office continued to protect it. But around this time, the government had requested the Post Office’s incoming Chairman, Tim Parker, to look into possible miscarriages of justice, following which he commissioned a new review by an ex-Treasury lawyer, Jonathan Swift QC, who found that the Post Office had initiated an earlier review by Deloittes, codenamed Project Zebra, which had spelled out how Fujitsu’s Horizon system enabled outside manipulation of sub-postmasters’ accounts, though these findings were not disclosed to the other investigation conducted by Second Sight. Deloittes started a second stage of investigation in 2016, into transactions going back to 1999. But this investigation was stopped in 2016, supposedly on legal advice, when the sub-postmasters started their action against the Post Office.

In 2016, Board minutes reportedly recorded that the IT system was not fit for purpose, but at that point, curiously, the decision was taken not to pursue further investigations.

However, resistance was building and in 2017 a group litigation order, or class action, was brought in the High Court by 555 sub-postmasters under the banner Justice for Submasters Alliance. The judgement, when it was released a couple of years later, found that the Horizon system from 2010 onward, up to which date most of the shortfalls appeared, still had significant failings. The judge criticised the Post Office’s evidence and had such concerns over the honesty of Fujitsu’s track record of disclosures that he decided to send a file to the Director of Public Prosecutions. The case was settled out of court resulting in a payment by the Post Office, and the convicted sub-postmasters were consequentially enabled to challenge their convictions.

Following this, after courts began to overturn convictions from 2020 onward, the government set up a formal public enquiry in 2021, and over the next three years some 100 convictions were overturned. But progress was slow, until the recent drama series caused an eruption of demands for urgent action, and the government responded by promising legislation to enable mass exoneration of those affected.

After the furore triggered by the TV series, the government minister currently responsible suddenly sacked the recently appointed chairman, who responded by giving an interview to the Sunday Times newspaper in which he shone a spotlight on the relationship between the Post Office management and the civil servants supposedly carrying out government policy in regard to the Post Office. The unfavourable light into which this cast the government prompted a sharp response from the minister, attacking the sacked chairman. A committee of MPs looking into the Horizon case then called various witnesses, including the ex-chairman, the CEO and the senior civil servant concerned, and documents were brought into the public domain which raised questions about the CEO and the degree to which government and civil servants were aware of what was going on.

What a mess!

Analysis of the Board’s Performance

Let’s consider the role of the Board, and how it appears to have performed over the period in question, by applying our three-pillar analysis of holistic corporate governance:

  • Culture: including environmental impact, social behaviour and practice, and ethics
  • Business Model: including reviewing the continued appropriateness of the agreed goal and feasibility of the strategy to achieve it, the appropriateness of the organisation structure and adequacy of resources, the effective of the systems of control and risk management, and accountability and transparency
  • Compliance: covering statutory and legal rules and the company’s constitution, the corporate governance codes, and industry regulation.

Without being privy to all the internal reports and relevant documentation, we can only apply a “sniff test” based on what is now in the public domain. But, in a way, a sniff test gives a clearer indication than reams of legally nuanced or journalistically enhanced publications.

Culture

There is a clear black mark here in the way the company behaved towards its most important stakeholder group, the sub-postmasters. It kept them in the dark about what it knew about the deficiencies in the Horizon system, showing scant regard for the trauma it was inflicting on hundreds of its, often long-standing, business partners. Moreover, it seems clear that it was passing the blame for its internal systems failings on to the outside party to protect its internal image while advancing its corporate strategy.

Score: 3 /10

Business Model

One can question the goal that the Post Office has been pursuing, and the role that the politics of the time played. Clearly it is currently under pressure as the digital revolution progresses and letter writing disappears. The original purpose of the Royal Mail established in 1635 and the General Post Office in 1660, has been subsumed by technological developments and its lunch is being eaten by other more efficient providers.

But the issue giving rise to the Horizon scandal is clearly the deficiencies in the systems concerned and the organisation that introduced and managed them, and the deliberate moves to keep transparency to a minimum around what was happening. Moreover, the practices which were at fault persisted over twenty years until the successful court action brought by the sub-postmasters, and even after that they didn’t disappear.

Score: 3/10

Compliance

An interesting issue here is whether the directors complied with the requirements of Section 172 of the Companies Act in regard to directors’ duties. This section of the Act requires directors to act in a way that they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members, and to have regard to:

  • the likely consequences of any decision in the long term
  • the interests of the company’s employees
  • the need to foster the company’s business relationships with suppliers, customers and others
  • the impact of the company’s operations on the community and the environment
  • the desirability of the company maintaining a reputation for high standards of business conduct, and
  • the need to act fairly as between members of the company.

The sub-postmasters were not employees, but they had a vital relationship with the Post Office which, surely, should have counted in the directors’ approach towards them.

More directly, in the action brought by the 555 sub-postmaster claimants in the group litigation, the High Court found that the contracts between the sub-postmasters and the Post Office were relational which therefore gave rise to an implied duty of good faith in the agreement. This worked both ways, but it meant that the Post Office was not entitled to act in a way which would be considered commercially unacceptable by reasonable and honest people.

The settlement by the Post Office was the result of this judgement.

Score: 2/10

Stakeholder actions and views

Who were the key stakeholders and what were they doing in relation to Horizon during this saga?

