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Memorandum submitted by the BBC Trust

 

Introduction

The Trust's role with respect to the commercial activities of the BBC is distinct from that of the BBC Executive. This statement sets out that role and explains how the Trust has fulfilled its responsibilities for oversight of the BBC's commercial activities in practice over its first 18 months of existence. A separate submission, prepared by the BBC Executive and agreed by the Trust, containing further information about the operation of the BBC's commercial services is also attached

 

Context

The BBC has undertaken some activities on a commercial basis through most of its history. Successive Governments have encouraged it to generate as much income as it can on behalf of the licence fee payer. The most recent charter review reaffirmed this principle but also established a clear framework for control.

 

The Trust's remit

The Trust is the guardian of the public interest in the BBC. It is responsible for ensuring that licence fee payers get the best value from the BBC's services and it holds the BBC Executive to account for its delivery of the BBC's public purposes. It takes a close interest in audience opinion, engaging directly with audiences and also through the Audience Councils to assess, from the perspective of licence fee payers, how well the BBC is fulfilling its public purposes.

 

Through its purpose remits and service licences the Trust has set the broad strategic direction for the BBC's public services and established mechanisms for performance measurement. It assesses new public service proposals (such as iPlayer) using its Public Value Test framework and keeps existing services under regular review (it is currently reviewing the provision of childrens' services).

 

The Trust has an overarching duty under the BBC Charter[1] to have regard to the competitive impact of the BBC's activities on the wider market.

 

The BBC Agreement[2] sets out in more detail the regulatory framework which applies in the case of the BBC's commercial activities and the Trust's remit.

 

Under the Charter and Agreement the Trust's general functions include:

1) Setting the overall strategic direction of the BBC within the framework set by the Charter and Agreement;

2) Approving high-level strategy and budgets in respect of the BBC's services and activities in the UK and overseas (Charter, Article 24(1)(a) and (b)).

 

These general functions apply across the full range of BBC activity, including its commercial services.

 

Article 3(3) of the Charter provides that the BBC may maintain, establish and acquire subsidiaries through which commercial activities may be undertaken to any extent permitted by the Agreement.

 

The Agreement requires:

· that a commercial strategy to be adopted by the Executive Board and approved by the Trust (Clause 72)

· that the commercial services should be organised separately from the "core" BBC (Clause 68).

· that BBC commercial services should be provided through commercial subsidiaries, not directly by the BBC

· that all of the BBC's commercial services must comply with four criteria (Clause 69)

 

It also sets annual reporting requirements (Clause 74).

 

 

Governance structure

The BBC Worldwide Board is accountable to the BBC Executive Board, which is in turn accountable to the BBC Trust.

 

Under the BBC's commercial governance framework there are three independent non-executive directors: Etienne de Villiers (also Chairman), Simon Clift and Thomas Geitner. In addition, the public service non-executive directors, Jana Bennett, Nicholas Eldred and Zarin Patel, represent the interests of the BBC. BBC Worldwide communicates regularly with the BBC, its ultimate parent company, and the Trust. It presents its strategy, financial results and budgets to the BBC and Trust for review and approval and certain other matters are referred to these bodies for approval and authorisation.

 

The non-executive directors share responsibility for carrying out the Board's duties, although their participation is largely supervisory. They bring an external dimension to BBC Worldwide's corporate governance and provide independent advice. Their responsibilities include:

· providing strategic and operational advice and direction to the Board;

· reviewing performance of the Board and effectiveness of the directors;

· ensuring appropriate standards of conduct and financial probity; ensuring a robust and appropriate internal controls environment is embedded in the business;

· compliance and governance.

 

Trust oversight of the BBC's commercial strategy

The Trust has adopted and published a protocol[3] which explains its role in relation to setting the strategy for the BBC's commercial services. The protocol explains that whilst responsibility for developing and gaining approval for the BBC's commercial strategy lies with the Executive Board, the Board must ensure that this strategy is developed and presented according to the Trust's requirements.

 

In this way the Trust maintains appropriate distance from the operational work of the BBC Executive and maintains the independence that is necessary for it to hold the Executive Board to account for the performance of the BBC's commercial arm. In deciding whether to approve the draft strategy, the Trust takes account of the following factors:

 

1) The objective that the BBC should relieve pressure on the licence fee by seeking to maximise commercial revenue within appropriate areas and by returning value to licence fee payers by reinvesting profits in the BBC's Public Services.

2) Assurance that the strategy fits with the framework for determining what commercial activities it is appropriate for BBC to engage in, as set out in the Charter (Article 3(3)) and the Agreement (Clause 69).

3) Whether the strategy covers an appropriate period taking into account the need for stability, planning in relation to the financial contribution that the commercial business is expected to make to the BBC's public service funding, and the pace of change in the market.

 

Trust approval of the BBC's overarching commercial strategy does not signal agreement to items within it of individual strategic significance, or in any way limit the discretion of the Trust in relation to its decisions on proposals requiring its approval. These are considered on a case by case basis once sufficiently developed.

