Financing the firm: how the royal family make their money

We're not a family, we're a firm," was a line spoken by King George VI in the 2010 film The King's Speech. According to legend, his daughter Queen Elizabeth II sometimes uses the same expression in private. At least one investigative author has used it as a book title – Penny Junor in The Firm: The Troubled Life of the House of Windsor (2008). And it is by no means as odd a comparison as it might once have seemed, because the British royal family is these days a very businesslike operation.

Since her accession 63 years ago, the Queen's entourage has evolved from a late-Edwardian court, shrouded in mystique and deference, to a media-conscious and relatively transparent enterprise that might be described in business terminology as a real estate and leisure conglomerate with a heritage brand and a highly developed sense of corporate social responsibility.

That may sound far-fetched but the analogy between monarchy and management crops up everywhere these days. The sovereign's "tangible and intangible assets" have recently been valued (by Brand Finance, a consultancy usually concerned with consumer products and services) at £44bn – while the financial director of her Royal Household has been warned by a parliamentary committee to "get a much firmer grip" in pursuit of "greater efficiency savings".

Like the British constitution itself, financial arrangements underpinning the throne have evolved organically since royal prerogative was first constrained by Magna Carta eight centuries ago. Unravelling the royal cashflow, past and present, requires an understanding of differences between the Privy Purse, the Civil List and the Sovereign Grant, between the Crown Estate and the medieval Royal Duchies of Lancaster and Cornwall, and between the Queen's private wealth and the assets and entitlements that come with the role. In the end, the key question is whether "public money" is wasted or well spent. As an institution, the monarchy is a pillar of British life that is admired the world over – but it is also a cost centre, which anti-monarchists see as absorbing state funds that might otherwise go to healthcare or schools. Though that cost is a drop in the bucket of overall public-sector budgets – £35.7m for 2013/14 or just 56 pence per head of population, less than the cost of a first-class postage stamp – today's taxpayer-citizens expect value, performance and good governance, wherever their money goes. How did this shift of perception come about during the Queen's reign?

When George VI died on 6 February 1952, little had changed in the modus operandi of the Royal Household – leaving aside the trauma of his elder brother's 1936 abdication – since the accession of his father George V in 1910. The new Queen inherited a pact with Parliament dating from 1760, in the reign of George III, whereby the monarch surrendered all revenues from the Crown Estate (of which more later) in exchange for an annual Civil List payment – then set at £475,000 a year – to cover her running costs as sovereign.

She also inherited private family estates at Sandringham in Norfolk and Balmoral in Aberdeenshire, and a private fortune which remains secret to this day – though the Sunday Times Rich List guessed her total wealth in 2014 to be £330m, one third of it "consisting largely of blue-chip British companies' shares".

This mantle fell on Elizabeth at a time of post-war austerity, when food rationing was still in place and London was littered with bombsites. What are now called the "occupied royal palaces" – Buckingham, St James's, Kensington and Windsor Castle – were unmodernised and much in need of repair. And she was very much the woman for the job.

The product of wartime upbringing and sensible parents, the Queen herself is frugal by nature and disciplined at her desk: according to a courtier quoted by Andrew Marr in The Diamond Queen: "You send a memorandum and it's back the next day." Her attention to detail is also applied to visible items of Household spending: a BBC report in 2013 alleged that she reprimanded Palace police for eating snacks put out for guests, and even marked levels on bowls as a check. Likewise, her no-nonsense consort the Duke of Edinburgh has a naval officer's eye for efficiency. The couple have always been seen as safe stewards of the royal portfolio – but in the 1950s their finances were not a matter for public discussion and rarely for parliamentary debate.

Any suggestion that the Household should be organised more like a business would have fallen foul of the courtiers she also inherited – the likes of her first Lord Chamberlain, the Earl of Scarborough, a former soldier and senior freemason, and her first private secretary Sir Alan "Tommy" Lascelles, a Palace fixture since 1920 who was (says his biographer) "a man of old-world certainties, wary of innovation". Drawn from families with long pedigrees of military and public service, such men shared an upper-class disdain for commerce and trade: as a young man, Lascelles had loathed a brief stint as a stockbroker.

Change had to wait for the next decade, when new breezes were blowing through every aspect of British society. By the mid-1960s the long-fixed Civil List payment of £475,000 a year had become inadequate for official expenses, forcing the Queen to dip into reserves – and provoking public speculation about her private wealth, which The Times in 1969 estimated at £60m. Finally in 1971 a parliamentary committee increased the allowance to £980,000, and agreed to regular inflationary reviews.

