Examination of Witnesses (Questions 60-79)
DAME PAULINE
NEVILLE-JONES,
SIR JOHN
CHISHOLM AND
MR GLENN
YOUNGKIN
TUESDAY 21 JANUARY 2003
60. I am glad to hear that. I think it has come
across you have an open mind. I worked in heavy industry before
I became an MP for 15 years and sometimes big companies do forget
the people on the shop floor are the people who turn the companies
into profitable businesses and I would like to think that open
mindedness would be able to transgress itself right down through
the ranks.
(Sir John Chisholm) In our company everybody is pretty
much on the shop floor because I never forget that those guys
earn the income out of which I get paid,
Chairman
61. Did I read that the shares that you purchase
depend on the grade, people on the lower down grade one way or
another could not afford to buy more shares than those higher
up the scale, especially at your level, are able to purchase,
that seems a little bit unfair if somebody wants to acquire more
shares and happens to be of a lower grade?
(Dame Pauline Neville-Jones) In many ways the actual
ability to participate in the fortunes of the company through
shares is actually going to be spread through QinetiQ much more
widely than any other company. We have a wider potential share
ownership scheme than many. A point that has just been made here
by Mr Roy, I absolutely agree that people throughout the company
should be able to share in the success of the company and get
the financial benefit out of that. I think there are certain levels
in the company where people frankly, apart from their individual
efforts, for which they should be rewarded, cannot have their
pay dependent upon leadership role and decisions for which they
are not responsible and therefore put at risk by that. It seems
to me they have to have substantial guaranteed pay which means
they have got to have the right salary level, but that they should
be rewarded for individual achievement and be able to participate
in the overall success. That must be right. It is certainly the
way we would like to go, I think.
Mr Roy
62. Can I just come back on one thing. Did the
MoD have any role in the part you played when you were speaking
about your remuneration packages for senior management?
(Dame Pauline Neville-Jones) The MoD is on the board,
is a shareholder and on the board.
(Sir John Chisholm) Are observers on the board.
(Dame Pauline Neville-Jones) But they will be on the
board. They have knowledge.
63. They are observers but did they have an
input? Did they agree it or did they just sit at the back and
listen to what was said? That is what I am asking. What I really
want to know is did they have an input? With all due respect,
sitting in a room perhaps looking out of the window is not really
an input as opposed to saying "yea" or "nay"
when it comes to the remuneration package discussions. Did they
have an input, yes or no?
(Dame Pauline Neville-Jones) I think the accurate
answer to your question is that those decisions were taken with
the MoD present who had the opportunity to comment but they were
the decisions of the directors of the company.
64. There are people behind you who are present,
I am asking you questions and you are answering them and they
have been part and parcel of this Defence Committee hearing but
they are not responsible for what happens at the end of the day
for the answers given. What I am asking is did the MoD give their
opinion and were they part of that negotiation when it came to
discussing the remuneration package because, quite frankly, coming
back to my earlier point, if we find that there was a problem
then I would be the first one to say "Excuse me, MoD, you
were there, you were part of the discussion, did you agree with
it"?
(Dame Pauline Neville-Jones) Mr Roy, I have tried
to give you an absolutely accurate answer which is that they were
in the room, they are observers to the board as things stand at
the moment. They had full sight of the decisions being taken,
they had the opportunity to comment, they were not part of the
decision.
65. Okay.
(Dame Pauline Neville-Jones) In the future—
Chairman
66. Under the new arrangements are they simply—
(Dame Pauline Neville-Jones) In the new arrangements
as members of the board they will have representation on the board.
67. Full?
(Dame Pauline Neville-Jones) Absolutely.
Rachel Squire
68. Just on that, if any decisions by the MoD
affect QinetiQ facilities and lead to potential job losses, will
the MoD cover the cost of redundancy and pension entitlement?
(Sir John Chisholm) Ms Squire, our relationship with
the MoD is no different from that with any other company serving
the Ministry of Defence. The MoD does not directly pay for the
costs of redundancies although the costs of redundancies are part
of the general costs of the company which form part of the overhead
of the company which the company can recover over a period of
time through charges to its overheads where those redundancies
are a direct consequence of Ministry of Defence decisions.
Rachel Squire: I find that interesting, thank
you.
