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DRAFT
ROYAL MAIL HOLDINGS plc
(Company no. 4074919)
Minutes of the meeting of the Board of Directors
held at 148 Old Street, London, on 5 October 2004
Present:
Allan Leighton
David Burden
Marisa Cassoni
Adam Crozier
David Fish
Richard Handover
Sir Mike Hodgkinson
Tony McCarthy
David Mills
John Neill
Bob Wigley
Apologies:
Elmar Toime
In attendance:
Jonathan Evans
Also present:
Gerry Degaute
Alex Smith
Alan Barrie
Frank Schinella
Michael Mire
RMH04/166
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Chairman
Group Chief Information Officer
Group Finance Director
Chief Executive
Non Executive Director
Non Executive Director
Non Executive Director
Group Director, People and Organisational Development
Chief Executive, Post Office Ltd
Non Executive Director
Non Executive Director
Executive Deputy Chairman
Company Secretary
Chief Executive, Royal Mail Pensions Trustees Ltd for
RMH04/177
Strategy Director, Royal Mail Letters, for RMH04/178
Operations Support Director, Royal Mail Letters, for RMH04/178
Financial Management and Control Director, for RMH04/178
McKinsey & Co, for RMH04/178
MINUTES OF PREVIOUS MEETING RMH(04)8™
The minutes of the meeting held on 4 August 2004 were
approved, subject to a minor amendment to RMH04/160,
clarifying that in the discussion on pensions strategy, the Board
asked for any proposed changes in actuarial reduction factors to
be explained when the matter returned to the Board in due
course.
MATTERS ARISING — RMH(04)151
The Board noted the status report.
OTHER MINUTES — RMH(04)149 and 150
The Board noted the minutes of the meetings of:
«the Post Office Ltd Board on 16 June 2004
e the GLS Supervisory Board on 23 June 2004.
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CHAIRMAN’S BUSINESS
Non-Executive Director: the Chairman reported that following a
selection process conducted under the rules of the Office of the
Commissioner for Public Appointments, which had also benefited
from the close involvement of members of the Nomination
Committee, the Secretary of State had given her consent for the
appointment to the Board of Baroness Margaret Prosser as a
non-executive director. The Board formally approved the
appointment, which would take effect on 1 November 2004;
Elmar Toime: the Chairman reported that Elmar Toime would be
leaving the Company within the following few weeks to pursue a
career as an international postal consultant. Departure terms
were being agreed by the Remuneration Committee within the
terms of his contract. Adam Crozier would take over
responsibility for Parcelforce and Royal Mail international affairs,
while GLS would report directly to Allan Leighton.
REPORTS FROM CHAIRS OF BOARD COMMITTEES
Nomination Committee: Richard Handover reported that
progress was being made in filling the post of Chairman of Royal
Mail Pensions Trustees Ltd, with two strong candidates having
final interviews. The calibre of the candidates was such that it
may be necessary to pay a higher fee than had been anticipated,
but the importance of the Chairman role at the current time
would clearly warrant this;
Remuneration Committee: David Fish reported that the
remuneration issues for GLS executives which were raised
during the Board’s visit to GLS in July had been resolved. The
annual bonus scheme for executive directors was still a subject
of continuing discussion with the DTI and HM Treasury.
Shareholder representatives were so far showing support for the
proposals being developed for the future LTIP and Share in
Success schemes, although at this stage Government had not
been asked to make any decisions;
Audit and Risk Committee: Bob Wigley reported that two audit
committee meetings had been held since the last full Board. The
draft minutes of the first were handed out to the Board, and the
second had taken place the preceding evening. Bob Wigley took
the Board through the minutes of the first meeting drawing the
Board’s attention to:
«the focus on overdue internal audit recommendations
« the changes to the committee’s terms of reference and
processes arising from the self-assessment exercise recently
undertaken by the committee
e the report of the external auditors addressed to the Chairman
on 2003-4 and its conclusions
e the delegated authorities paper presented to the committee
and the changes requested to it - now incorporated in a
revised paper considered at the previous evening’s meeting
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and on the Board’s agenda
e the paper on the need for a new group investment appraisal
and monitoring process presented by Martin Gafsen. The
original paper had shortcomings, and the revised paper
presented to the previous evening’s meeting had addressed
the committee’s concerns and was on the agenda for the
Board to approve
« the committee’s request that the Company Secretary reports
to the Board monthly an ongoing tracker of regulatory
investigations and potential investigations and other similar
issues
« the proposed relaunch of substantially enhanced
whistleblowing procedures and the ongoing reporting to the
committee of whistleblowing activity;
Bob Wigley also reported on the previous evening's meeting to
review internal audit reports with limited or no assurance. He
reported in detail on section 4.2 of Internal Audit’s report on
potential non-compliance with the licence. He updated the Board
on the presentation made by management on this topic and on
the programme of work now proposed by management to
achieve two principal objectives - to put in place a sufficiently
robust compliance function going forward to give the Board
adequate assurance about licence compliance and secondly to
scope and deal with legacy non-compliance issues. Jonathan
Evans would work with Slaughter and May on a rapid and
comprehensive programme to achieve these two objectives with
the aim of reporting to the next audit committee meeting.
