The role of the BBC Trust
23. The BBC Trust is the body that oversees the BBC,
having replaced the previous oversight body, the Board of Governors,
on 1 January 2008. It claims to be "independent of BBC management
and any external body, leaving it free to meet its clear responsibility
to operate only in the interests of all licence fee payers".[53]
It has responsibility both to regulate the BBC, and to set its
strategic direction, conflicting requirements in the view of some
of the witnesses to this inquiry. For instance, the Guardian Media
Group argued that this dual function is "extremely confusing"
and that instead "a regulator should be unambiguously a regulator;
that is all they should do—regulate".[54]
The role of the Trust has been blurred further by recent statements
in which its Chairman has seemed to act as an apologist for the
BBC, defending the business interests of the BBC, rather than
the interests of the licence fee payer. For instance, in his speech
to the Broadcasting Press Guild in October 2008, he said "I
question the thinking behind a proposal to gift BBC Worldwide
to Channel 4. Put aside for a moment whether this is actually
legal, State Aid issues, and the merits of removing £100
million a year of dividends back to the public via new BBC programmes.
In what way might this make business sense for BBC Worldwide or
Channel 4?".[55]
24. However, the Chairman of the Trust defended the
BBC's governance framework, telling us: "It is quite a complicated
model but it is one carefully determined by Parliament to reflect
the status of the BBC as an organisation which is funded by universal
levy, the licence fee, but where the most important principle
was to protect its editorial independence".[56]
25. Other witnesses questioned the Trust's effectiveness
specifically in relation to its regulation of the BBC's commercial
activities. The Chairman of Time Out Group expressed doubt that
the Trust, despite the "62 people who work for it and a budget
of £11 million", had the track record to be able to
hold an enormous organisation such as the BBC to account.[57]
Meanwhile, Pact argued that the Trust does not have any effective
oversight of BBC Worldwide and that, in reality, commercial operations
are managed exclusively by the Executive.[58]
26. We asked Lord Carter, the Minister for Communications,
Technology and Broadcasting, if he was satisfied with the Trust's
effectiveness as a credible check on the BBC's commercial ambitions.
He told us:
"Creating institutions fast is a contradiction
in terms because you need some time to do that and the BBC Trust
is still [in its] relatively early days. Is it an improvement
on the completely integrated governing structure that there was
before? I think on balance, yes. Is it a forensically separate
structure where accountability sits clearly in one place and regulatory
responsibility sits clearly and singularly in another? No, it
is not, but it never was".[59]
27. BBC Worldwide's new investment projects are subject
to approval by different bodies depending on a number of factors,
including transaction value. Transactions with a value of over
£50 million automatically require approval by the BBC Trust.
The BBC claims that this threshold is "low in financial terms
compared to the equivalent 'shareholder consent' requirement for
publicly listed companies".[60]
Pact, Fremantle and Guardian Media Group told us, however, the
£50 million threshold is extremely high in comparison to
the commercial sector.[61]
Indeed, £50 million is nearly half of the £118 million
profit that Worldwide generated last year. The result, Fremantle
concludes, is that very significant investments can be made by
BBC Worldwide without authorisation from the Trust. This point
was demonstrated when the BBC was able to provide us with only
one example—Worldwide's acquisition of Lonely Planet—whereby
the £50m threshold had been breached.