Meanwhile, the court had also taken tentative steps towards modernity. Scarborough had been succeeded as Lord Chamberlain (head of the Household) by Lord Cobbold, a former Governor of the Bank of England who brought new financial acuity and described his position, tellingly, as "similar to that of a part-time chairman of a large company with a single active shareholder". He also spoke in 1968 of "bringing an ancient and venerable institution into more modern shape" – an aim that was advanced the following year by a television documentary, Royal Family, which offered behind-the-scenes glimpses of Buckingham Palace for the first time, and was said to have been watched by two-thirds of the British population.

The appointment of former BBC royal reporter Ronald Allison as the Queen's press secretary in 1973 was another milestone towards openness. But growing public fascination with the private lives of the royals – particularly the marriage prospects of the Queen's offspring and the wayward behaviour of her sister Princess Margaret – was accompanied by growing scrutiny of the royal finances, particularly from the hostile political Left. Most outspoken was the Labour MP for Fife, Willie Hamilton, who at the time of the 1971 review described Margaret as "an expensive kept woman" for her Civil List pay rise to £35,000, and maintained a vituperative commentary on "the price of monarchy" until his retirement in the 1980s.

Gradually the Palace acquired the financial knowhow it needed both to keep criticism at bay and to make ends meet within the constraints of the Civil List system. Lord Chamberlain from 1984 to 1997 was the urbane Earl of Airlie, former chairman of the investment bank Schroders – and one of his first decisions was to call in the accountants Peat Marwick Mitchell (now KPMG) to conduct a thorough review. The task fell to Michael Peat, who according to one source went through the Household "like a knife through butter" to identify savings, while Airlie himself conducted a discreet battle to regain control of royal affairs from Whitehall civil servants. The sharp-pencilled Peat (now Sir Michael) in due course joined the Household as its first "director of finance and property services"; he went on to be Keeper of the Privy Purse, Receiver-General of the Duchy of Lancaster and Treasurer to the Queen, and finally private secretary to the Prince of Wales.

While the Queen's own commitment to duty and restrained style kept her above criticism, scrutiny of royal value for money tended to peak at times when family members were attracting adverse headlines, an occurrence that was becoming all too frequent. 1992 was to be, in several respects, the Queen's "annus horribilis" – as she herself described it. This was the year of the break-up of the Duke of York's marriage, the leak of the so-called "Camillagate" tapes of conversations between the Prince of Wales and Camilla Parker Bowles, and the publication of Andrew Morton's Diana: Her True Story, informed by secret interviews with the Princess of Wales. Then on 20 November 1992 came the catastrophic fire at Windsor Castle, causing £36m worth of damage, most of it uninsured. When the then Home Secretary announced, without consultation, that taxpayers would pick up the bill, public reaction was distinctly hostile – contributing to the Queen's misery, which was made worse by the official announcement, days later, of the separation of Charles and Diana.

Discussion of royal finances was already under way between the Palace and the Conservative government of prime minister John Major – and the upshot of this unhappy period was agreement on two fronts. First, the Queen would meet some 70% of Windsor's restoration costs by opening both Windsor Castle and Buckingham Palace to the paying public for the first time, as well as making a £2m contribution out of her private account. Second, she would henceforth voluntarily pay tax both on her private income and on the surplus of the Privy Purse (the revenues from the landed estates of the Duchy of Lancaster) above what was needed to meet official family expenses not already covered by the Civil List. Similarly, the Prince of Wales (who had been paying some voluntary tax since he came of age in 1969) formally agreed to pay tax on the surplus of his income from the Duchy of Cornwall in excess of his own official running costs.

The terms of that agreement have subsequently been varied several times, but the amounts of tax paid are confidential. The annual Civil List payment left the Queen with surpluses in some years, but eating into reserves in others. It had risen to £13.6m by 2011/12, but had to be supplemented by £18.7m of "grant-in-aid" from government departments to cover travel, communications and property maintenance – and was replaced in that year by the Sovereign Grant, a single payment set as a percentage (initially 15%) of the profits of the Crown Estate, which dates from the Norman Conquest but these days describes itself as "an independent commercial business".

And a very significant business it is, far from the passive hereditary landlord its name might suggest. Chaired by Sir Stuart Hampson, ex-head of the John Lewis department store group, the Estate owns the whole of Regent Street and much of St James's in the heart of London's West End, where it is engaged in a £1.5bn redevelopment programme. It also owns and manages 139,000 hectares of agricultural land and forest, as well as half the UK's shoreline and all of its seabed out to the 12-mile nautical limit – which brings interests in cutting-edge industrial sectors: wind, wave and tidal power, carbon capture and storage, mineral exploitation, and cables and pipelines. With a capital value of almost £10bn, the Estate made £267m of profits in 2013/14 – of which the royal dividend was £36.1m, providing a small surplus over expenditure of £35.7m.

