Examination of Witnesses (Questions 40-59)
DAME PAULINE
NEVILLE-JONES,
SIR JOHN
CHISHOLM AND
MR GLENN
YOUNGKIN
TUESDAY 21 JANUARY 2003
40. Hold on. I do not want you to answer that
question because that is your question. You are answering your
own question. I want you to answer the question based on the published
accounts of the company in which you have taken a 34% stake. Please
explain to me why you have not paid over £100 million for
the stake?
(Mr Youngkin) The primary reason is that it is in
our view not worth that.
41. So The balance sheet does not reflect the
valuation. Who are the auditors here? We had better have a word
with them. Are you saying that the auditors have it wrong? That
the company does not have assets of £312 million?
(Mr Youngkin) To be honest, I do not know. I do not
know what the balance sheet of the company—
42. But you have a third shareholding. Are you
saying you do not understand the balance sheet of a company on
which you have on behalf of your investors bought a third stake?
(Mr Youngkin) Mr Howarth, all I can say is the way
we value companies is not off published balance sheets but looking
at the cashflow capability of the business.
43. I suspect the National Audit Office and
certainly this Committee, whose job it is to try to look at the
public interest here, and I serve notice of this, will be asking
of ministers why they appear to have done a deal with you whereby
you have paid only £42 million for a company whose balance
sheet shows differently, and I declare an interest because I think
I know both the chaps who signed these accounts. Maybe Sir John
can enlighten me—he normally does. I am sorry if I am being
thick, Sir John, but no doubt you will put me right.
(Mr Youngkin) What I can say is that we competed from
April until September and put forth our best offer and I know
there were other bidders involved in the process, so I would think
that the Ministry of Defence might have more perspective on this
than I do.
44. It has nothing to do with the merits of
Carlyle—I accept that Carlyle brings a lot to this particular
partnership and obviously Mr Major was a former colleague of mine
in this House so I have no problems on that score. What I am trying
to get at is what is going on here. Can you explain how many shares
you have bought? Can you tell us how many shares Carlyle has got
the certificates for in exchange for the £42 million you
have handed over?
(Mr Youngkin) We will get 42 million shares.
(Sir John Chisholm) Perhaps I can help, Mr Howarth,
just a little. As you rightly anticipated, this is principally
a question for the principals in the transaction but I ask you,
Mr Howarth, to remember that the company is restructured as a
consequence of the deal and the debt to equity ratio, as I was
explaining earlier, is reset at a point which is relevant to the
phase that the company is now going through.
45. Does that mean we will see a complete rewriting
of those accounts as at 31 March 2003?
(Sir John Chisholm) Not in relation to the valuation
of the assets; the assets do not themselves change value as a
consequence of the transaction. What does happen is that the other
side of the balance sheet, the equity side of the balance sheet,
does change in terms of its relation to the amount of the net
assets which is reflected in equity and the amount that is reflected
in debt. That is what changes.
Chairman: Perhaps Mr Balmer can explain to us
later. I see him nodding in the affirmative at the back.
Mr Howarth
46. How have things gone, Dame Pauline and gentlemen,
since you began operating 18 months ago? You made a loss of £19
million last year. Can you let us know how things are looking
for the coming year?
(Dame Pauline Neville-Jones) One of the things we
need to take into account is we are operating in quite tight markets,
so this is a young company that certainly is putting its best
foot forward but we are up against pretty tough competition at
the moment. I think Sir John might want to add a bit more about
business progress so far.
(Sir John Chisholm) It is true that at the very bottom
line we made a loss last year but that was a combination of two
things: one was the trading regime which you might have noticed
made a respectable if not outstanding profit last year, and other
non trading items, for instance revaluation of our property, dealing
with the issue of the FRS17 valuation pension fund, all of which
appear as non trading items to set against our trading profit.
I think your question essentially related to trading, did it not?
47. Yes, and whether you are likely, as a business,
to be showing a profit in the coming year. Without lifting too
many veils, perhaps you can tell us how dynamically the company
has moved on since the injection of Carlyle's expertise?
(Sir John Chisholm) That has not happened yet, of
course. We look forward with anticipation to that event which
will only happen once completion has occurred. So far as trading
is concerned, last year with some difficulty we hit the operating
budgets the board had set for us, and this year has been more
difficult. Each year turns out to be more difficult. The commercial
markets are hard and for various reasons we had a very slow start
in relation to our Ministry of Defence customers, so the start
of the year was very tough for us and we had to gear up our people,
our management team and all the people working with us to meet
the challenge. Right now, as I said earlier on, we are in the
third week of the tenth month and for the first time this year,
fingers crossed, it is looking promising that we might hit our
operating figures for the year, which would be, I have to say,
in today's climate I believe a tremendous achievement.
48. Very good. Can I ask Mr Youngkin, it has
been put to me that it is fundamental for QinetiQ's long-term
success that the Ministry of Defence continues to make a long
term commitment to funding and research—we will come on
later to whether there will be fair competition between the others
providing research—can you confirm that it is your understanding,
that the on-going success of the company will be based on continuing
MoD funding of research? Is that how you see it at Carlyle?
(Mr Youngkin) I think the MoD continuing to fund research
for which QinetiQ can continue to compete is a fundamental part
of the company's business plan on a go-forward basis. Yes, the
MoD must continue to fund research and QinetiQ must still have
an opportunity to compete to win.
49. Site rationalisation, there will obviously
be some, we have discussed this in the past, as I recall you did
not foresee that you would be disposing of sites and certainly
not disposing of some of the test sites, can you show the committee
whether you do have any preliminary thoughts on site rationalisation
beyond those that have already been announced and how much money
is that likely to raise?