Board

Without looking at the minutes of board meetings over this period, and the CVs of the directors who attended those meetings, it’s impossible to know exactly what went on, and the competence of individual directors. But the current board comprises the Chairman (currently interim), CEO and CFO, and seven NEDs, one of whom is interim chairman. The NEDs come from a range of backgrounds, including postmaster experience, management consultancy, accountancy, legal and retail. On the assumption that this is typical of the past twenty years, it provides a range of experience, including what is involved in running a post office.

What were these people doing while the Horizon disaster was developing around them? Either they were extraordinarily badly informed, or they were appallingly negligent of their duties.

Company management

Management doesn’t come out of this well. After commissioning the development and installation of a clearly defective system, year after year they covered up the deficiencies and blamed the financial consequences on the sub-postmasters. As part of the programme to address yearly trading losses, they put the achievement of acceptable results above everything.

When the investigations they commissioned turned out bad results they hid the results then stopped the investigations. And when the sub-postmasters did their own researches the Post Office denied them access to key information which would have helped their cause.

National Federation of Sub-postmasters

This body appears conspicuous by its absence from all reports. It was supposed to be representing the interests of the sub-postmasters, but it seems to have been monumentally ineffective.

 Suppliers – Fujitsu

What can one say about Fujitsu? Incompetent in its professional capacity and less than transparent in its communications with outside parties. Summed up, perhaps, by its recent apologies.

Sub-postmasters

“Relational” is how the judge described their contract with the Post Office. One might argue that too many of them were naïve in their dealings with the Post Office, on whom they depended for their livelihood. But one reviewer, an experienced IT professional, said even he would have had difficulty getting his mind round what exactly was going on if he had received such training as was made available to the sub-postmasters.

The vast majority seem to have done their best to make sense of the new system and because of the assurances from the Post Office, assumed the faults did indeed lie with them. The trust they placed in the Post Office was misplaced, and the judge in his ruling made his conclusions very clear.

Public customers

Interestingly, the ultimate customers, the general public, haven’t been mentioned in this, but to the extent that they have figured, it has been in stories of the vilification of a sub-postmaster who had been branded a thief by the prosecution.

One would assume that the general view would have been sympathetic towards well-liked local sub-postmasters who would have explained their predicament to their regular clients. Certainly, after the drama series on the subject appeared on television there could be no question where the public’s sympathies lay.

Owners: UK Government

The UK government owns the Post Office through the Department for Business, Energy and Industrial Strategy (BEIS), and the shareholding in Post Office Ltd has been managed by UK Government Investments Limited (UKGI) and its predecessor, the Shareholder Executive on behalf of the BEIS from 2012. So what was the owner doing all this time, and what were the actions of its agent, UKGI, to look after the government’s interests?

Good question. The government’s position seems to have been to keep out of the way by hiding behind the pronouncements of the Board and management of the Post Office. Hardly an involved owner.

And what about its agent. Oddly, UKGI doesn’t seem to appear at all in stories about the scandal. But surely, as the body charged with looking after the government’s interests in the shape of BEIS Assets, UKGI and its predecessor should have figured prominently, particularly since the difficulties with Horizon are not a recent event. It does appear fairly clear that the government and its agents knew quite a lot more about what was going on than they acknowledged at the time.

In its 102-page submission to the Horizon enquiry, UKGI acknowledges that it and its predecessor, and also the Post Office Board, placed too much faith in what management told them. In other words, they should have challenged what they were told, but it was all management’s fault. And they will learn lessons from the enquiry and challenge more in the future!

Holistic Governance Performance in practice?

This is an interesting case study in that there is only one owner, His Majesty’s Government, and it’s perhaps instructive to compare it with another example of corporate ownership where there is only one owner, namely Private Equity’s acquisition of a public company with a view to improving performance.

The thought that the Private Equity owner could achieve the required performance improvement of its 100% owned company with a totally hands-off approach is laughable. But that is what the government was doing, through its agent UKGI.

And what about the board of Post Office Ltd? It seems to have drifted along accepting what it was told by the management at face value, while also accepting the priority of addressing the on-going unacceptable financial performance.

The key element in the approach advocated by us at Applied Corporate Governance to deliver top class holistic corporate governance, is to have a set of measures framed around our three pillars summarised above, and to assess performance against these measures by regular surveys of the views of the key stakeholder groups, reported back to the board directly using a reporting system that cannot be captured by the management.

What would such a system have told us here?

Management at highest levels would have said no problem, but staff at lower levels, on guarantee of anonymity, would almost certainly have drawn attention to the significant on-going problems with the Horizon system. It’s even possible that an appropriately selected survey at Fujitsu would have blown the whistle on the openness of the Horizon system to outside adjustment of figures, the crucial point of dispute.

There would have been such a consistency of complaint from the sub-postmasters that it would have been apparent even to the most trusting of directors that there was something seriously wrong, notwithstanding management’s denial.

Government, represented by BEIS and its agent, UKGI, would have delivered a bland response indicating their preference for accepting the status quo, which would have prompted an early meeting between the chairman of the board and the minister.

But the Post Office didn’t (and doesn’t) have such a system, and the recently appointed ex-chairman was briefed by the same management that had briefed his predecessors. His only hope of avoiding the mess he inadvertently walked into was to have sat down before accepting the role with the High Court judge who heard the case brought by the 555 sub-postmasters. He might then have concluded that this job was a poisoned chalice and best avoided.

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