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Royal Mail — Strictly Confidential
ROYAL MAIL HOLDINGS plc
(Company no. 4074919)
Minutes of the meeting of the Board of Directors
held at 148 Old Street, London, on 6" April 2004
Present:
Allan Leighton
Marisa Cassoni
Adam Crozier
David Fish
Richard Handover
Sir Mike Hodgkinson
Tony McCarthy
David Mills
John Neill
Elmar Toime
Bob Wigley
In attendance:
David Burden
Jonathan Evans
Also present:
Richard Barker
Michael Mire
Martin Gafsen
RMH04/67
RMH04/68
RMH04/69
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David Mills
Chairman
Chief Financial Officer
Chief Executive, Royal Mail Group
Non Executive Director
Non Executive Director
Non Executive Director
Group Director, People and Organisational Development
Chief Executive, Post Office Ltd
Non Executive Director
Executive Deputy Chairman
Non Executive Director
Chief Information Officer
Company Secretary
Post Office Limited, for RMH04/76
McKinsey & Co, for RMH04/77
Group Investment Director, for RMH04/76-77
MINUTES OF PREVIOUS MEETING RMH(04)3®°
The minutes of the meeting held on 9 March 2004 were
approved and signed.
MATTERS ARISING — RMH(04)70
The Board noted the status report.
OTHER MINUTES — RMH(04)66-69 and 84
The Board noted the minutes of the meetings of:
the Pensions Sub-Committee of 9 February 2004
the Post Office Ltd Board of 17 February 2004
the GLS Supervisory Board of 27 November 2003
the Audit and Risk Committee of 11 November 2003 and
18 March 2004.
in respect of the Post Office Ltd Board minutes, David Mills
undertook to clarify the reference at POB04/07(a)(ii) about the
reported potential loss from the Ordinary Account.
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Richard Handover
Allan Leighton
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CHAIRMAN’S BUSINESS
The Chairman reported that he had been in correspondence
with Nigel Stapleton, the Chairman of Postcomm. By July
Postcomm had to decide the speed at which it proposed to
open the postal market to further competition, and to have
completed some preliminary steps in determining the shape of
the future price control. Allan Leighton had therefore invited
Mr Stapleton and a few of his fellow commissioners to attend
the May Board meeting to discuss these matters before any
firm proposals were made;
the Secretary of State had responded on 31 March to the
Chairman’s letter about the shareholder relationship discussed
at the previous board meeting. The Secretary of State had
approved the relationship document and had sanctioned the
requested increases in pay for certain directors; however she
was continuing to withhold agreement to pending Board
appointments until actions were in hand to recruit a new non-
executive director from the trade union sector. The Board
continued to have reservations about the need for such an
appointment, and agreed that the next steps should be for the
Chairman of the Nomination Committee to write to the
Secretary of State expressing the Board's views, in advance of
which the Chairman would attempt to have an informal
discussion with the Secretary of State.
REPORTS FROM CHAIRS OF BOARD COMMITTEES
Remuneration Committee: David Fish reported that the
Committee had met the previous day and had discussed:
e results from a survey conducted by Mercers into
remuneration levels for executive directors, in preparation
for the July review
¢ outline proposals for extending the arrangements for long-
term incentive plans and the Share in Success scheme
¢ proposals for the annual bonus scheme for 2004/05, on
which the Committee had given its views to executive
directors for further consideration
* proposals for the introduction of salary sacrifice
arrangements in connection with employee pension
contributions;
Audit and Risk Committee: Bob Wigley reported that the
Committee had met in March, when the main items discussed
had been proposals for reviewing the Committee’s terms of
reference and way of working to ensure continuing compliance
with the Combined Code and best practice; preparations for
the production of the annual accounts; whistleblowing
procedures; the level of internal audit resource, and reports
from the Director of Internal Audit on the Company's control
environment and state of compliance. The Committee had
decided to hold in depth reviews with management
representatives on internal audit reports which had revealed a
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state of either no or limited assurance: the first of these
meetings had been held earlier that day, when the Committee
had had useful discussions with the heads of operations about
the implementation of the Single Daily Delivery programme,
and with the Director of People and Organisational Services
about a recent serious payroll fraud, and with the Group
Finance Director and Company Secretary about the PAYE
audit;
Corporate Social Responsibility Governance Committee: Sir
Mike Hodgkinson reported that the Committee was currently
giving priority to safety issues as there continued to be a
number of areas where step change improvement in safety
performance was needed.