Chairman
69. Industry and others have complained at various
times to us about what they would regard as the lack of a level
playing field on which QinetiQ and industry have to play. From
your perspective, do you agree that the playing field is flat
or tilted? How would you like to see it improved or not improved?
(Sir John Chisholm) I think that is a question for
me, Dame Pauline. From the perspective of the scientist on the
shop floor, as was said earlier, on the lab bench, the playing
field does not look particularly level because, as far as he is
concerned, his business is being opened to competition so anybody
can bid for that but there are restrictions about him bidding
for the work of the companies who are bidding against him, so
he does not feel it is an especially level playing field. But,
on the other hand, he has the advantage that he knows his customers
pretty well and he is a pretty good scientist and he knows his
job pretty well and, therefore, he has an advantage which comes
from his knowledge of the science and his knowledge of what customers
want. My answer to that is I do not know what a level playing
field is, Chairman. I do know everybody who plays on it thinks
that the slope is in the wrong direction.
70. A level playing field to my non-financial
mind would be you bid for contracts and those bids are awarded
fairly. However, from the MoD's submission, in 2001-02 30% of
the MoD's £416 million research building block was placed
with DSTL without competition and of the remainder only £9
million was contracted following competition. It might differ
in successive years but you have said that it does not look like
a level playing field to your men and women and I would suspect
it looks even less of a level playing field to those who I suppose
would see you in the early days as somehow being featherbedded?
Is that part of the deal with the MoD? Are they looking after
you just to give you a leg-up in the early stages?
(Sir John Chisholm) Chairman, the first point is that
none of that was competed before, it is now being progressively
competed and, therefore, from the point of view of anyone other
than the scientist in QinetiQ the market is getting bigger year
by year and, therefore, they cannot lose but they can gain. The
net result of this increase in the competition in the research
programme is a net gain for everybody other than QinetiQ and a
net loss for the scientists in QinetiQ. That may seem to people
outside QinetiQ to be an unlevel playing field; it also looks
pretty unlevel to people in QinetiQ. However, overall we are quite
satisfied that our people will do a good job and will win a sufficient
proportion of that business and when balanced against opportunities
in commercial markets we will do reasonably well.
71. Do you have first pick of the contracts?
Do they say "Sir John, here is a list of contracts, which
ones do you want"? If not that, what influence would you
have in the way in which the MoD research is gradually exposed
to competition?
(Sir John Chisholm) Chairman, no more so than any
other company. We have no say in that process. Just like every
other company we make our opinions, so far as we have them, known
but we have no more say than any other company does.
72. In the very early stages when they exposed
very little of the contracts to competition, were you surprised
when you were given a contract without competition or was it something
that you had prior notice of? You say you do not have prior notice,
it is up in the air as to whether a contract is bid for or is
given to you.
(Sir John Chisholm) The MoD has complete control of
that decision and until it is made we do not know.
73. When QinetiQ was set up it had a prohibition
on undertaking "defence manufacturing". What in practical
terms has that meant for the way QinetiQ operates? Has it prevented
you from undertaking any projects that you would otherwise seek
to do?
(Sir John Chisholm) Chairman, that relates to our
compliance process. As far as we are concerned we submit through
the compliance process all activities which relate to the Ministry
of Defence's procurement food chain. So whenever we are offered
or would like to be offered a contract by a defence supplier who
wants to supply on to the Ministry of Defence, no matter what
it is for, because we find the manufacturing definition difficult,
our process is that we put it through the compliance process and
we have an auditable trail to the Ministry of Defence giving us
agreement to do that work. The second part of your question was
has this limited our business. Clearly it does limit our business
but we are beginning to learn about where the territory of permission
lies and where it does not, so as time goes by we need to learn
what the Ministry of Defence's policy is in this field and to
what extent we are going to be allowed to do work and to what
extent we are not. Generally speaking, where we are transferring
technology to a company who will therefore offer better product
to the Ministry of Defence, there is often positive agreement
that that is a good thing for us to do.
74. As a British company, about which I am delighted,
let us say that another British company was entering competition
with the Ministry of Defence, would a foreign competitor be allowed
to give a contract to you enabling that company to win a contract
against another British company? Can you give advice or provide
your expertise to two bidders in the same MoD contract negotiations?
