Examination of Witnesses (Questions 168-179)
MR JOHN
SMITH, MR
ETIENNE DE
VILLIERS, MS
ZARIN PATEL
AND MS
CAROLINE THOMSON
18 NOVEMBER 2008
Chairman: I would like to welcome to
the second half of this session the Chairman of BBC Worldwide,
Mr Etienne De Villiers, and the Chief Executive, John Smith, together
with the BBC's Chief Operating Officer, Caroline Thomson, and
Director of Finance, Zarin Patel. I am sorry that we have kept
you waiting. I should say that it is not necessary for each of
you to answer every single question or we will be here until supper
time. Nigel Evans is going to start.
Q168 Mr Evans: Good afternoon. BBC
Worldwide I know is tasked with making money but it also appears
to be making enemies along the way. Are there any barriers whatsoever
to your operations?
Mr Smith: It is fair to say that
we are obviously in the middle of a debate about Worldwide at
the moment and this Committee is rightly looking at it. These
debates are cyclical and it does come round from time to time.
Indeed the very last time, at the time when the BBC's Charter
was being renewed four years ago, much of the debate was centred
around a belief in some quarters that the company was underperforming
in all sorts of ways, had loss-making businesses and so on. We
have spent four years collectively addressing the concerns that
were then in the air: that underperformance, that the role of
the Chairman and the Chief Executive had not been separated and
that there were no non-exec Directors and things like that. Those
concerns have all been addressed and the company over the last
four years has been growing. That growth has led to an almost
doubling of its turnover and a tripling of its profits. Of course
success means that we are doing more things now than we were doing
four years ago, and the more we do, the more inevitably competitors
who occupy similar spaces find what we do a problem. I think there
is an inevitability about it. In answer to your question, Mr Evans,
about the boundaries, I think the previous session touched on
this a little bit but let me just say a little bit more. The key
boundaries are those that are very clearly laid out in the Charter.
The four commercial criteria that were mentioned earlier—and
we can go through again if you would like—are laid out in
the Charter as an absolute prohibition on doing anything which
is outside of those four criteria. There are other controls obviously.
For example, there is a borrowing ceiling imposed on the company
by the Treasury which imposes a restriction on the amount of money
that can be borrowed and therefore that can be invested. That
acts, in a way, as a sort of fifth criterion on top of the four.
On top of that, the strategy of the company must be approved—and
indeed was approved by the Trust—before we are then able
to come forward with any individual proposals for doing anything
new. It is safe to say there are quite a lot of controls in that
process and they are all laid out in the Charter.
Q169 Janet Anderson: There was a
bit of a discussion in the earlier session about the cross-directorships.
You and Mr Smith sit on BBC Executive Board and it is claimed
to us that that did not give you an unfair commercial advantage
because the Executive Board did not discuss forward schedules
in advance and so on. Could you just tell us a bit about what
you are privy to on the Executive Board, so that we can have a
clearer idea on that.
Mr Smith: Most definitely. I think
the best way of answering this question is to think that there
are two relationships that BBC Worldwide has with the BBC. One
is a vertical ownership relationship, whereby 100% of the shares
of the company are owned by the BBC public service. As you would
expect in any group structure with a subsidiary, there are issues
to do with that relationship that need to be handled. The other
relationship is a horizontal one, in that the BBC provides some
of the product which Worldwide then exploits around the world—indeed,
the majority but not all of it, as was mentioned earlier—and
there are issues around that horizontal relationship. I think
the point that was being made earlier is that the crucial thing
that the Trust needs to ensure in relation to the fair trading
system is that the way in which product is passed over that trading
relationship, the horizontal one, is done entirely fairly, with
all the appropriate checks and balances, observing the Fair
Trading Guidelines, with the independent audit and all those
things that were mentioned earlier, such that there could be no
unfair advantage given to the company in the acquisition of those
programmes, the acquisition of that product, for Worldwide to
then exploit around the world with some kind of inherent advantage.
On the other hand, as a subsidiary of a company whereby the shares
are owned entirely by the BBC, there are issues to do with the
BBC wanting to have control of its subsidiary and to know what
it is doing, and also wanting the subsidiary to know broadly speaking
what the parent is doing. After all, do not forget that both companies
share benefit from and build the BBC's brand all around the world.