EXECUTIVE DEPUTY CHAIRMAN’S REPORT — RMH(04)71
The Board noted Elmar Toime’s report.
EXECUTIVE REPORTS
Oxford industrial action: Adam Crozier updated the Board on
the recent recurrence of unofficial industrial action at Oxford
mail centre, the fifth incident in five months. The dispute had
been triggered by accusations of bullying in the mail centre:
however disagreement had developed further over how, on
resumption of work, management proposed to deal with
people who had taken unofficial action. It was important to
ensure that employees could not simply take unofficial action,
which was unlawful, without there being consequences for
them — particularly in a location with such a poor record of
unofficial action. Discussions were taking place with the CWU
at national level in an attempt to resolve the dispute, but there
was a real risk that the action could spread across the country,
although attempts were being made, successfully so far, to
constrain this;
Parcelforce Worldwide: the PFWW executive meetings were
being reconstituted as formal Board meetings, with Marisa
Cassoni joining the Board and Adam Crozier taking the chair.
Rico Back would also join the meetings on an occasional
basis. Work was taking place on analysing the PFWW.
business model to ensure it continued to be a sustainable
commercial proposition. In the meantime the PFWW
management was focussed on improving the current model:
pressure was continuing to be brought to bear on costs, and
an announcement had been made to shed a further 1200 jobs.
There remained a number of union restrictions to remove, in
particular the constraint on moving to higher levels of owner-
drivers, and these were being tackled;
Single daily delivery: Adam Crozier updated the Board on the
latest position with the implementation of SDD revisions. 970
delivery offices had deployed their revisions, and the rest were
due to be implemented within the following 1-2 months. Within
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this remainder was a potential hard core of offices which could
give rise to industrial relations problems, and these were being
carefully managed on an individual basis;
Headcount reduction: Adam Crozier informed the Board that
the business was on track to reduce headcount numbers by
some 9-10,000 by around the end of April. The number of
surplus staff was growing, and increasing pressure was being
exerted to encourage more staff to leave on the existing
voluntary redundancy terms. The position was being
monitored carefully — the business could not afford to carry
large numbers of surplus people, while it was equally aware of
the desirability of avoiding the need to recourse to compulsory
redundancies.
GROUP FINANCE DIRECTOR’S REPORT
2003/04 performance: the Board noted Marisa Cassoni’s
presentation, based on the flash financial results for period 12.
These showed that for the period, profit from operations was
£34.1m, which was £28.3m and £41.8m adverse to budget
and prior year respectively. For the full year, profit from
operations was £220m, £45m and £293m favourable to budget
and prior year respectively. Expenditure had continued to run
over budget, predominantly as a result of headcount being
above plan levels. This overspend had been compensated for
by revenue being ahead of budget;
as at period 11, 13 of the 15 licence service targets had been
failed for the year. It was still mathematically possible for the
remaining two to be achieved, but unlikely.
2004/05 budget review: the Board noted the papers detailing
the proposed budget for 2004/05, and Marisa Cassoni’s
presentation. The Board noted further in discussion:
the budget proposed a profit from operations of £400m which,
after the costs of the Share in Success scheme, would result
in a profit of £257m — the target for the third year of the Interim
Strategic Plan (ISP) presented to Government. The budget
contained net risks of £196m in business units, with £82m of
de-risking factors held centrally. The biggest area of risk
stemmed from the challenge to continue reducing headcount
by substantial numbers;
after discussion, the Board:
noted the over-performance in both profit from operations and
trading cash compared with the ISP and financing packages;
noted that the budget met all covenants under the financing
agreements;
noted that results by business unit would change to reflect re-
organisations, changes in inter-business charges, and the
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Adam Crozier
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allocation of costs from the Share in Success and other
expenses;
noted that the Group results would be impacted by final
taxation projections;
approved the Group budget for 2004/05 as presented;
authorised submission of the budget to the shareholder;
agreed that the Board would need to carefully monitor the risks
and opportunities each month.