The Duchy of Lancaster – which delivered £13.6m to the Privy Purse in 2013/14 and holds almost half a billion pounds worth of real estate, including 18,500 hectares of land – traces its origins to a grant of land by Henry III to his son Edmund in 1256. Its annual reports have a traditional tone – and it is chaired not by a businessman but by the Queen's lord-lieutenant for Lancashire, Lord Shuttleworth. But it too is a progressive London landlord, owning the Savoy estate between the Strand and the Embankment, and has commercial interests ranging from holiday cottages on the North Yorkshire coast to quarrying in South Wales.

A third leg of the royal land-bank is the Duchy of Cornwall – dating from 1337, holding 53,000 hectares of land, and generating a net surplus of £19.5m in 2013/14 – which funds the Prince of Wales's household and the official outgoings of his sons William and Harry. Chaired by the heir to the throne himself through a body called "the Prince's Council", it is a rather less traditional enterprise whose mission statement speaks of "fully reflect[ing] His Royal Highness's views and wishes" with particular emphasis on "environmental integrity". The Duchy of Cornwall's most famous project is Poundbury, a greenfield development on the edge of Dorchester in Dorset that will eventually house 5,000 residents – and which vividly expresses the Prince's traditionalist approach to architecture and town planning, to the scorn of his critics. Also of note (though owned through his charitable foundation, rather than by the Duchy itself) is Duchy Originals, the organic foods brand he founded in 1990, and which now operates through a licensing agreement with the Waitrose supermarket chain.

The last piece of the conglomerate, also chaired by the Prince of Wales, is the self-funding Royal Collection of artworks held by the Queen (as sovereign, rather than personally) and made available, largely due to the settlement after the Windsor fire, to be seen by the public within the royal palaces or on loan to exhibitions. Some 2.7 million visitors contributed £55m to the royal coffers in 2103/14, generating a net cash inflow to the Collection's reserve fund of £9.2m. (The Collection's published "net asset" figure of £46m bears no relation to the market value of the artworks, which are highly unlikely ever to be sold.) These portfolios together amounted, according to Brand Finance in 2012, to total "tangible assets" of £18bn – to which the consultancy added £26bn for "intangibles" to come up with its "brand value" of £44bn – which was more than Tesco and Marks & Spencer combined at the time. Intangibles included "the value of the uplift to the economy attributable to the monarchy", based on an estimated £500m annual contribution to tourism and leisure spending plus the notional value of Royal Warrants ("by appointment to ... " badges awarded to favoured suppliers) and the use of royal imagery on all manner of merchandise.

That £44bn headline is of course open to challenge but there can be no doubt British royalty is a complex and wide-ranging financial enterprise, as well as a proud constitutional symbol. And taxpayers will continue to ask: is it well run, and will it be in safe hands in the next generation?

Sir Michael Peat's successor as Keeper of the Privy Purse successor is Sir Alan Reid, another ex-KPMG accountant. He and his deputy Mike Stevens, had to face fierce questioning on behalf of the taxpayer – focused on the Royal Household itself, rather than the wider asset portfolio – from the House of Commons public accounts committee in October 2013.

The panel of MPs chaired by Labour's Margaret Hodge noted that the Household had squeezed net costs down by 16% over five years but "more could be done" – particularly in relation to what appeared to be over-staffing. Household staff levels (at just below 500 "full-time equivalent" employees) had remained static for eight years, Mrs Hodge pointed out, despite the fact that "throughout the world of things funded by the public purse, people have had to do more for less. On the whole, in the public sector, that means fewer people delivering more efficiently. That does not appear to have happened." MPs were also concerned that "39% of the royal estate'"(referring to the "occupied palaces") was below "acceptable condition" and in urgent need of refurbishment, and that the Household Reserve Fund was down to its last million pounds. Hence the all-round need for "a much firmer grip".

Royal watchers more broadly share that concern in relation to the succession from the present Queen to her eldest son. In the business world, the departure of a long-serving and universally admired chief executive is often followed by internal turmoil, disappointing performance and a falling share price – witness the decline of Tesco since the retirement of Sir Terry Leahy in 2011. Is this the fate that awaits Monarchy plc?

The Prince of Wales has achieved extraordinary things through the charities he has founded, especially the Prince's Trust which does so much to help disadvantaged young people. But he has a reputation for extravagance both in his ideas and his lifestyle, and for eccentricities in his way of management. No one has ever said that he is as "businesslike" as his mother – yet one day in the next few years, when he is already well past conventional retirement age, he will inherit from her the running of a very big business indeed.