The BBC's structure may no longer be sustainable

The Public Accounts Committee (PAC) of the House of Commons tore strips off the BBC's regulatory body, the BBC Trust, at a public grilling on July 10th. A report by the National Audit Office, commissioned by the Trust at the behest of the PAC, had uncovered a pattern of irregular and poorly documented severance agreements for senior BBC managers in relation to a selected sample from 150 such agreements over the last three years (see my "Squandering public money, BBC style" of July 19th).

The trigger for the inquiry had been the questionable payment in November 2012 of nearly £500,000 to departing Director-General, George Entwistle, after his disastrous 54-day period in the job. This had included 12 months' salary, which might have been justified under his contract if he had been fired. But he had officially resigned - "honourably", as Trust chairman Lord Patten put it - so had no such entitlement. Patten and fellow Trust member Anthony Fry justified the payment as a way of ensuring a quick, co-operative and smooth exit.

The DG is the only member of the BBC Executive Board (EB) whose contract is determined by the Trust. Tessa Jowell, as Secretary of State, had replaced the BBC Governors in 2006 because she felt their dual role as regulators and cheerleaders for the BBC was too compromised, as evidenced by the departure of both the chairman of the Governors, Gavyn Davies, and Director-General Greg Dyke, after the Hutton verdict on the Gilligan affair: the Governors had failed to constrain the behaviour of the executives.

She saw the Trust as a more arm's length body, setting strategy and ensuring value for the licence fee payer as it held the EB to account. Most commentators saw this as a fatally flawed structure, with the Trust simply lacking the day-to-day knowledge and power to carry out its function effectively, whereas the old Governors had been fully engaged at the highest level of the BBC.

The scale of manager departures the BBC has experienced in recent years cannot have been a surprise to the Trust: indeed, they spent a great deal of effort pressuring the EB to reduce top level salaries and benefits, as well as headcount. This caused - as Anthony Fry has asserted - a good deal of conflict with the EB. Unfortunately, as he conceded, the Trust paid little attention to the size and calculation of severance packages, no doubt more focused on the gratifying reduction in senior manager numbers.

What worried the NAO - and the PAC and BBC Trust in turn - was the regular use of payment in lieu of notice (PILON) as a sweetener, over and above contractual redundancy entitlement, to induce people to go. Even where leavers had new jobs to go to, and even when notice was served well in advance of actual departure, 12 months of PILON became normal.

At the July 10th session, the BBC Trust – by then lacking anyone from BBC management at the time the departures happened, other than the Human Resources director, Lucy Adams - decided to deny all knowledge of this perceived irregularity in payments, and lay all the blame on the EB, inviting the PAC to question former Director-General Mark Thompson about what happened. With most of the old EB replaced by recent appointees of the new Director-General, Tony Hall, it was understandable that Hall chose to concede that management had been to blame ("we lost the plot") and to announce a future cap on severance payments of £150,000, with no PILON. Notice would be worked or waived, not bought out.

Thompson, however, declined to play the role of scapegoat. He sent the PAC a 13,000 word screed, spelling out how the pressure to reduce costs and numbers had prioritised speed of departure above economising on payments, and operational continuity over the niceties of contractual wording. He claimed the cost of the severances was quickly recouped by subsequent savings, and refuted the claim that the Trust and its former chairman, Sir Michael Lyons, had been left in the dark about two of the highest profile departures, from the EB itself: that of Deputy DG Mark Byford after 31 years service, and of Marketing Director Sharon Baylay, after less than 2 years.

He gave the PAC documents showing that he had set out for Lyons the case for the two redundancies and the likely cost, so as to get his advance acknowledgement before submitting the proposal for formal approval to the non-executive directors on the EB Remuneration Committee (EBRC). He also claimed to have briefed Patten on the payments the following year when he took over as Trust chairman, so that he would be able to deal with any questions when the Report and Accounts for 2010/11 were published.

Thompson was duly summoned to a second PAC hearing, on September 9th, alongside Lyons, Patten, Fry, Adams, the head of the Trust secretariat, Nicholas Kroll, and Marcus Agius, who had been the senior non-executive on the BBC board at the time and had chaired the EBRC. Agius had publicly endorsed the Thompson version, whilst various Trust members had publicly backed the Lyons and Patten denials of knowledge.

What played out in a dramatic session was a re-run of Rashomon. Each person's story was itself correct, but only by cross-matching them could we work out the truth. When Thompson theatrically produced a copy of the Daily Mail of October 12th 2010 detailing the Byford departure and package, asking rhetorically why he would have briefed all the press but not the Trust, Kroll replied: "exactly". (Those of us who had wondered how Thompson, as DG, had managed to miss every single newspaper story about the Newsnight programme on Jimmy Savile shook our heads in disbelief at this brazen flourish.)