Management would also consider carefully how to communicate
the extent of past non-compliance to Postcomm and proposed
changes to procedures. This was to be progressed as rapidly as
possible with an update being presented to the next Board.
Adam Crozier was to consider whether sufficient resource was
being dedicated to scoping legacy non-compliance issues and in
particular non-standard prices given the potential revenue loss,
which management could not at this stage precisely quantify,
and report back to the next Board. Bob Wigley went on to report
on the internal audit report on purchasing procedures and
management's presentation to deal with issues identified.
Jonathan Evans was to consider further the issue of how and
when to report any non-compliance with public procurement
regulations to the DTI and provide an update at the next meeting
of the committee;
John Neill added that the committee had also discussed the
audits on the state of compliance with standard traffic forecasting
measures in mail centres, and on progress with the introduction
of Single Daily Delivery. The latter report had caused the
committee considerable concern, as it gave only limited
assurance that the savings being made in delivery offices would
be sustainable, while the pay increases implemented were
permanent. Operational management present at the committee
had given assurances that additional resource was not being
introduced to protect quality of service at the expense of failing
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financial targets. Furthermore where offices were failing targets,
appropriately robust corrective action was being taken on an
office-by-office basis. In many instances this was creating some
industrial unrest: but the committee was assured that there was
no question of any re-instatement of restrictive practices in order
to secure agreement. The committee had taken some comfort
from management's responses, but progress with SDD, and in
particular the sustainability of the targets, would continue to be
monitored closely;
Corporate Social Responsibility Governance Committee: Sir
Mike Hodgkinson reported that the committee was continuing to
make progress. A memorandum of understanding had recently
been agreed between the committee and Internal Audit which set
out their respective roles in safety audits.
EXECUTIVE DIRECTORS’ REPORTS
The Board noted the reports from the executive directors, and
noted in particular:
Post Office Ltd: there had been an 80:20 vote in favour of the
subpostmasters’ pay deal at a special conference of the
Federation. This was a very pleasing result as it would result in
a much more sales-incentivising pay system for subpostmasters;
David Fish commented that now that network re-invention was
nearing completion and the attention was turning to the directly-
managed network, more attention should be given to investment
in branches and that the topic should have its profile raised.
David Mills undertook to consider this further;
Technology, Services and Innovation: David Burden reported
that HWDC was now operational. The Board agreed to hold a
future meeting at the unit. In response to questions from the
Board, David Burden explained that the YANTRA systems in the
Logistics unit had been unsuccessful, costing some £2million.
Discussions were underway with the supplier to determine the
best way forward;
People and Organisational Development: Bob Wigley queried
why Tom Melvin, Operations Director in RM Letters, was
reported as setting the pay rates for agency staff. Tony
McCarthy explained that agency hiring rates were seen as an
operational cost, for which Tom Melvin had budget authority;
Chief Executive's report: Adam Crozier updated the Board on
the following issues:
Postcomm: Martin Stanley had now left Postcomm to take up
his new role as Chief Executive of the Competition Commission.
Final interviews were taking place with the aim of appointing a
new Postcomm Chief Executive in the near future. The
investigation into whether Royal Mail had used all reasonable
endeavours in attempting to meet Quality of Service targets in
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2003/04 had gathered all of its evidence, and the Commissioners
were now trying to come to a decision on the results. Informal
talks were continuing with Postcomm and the Shareholder
Executive about the next price control, and the hurdles which
would need to be cleared before its introduction. This subject
would be a key item on the agenda of the forthcoming meeting
between the Board and the Commissioners;
Bulk compensation scheme: Postwatch was claiming that a
large, albeit unquantified, number of customers had complained
to them about Royal Mail’s stance on the compensation scheme.
