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INFORMED SOURCES November 2007

Network Rail – governance by rubber stamp

Think corporate governance is boring? Wait ‘til Captain Deltic gets involved

In the 1961 Edition of Chamber's 20 th Century Dictionary, which I bought with part of an apprentice prize (the rest went on even more spanners), ‘Governance' is listed as ‘archaic' and defined as ‘government; control; behaviour; direction'. Mrs Ford's New Oxford Dictionary simply defines it as ‘the action or manner of governing'. But it adds an archaic meaning of ‘sway or control'.

Which suggests that ‘governance' is one of those obscure words with a crusting of the weight of history which politicians, in particular, use when they want to make a vague concept seem portentous. As in the ‘Governance of Network Rail'.

Private companies, so the argument goes, have shareholders whose investment suffers if the company underperforms. Unhappy shareholders can hold the Board of Directors to account, for example by calling an Extraordinary General Meeting and voting for their replacement.

Thus equity is supposed to have a powerful influence on the direction of a company. Which is why, when Railtrack collapsed and was replaced with not-for-profit Network Rail, a company limited by guarantee, ‘Governance' was an issue.

Without the ever watchful eye and controlling hand of equity shareholders who would, in another stock phrase, hold the Board of Network Rail ‘to account'? To whom, for a start, did Network Rail belong?

Members

Well, a company limited by guarantee (CLG) is owned by its members. The Rail Safety and Standards Board is another CLG.

It is the members who provide the vital role of holding the Board of a CLG to account. Thus Network Rail has around 100 members, divided into four categories. Their responsibilities are detailed in the box. This text is probably the most content free collection of 62 words ever published in this column.

First we have the industry members, a representative collection of Passenger and Freight Train Operating Companies, rolling stock manufacturers and maintainers, track renewal contractors and other companies with access to the railway infrastructure.

Then we have the Public Members, which come in two flavours. Some represent organisations involved with the railway industry, such as local authorities and trade associations. The rest are individual public members who put themselves forward for selection. Although they may have an affiliation with a specific interest, this is not listed.

Finally we have that exclusive group of ‘Other Members', of which the sole representative is the Department for Transport. And thereby hangs a scandal.

Swashbuckling

As we all know, the swashbuckling, hard nosed, larger than life bus bandits and entrepreneurs who own the TOCs turn into a lily livered bunch of Caspar Milquetoasts when it comes to dealing with Government. Not for them the John Welsby philosophy of keeping civil servants at arm's length, to get a better swing at them.

What makes it particularly sickening is that when. In the past, I have taken on the safety fascists or disability Taliban the plaudits flood in from people infinitely more influential than me who daren't say ‘boo' to the Marsham Street office cat.

Clearly individual TOC MDs are not going to upset their pusillanimous masters by making waves. And believe me, TOC MDs to a man and woman are totally hacked off with Network Rail.

This, of course, was a problem with pirate ships. The pirate chief was elected by the crew. But to seek to get rid of him when you had handed over power was risky. Hence the development of the round robin where the names of the dissenting crew members were signed in a circle so that that no one was top of the list of trouble-makers.

For the TOCs, in their attempt to punish Network Rail's arrogance, anonymity was available through the Association of Train Operating Companies. And while I have satirised the panglossian views of its Director General in the past, ATOC is now putting itself about on its members' behalf, to some effect, in ticketing, the ITSO fiasco, energy policy and, even, disability legislation.

Intervention

So, on behalf of those of its members which are Industry Members, ATOC tabled a critical resolution at the Network Rail annual Meeting on July 18. Now comes what I consider a scandal, not a word you come across often in this column.

When the resolution was published , Mike Mitchell, DfT's Director General, Rail and National Networks telephoned ATOC Director General George Muir. According to an e-mail circulated to the TOCs by George, Dr Mike was especially concerned that the critical Resolution could trigger a media row in the week that DfT Rail was expecting to publish the High Level Output Specification.

As told in the e-mail, Mike Mitchell said that while he fully supported the TOCs holding Network Rail to account on performance, the government was in the ‘hot seat in the press', on overcrowding. With performance and safety, previously the ‘big public issues', out of the headlines Mitchell ‘did not want to see public disagreement between NR and the TOCs'.

Consider the implications of this phone call – and I gather others were also approached. DfT is a Member of Network Rail. As a Director General Dr Mitchell shares the duty of all members ‘to act in the best interests of the business without personal bias'. And yet here is one member trying to prevent other members doing their duty in an attempt to avoid embarrassment for his political masters.

I consider this inappropriate behaviour for a paid public official. Once upon a time I like to think he would have been called in by the head of the civil service and given a dressing down.

Chris Grayling, Conservative shadow transport secretary described Mitchell's intervention as ‘yet another classic example of the government trying to bury bad news'. When I pointed out to Chris the clear conflict of interest he said, rather shamefacedly, ‘oh, I didn't think of that'. Such is politics today.

Voted down

Come the day of the AGM and Resolution 10 was voted down by 58 to 13 with 9 abstentions. Two proposed resolutions submitted by individual Members, to establish a Members' Council and to ask the Directors to make a voluntary reduction in their bonus payment, were also ‘firmly rejected'.

But what really mattered was the reaction of the Public Members to the ATOC Resolution. We are indebted to reader David Stewart-David for articulating this in last month's Forum. One member did, indeed, describe the Resolution as ‘offensive'.

A common reaction was to accuse First Great Western, in particular of throwing stones in glass houses. But this exposed the ignorance among the Public Members of the relative contribution of their company and the TOCs ro delay minutes.