 

In accordance with the above arrangements the Trust approved a commercial strategy for BBC Worldwide in March 2007. This strategy responded to the challenge set by the BBC to maximise commercial revenue, in appropriate areas, to reinvest in programming and talent to the benefit of licence fee payers. The main growth areas were digital business and increasing BBC Worldwide's operations outside the UK. Following earlier scrutiny by the Trust's Finance and Strategy Committee the strategy also included specific analysis of merger and acquisition opportunities. Updates on progress against the strategy are required at least annually, and changes to the plan require Trust approval.

 

In February this year the Trust instigated a review of the BBC's commercial activity, the aim of which is to reassess BBC Worldwide's strategy and governance arrangements. Terms of reference were agreed with the BBC's Executive Board and the BBC Executive, which is conducting the review, is expected to report its findings to the Trust in November.

 

Similar principles apply in the case of the BBC's other two active commercial subsidiaries - BBC World and BBC resources.

 

BBC World

BBC World is subject to a separate business plan which sets out its strategy, budget and targets. The four commercial criteria apply to BBC World's activities and any new service propositions must be subject to assessment against those criteria. In the case of BBC World, the assessment of commercial efficiency must be made against the financial targets set in the business plan agreed by the Governors.

 

BBC World performance is monitored through quarterly financial reporting arrangements.

 

BBC Resources

Whilst the principles in this protocol apply to BBC Resources, the activities of this business are, at present, subject to separate governance arrangements. The Trust agreed to a sale process for the business and, in March 2008, agreed that the Outside Broadcast part of the business should be sold. It was agreed that two other parts of the business, Studios and Post Production facilities, should not be sold at the present time.

 

BBC Resources' performance is monitored through quarterly financial reporting arrangements.

 

 

Arrangements for assessing proposed changes to BBC commercial services

The Trust has set out arrangements for governance and scrutiny of new service proposals and changes to existing services in a separate protocol. This sets out the basis on which it will be determined whether Trust approval is required, and also the framework of criteria against which the Trust will make its assessment of such proposals.

 

A new or changed commercial service proposal is subject to approval from the Trust itself where it:

 

1) Involves an investment or divestment in excess of £50m; or

2) Falls outside the strategy for the BBC's commercial services as approved by the Trust; or

3) In the UK, represents entry into a wholly new market sector for the BBC's commercial services

 

In addition the BBC Executive Board must consider referring any proposal for consideration by the Trust where it believes that (i) matters of wider strategic significance for the BBC may be raised; or (ii) the good reputation of the BBC may be jeopardised.

 

Most proposals do not require Trust approval. They are subject to the same requirements and assessment criteria as those referred to the Trust, but decisions are taken, depending on the scale of the proposals, at executive or main board level in BBC Worldwide, BBC World and BBC Resources with input in many cases from the BBC Executive.

 

The framework against which all proposals are assessed, whether by the Trust, the BBC Executive or the relevant commercial subsidiary, is the four criteria, set out in the Agreement. No new/changed commercial service proposal should be approved unless it:

 

1) Fits with the BBC's Public Purpose activities

2) Exhibits commercial efficiency

3) Does not jeopardise the good reputation of the BBC or the value of the BBC brand, and

4) Complies with the principles set out in the Fair Trading Policy and with the Fair Trading Guidelines, and in particular, avoids distorting the market.

 

In all cases the relevant commercial subsidiary must secure sign-off from the relevant specialists in the BBC Executive against each of the four criteria.

 

 

Trust consideration of 'Kangaroo' proposal

The Trust has not, at this stage, considered detailed proposals for BBC participation in the proposed "Project Kangaroo" joint venture. It did, however, give its approval in principle in June 2007 for the BBC to proceed with the development of such proposals with joint venture partners. At that stage the Trust made clear that the proposals, once fully formed, would be subject to approval by the Trust.

 

The framework against which the Trust will need to evaluate any firm proposition if it is put forward by the BBC Executive is the four criteria, set out in the Agreement, that apply in the case of commercial services.

 

Since the proposals were referred by the OFT to the Competition Commission at the end of June, the Trust has maintained contact with the Commission and offered its assistance. Whilst most of the Commission's work has focused on the proposed joint venture partners, the Trust's Chairman has agreed to meet with the Commission.

 

If the BBC Executive decides to bring forward firm proposals for Trust consideration, the Trust will require the Executive to submit their assessment of the proposals against the four criteria. The Trust will consider this as part of the evidence on which it would base any decision. Whilst we do not anticipate the BBC Executive being in a position to make such a submission until the Competition Commission has published its findings, we are working to ensure that the Trust is kept informed as the deal proposals evolve so that, should it have difficulty with what is emerging it will have an opportunity to say so before the Commission reaches its conclusions.

 

October 2008

 


[1] http://www.bbc.co.uk/bbctrust/assets/files/pdf/regulatory_framework/charter_agreement/royalchartersealed_sept06.pdf (Article 23(e))

[2] http://www.bbc.co.uk/bbctrust/assets/files/pdf/regulatory_framework/charter_agreement/bbcagreement_july06.pdf (Clauses 68 - 74)

[3] http://www.bbc.co.uk/bbctrust/assets/files/pdf/regulatory_framework/protocols/d6_commercial_services_approvals.pdf