It transpired that the Trust knew the quantum of the Byford severance, and that his actual departure would be some time in 2011. What they were reluctant to work out for themselves was how the total was calculated - a simple enough exercise, as Byford's maximum redundancy entitlement was a little less than £500,000 (representing the 12-month limit on the one month's salary for each year served), so the balance could only be pay in lieu of notice, as pension top-ups were no longer allowed.

Kroll's complaint was that no-one had spelled out that Byford would not be formally given notice till June 2011, and then be granted 12-months' PILON. Everyone clearly knew that not deducting from his PILON the 8 months that Byford remained at the BBC after his departure was announced was an abuse. The formulation that he and the BBC were "in consultation" between October and June over his severance payment, when the amount had been agreed and signed in October, was clearly a sham. So whether to a greater or lesser degree, the Trust was complicit in a manipulation so as to induce Byford to agree his exit, and continue working on his various projects until Thompson was ready to let him go.

What Patten - and by inference his predecessor - expressed indignation about was the alleged withholding of details of payments to departing managers made "outside contract". The NAO had also criticised payments that were "non-contractual". Yet by definition, payments in lieu of notice were contractual if the absence of a notice period was genuine. To allow Byford eight months' extra salary (and pension contributions) after announcing his departure and then formally give him 12 months' notice was highly questionable. But the indignation was surely as fake as the PILON. The Trust could not have failed to detect a fiddle if it had given the matter enough thought.

Of course, the Byford deal was not the most egregious. Pat Loughrey, when his post as Director of Nations and Regions was abolished, was able to stay for 14 months before moving to a similarly-rewarded job at Goldsmiths (why do so many institutions imagine that former BBC managers will make good leaders?), picking up his 12 months' maximum redundancy cheque, plus 12 months of PILON and a pension fund top-up of £266,000 (just before such top-ups were banned).

Crucially, no BBC witness at the September 9th hearings, whether from the Trust or the EB, challenged the underlying assumptions put forward by Thompson, all of which were simply wrong. Like two bald-headed men arguing over a comb, Patten and Thompson (and their assorted supporters) were debating a minor detail - exactly how much were we told? - when the real issues were the quantum and the rationale.

Thompson argued that there was intense pressure to reduce manager costs and numbers which was coming from politicians, the media and the Trust, and that "getting people out of the door" (to use a telling phrase from Lucy Adams) was more important than worrying about the precise cost. Yet we know from the published documents (the original NAO report, a second NAO report, and a report from KPMG covering the period from 2006 to 2009, immediately before the 3 years addressed by the NAO) that the rate of exit before the announcement of the Byford and Baylay departures was identical to that after: 50 senior managers a year, 326 in six and a half years. The exit pressure and the reported "success" of Thompson's policy was an illusion.

The second rationale for generous severances was to ensure co-operation from employees who might otherwise become disaffected. Thompson told the PAC he did not want Byford distracted by headhunters during his last months. Marcus Agius was concerned about undermining morale amongst managers potentially facing redundancy if severances were less than generous.

There was no need to seek co-operation from Sharon Baylay for her heavily massaged £392,000 leaving cheque, as she left almost immediately after her departure was announced. In fact, she had no entitlement to redundancy when Mark Thompson (who had hired her at a spectacular salary as Marketing Director) decided to dispense with her and her job title after barely 18 months. As it happens, she was pregnant, and Agius tells us that it was not BBC policy to make pregnant employees redundant. So, after her departure was announced, she was allowed to stay on the payroll long enough to cross the 2-year minimum threshold necessary to earn redundancy pay (£51,667 in her case). Thompson expressed it differently: including Baylay's prospective maternity leave (if she had not been fired) would have taken her over the 2-year requirement. For good measure, she was given an extra month's salary (£25,000) as a gift and 12 months' PILON.

All the waffle about morale was effectively torpedoed by Tony Hall in July, when - in response to the first NAO report - he simply abolished PILON. The BBC has not collapsed. Managers are still departing, but they can work their notice or waive it: they can't monetize it. Simples, as Aleksander Orlov might say. In any event, to imagine that Mark Byford - a super-loyal BBC lifer - was likely to become disaffected or distracted if he was deprived of £300,000 of PILON (for the 8 months of his notice period that he actually worked) is an insult to him, and to our intelligence.