They both have exactly the same brand, and it is very important
from that point of view. In addition—and maybe Zarin Patel
will say more about this—BBC Worldwide is contributing about
20% of the Group's total turnover. These are quite important relationships
as parent and subsidiary, and I think it is for that reason—and
it is not my decision of course, it is Mark Thompson's decision—that
he has asked me to sit on his Executive Board. In a straight answer
to your question as to what we talk about around the Executive
Board: we never talk about programming issues. Indeed, in so far
as BBC Vision (who produce the programmes of the BBC that we then
buy) are going to make any commissioning decisions, their commissioning
strategy is published for all distributors and all suppliers,
for them all to see at the same time, and we at BBC Worldwide
get it when independents or anybody else would get it. That never
happens at the Executive Board; it happens in other ways.
Q170 Chairman: The Head of BBC Vision
does not sit on the board of any other independent production
company.
Mr Smith: No. Forgive me, Chairman,
I was answering the question about my own position on the Executive
Board, although we could talk about that as well. The kinds of
things we talk about around the Executive Board, as Mark Thompson
said, are strategic. They are about the long-term direction of
the BBC, the issues facing it, the long-term funding issues, the
role Worldwide will contribute in that regard, et cetera, et cetera.
They are that kind of thing. They are not anything to do with
individual programming.
Q171 Janet Anderson: Are you satisfied
that that horizontal relationship, as you describe it, is carried
out fairly at the moment? Do you think it is done fairly?
Mr Smith: Yes, I am. I would say,
as was said earlier, the panoply of controls that are around it
are really very, very substantial. I would love to be judged,
personally, based on the performance of a company with people
crystal clear that there is no unfair advantage being given, than
through some peculiar and rather unwelcome or unwanted help that
is given because of that system not working. We have to bid for
the rights to every programme that the BBC makes in order to try
to win that programme from the BBC. There is a first-look agreement,
which we will explain in a minute, but basically we have to bid
a market rate for every programme that the BBC is supplying. We
pass on some because we look at them and decide we do not want
to bid on them—because it will not fit with our catalogue
or we do not think we can make any money out of it—but we
bid on the vast majority. We do not win all the bids. We lose
15-20% of all the programmes that are offered because we have
not bid enough or, alternatively, because we have decided not
to bid at all. And then the BBC offers those programmes out to
the rest of the market and other people end up getting them. There
are plenty of examples of programmes where we are not winning
bids, we are not offering a bid that is good enough. That system
is designed to ensure that we are regularly tested on the amount
of money that we are paying for the individual programmes against
the amount that other people in the market-place are willing to
invest. Of course there are some times when we overbid and sometimes
when we underbid, but, broadly speaking—and I am just going
to stray because I think it is important to answer another question
that I think the Committee may have—the way of judging whether
or not we are paying the right kind of price for these programmes
is are we making a decent return? If you look at our annual report—and
indeed we are willing to give any more information that is necessary—the
return we are making at the moment is 13% return on sales across
the entire group. That is a good return in the context of the
media industry, and we can only be doing that if we are paying
a relevant price for the programmes. We could not do it if we
were overpaying for the programmes, as some people were suggesting.
Q172 Janet Anderson: Zarin Patel,
I know you sit on the Worldwide Board. Do you see any conflict
there? Do you have any problems with that or do you feel comfortable?
Ms Patel: I do feel comfortable.
My role as Group Finance Director of the whole BBC is to manage
financial risk and to control financial risk—the control
relationship that John Smith talked about. Worldwide is a significant
commercial operation. It has significant overseas revenues, for
example, so it has much more risk than, say, the licence fee income
would have and therefore it is important that the Group Finance
Director is in a position to be able to control the activity.
You will also find that in public limited companies where there
is a significant subsidiary, perhaps a quoted one, the group CFO
will sit on the subsidiary's board. The objective assessment of
commercial efficiency is also another part of my role. As a non-executive
Director you can challenge that much more from the inside and
understanding how the whole company is run, than through papers
from outside the company. In essence, I do not take part in the
commissioning decisions. I do not take part in the role of the
commercial agency which tests market value. Neither do I take
part in the initiating or shaping things from the Worldwide perspective
either. That is the management team's job.
Q173 Janet Anderson: In both cases
does your remuneration reflect the fact that you sit on both?
Ms Patel: My remuneration does
not absolutely reflect any of my non-executive Directorships within
the BBC.
Mr Smith: My remuneration is determined
by the performance of BBC Worldwide.
Q174 Chairman: As non-executive Chairman,
how often do you feel it necessary to rein back John Smith from
pursuing various options because you feel they may be straying
too far beyond the remit of the BBC?
