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December 10 2024

“They slipped the surly bonds of earth to touch the face of God.”

Those words from the poem, High Flight by John Magee, were said by President Reagan on the afternoon of Tuesday 28 January 1986. They ended his address to the nation after the Challenger Shuttle exploded barely 2 minutes after its launch earlier that day.

The seven astronauts on board did not disappear into the sky. As described in Adam Higginbotham’s magisterial, detailed and gripping account of the tragedy and its aftermath – “Challenger: A True Story of Heroism and Disaster on the Edge of Space”, the cabin where they were seated did not break up but plunged two minutes 45 seconds later into the ocean where it was recovered from the ocean floor along with what remained of the astronauts and their personal effects. As recounted in the final chapters of this book, the extraordinarily detailed recovery efforts and forensic investigations revealed that at least three of the astronauts had been operating their personal Egress Air Packs (designed for ground emergencies only), containing air supply connected to their helmets. One of them had been breathing from it for the length of time it took for the cabin to fall into the ocean. As the author writes, not only had the astronaut “been conscious when he began his long descent toward the ocean, but … he had been busy, working through every procedure he could think of as he fell. He was nobody’s fool; he knew he was going to die. But he never stopped trying to live.”

It is one of many details which makes the book so absorbing to read but must have been unbearable for the families to learn.

The astronauts knew the risks of space flight. But they did not know – and were not told – of the very specific risks they were running on this flight. What makes the book so fascinating – despite us knowing what happened and why – is its minute-by-minute account of the decision-making process in the hours leading up the flight. The night before the flight (already delayed by a few days by unexpectedly cold weather) the engineers working for the manufacturer of the rocket boosters, Morton Thiokol, had said the flight should not go ahead because the very cold temperatures meant the rubber O-rings designed to seal the joins in the booster rockets during ignition would not work as they should. They knew this – not just from theory but because they had been repeatedly compromised on previous flights. (The engineers had been trying to find a solution but had not yet succeeded and there had been repeated memos explaining the problems and risks, all of which were largely ignored by the complicated and extensive process NASA had put in place for assessing the viability of its projects and specific flights.) What raised the risks were the freezing temperatures which meant – because extreme cold prevents rubber from stretching as needed – the seals failed long enough for highly flammable fuel to leak leading to what NASA’s commentator, after an agonising wait, called a “major malfunction”. But what turned this flight into a tragedy was the decision of Morton Thiokol’s managers to change the original advice to NASA from “Do Not Launch” to “Go” in little over an hour.

Why was the engineers’ advice overridden? The usual reasons: the more senior managers did not want to be responsible for a failure to launch a flight on which so much depended – for itself and for its main client – NASA. So they rationalised away the engineers’ concerns (there was no conclusive proof that if the seals were damaged, disaster would result – a bizarre approach to assessing a risk since if there were such proof, there would be no decision to take) and simply ignored it, giving NASA the answer they knew it wanted to hear.

As in Challenger, so in many other tragedies.

Even after this visible failure, Morton Thiokol senior managers sought to mislead the Congressional Commission about what had gone wrong. Not just to protect themselves but their most valuable customer. It was only because the senior engineer present at the hearing (Allan McDonald), realising what was happening, had to jump up and down waving his hand furiously to catch the panel’s attention, that his evidence was finally heard and the full story came out. The accident was not simply a technical failure. It was caused by years of NASA and its manufacturers not understanding the specific risks they were running with their design of the rocket boosters and the rubber rings in particular and – because of this – the final catastrophic failure of the launch approval process. Human decisions and human errors, in short.

The final report was, as is all too familiar, damning: cost-cutting, faulty design, management blunders, repeated warnings ignored, institutional hubris, safety and quality assurance structures weakened. As one of the Commission’s members wrote: “For a successful technology, reality must take precedence over public relations, for nature cannot be fooled.” NASA was described as having exaggerated “the reliability of its product to the point of fantasy” to continue getting government money: a finding echoed over the decades in very different sectors.