28. Several witnesses called for the £50 million
threshold to be lowered considerably, with the Guardian Media
Group suggesting that the ceiling value be benchmarked against
other media boards.[62]
Fremantle could not give us the corresponding threshold figure(s)
that it uses due to commercial confidentialities, but its Chief
Executive did tell us it "would be a major order of magnitude
less than £50 million".[63]
29. In addition to the automatic referral system,
the BBC Executive Board may also refer decisions to the BBC Trust
"where they represent reputational issues or matters of wider
significance for the BBC".[64]
We asked the Chairman of the Trust for specific instances whereby
the Trust had considered the merits, or otherwise, of a BBC commercial
activity. He offered three examples:
- The acquisition of Lonely Planet,
which the Trust ultimately approved;
- The decision to allow advertising on Worldwide's
bbc.com website, again approved by the Trust;
- The proposed "Kangaroo" joint venture
video on demand service, on which the Trust claims it did not
take a view, given the Competition Commission's inquiry that ultimately
ruled against it.[65]
However, as we concluded in our recent report on the BBC Annual
Report 2007-08, it is apparent that the Trust reviewed proposals
for a joint venture at a number of stages.[66]
30. Neither the bbc.com nor Kangaroo issues came
up against the £50 million ceiling but, according to the
Trust Chairman, both matters "automatically came to the Trust—it
was not a question of being referred—because they were matters
of novel activity".[67]
This would seem to suggest a third means for engaging the Trust,
one which required neither referral nor a breach of the £50
million threshold. The BBC Trust also accepted that, as yet, there
had been no occasion where the Trust had rejected outright a BBC
commercial activity.[68]
31. With respect to acquisitions and major investments,
there are two issues the Trust needs to consider: firstly, the
threshold for authorisation and secondly, transparency—that
is, the details the BBC should make public. For quoted companies,
the Stock Exchange imposes strict rules in these respects for
good reason: to protect the interests of shareholders. In evidence
to us the Trust, the BBC and Worldwide stressed that they followed
an equivalent process.[69]
The analogy to a quoted company should not be taken too far—as
the Trust has a wider remit than simply acting, in effect, as
the controlling shareholder for the licence fee payer—but
it is instructive.
32. The BBC followed up with a written submission
to us showing how the Stock Exchange's four different "Class
Tests" had been calculated for the acquisition of Lonely
Planet.[70] These tests
govern the amount of disclosure, and if a deal falls into the
"Class 1" category, it requires shareholder approval.
The BBC maintained that on these tests Lonely Planet was only
"Class 2", not requiring approval—yet because
of its own threshold rule, Trust authorisation was actually required.
On that basis, the BBC argued, Worldwide operates within a stricter
system than similarly sized public companies.[71]
33. In reality, however, Worldwide is not publicly
quoted and two of four tests—which include measures of market
valuation—do not apply.[72]
In such circumstances, it might be reasonable to substitute either
Worldwide's gross or net assets as a proxy. In 2007, these stood
at £410.5 million and £119 million respectively.[73]
On either of these bases, the price for Lonely Planet would fulfil
the Class 1 requirements for approval, being above a 25% ratio.
Using net assets would be much more conservative, but would acknowledge
the risks of a large deal relative to the size of Worldwide's
balance sheet. It could also be used to support assertions from
witnesses that the Trust's £50 million threshold is, indeed,
too high. Based on Worldwide's net assets, the 25% test would
currently suggest £30 million to be a more appropriate threshold.[74]
34. Regarding disclosure, the Lonely Planet purchase
was announced in a press release by Worldwide on 1st October 2007.[75]
In its follow-up evidence, the BBC said: "The level of disclosure
provided by BBC Worldwide was therefore no less than would have
been required if BBC Worldwide was a plc given that the size of
the acquisition was equivalent to that of a class 2 transaction".[76]
35. This statement from the BBC, however, is mistaken.
Unsurprisingly, Stock Exchange disclosure requirements are not
just satisfied by the issue of a press release, but by its content.
For a "Class 2" deal, its rules require disclosure of
the price, the assets and profits of the business and details
of any money payable later on (Class 1 requirements are more onerous).[77]
Neither the BBC, nor the Trust in its own release, disclosed any
financial information about Lonely Planet at all, however.
36. In evidence, competitors including Time Out and
Wanderlust complained that it was difficult to establish and comprehend
the price the BBC had paid, and therefore whether it was distorting
the market.[78] Their
concerns are justified. Before the BBC's evidence to us, the details
could only be gleaned from a careful examination of the notes
to the BBC and Worldwide accounts for the year ending 31st March,
2008, which were published in mid-June that year, over eight months
after the acquisition.[79]
37. Even then, Worldwide's Annual Review was less
than forthcoming about the total valuation of Lonely Planet. Its
summary puts the cost of 75% of the business at £89.9 million.[80]
Readers have to turn to the small print of the BBC's own accounts
regarding the remaining 25% retained by Lonely Planet's founders.