The Company was adhering to the position that it was carrying
out equitably the terms of the compensation scheme agreed with
Postcomm;
Operational issues: Single Daily Delivery had been deployed in
94.8% of delivery offices and 95.8% of sub-offices, with 88.1% of
staff now in a position to earn the additional £26.28. A relatively
small number of offices were having difficulty in maintaining
target savings after the qualifying period for the bonus payment —
causing some industrial unrest - and these were being tackled on
an office-by-office basis. Recognition was rightly having to be
given in some cases to increases in traffic volume since the
target baseline date of June 2003. As had been confirmed to the
Audit Committee the previous evening, operational management
was standing firm in not allowing any re-introduction of restrictive
practices in order to solve any individual disputes;
Recruitment: progress was continuing to be made in improving
recruitment processes. In addition the number of staff on
temporary contracts had been reduced from 23,000 at the
beginning of 2004 to some 5,000 currently;
Quality of Service: the level of operational failures continued to
be under control, although there had been an increase
immediately after the end of the summer period as volumes had
risen. The period 6 result was 93.1% for 1° class, and this was
expected to decrease to around 91.5% in period 7 as autumn
volumes grew. Adam Crozier reminded the Board that while the
recent press criticism had tended to imply that service target
failures were a recent phenomenon, Royal Mail had in fact failed
its 92.5% 1° class target for the last five years at least. David
Fish asked whether the operational pipeline was sufficiently
robust to cope with the increasing volumes in the rest of 2004.
Adam Crozier replied that the prime focus of operational
managers was to ensure this: particular attention was being paid
to the poorest performing mail centres, and to having
contingency plans to protect against adverse weather conditions;
Customer complaints: Customer complaints were showing a 3%
year-on-year increase, with a big increase in delivery complaints
compensated for by a reduction in complaints about loss;
The Board agreed that future executive reports should include
more on safety performance, and also that there would be a
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written CEO report each month.
FINANCE DIRECTOR’S REPORT
The Board noted Marisa Cassoni’s presentation, the key points
from which were:
period 6 profit from operations was £79m, some £40m
favourable to budget. This good performance had been
achieved despite people costs being £27m above budget, and
accelerating;
headcount up to period 5 was 1362 adverse to budget, and while
full-time equivalent people numbers had reduced, they were
adverse to budget by 5091;
all 15 licence targets were failed as at period 5, but there were
improvements in a number of products, and 1* class stamped
and metered was just below target at 92.4%;
on the “Great Place to Work” measures, 59% of people said they
enjoyed working in Royal Mail, the same as the previous year;
the main strategic programmes were showing varying levels of
progress: SDD, as had been reported before to the Board, was
complete in some 94% of units with the sustainability of the
benefits an issue; six flat sorting machines were now in
operation, with the challenge being to secure the planned
headcount reductions; mail centre review revisions and benefits
were on track; and the financial services JV in Post Office Ltd
was showing a lower than forecast level of take-up of personal
loans;
the draft half-year results showed a profit from operations of
£217m, which was £73m and £161m favourable to budget and
prior year respectively. Profit before tax was £55m, £19m
adverse to budget, but £52m favourable to the prior year. The
results were still subject to review by the auditors, and would be
presented to the Board on 2 November, with publication
scheduled for 18 November;
turning to the full-year forecast, as the half-year position was
£73m favourable to budget, and the £82m central contingency
had not yet been called upon, the business appeared to be on
track to exceed the £400m target, possibly by a substantial
margin, with some flexibility to manage Quality of Service.
However this would require revenue to continue to compensate
for the people cost overruns in the Letters business;
The Board approved the proposed timetable for the authorising
of the half-year accounts as set out in Marisa Cassoni’s paper
RMH(04)152. The Board also noted that the half-year accounts
would include a charge of some £80m relating to the first half
charge to the accounts of the Share in Success scheme.
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ALLOWABLE PROFIT FOR THE REGULATOR - RMH(04)153
The Board noted Marisa Cassoni’s paper. The paper was not
discussed in detail: it was agreed that it would need to be
considered further in the light of the development of the strategic
plan.