What might those not involved in space travel learn from this story?

1.     Controls / processes / systems are only as strong as at their weakest point. Any part of a system can become its weakest link if it is not properly understood: either why it exists, how it works – or is meant to – and what happens when it doesn’t.

2.     Understanding the risks you run is essential if effective action is to be taken to eliminate or mitigate them. NASA’s very success in establishing and running a space programme at all blinded it to the unnecessary risks it was running with these rocket boosters. How could a rubber ring similar to that found in most taps be allowed to hold up the astonishing achievement of space travel? But – are you listening Post Office executives, indeed all executives? – just because something works – or appears to – most of the time is no reason to ignore warnings about what happens – or might happen – when it doesn’t.

3.     Successful systems contain the seeds of their own failure, if pushed too far. NASA was by far Morton Thiokol’s biggest customer. Morton Thiokol had every incentive to do the best possible job. But what that meant was that it also had an incentive to ignore or cover up failings which threatened that lucrative business. What NASA wanted, it got. But it was not always what it needed.

Understanding and identifying the point at which a good system or control tips over into creating the very mischief it is seeking to avoid – or a risk no-one has anticipated – is the essence of all risk management. It is not so much a question of having or not having a control or rule but of understanding how it works, how the humans operating or responding to it behave and how that behaviour may itself undermine the control or lead to unexpected or unwelcome outcomes.

Ah – humans.

What happened to those engineers and managers who spoke up explains why it is often so hard to do so when much is at stake. Allan MacDonald knew that if he told the Commission what happened the night before the launch, he would damage NASA, his employers, his colleagues’ jobs and his own career. He went ahead anyway. When he and other engineers who gave evidence returned to their jobs, they were shunned by their colleagues and managers. So badly were they treated that they called themselves the Five Lepers. It took intervention by Congress for them to get their jobs back. It takes guts to speak up in such circumstances. Few people can – or are willing to – withstand the consequences of being made to feel a pariah by colleagues and bosses. A beautifully written law or procedure about no retaliation is cold comfort when you hear a colleague shouting furiously: “If I lose my job because you guys couldn’t resist testifying, then I’m going to dump my kids on your doorstep.”

If we want evidence of this more recently and closer to home, listen to the evidence given by junior employees of Kingspan, Celotex and Arconic, manufacturers of the dangerous cladding and insulation used on Grenfell Tower, to the Moore-Bick Inquiry (into the fatal 2017 fire), which found those companies to have deliberately deceived customers and the regulatory authorities about the safety of their products. Despite their concerns, they felt unable to challenge senior management, either because doing so wasn’t “doing any benefit to my career” or they were “embroiled in the culture of the business and it becomes second nature” or because they didn’t know who to speak to or because they “lacked the, I guess, the life experience to find the right way forward and it was – it was a failure of courage and a failure of character and a failure of moral fibre on my part not to do so.”

What they said, what happened to the Morton Thiokol employees nearly 40 years ago says more clearly than anything else what a toxic culture looks like. It is not just a culture which puts commercial interests above ethical ones. It is not just a culture which seeks to break the law or take unnecessary risks. It is not just a culture which seeks to mislead those who put their trust in its people and products. It is also a culture which puts the most junior employee in positions where they feel unable to do the right thing, which encourages and rewards them for doing the wrong thing then leaves them exposed when the consequences of the decisions taken at senior levels are cruelly revealed.

And finally – note how quickly the Commission was able to report – 4 months after the disaster. Contrast this with the years – often decades – needed for the many public inquiries Britain now has. Would it be unkind to suggest that they are a magnificent tool for the British state to appear to be doing something while in reality making sure that nothing of substance gets done at all? Potemkin justice: a magnificently expensive, intricately detailed facade, while behind it the systems and behaviours which led to the scandals continue as before, the people responsible for what went wrong get away with it and, as has happened countless times before, the recommendations are not acted on but neatly filed away, as a historical record of what might have been – if only death and weariness had not taken over. The process working exactly as intended, in other words. Or is that too cynical?