This was subject to a "put option" whereby the BBC had
agreed to pay a further Aus$67.3 million (£28.8 million then,
and £31.9 million at current exchange rates) if it were exercised
by 31st October, 2009.[81]
In evidence, the BBC stated that this was a fixed price due to
the founders, irrespective of the performance of Lonely Planet
post-acquisition.[82]
38. To say, therefore, that the BBC has been less
than forthcoming, in a timely fashion, about the Lonely Planet
deal is an understatement. Limited companies, whether publicly
listed or private, are obliged to follow accounting standards
regarding information about acquisitions in their accounts. The
BBC seems to be under the misapprehension that in satisfying these
standards, it has disclosed everything a listed company would
be obliged to do. It has not, however. Far from acting like a
publicly quoted company, as it maintains, the BBC has behaved
like a private firm, only formally disclosing financial details
when required for its accounts. And this is more than just academic;
the licence fee payer, like any shareholder, needs to be able
to assess whether public money is being used wisely.
39. In evidence, the Trust, BBC and Worldwide said
they were satisfied that the price was fair and reasonable.[83]
Worldwide's Chairman, Etienne De Villiers, told the Committee:
"Having come from a world of private equity […] we went
through this with significant due diligence".[84]
"We were not anywhere close to where I felt as a non-executive
and the other two non-executives from outside the company with
good commercial experience felt that we were overpaying for the
business. We simply were just not overpaying," he added.[85]
Competitors, including Time Out, begged to differ.
40. The reality is that we cannot judge. From the
evidence, we know now that the BBC agreed to pay £118.7 million
for a business which lost £2.1 million in 2007-08 on turnover
of £45.7 million.[86]
Moreover, the BBC has added that "the book publishing activities
accounted for 87% [£103 million] of the value attributed
to Lonely Planet, with the balance represented by the online activities".[87]
Sadly, it has given no further breakdown. In evidence, the Trust's
Chairman said: "Things have developed, as we have expected,
but it still remains a matter for further reflection whether this
merger will deliver all of the benefits that we expected for this
purchase. Does that surprise me at this point […]? No, it
does not. But the case is still to be proved".[88]
41. We believe that the £50 million threshold
at which a commercial transaction is referred to the Trust is
too high. The BBC's claim that it is low is based on a misleading
comparison with the shareholder consent requirements of publicly
listed companies. We note that in the past "novel" activities
have been automatically considered by the Trust and any threshold
should, of course, not be a substitute for discretion. Nevertheless,
it is alarming that, in theory, a commercial transaction equivalent
in value to almost half of Worldwide's net assets or its shareholders'
funds could escape the need for the Trust's approval. We believe
the threshold should be lowered considerably, to allow the Trust
more scrutiny and a greater say in the BBC's commercial decisions.
We have suggested that £30 million may be more appropriate,
based on 25% of Worldwide's net assets. To recognise the Trust's
unique regulatory role (and cater for the arbitrariness often
found in balance sheet valuations), we would be more conservative
still. We would urge the Trust to consider a level where the value
of the investment exceeded 25% of Worldwide's pre-tax profits
(before exceptional items) in the previous year. Currently, this
too would approximate to £30 million. We recommend that the
Trust should, as a matter of priority, review the threshold level
and report back to us on its findings.
42. The BBC has also been less than transparent
about its commercial investments, notably Lonely Planet. In evidence
to us, the Trust Chairman Sir Michael Lyons said: "I can
offer a willingness […] to test that proposition about whether
the levels of disclosure are less than you would expect of a plc
in this setting. If you have a point, then that is something that
the Trust will want to take on board".[89]
We recommend, therefore, that the Trust also considers and reports
back on the Committee's and the industry's concerns about disclosure
and transparency.
43. With respect to directorships too, BBC Worldwide
is less transparent than publicly quoted companies. The remuneration,
including bonuses and benefits, of its Chief Executive is disclosed
in the BBC's main accounts by virtue of his being an Executive
Director of the main board, as is that of two of Worldwide's non-executive
directors who also sit on the main BBC board. Worldwide's Annual
Review, however, makes no comparable disclosure with respect to
its remaining executive and non-executive directors. Instead,
it simply describes Worldwide's approach and policy in two brief
notes in the Review.[90]
In order to better understand the incentives within Worldwide,
and whether remuneration is in line with comparable media companies,
we believe full disclosure should be made for all its directors.
Cross-Directorships
44. The BBC Executive Board, with ten executive and
six non-executive members, has responsibility for delivering the
BBC's services in line with the priorities set by the BBC Trust.
One of its executive members is John Smith, the Chief Executive
Officer of BBC Worldwide. As a result, BBC Worldwide has direct
representation on the BBC Executive Board.