Mr De Villiers: As Chairman of
any company, and especially this one, I am tasked with the fiduciary
duty to shareholders to act with due care and concern and loyalty
to those, so I really act to help the Trust in fulfilling that
role to the licence fee payers. I do come to this with an independence
and an objectivity. I believe it is fundamental that we meet the
commercial criteria that we have established and which I believe
to be reasonable, and we have very healthy debates. This is an
organisation which—I think by virtue of the iconoclastic
nature of British education and the BBC—no one is afraid
to talk back to the boss, and so we do have very healthy debates.
We try to make new mistakes. I think this is a creative industry
and people only stumble when they move forward. This is what I
did at Disney. I did this for 15 years. We did it by building
a small, heavily subsidised international television business
of some $16 million turnover in 1986, to north of $1 billion.
In doing that we created local programming on a weekly basis of
over 250 hours. We spread Disney branded product reaching 250
million viewers. We did that with a far more fragile brand than
the BBC brand is. It is very clear from my accent that I am not
from these parts, but one of the reasons why I live here and one
of the reasons why I love being here is because of what the BBC
meant to me as a young South African growing up and listening
to BBC World Service and then being exposed to what the BBC stood
for in the late 1960s and early 1970s as a student. I get what
this brand is and I get what managing brands are. I can say with
hand on heart that this is a group of people I am incredibly impressed
by. I am impressed by their abilities, I am impressed by their
diligence, I am impressed by their kindness, I am impressed by
the responsibility that they feel towards the brand and they feel
towards the licence fee payer. In answer to a very short question
I have given a very long answer, but we have had at least 30 initiatives
that we have squelched. Some have never come to the Board.
Q175 Chairman: We being whom?
Mr De Villiers: BBC Worldwide.
Q176 Chairman: Where have the initiatives
come from?
Mr De Villiers: The initiatives
have come from within the system. Because the staff and the executives
have a very real understanding of "If you do not stand for
something you will fall for anything" these people stand
for something, so they have a clear idea of what would be compatible,
what would be consistent, and what would make sense. I think over
50% of those initiatives were stopped before they even came to
the Worldwide Board. Of the number that came to the Worldwide
Board, we did debate the number of them and we rejected a number
of them. I think it is a very healthy system. There are checks
and balances. We have the internal reporting systems which Sir
Michael and Mark talked to, but I am comfortable that this is
not over controlled. This is appropriately controlled, but it
is more controlled than Disney ever was. Disney was monomaniacal
about maintaining its brand. It is such a tenuous connection between
what their programming stood for and the confidence that mothers
and care-givers had when leaving their children in front of the
television set. We all make mistakes but hopefully very small
ones.
Q177 Chairman: This is slightly different.
The concern here is market distortion and whether or not it is
appropriate and whether there is a proper separation between the
main BBC and Worldwide, which is not a consideration which applies
to an organisation like Disney. The BBC said to us that the non-executive
Directors have the right to refer a proposal to the BBC Trust
if they have concerns that it may not be compliant with the commercial
criteria. Have there been any occasions on which that has happened?
Mr De Villiers: As you have heard
from Sir Michael, one of the four that have been referred to the
Trust in the time that I have been there met the threshold, and
three of those were referred because there were sensitivities.
I know I have that right at any point. If I felt that Worldwide
was going down a path that I felt uncomfortable with, I would
go and refer to the Trust. In fact, the publishing of the Lonely
Planet magazine was an issue that Nicholas Eldred, who is
the General Counsel of the company, the BBC, as well as the guardian
of the Four C's (the four commercial criteria), felt that the
Trust should be aware of and so he went into the system in order
to raise it as potentially a concern. In addition to that, the
COO of this company will meet on a monthly basis with the Trust
Unit to discuss commercial criteria. There is an ongoing formal
and informal system, therefore, that ensures that any issues that
might be of concern will be raised. None to date is the answer,
because we have never got to that point where we felt—
Q178 Chairman: You have said that
the Lonely Planet magazine had been referred up to the
Trust.
Mr De Villiers: It was put into
the process. I would need to have Caroline explain the distinction.
Ms Thomson: It has not, as far
as I am aware, been referred to the Trust. When Lonely Planet
was acquired, one of the key strategic aims of it, as my colleagues
will tell you, was to be able to launch a magazine along with
a much revamped website. When the decision to launch the magazine
came up to the Worldwide Board, it was felt by one of the public
service non-executive Directors, Nicholas Eldred, who is our General
Counsel, that it had to have a separate compliance process, which
it would not normally have had, to see whether it met the Four
C's. So the non-executive Directors on the Worldwide Board invoked
a Four C's compliance process, which otherwise would not have
happened.
Q179 Chairman: Has that been completed?
Ms Thomson: It has been completed.
It has not had to go to the Trust because it was completed satisfactorily.
|