The third rationale was "payback". That Thompson and the other BBC witnesses actually believe this stuff is alarming. Of course, however much you pay departing managers eventually the "saving" from not paying their salary will exceed that amount, unless they are replaced at little or no reduction in cost. To talk about 16-month "paybacks" is meaningless. Even if Byford had been handed £2 million, rather than £1 million, the BBC would have "saved" that amount in salary in four years. The savings the BBC claims from all this reduction in managers - reportedly now £19 million a year - are simply a reflection of how much the BBC wasted each year, for decades.

Indeed, Thompson wrote in his evidence that he had told the EBRC there would be "divisional" savings on top of salary savings - Byford's office, his PAs, his car, his driver, his travel, his expenses, his entertaining, his NICs, and so on ("battalion" sounds more appropriate than "division", but you get the picture). In point of fact, all those savings would have accrued whether Byford received a £1 million farewell, or half that - as PAC chair Margaret Hodge kept asking, isn't £500,000 enough for anybody?

And there's the rub. Patten had a moment of honest reflection at the hearings when he said the BBC had a cultural issue which it had to grasp and for which it had to apologise. Salaries were simply far too high, so exits were consequently far too expensive. He cited Neil McGregor's £180,000 salary at the British Museum - was there anyone at the BBC who deserved more (scarcely glancing at Lucy Adams to his left: salary £322,000)? It has now been revealed that the DG's office manager is paid £131,000 pa.

Lord (Michael) Grade, the last chairman of the old BBC Governors, made two startling admissions on Newsnight on September 9th. He admitted that he had offered Mark Thompson too high a salary to tempt him to the BBC from Channel 4 (well above that of his predecessor as DG, Greg Dyke). This arguably swelled the rising tide of managerial salaries at the BBC, with Thompson's acting as a magnet to those below.

Disingenuously, Thompson referred in his PAC document to the growth of BBC pay in the late 1990s and early 2000s - in other words, before he became DG (he famously derided the BBC, when he was briefly at Channel 4, as drowning in a "tsunami" of licence fee cash). In fact, executive pay continued to grow under his leadership: his own to an astonishing £840,000 a year. For years, he received huge supplements to his pay as "compensation" for the cap on pension contributions that the HMRC rules imposed on employers.

Notably, in his written evidence, Thompson mocks Patten for agreeing an "outside contract" severance deal for his failed successor, George Entwistle, paying him the 12 months' salary associated with dismissal, whilst publicly stating he had resigned. Resignation, Thompson argued, would only have "entitled" Entwistle to 6 months' pay. In fact, if Entwistle had resigned he would have had no entitlement to any payment. The BBC would have been entitled to require six months' notice; or it could waive notice; but it was under no contractual obligation to pay any cash. Patten unquestionably committed the same error with Entwistle as Thompson had with Byford, but it is Thompson's mistaken assumption about entitlement which is the biggest giveaway.

Grade's second admission was even more startling than the first: that the BBC's huge guaranteed income effectively distanced BBC executives from the true value of money, as compared with a real business, where all the cash actually belongs to the owners, who care about it. By that measure it is the future of the licence fee that should be in question, not that of the BBC Trust as it currently and justifiably is.

It was Grade who had been at the forefront of the case for replacing the Governors with the Trust (though he jumped ship to ITV before he could become its first chairman), using the argument "follow the money" - that is, if the Trust were the guardians of the licence fee, they would have effective power over the executives. Yet on severances the Trust lost track of the money and bought into Thompson's dodgy rationale too readily, pulling away only over the irregularities at the edge of the process, not the process itself. It is worth reminding ourselves that the 326 manager departures cost the BBC £47.5m, but that only £3.8m of that - 0.015% of licence fee income during the period - was judged by the NAO and KPMG as irregular. The Trust was on board for all the rest.

That the Trust and EB members should argue so passionately and publicly over this narrow point is indicative of its sensitivity, but also of a failure in either structure or relationships, or both. The BBC is urgently examining the wording of the Charter so as to eliminate - if possible - the ambiguities and gaps in the design of the present governance system. If that fails the days of the Trust will be numbered. Patten was willing to argue that he and Tony Hall will have a much better working relationship than Lyons had with Thompson; but as chairman Hodge noted, a structure which depends on personal relationships is not sustainable long term.

Thompson scored a number of own goals in his written evidence. He promised the Trust that the switch of Jana Bennett from BBC Director of Vision to a post in BBC Worldwide specially created for her would be "nil cost": yet when she was subsequently made redundant by Worldwide, a cheque for £687,333 was needed to soften the blow. Whether paid directly by the BBC, or on its behalf by Worldwide, that cost was borne by the licence fee payer (and included a further £40,000 in NICs on top).