(Sir John Chisholm) Yes, indeed, the Ministry of Defence
frequently demands that we do precisely that. If there are two
or three or four competitors in a particular competition and we
have some key technology, they frequently ask us to make it available
to all of the bidders. We then have to set up firewalls between
each of those teams and between those teams and the Ministry of
Defence to ensure that each participant in the competition feels
comfortable.
Chairman: Just a couple more questions.
Syd Rapson
75. Could I move on to the compliance regime
structure that you have to comply with. The MoD has set up a compliance
regime and drafted your Articles of Association to make sure that
the controls were in place, such as protection against misuse
of intellectual property rights, the firewall and to stop you
manufacturing, etc, but in your submission you said that you "expect
to be treated as a commercial company". There seems to be
a contradiction there where you want to be freer to operate as
a commercial company and you have these constraints put on you
for good reasons by the MoD. To what extent does that constrain
you in what you want to do.
(Sir John Chisholm) It clearly constrains us because
that is exactly what it is designed to do. I say quite clearly
the answer is yes, it does constrain us. Because we know it constrains
us I cannot say that it constrains us beyond what we want to do.
76. In your company accounts etc., you have
got protection put in in case of challenges against intellectual
property rights problems, so you are anticipating in advance there
might be some claims on that use. Are you expecting to push these
controls and to pay money out or are you happy to work within
them? There seems to be a predisposition where you think you might
come up against problems later because you are going to extend
further than these controls would allow you. I might well be misreading
it. Are you intending to stretch the bounds?
(Sir John Chisholm) You are very observant of our
accounts. The particular item you refer to there relates to our
commercial exploitation where as a major vendor of IP we have
a number of outstanding disputes, for want of a better word, with
various commercial entities out there as to who owns what piece
of IP. None of that relates to the compliance regime issues to
which you are referring now. We have an independent board committee
which the Ministry of Defence has a right to approve the chairman
of and that board committee oversees the execution of our compliance
process and it is absolutely not part of our agenda to try and
push the boundaries of it so to speak, it is our agenda to apply
it in the way it is designed to be applied.
77. As you become established, and hopefully
everything will work out fine, you go on and they are happy to
fit with you and work with you etc., are there aspects of that
compliance regime that you desperately want to do away with?
(Dame Pauline Neville-Jones) Perhaps I ought to take
this, Chairman. I am actually chairman of the committee. The answer
to your question is the compliance regime is not something capable
of being bent or expanded or changed, it is a given in the system
and it has got to be applied with rigour and, in fact, frankly
it is the interest of the company that it should be applied with
rigour because it is not in our interest to be accused of trying
to go beyond those things that we are permitted to do or to creep
into the defence manufacturing field from which we are banned,
nor is it in our interest to get a reputation of tainting the
integrity of our evaluation advice by other interests in the company
and, therefore, we have a very strong interest in maintaining
absolute clarity on the subject of preventing conflict of interest.
I certainly regard it as my role as chairman of that particular
sub-committee to maintain the integrity of the regime. It is one
which is rigorously enforced. I think the culture of the company
in this area is good, they understand the company's self-interest
as well as the integrity and the honesty that must run through
that system and, of course, the Ministry of Defence has an extremely
good ability at any stage to know precisely what we are doing.
Indeed, in any given case they will be party to the arrangements
that are put in place and at any moment they can go and see whether
they are actually operating. I think it is an unchanging feature
of the system for us.
78. I accept that answer. From the headings
there is about 8 audits or controls. There must be a proper way
of negotiating them away as time goes on, is there an intention
to try and properly negotiate them away?.
(Dame Pauline Neville-Jones) I do not think so. The
function and the nature of our business will continue to dictate
the need for them.
Mr Howarth
79. Intellectual property, a matter Sir John
and I have discussed several times in the past, can you just tell
us whether there are, in your view, any substantial outstanding
cases where intellectual property which you believe under your
process to have been identified as yours is challenged by third
parties and are any of those significant?
(Sir John Chisholm) Again on the commercial field
there are definite opportunities. We believe we have inventions,
particularly coming out of our Malvern? That other manufacturers
are misusing. As I was answering the previous question, yes we
are seeking to pursue those intellectual properties vigorously.
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