BALANCE SHEET RESTRUCTURING - RMH(04)154
The Board noted Marisa Cassoni’s paper.
RESERVED POWERS AND DELEGATED AUTHORITIES
FRAMEWORK - RMH(04)155
The Board noted Marisa Cassoni’s paper which proposed for the
Board’s approval an updated framework of reserved powers and
delegated authorities. The changes proposed to the previous set
agreed by the Board in July 2002 were in the main to reflect
changes in organisational structure, and to ensure that controls
were clear. The Board noted that the proposals had been
reviewed extensively by the Audit and Risk Committee;
The Board approved the proposals for delegated authorities,
subject to removing from the framework the budget offset
arrangements for unbudgeted items - a principle with which the
Board disagreed;
On the proposals for the establishment of an Investment
Committee, Sir Mike Hodgkinson raised a concern that the
implication of the proposal would be to remove the power from
the Post Office Ltd Board to approve investment cases - in his
view this would be counter to the rationale for setting up POL as
a separate company within the Group, as had been agreed with
Government. The Board agreed that Sir Mike should review this
element of the proposals with Adam Crozier. Subject to
resolving that point, the Board agreed the new investment
authorisation arrangements.
CORPORATE RISK SCORECARD - RMH(04)168
The Board noted the paper which set out the latest proposals,
reviewed by the Management Board in September, for a
scorecard of corporate risks for Royal Mail Holdings. The Board
endorsed the content of the paper, and noted that the risks
would be re-validated when the strategic plan had been
completed.
ROYAL MAIL PENSIONS TRUSTEES LTD ANNUAL REPORT
- RMH(04)157
The Board welcomed Gerry Degaute to the meeting, who
presented the annual report to the Board on behalf of the
Trustee Company. The Board noted:
the Fund’s assets had grown in value by £3.3bn to £15.3bn over
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the year to 31 March 2004;
membership of the pension plan had been fairly static at nearly
440,000, although the membership profile had changed with a
reduction of some 14,000 employee members, with a net
increase of 12,000 pensioners and deferred pensioners;
the interim valuation for March 2004 was to be discussed by the
Trustee Company at its October meeting, and was likely to show
an increase in the funding level to 85.1% compared with 82.6%
at the March 2003 full valuation. The increase was due mainly to
additional employer contributions and better than expected
investment experience;
the revised investment policy discussed with the Company
earlier in the year - to reduce holdings in equities from 50% to
40%, and increase holdings in property and bonds - was being
introduced gradually to take the maximum advantage of market
conditions and cash flows;
overall the Fund had outperformed its benchmarks by over the
past three years by 1% per annum on average;
the performance of the membership administration unit in
Chesterfield had been good, with most agreed service targets
having been met. A new computer system had been installed
during the year, and in the main it had bedded in well;
The Board noted further in discussion:
the impact of the Government's pension protection proposals
was not yet clear, but it was estimated that they could have a
possible cost impact of up to £9m for the Royal Mail pension
schemes;
Bob Wigley asked about the arrangements made to ensure that
the trustees were suitably qualified for the role. Gerry Degaute
explained that trustee appointments were made by Royal Mail,
who satisfied themselves that nominees were competent for the
role. There was a comprehensive set of induction arrangements
provided by RMPTL, together with regular opportunities for
trustees to have ongoing training and attendance at relevant
seminars;
The Chairman thanked Gerry Degaute on behalf of the Board for
his presentation and for RMPTL’s effective stewardship of the
Company's pension schemes.
ROYAL MAIL STRATEGY - RMH(04)156
The Board discussed Adam Crozier’s paper which set out a draft
version of the strategic plan for the Letters business. The
purpose of the agenda item was to gain reactions from the
Board, before the plan was developed further. The strategic plan
would be put to the Board for formal approval later in the year. A
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separate record of the summary of directors’ comments on the
plan is attached.
POST OFFICE CARD ACCOUNT SERVICE FAILURES -
RMH(04)158
The Board noted David Mills’ paper.
POST OFFICE CARD ACCOUNT VAT RISK - RMH(04)161
The Board noted David Mills’ paper.