45. At the same time, BBC Worldwide also has its
own Board (eleven executive members, including John Smith, and
six non-executive members), which operates under the BBC Executive
Board. Amongst its non-executive Directors are Zarin Patel, BBC
Group Finance Director, and Jana Bennett, Director of BBC Vision
(the in-house television production arm of the BBC). As both are
also members of the BBC Executive Board, the BBC Executive therefore
has direct representation on the Worldwide Board. These three
cases of Directors sitting on both boards were frequently referred
to in our inquiry as "cross-Directorships".
46. The BBC Trust told us that the cross-Directorships
had come about in an attempt to balance the "commercial imperative
for BBC Worldwide" against the four commercial criteria,
in particular the requirement that the BBC's reputation should
not be damaged.[91] The
Director General explained further, arguing the case for "close
coordination" between Worldwide and the BBC's public services.
He told us the cross-Directorships helped to "make sure that
we have the commercial operations of the organisation seen in
the context of the total mission of the organisation".[92]
47. Specifically, the BBC justified John Smith's
membership of the Executive Board on two counts. Firstly, "he
represents BBC Worldwide in their role contributing towards the
BBC's delivery of its Public Purposes, in particular the fifth
purpose, 'bringing the UK to the world and the world to the UK'".[93]
Secondly, "he is accountable to the Board for BBC Worldwide's
management of BBC content and brand in BBC Worldwide's capacity
as the main distributor, and for the performance of BBC Worldwide
in the BBC's capacity as shareholder".[94]
The BBC offered no specific justification for Zarin Patel and
Jana Bennett's membership of the Worldwide Board, other than the
need for "close coordination".[95]
48. The BBC's fair trading guidelines state that
its commercial services must always maintain "a clear and
separate management structure" from the BBC's public service
activities.[96] The BBC's
public service activities must not "provide the commercial
subsidiaries with access to information (or resources) beyond
what would be strictly necessary for the efficient commercial
exploitation of a particular right or asset owned by the BBC's
Public Services".[97]
Several witnesses argued that the cross-Directorships are in clear
breach of these requirements.
49. Fremantle claimed that the cross-Directorships
give Worldwide an "unfair commercial advantage because [Worldwide]
know what the plans are for the future and from BBC Worldwide's
point of view they can have an impact on the planning of the BBC".[98]
Specifically, Fremantle argued that the cross-Directorships give
Worldwide "very significant contractual and informational
benefits unavailable to the BBC's commercial competitors".[99]
Pact, told us that it "cannot see how the BBC can ensure
an appropriate level of separation between its two activities
under these circumstances".[100]
50. When we put these concerns to the BBC, the Trust
Chairman conceded that it represented something of a dilemma:
"you might say commercially and in fair trading terms there
should be clearer separation, but then you come back to the fact
that brand management and protection of reputation requires very
close working".[101]
That said, the Executive's view remains "that BBC Worldwide
representation on the Executive Board does not make it privy to
information which gives, or would give, it an unfair commercial
advantage over its competitors".[102]
The Director General insisted that John Smith would not have access
to market sensitive programming or talent specific information,
"bluntly because the discussions in the Executive Board are
strategic ones".[103]
Nevertheless, the Chairman of the Trust hinted that changes to
the current arrangements were being considered, though we note
that there was no specific mention of the cross-Directorships
in the Trust's interim statement.[104]
51. We accept that the BBC's representation on
the Worldwide Board, especially at Finance Director level, permits
financial oversight and helps ensure coordination between the
two organisations. However, we find it impossible to accept the
justification for the presence of the Chief Executive of BBC Worldwide
on the BBC Executive Board. We disagree with the BBC's assertion
that this does not give Worldwide a significant, unfair advantage
over its competitors. Even if the BBC's claim that Board level
discussions are purely strategic and of little benefit to Worldwide
has some credence, it still creates an unwelcome perception of
special favours. It appears from the comments by the Chairman
of the Trust that a revision of this arrangement is already being
considered. We accept that the Executive and Worldwide may derive
some operational benefits from the presence of the Worldwide Chief
Executive on the BBC Executive Board, but believe that the BBC
should seek to achieve these via other means which do not contravene
its fair trading guidelines. We therefore recommend the removal
of Worldwide's representation on the BBC Executive Board. This
would represent one practical step towards a more transparent,
regularised and arms-length commercial relationship between the
BBC and Worldwide.