Whatever your thoughts on that, this book is well worth reading.

Photo by NASA on Unsplash

August 1 2024

Remember Archegos? Of course you do. And, if not, here’s a reminder. The banks which funded it and ended up with some humongous losses certainly do.

What about its founder, Bill Hwang? The man who used his fabulous wealth to set up The Grace and Mercy Foundation, a charitable organization which sponsors Bible readings, religious book sales, and funds Christian organisations. What happened to him?

Well, in April 2022 Mr Hwang was  arrested and charged by the US Federal authorities with 11 counts of securities fraud, wire fraud, conspiracy, racketeering and market manipulation. His Chief Financial Officer, Patrick Halligan, was charged with 3 counts of conspiracy, securities and wire fraud.

On 10 July 2024 Mr Hwang was convicted on 10 of those counts. Mr Halligan was convicted on 3 counts. Unless they succeed on appeal, they will face a long spell in a Federal prison.

According to the prosecution, both Mr Hwang and his CFO had lied about Archegos’s “positions in the companies” whose shares it traded and “just about every other materially important metric investment banks would use in determining the firm’s creditworthiness.”

Well now. There’s a phrase – “materially important metric”. Did it perhaps include the most important metric of all – the character of the person running it?

Other questions really ought to have been asked by now by the banks whose client Mr Hwang was. What due diligence did they do on him? And his fund? Was a fund run by a convicted insider dealer really a suitable client? How did banks get comfortable with this? Did they really know their customer? And if they did, how did they assess the risk this fund might pose? How was it monitored? And so on. Above all, was  his character even a metric – let alone a “materially important” one?

The prosecution went on. The lies both men had told the banks had allowed them to “fraudulently inflate a $1.5 billion portfolio into a $36 billion one”.

This is all very medieval. Money being magicked out of thin air like latter-day alchemy. The financier seeking to buy his way to Heaven through good works, though, alas, not with a Scrovegni Chapel painted by today’s equivalent of Giotto. Would it be impertinent to mention the 8th Commandment at this point? Far from being a wealthy financier seeking to preserve and enhance family wealth, Mr Hwang was essentially a “pump and brag” merchant, freewheeling and reckless, who used sophisticated derivative products and loans to mislead banks.

There is something rather Maxwell-like about Mr Hwang: a man with a dodgy record, an eye for the main chance, a willingness to brag and puff himself up, who would not let the mere matter of a regulatory finding against him stop him, who managed to get some of the most apparently sophisticated banks in the world to enable and fund his ambitions, ambitions which turned out to be so much fraudulent hot air.  (He even looks a bit like him.) Something rather Maxwell-like too about the way so many banks rushed to facilitate his trading and lend him money.

As is all too common, there was plenty of greed to go round. And stupidity.

June 1 2024

Part Three

This scandal was not an unfortunate consequence of stodgy processes, ill-informed incompetent executives and a blind faith in a flawed IT system. Post Office staff did not behave the way they did just for the hell of it. They did so because they believed this was what was wanted by the government, its owner. It was the government which set its “strategic parameters” while remaining at arm’s length from its day-to-day operations.

I wrote here about one key question which remains to be answered in relation to the cover up and the Post Office’s conduct over the Bates litigation: What did the government know? When did it know it?

But there is another important question which needs asking first.

To what extent did the government’s strategic priorities for Royal Mail and the Post Office lead to the scandal? 

Last week’s evidence from Paula Vennells shed some light on one aspect of this: the 2013 IPO of Royal Mail and her curious intervention, the one which according to her self-appraisal “really earned her keep”.