PROJECT BILL PAYMENTS - RMH(04)159
The Board noted David Mills’ paper. The Board would be
informed of how and to what timescale POL would be targeting
activity in the bill payment market to address the profit shortfall
resulting from the acquisition of the Alliance and Leicester bill
payment business.
POST OFFICE FINANCIAL SERVICES HOME INSURANCE -
RMH(04)160
The Board noted David Mills’ paper.
GROUP INVESTMENT 2004/05 QUARTER 2 REPORT -
RMH(04)162
The Board noted the report, in particular the activity underway to
increase the Company's shareholding in NDC2000 Limited and
to change the existing terms of the options on the Company's
shares, designed to enable NDC2000 Limited to remain in the
Royal Mail VAT group.
ROYAL MAIL VEHICLE REPLACEMENT PROGRAMME
2004/05: QUARTER 4 ACQUISITIONS - RMH(04)163
The Board noted Adam Crozier’s paper, and noted further:
the full-year vehicle acquisition programme had been authorised
by the Board on 3 May 2004, at a level of £112.5m for 9819
assets. The Board had devolved authority for the approval of
each quarter's acquisitions to the Management Board;
cumulative to quarter 3, the Management Board had authorised
£70.0m on 5404 assets. The quarter 4 acquisition authorised
was £38.8m capex for 3846 assets, bring the total vehicle
acquisitions to £108.8m, some £3.7m below the Holdings
Board’s authorised sum. The anticipated impact of the P&L was
£23.8m.
REGULATION REPORT — RMH(04)164
The Board noted the report.
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ACCESS PRICING - RMH(04)165
The Board noted the paper.
GROUP TREASURY REPORT - RMH(04)166
The Board noted the report.
COMPANY SECRETARY’S REPORT — RMH(04)148
The Board noted the report.
CLOSE
In the absence of any further business, the Chairman closed the
meeting. The next meeting was scheduled for Tuesday 2
November 2004, at 148 Old Street, London.
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ROYAL MAIL HOLDINGS plc BOARD - 5 OCTOBER 2004
DISCUSSION OF DRAFT STRATEGIC PLAN - SUMMARY OF DIRECTORS’ COMMENTS
Sir Milke Hodgkinson
some big issues involved, some of which would not be easy
need some background papers on
o labour market to understand what we need to do
o pricing to understand what we are trying to achieve in markets compared with
what might be politically acceptable
what difference would it make if the plan took 10 years to implement rather than 5?
how should it be presented to the regulator?
would phasing the plan assist? - ie trialling some elements of the plan before rolling out
would a move to self-billing for large customers be significant?
Bob Wigley
supported MH’s comments
draft strategy was a good document - challenges status quo, likes focus on simplicity,
and it being customer-led
does it sufficiently recognise the scale of cultural change needed?
is the requirement for change management sufficiently understood?
the technology programme is huge - given RM's track record, would need superb project
management skills to see this through
John Neill
supported previous comments
liked mission and vision statements
big concern was lack of an operational strategy - possibly a £600m risk (as identified on
corporate risk register)
an ops strategy is more important than automation
would rather spend £600m on improving management than on VR
pension deficit is big issue
company needs a mindset change from “good enough will do” to passion for excellence
need effective means of policy deployment to ensure strategy is delivered
David Fish
needs a bigger concentration on selling products - need to think more about better
product definitions
labour assumptions are too tight - need to get to £400 per week within 5 years to attract
better people
too much capex - not enough peoplex
pricing assumptions too aggressive for customers and government
Richard Handover
need more on competitive landscape to show strategy is on right lines
people issues are key, and are not fully addressed
supported John Neill’s views about need for operational strategy
concerns about management capability to deliver
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what are the lynchpin plans which would need to have priority?
do we need to be more radical?
Allan Leighton
good template to think through issues
despite plan’s big headcount reductions, company would still be a big people-business.
Plan needs to address how to make people feel more in tune with RM
£300 pa is not enough for Share in Success
must fix DOMs and MC managers.
take out non-delivery work from DOs
need more focus on looking after top 100 customers
Summary
good framework
need to put more investment into people to raise quality and improve morale - need £400
pw in year 5
less capex to realistically manageable levels
need to do a top-down business model which has the givens of:
o £400 pw for front line, better bonuses, more in Share in Success
o politically acceptable prices
co base levels of capex
and then see how plan looks.
Board will review again at special meeting to be fixed before next full Board meeting.
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