TRANSPORT REVIEW — RMH(04)73
The Board welcomed Paul Bateson and noted the paper and
its conclusions. In discussion the Board noted further:
in Paul Bateson’s view, the main reason for the programme
failing to deliver its financial and quality targets stemmed from
the lack of integration and team-working between the Logistics
and RM Letters units, which resulted in network specifications
which were unachievable and, until recently, ineffective
implementation. The programme had been run centrally, and
there had been insufficient involvement of operational
managers;
improving quality was now a priority. The units were now
working well together to solve particular design problems in
the new network as quickly as possible, although it was
expected to take until the Autumn for the current
implementation problems to be sorted out. Paul Bateson
informed the Board that the new network design would be
capable of providing an acceptable level of quality of service,
although some advancement of collection times in some areas
may be necessary. The possible use of rail services to
support quality performance at peak times was also being
considered, and proposals would come before the Board in
June;
in some directors’ view, the paper insufficiently seriously
addressed the substantial failings of the programme. While
the Board was reassured to hear of the remedial action now
being taken, it was of considerable concern that the
programme, which had been reported on regularly to the
Board, had experienced such a marked downturn in benefits in
a short time. It was important that lessons be learned, and the
Board informed each month of actions being taken and
progress made.
NETWORK REINVENTION — RMH(04)74
The Board noted David Mills’ paper, which updated the Board
on changes to the Network Reinvention project and business
case in the light of the intervention by the DTI following their
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ACTION
Sir Mike
Hodgkinson
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concerns about the build-up of public pressure about the
programme;
the Board noted that the revised business case produced a
£17.1m worsening in the benefits from the programme in
2003/04, with an £8.8m worsening in 2004/05. As this was in
large part the direct result of DTI’s involvement, resulting in the
programme being conducted at a slower pace, the Board
requested Sir Mike Hodgkinson to write to DTI asking for this
impact to be reflected in POL’s, and the Group's, financial
targets;
after discussion the Board noted:
e the revised completion date of March 2005;
e the reduction in the closure number from 3000 to 2400
branches;
¢ an increase in programme costs of £19.4m to £48.6m;
e an increase in steady state net annual benefits of £11.8m
to £37.4m from 2007/08 onwards.
STRATEGIC OPTIONS UPDATE
The Board was updated on the status of the analysis being
made of possible future strategic options for the business.
“A NEW BEGINNING” — RMH(04)75
The Board noted the latest version of the Company’s proposed
new vision and values statement. Any director with comments
on the draft would supply them direct to Adam Crozier.
ROYAL MAIL’S COMPETITORS: AN OVERVIEW OF HAYS
— RMH(04)76
The Board noted the paper.
ACCESS TO ROYAL MAIL’S POSTAL FACILITIES -
RMH(04)77
The Board noted the paper. After discussion the Board:
confirmed that access agreements should be entered into with
DPWN and TPG;
confirmed that further access agreements that were not
materially different may be entered into with further approval of
the Board;
noted the strategic options which were being scoped on
upstream competition.
MERGERS AND ACQUISITIONS REPORT — RMH(04)78
The Board noted the report.
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Marisa Cassoni
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GROUP TREASURY REPORT — RMH(04)79
The Board noted the report.
SUMMARY OF INVESTMENTS PROJECTS — RMH(04)80
The Board noted the summary.
REGULATION REPORT — RMH(04)81
The Board noted the report. The Board requested a paper at
a future meeting to explain the background to the CCRAT
issue which had caused difficulties with Postcomm. The
Board wished to understand the actions taken, and the
lessons learned.
EFFECTIVENESS OF CREDIT CONTROL — RMH(04)82
The Board noted the paper.
COMPANY SECRETARY’S REPORT — RMH(04)83
The Board noted the report.
OTHER BUSINESS
John Neill raised the question of the need for the external
auditors to bring to the Board’s attention any instances of fraud
discovered in the course of their activities. Marisa Cassoni
reported that Ernst and Young were alert to the need to do
this, and any instances would be reported to management and
the audit and risk committee.
CLOSE
In the absence of any further business, the Chairman closed
the meeting.
The next meeting was scheduled for 4 May 2004, at 148 Old
St, London.
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