(Sir John Chisholm) We have no significant plans for
site rationalisation beyond those that are pretty well known about.
Of course we do not own the test sites ourselves, those belong
to the Ministry of Defence and we are not in a position to dispose
of them. We will be, as we have announced, changing our usage
of those facilities in order to improve the efficiency of the
service that we can provide to our customers, in other words concentrating
our use on fewer of those sites. So far as our core science research
laboratories are concerned you will know that we are completely
committed to Farnborough.
50. I am very pleased to hear that publicly,
can you say it a bit louder so that everyone else can here.
(Sir John Chisholm) We have other key sites at Malvern
and Portsdown and we do not anticipate at this time that there
is a need for us to vacate. We always have to respond to customer
demand, if customer demand moves away from a particular area of
work which is particularly important for one site then we will
have to respond to that.
51. Dame Pauline, you made a very encouraging
point about how this is a British company and that is how you
saw it. There have been suggestions that once the company is fully
launched to the private sector, even though the government will
retain two share holders on the board, there could be a process
of asset sales, how do you feel about that?
(Dame Pauline Neville-Jones) That is the first I have
heard of the process of asset sales, that is not the intention
of the company. On your point about it remaining British, QinetiQ
has every interest in being a successful British company and not
beginning to strip itself of its capabilities. When I said at
the beginning that I expect us to remain the same sort of company
in say 5 years' time that is exactly what I meant.
Mr Howarth: Thank you.
Mr Roy
52. Senior management pay has brought many companies—and
by saying pay, I mean very, very high pay—into disrepute
throughout the United Kingdom in the past year or so. Could I
ask, have your senior management been given a pay package that
encourages them to strive for maximising the company's return
within 3 or 4 years at the expense of long-term viability? If
so, could that be perceived as more or less a very greedy, short-term
view for a quick buck, for want of a better word?
(Dame Pauline Neville-Jones) Let me make one very
important general point, and I will ask John to talk about the
structure of senior management reward, I think it is very important
that the intention of the board is understood in this, which is
there should be long-term sustainable growth in the company. We
are not in the game of trying to make a quick buck. We have an
investor for a given period of time but the long-term future and
viability of QinetiQ must be—
53. Does that mean the remuneration package
is over the long-term?
(Dame Pauline Neville-Jones) It means the way we structure
the rewards of senior management and incentivisation must be related
to the way in which they build the company over the long-term.
54. Can I take it from a different angle, do
you have senior management remuneration packages geared for the
short-term, 3 or 4 years?
(Dame Pauline Neville-Jones) No I think is the answer
to that question. I think it is fair to say that we put a substantial
amount of the remuneration into the basic salary with certainly
an element of bonus but we do not do what some companies do in
the financial sector, which is to put a very large amount into
bonus.
55. What is that element of bonus? Is it production,
is it profit or is it a time scale bonus?
(Dame Pauline Neville-Jones) It will be related to
performance. We are putting a business plan in place which is
actually going to grow the company over time, the two things are
related, they are being asked to perform against targets which
are related to the healthy, long-term sustainable growth of the
company.
(Sir John Chisholm) Obviously the board sets the remuneration
of the most senior managers but it is in line with the general
policy in the company, which is as close as we can get to market
salaries for the salary portion of the remuneration. The increases
in salaries, if they exist, would be related to performance, as
indeed would the bonus. We have the bonus awards which go to literally
thousands of people within QinetiQ. The notion of bonus is well
spread. The bonus is there to incentivise the right behaviour,
starting with good performance and going on to the other attributes,
creating the right culture within a company and creating the right
climate which encourages innovation, which encourages the sort
of company that we feel we want to be. The sort of company I believe
Britain would be proud of having, keeping QinetiQ as a British
company.
56. I firmly believe that any company is only
as good as the people it employs, from senior management right
through to the shop floor. I am glad to hear there is a bonus
system that you give to all employees. Do the people on the shop
floor have the same—I know they do not have the same amount
of money—performance related bonus, is it the same from
one end of the market in the senior level to the shop floor?
(Sir John Chisholm) It does not go all the way to
the shop floor, what I was describing is many people in the company
who are involved in, if you like, leadership roles of one sort
or another and it goes well beyond senior managers. Our sort of
company, as you rightly say, depends upon these people, the leadership
team is very broad. The kind of bonus scheme I referred to is
what the leaders will get.
57. I understand that. What about the producers
as well, I am asking you specifically about the people on the
shop floor, if they are an integral part of this company, it is
their job to do the job to the best of their ability, to earn
a living and to make sure that your company is as profitable as
it should be and therefore surely they should reap the benefit
as well? You say there is a bonus system for some people in the
company but not for others.
(Sir John Chisholm) The award of bonuses, which can
be awarded to anyone, once it goes beyond the leadership it becomes
a matter of rewarding outstanding performance of particular events.
If somebody goes on a trial and does a great job and the customer
is really pleased then he can be awarded a bonus as a consequence
of that.
58. That does mean there is a different remuneration
package from one end of your company to the other because you
just said that some of your people are not getting it and other
people can get it, even short-term. That is the point of my first
question, am I going to be here in 6 years' time saying to you
or somebody else in your position, where did all of those guys
go that were here for the first 4 years, they took their money
and ran with big bonuses. Is that a possibility?
(Sir John Chisholm) I take your point. We try and
think very hard about reward schemes within the company because
rewards and creating the kind of company culture that will be
really successful is crucial, it is really a central role of the
strategic management of the company. We do try and think of reward
schemes that do encourage what you are talking about.
59. I am glad to hear you say that.
(Sir John Chisholm) I would not like to claim that
we have the perfect answer. Every year we work a bit more on it.
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