Royal Mail had been loss-making for years: governments, whatever their political persuasion, were determined to make it more commercial, perhaps even profitable and, eventually, to privatise what could be privatised. The Post Office needed to widen the range of products it sold, with financial products its preferred option. It also needed to reduce costs. These were the priorities. Any sort of admission that IT systems were not fit for purpose, might need more (expensive) investment risked derailing this. It also partly explains why no-one inquired too closely into how Post Office investigators actually behaved. Rather than being a genuine investigations team, they were a debt collection team collecting monies which the Post Office wrongly thought it was owed. There was no incentive to look closely at whether they were complying with the law, actually investigating the reasons for the discrepancies, or abusing their powers. The incentives went the other way.

Once privatisation was on the agenda, this became even more important. Ensuring the Royal Mail was attractive enough to be sold – profitably – and splitting the Post Office into a separate stand-alone company were the focus. Achieving this while ensuring that its day-to-day business and backroom functions are being run as they should be is a challenging task, even in the best run company. Not even its best friends would describe the Post Office thus.

The Royal Mail IPO

The 2013 prospectus for Royal Mail’s IPO contains a section dealing with its relationship with Post Office Limited (“POL”) and the material risks this exposed Royal Mail Group to – para. 1.18. It mentions dependance on the “effective operation of POL’s IT systems and processes” and on the public perception of Royal Mail and POL as one entity. “Any business or commercial decisions taken by POL could therefore be perceived as decisions taken by…. the Group and adversely affect the reputation and brand of the Group……Any failure in POL’s IT … systems …. may lead to adverse publicity and adversely affect the reputation and brand of the Group.”

What this section or the prospectus as a whole nowhere mentions is POL’s prosecutorial role during the period when it and Royal Mail were one entity. Nothing was said about any ongoing responsibilities for (a) any failings in prosecutions carried out pre-IPO and/or (b) any obligations to pay compensation.

Ancient, irrelevant history? No. By mid-2013 there were credible concerns about POL’s IT systems, the safety of past prosecutions and possible liability for compensation. POL’s insurers had been notified. Any prospective investor in Royal Mail would surely have wanted to know about risks arising from past conduct by Royal Mail (unless these had clearly been carved out) as well as ongoing risks relating to a future long-term business partner. Those drafting the prospectus must have thought so because something was put in about the Horizon system.

On her last day giving evidence, Paula Vennells stated that she had managed to remove references to Horizon from the Royal Mail prospectus. According to her, it was irrelevant and damaging to POL. She repeated that she had played no role at all in the prospectus or the IPO so it is odd how she was able to assess the possible relevance of certain statements. Perhaps an understanding of regulatory obligations and listing rules was one of her hidden talents.

What was it she was so keen to remove because it was so damaging and irrelevant? It was the statement which POL had proudly trumpeted in its press releases following the interim Second Sight review to show that subpostmaster allegations and concerns were exaggerated and unjustified.

“In July 2013 an interim report was published into alleged problems with POL’s “Horizon” computer system which is used to record transactions in its branch network. The report confirmed that no system wide problems had been found in relation to the “Horizon” software, but suggests that POL should examine its support and training processes for sub-postmasters.”

How could POL’s own press release be damaging? Two reasons: the reality behind the review and the other advice which POL had received by now made this statement “economical with the truth“. If questions had been asked, who knows where these might have led? Had there been even the merest hint of possible miscarriages of justice arising from matters taking place during the period when Royal Mail was in charge, how would this have affected Royal Mail’s sale? The question answers itself.

More questions, then –

• What exactly did she say to persuade those who drafted the prospectus to remove statements they clearly thought necessary? How accurate and evidence-based was it?
• Was this discussed by the Royal Mail Board? By the POL Board? With the Business Department? With the Treasury? With Ministers? With the underwriters and advisors?
• Were there discussions, arrangements, legal agreements regarding any ongoing responsibility for such matters?
• Who – and at what level – signed off?

And so on.

The Arbuthnot Test

It was Lord Arbuthnot who in his evidence pointed out the problem with the government’s arm’s length approach to POL. Where there was only one shareholder – the state – refusing to get involved in operational matters, even when such matters had gone badly wrong, there was a lack of democratic accountability. What sort of effective governance can you have of a state owned body which faces neither the discipline or scrutiny of the market nor effective democratic accountability through Ministers?