Performance

Take FGW. for example. In Period 5 2007-08 (22 July-18 August) it recorded the highest number of delay minutes of any TOC. This resulted in the second lowest PPM of 82.4%

But consider the cold numbers. FGW itself incurred 38,000 delay minutes: Network Rail was responsible for 79,000, excluding TOC-on-TOC delays.

In the case of SWT the operator was responsible for 14,300 delay minutes, its infrastructure provider 34,300. Only Arriva Trains Wales, with its ‘wooden spanner' winning fleet reliability, generated more delay minutes that Network Rail.

And what got the TOCs is that while they have been cutting delay minutes Network Rail has plateaued. Were I a TOC MD I would consider this ‘unacceptable'.

Members also criticised the wording of the Resolution. According to Informed Sources, if Network Rail's performance has not improved by the next AGM , the TOCs will be back with another, better drafted, Resolution.

Wannabe

Every year, a number of Public Members retire in rotation and Network Rail advertises for replacements. In May 2006 I thought it would be interesting to apply and see what happened.

By the time I started filling in the forms, journalistic curiosity had been overtaken by the belief that I had something to offer and that, having lived off the railway since 1976, it was about time I put something back.

After the usual CV stuff, Section 2 of the application form covers ‘abilities and experience'. First you have to provide details of abilities and experience you consider ‘relevant to your suitability to be a Public Member'.

Next, you have to provide two specific examples, from ‘professional, voluntary or personal activities', showing how your abilities and experience will benefit you in the role of public member. To complete this section, you have to express in your own words ‘how you believe your understanding and appreciation of corporate governance is relevant to and would bring added value to the role of a Public Member'.

Then all you have to do is find a referee, indicate any links with the railway industry and post the application.

Selection

Applications are assessed by a Membership Selection Panel Chaired by Alastair Macdonald. The recruitment processed is administered by consultants KMC International.

Successful applicants are invited to Candidate Workshops in late September. The Selection Panel then makes its recommendations for new Public Members to the Network Rail Board at the end of October.

But in 2006, my application failed at the first hurdle. In August I got a letter from Mr Macdonald. He thanked me for applying. Explained that deciding who should go through for this ‘interesting and somewhat unique role' was not an easy task, ‘especially with the quality of applications being so high'.

Then came the blow: the Panel had decided not to include me on the shortlist. However, there would of course be the opportunity to apply again, in subsequent years.

So, I did what Mrs F called the ‘piquey thing', and wrote back asking how, given my experience, I had failed even to make the shortlist? The gist of the answer was the need for a balance of background, experience and geographical spread.

Fired

By the time the 2007 recruitment process started I was fired up. Dr Mike had tried to keep the industry members quiet and it seemed to me that the Public Membership needed someone prepared to hold to account rather than hold the hand.

So I updated my application and in the section on my understanding of Corporate Governance, summarised the concerns expressed by Chris Grayling, highlighted Mike Mitchell's intervention and concluded:

‘To this situation I would bring a positive, focused and independent view of the role of a Member concentrating on key broad brush issues and informed by a unique knowledge of Network Rail, its finances, its commercial relationships with its customers, its regulatory issues, its technical problems and opportunities and the political climate in which it has to operate.

I would not be a ‘comfortable' Public Member, but I believe I would be a uniquely capable one, with the ability to make a valuable contribution'.

Well, there's no point in false modesty, even if, to forestall any comments, you have a lot to be modest about. To reinforce the application I needed a high level referee: when he had stopped laughing former Rail Regulator Tom Winsor agreed.

It was Tom who came up with the joke of the year. Speaking in early June he asked when I would hear from the Panel. ‘August 20', I replied. ‘That's a long time to say no', said Tom dryly.

Rejected again

And of course, as everyone predicted, they did say ‘no'. I did the piquey thing again, asking for feedback ‘so that I could make a stronger application next year'. Back the same pro forma letter as in 2006.

Not good enough. So I piqued again and asked for the courtesy of feedback specific to my application.

I was told, ‘as a matter of policy the Membership Selection Panel does no provide specific feedback on the merits or demerits of individual applications. To do so would at the very least be misleading in that each application is not only judged on its on contents but importantly it is judged in the round with the other applications received as well as the Panel taking into account the composition of the existing Public Members'. This is known as the ‘balanced slate'.

So, in other words, the 57 strong Public Membership is overweight on white middle-class middle-aged trouble makers with long experience of railways living in the home counties.

Concern

Now, I am sure that readers will be thinking that this is a case of Captain Deltic displaying ‘les idées au dessus de sa gare'. But separate the ego crazed aspirant from the selection process and I think there is genuine cause for concern.

Note that selection is entirely subjective. Note that Network Rail is involved in the vetting of the applicants. Note the catch-all ‘level slate'. Transparent it is not.

Does it matter? Well with Network Rail getting £2.5 billion of taxpayers in direct grant from DfT Rail this year, the company should be held to account. Informed Sources tell me that ORR was supportive of Resolution 10.

Nor is it going to be easy to get a majority in support of a critical resolution. The industry members and the organisations are riddled with petty feuds. Would you believe that the Rail Freight Group, whose members have seen delays reach record levels, were against Resolution 10?

Add in Ian McAllister's assiduous grooming of the public members – and this is a compliment, not a criticism, to a Chairman who is doing his job properly – and the likelihood of a critical resolution being passed is slim. Which, perhaps suggests that the company limited by guarantee structure, cuddly though its ‘not for profit' tag may be to left wing politicians forced to live with the privatised railway, needs to be reconsidered.

Meanwhile, I will be back next year. I wonder if John Armitt would be my referee? Or perhaps Gerald Corbett.

Continues.........