Perhaps the saddest confirmation of Grade's negative judgement of BBC executives is the way these public service broadcasters have all - with one honourable exception - accepted and kept these enormous severances. Some have still to be declared - the NAO referred to four departures relating to operational foul-ups, and we only know about two: Lesley Douglas (dropped after the Brand/Ross fiasco) and Peter Fincham (who accepted the blame for a mis-edited clip of footage of the Queen, even though the BBC inquiry into the incident did not point the finger directly at him but the Trust needed a fall guy, and £500,000 in pay-off did the trick (surprisingly, for a man who received £15 million from his share of the sale of independent production company Talkback TV).

Inevitably, Thompson received a pay-off, too. In his PAC note, he tells how he had known "for some years" that he would leave the BBC "soon after the 2012 Olympics". In January 2012, Patten announced he had appointed headhunters to find a new DG. Yet when Thompson duly stepped down in September, a month after the Olympics, he still contrived to receive an extra payment of £102,000 to compensate for staying on as long as he did. Really.

Thompson also reveals in his note that he told the Trust of his intention to abolish the post of Creative Director, one that Alan Yentob continues to hold three years later. And he confirms that the (still unpublished) letter that most of Murdoch's competitors signed - and he co-signed - calling on Vince Cable to intervene in the News Corp bid for BSkyB asked for the bid to be blocked, not just investigated.

This wholly unnecessary act - one avoided by ITV on the grounds that it would prejudice ITN's reputation as an impartial news source - eventually earned Thompson a reprimand from the Trust for not seeking approval before signing. The Trust was too weak to fire him for a clearly dismissable offence, and Thompson was too indifferent to its views to care. That the BBC controls 60% of all news consumption in the UK - six times the combined share of News Corp and Sky News - only adds to the whiff of hypocrisy here.

The episode was symptomatic of Thompson's behaviour; indeed, it occurred at almost the same time as he was trying to triangulate the Byford deal. And we can see the real weakness in the structure Jowell created. Historically, the chairman of the BBC has been an important counterweight to the Director-General, particularly a well-established DG. Gavyn Davies made the mistake of getting too close to Greg Dyke to be able to help the BBC recover from Hutton's scathing criticisms. By contrast, Lord Hill and Duke Hussey both disposed of sitting DGs.

The chairman of the BBC Trust is not the chairman of the BBC. However, in failing to require that a non-executive chair the BBC Executive Board, the Trust allowed Thompson himself to take the role, in direct breach of normal good governance practice. The result was that the only independent chairman - of the Trust - was too remote from the DG to be a reliable sounding board, and the non-executives on the EB lacked the status to constrain a determined DG. The four current non-executives have just 84 months of experience at the BBC between them.

At the PAC, Patten disingenuously pointed out that Ofcom would have no interest in "regulating" BBC pay. Of course, the case for replacing the Trust as the external regulator of the BBC with Ofcom (which performs that function for all other UK broadcasters) is strong, but it is the structure of the main board which is the proximate cause of the severances fiasco. At Channel 4, the combined board has equal numbers of executives and non-executives, but both the chairman and the deputy chairman are non-executive and the non-executives have clear control of pay, employment contracts and severances. This structure did not save Channel 4 from the embarrassment of its own Chief Executive signing the Cable letter, but at least that decision could be attributed to the whole board (no doubt influenced by the strong anti-Murdoch sentiments of its deputy chairman, Lord Puttnam).

So was the severances affair no more than a storm in a teacup? Compared with the £100 million lost without trace on a digital project that Thompson assured the PAC was absolutely on track in 2011, and which Hall dumped as soon as he saw the numbers; or with the £1.7 billion deficit in the BBC pension fund; or with the billions spent on new buildings and shifting a chunk of the BBC to Salford, the £3.8 million spread over six years is small beer.

Yet the public display of animosities, frustrations and selective memories was not just hugely embarrassing: it revealed an organisation ill-managed and ill-governed, a corporate culture depressingly far from what public service implies, and a structure ill-fitted to its purposes and our needs.

For the Trust to be responsible for the DG's pay and the EB's structure but nothing else in relation to how the BBC is run, and to be responsible for strategy and policy but not a policy as significant as severances for 326 senior managers, is surely unsustainable. The current exercise to "fix" the ambiguities in the Charter may steady the ship, but the Trust is surely - to borrow a well-worn Westminster phrase - in the last chance saloon.

Meanwhile, Tony Hall has yet to show that he has learned the lesson about culture that Patten spelled out to the PAC. He has hired three high-profile executives - James Purnell, Anne Bulford and James Harding - all at high salaries.  Soon he will have to replace Lucy Adams, who has resigned (receiving no severance): if Hall pays her replacement anything more than half Adams'£322,000, he will be sending us - and chairman Patten - a distinctly unwelcome message.