It is a good question. We have yet to receive a good answer.

Arm’s length?

But was the government that arm’s length in reality? There was some evidence that one of the non-executive directors, Richard Callard, representing the government, was closely interested in how POL responded to adverse press coverage, which doesn’t sound particularly hands off. The two other shareholder representatives, Susannah Storey and Tom Cooper, have yet to give evidence. What they say will merit close attention.

The government’s reaction to this scandal has been curious and surprisingly similar to Ms Vennells’ unconvincing response to a key question put by Jason Beer KC. He pointed out that if, for years, she had been told by staff that all was well with Horizon, it seemed odd that she was so insouciant when finally told that there were some serious problems with it and that these affected past and existing prosecutions. Why wasn’t she more shocked? Why didn’t she demand answers about how this could possibly have happened? Why didn’t she ask why she had not been properly briefed? Ms Vennells hand waved it all away by saying it was all historic and had now been fixed. But her reaction at the time was more instructive: it was consistent with someone who had known all along but was reliant on the measures taken to keep this knowledge to as few people as possible.

When Sir Wyn asked her why the briefing for her appearance before the Business Select Committee in 2015 was “very precise, very circumspect, very guarded” she had no answer (see here). In agreeing so easily that this was the intended effect of the briefing prepared for her, she had not thought through the implications of why her staff believed she ought to be briefed in such a way.

It was a telling moment.

The government’s reaction

Much the same could be said about the government’s response. If POL was a rogue organisation which for the best part of two decades had misbehaved, misled the government and the courts and wasted money on pointless litigation, you’d expect the government to be furious when it finally discovered this in 2019. After all, the Common Issues judgment severely criticised the Post Office’s behaviour in the litigation, its witnesses’ credibility and honesty (with one witness referred to the DPP for possible perjury) and its mistaken belief in Horizon’s integrity. It was not so much a mistaken belief as “the 21^st century equivalent of maintaining that the earth is flat” in the teeth of considerable factual evidence to the contrary.

But no – Ms Vennells was sent off with a large six-figure bonus, a CBE, a role in the Cabinet Office and well-placed to fast track into other plum public sector jobs. There is no evidence that anyone else suffered even the mildest rebuke. The Chair, Tim Parker, who presided over this, the disastrous attempt to recuse the trial judge, witheringly dismissed by the Court of Appeal as “without substance”, “misconceived”, “fatally flawed”, “untenable”and “absurd” and the substantive judgment in favour of the subpostmasters, remained in post until 2022.

This reaction does not suggest a government surprised by what it had learnt. Let alone one cross at what had happened and the money wasted. But if it was such a rogue organisation which could not be trusted, why is it – even now – being tasked to deal with the compensation schemes for subpostmasters?

Given the carefully drafted Terms of Reference, the Williams Inquiry may not be able to get to the bottom of what the government really knew and when. It may not be able to determine whether the government incentivised bad behaviour and the turning of blind eyes because it was more concerned to save money and sell Royal Mail. It may not be able to determine whether or not it was actively involved in or approved of the cover up of the miscarriages of justice. It may not be able to assess how far the government approved or encouraged POL’s aggressive and expensive litigation tactics to wear down the subpostmasters.

But if it can’t, this task should certainly be followed up by the Business Select Committee.

This scandal started out as an IT scandal. It has certainly turned out to be that. But it is also a legal scandal, a corporate governance scandal, and possibly also a financial scandal if investors in the IPO were indeed misled.

Above all, it is a governmental scandal – one encompassing the priorities the government set, the incentives it created, the supervision it exercised, whether it was complicit in one of the worst miscarriages of justice, whether it was complicit in or turned a blind eye to attempts cover up those miscarriages of justice and/or to pervert the course of justice and how it has sought to put these matters right. It too now needs to answer some serious questions about its own behaviour.

Photo by Jamie Street on Unsplash