39 Department for Culture, Media and Sport, Broadcasting:
An Agreement between Her Majesty's Secretary of State for Culture,
Media and Sport and the British Broadcasting Corporation,
Cm 6872, July 2006, pp 37-39 Back
40
Department for Culture, Media and Sport, Broadcasting: An Agreement
between Her Majesty's Secretary of State for Culture, Media and
Sport and the British Broadcasting Corporation, Cm 6872, July
2006, p 37 Back
41
Ev 47; BBC: The BBC's Fair Trading Guidelines, July 2007,
para 2.12 Back
42
Q 35 Back
43
BBC Worldwide: Annual Review 2007-08, July 2008, pp 29-30;
Q 37 Back
44
BBC Worldwide: Annual Review 2007-08, July 2008, p 23;
Q 48 Back
45
Q 2 Back
46
BBC Worldwide: Annual Review 2007-08, July 2008, p 19 Back
47
BBC Worldwide: Annual Review 2007-08, July 2008, p 10 Back
48
Ev 11 Back
49
Ev 2 Back
50
Q 126 Back
51
Q 126 Back
52
"BBC Trust review of the commercial activities of the BBC-interim
statement", BBC Trust press release, 4 March 2009 Back
53
Why the BBC Trust?, www.bbc.co.uk/bbctrust Back
54
Q 38 Back
55
Speech by Sir Michael Lyons to the Broadcasting Press Guild, 15
October 2008 Back
56
Q 131 Back
57
Q 40 Back
58
Q 34 Back
59
Q 263 Back
60
Ev 92 Back
61
Qq 5, 38 Back
62
Q 38 Back
63
Q 5 Back
64
Ev 92 Back
65
Culture, Media and Sport Committee, Fourth Report of Session 2008-09,
BBC Annual Report and Accounts 2007-08, HC 190, Ev 27 Back
66
Culture, Media and Sport Committee, Fourth Report of Session 2008-09,
BBC Annual Report and Accounts 2007-08, HC 190, para 14-18 Back
67
Q 145 Back
68
Qq 146-147 Back
69
Ev 139 Back
70
Ev 139 Back
71
Ev 139 Back
72
Financial Services Authority, Handbook, accessed online March
2009, www.fsahandbook.info, London Stock Exchange Listing Rules,
Section 10, Annex 1 Back
73
BBC Worldwide: Annual Review 2007-08, July 2008, p 38 Back
74
25% of BBC Worldwide's net assets of £119 million equals
approximately £30 million Back
75
"BBC Worldwide acquires Lonely Planet", BBC Worldwide
press release, 1 October 2007 Back
76
Ev 139 Back
77
Financial Services Authority, Handbook, accessed online March
2009, www.fsahandbook.info, London Stock Exchange Listing Rules,
Sections 10.4, 10.5, 13.4 and 13.5 Back
78
Qq 40, 45 Back
79
BBC, Part Two: Annual Report and Accounts 2007-08, June
2008, p 130; BBC Worldwide: Annual Review 2007-08, July 2008,
p 34 Back
80
BBC Worldwide, Annual Review 2007-08, July 2008, p 34 Back
81
BBC, Part Two: Annual Report and Accounts 2007-08, June
2008, p 130. "Current exchange rates" as on 23 March
2009 Back
82
Qq 229-231 Back
83
Ev 128-129; Q 232 Back
84
Q 232 Back
85
Q 232 Back
86
Ev 139 Back
87
Ev 138 Back
88
Q 156 Back
89
Q 161 Back
90
BBC Worldwide: Annual Review 2007-08, July 2008, p 47 Back
91
Q 133 Back
92
Q 134 Back
93
Ev 136 Back
94
Ev 136 Back
95
Q 134 Back
96
BBC: The BBC's Fair Trading Guidelines, July 2007, para
3.6 Back
97
BBC, The BBC's Fair Trading Guidelines, July 2007, para
3.6 Back
98
Q 18 Back
99
Ev 2 Back
100
Ev 22 Back
101
Q 134 Back
102
Ev 136 Back
103
Q 136 Back
104
Q 136; "BBC Trust review of the commercial activities of
the BBC-interim statement", BBC Trust press release, 4 March
2009 Back
