RMH(06)15"
RMH06/01 - 20
Present:
Allan Leighton
David Burden
Adam Crozier
David Fish
Richard Handover
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Royal Mail ~ Strictly Confidential
ROYAL MAIL HOLDINGS pic
(Company no. 4074919)
Minutes of the meeting of the Board of Director
held at 148 Old Street London, on 10 January 2006
Sir Mike Hodgkinson
Tony McCarthy
John Neill
Baroness Prosser
Helen Weir
Bob Wigley
In attendance:
Jonathan Evans
Also present:
Rico Back
Frank Schinella
Martin Gafsen
Peter Corbett
lan Anderson
Michael Mire
Jon Millidge
Neil Henderson
Andrew Wilson
RMHO06/01
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Chairman
Group Chief Information Officer
Chief Executive
Non-Executive Director
Non-Executive Director
Non-Executive Director
Group Director, People and Organisational Development
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Company Secretary
Chief Executive, GLS
Acting Group Finance Director
Group Investment Director, for RMHO6/09 and 12
Finance Director, Post Office Ltd, for RMH06/09
Human Resources Director, POL, for RMH06/09
McKinsey & Co, for RMHO06/09
Employee Relations Director, for RMH06/10
Service Integrity Director, Royal Mail Letters, for RMH06/13 -14
Group Security Director, for RMH06/13 - 14
DIRECTORS
The Chairman welcomed Helen Weir to her first meeting of the
Board. The Board noted that Helen Weir had been appointed for
a three-year term, beginning on 1 January 2006, and agreed that
she be appointed to the Board's Audit and Risk Committee with
effect from the same date;
the Board noted that the Secretary of State for Trade and
Industry had given his consent to the appointments of lan
Griffiths as MD Royal Mail Letters, and of Alan Cook as MD Post
Office Ltd. The appointments would take effect on 6 February
2006 and 1 March 2006 respectively;
the Board noted that David Mills’ resignation as Director of the
Company had taken effect on 31 December 2005.
MINUTES OF PREVIOUS MEETING RMH(05)12™
The minutes of the meeting held on 6 December 2005 were
approved and signed.
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MATTERS ARISING — RMH(06)01
The Board noted the status report;
Reed and Manpower contracts (RMH(05)213(h)) — Tony
McCarthy reported that these contracts had not been finalised
and that negotiations were continuing;
Wholesale Director (RMH(05 212(a)) — Adam Crozier reported
that he had now received legal advice about the appropriateness
of the Wholesale Director having a seat on the Letters Board.
He would be considering this advice over the next few days;
Avian ‘flu (RMH(05)212(f)) — David Burden expanded on his
report to the Board, explaining that a current major focus of
activity was on determining contingency plans for the response
to widespread absence of staff in delivery offices, particularly
delivery office managers. John Neill outlined some of the
approaches being taken in Unipart: David Burden accepted the
offer to pursue these with John Neill in more detail;
Pension Protection Fund levy (RMH(05)216(b)) ~ John Neill felt
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the Board should be doing more to press the authorities for
greater transparency about the formulae being proposed to
calculate the levy. They currently relied heavily on company
ratings provided by Dun and Bradstreet, the basis of which
appeared opaque and the results volatile: for RMG the levy could
vary by tens of millions of pounds. Frank Schinella undertook to
return to the Board with an update on the latest position, anda
proposal for any action the Board might take.
OTHER MINUTES
The Board noted the minutes of the meetings of
* the Royal Mail Letters Board of 16 November 2005
* the GLS Supervisory Board of 8 November 2005
* the Audit and Risk Committee of 15 November 2005
* the PFWW Supervisory Board of 23 November 2005.
CHAIRMAN’S BUSINESS
The Chairman had no business other than that covered
elsewhere on the agenda.
REPORTS FROM CHAIRS OF BOARD COMMITTEES
Nomination Committee: Richard Handover reported on the
Proceedings of the Committee:
* the process for gaining the Government's approval to the
appointment and remuneration of Alan Cook had proved
tortuous. Part of the difficulty had stemmed from the
Company itself not following its own procedures fully, but
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Government had also not handled the matter adroitly. A
meeting had been held with members of the Shareholder
Executive to learn lessons for the future;
* the process for recruiting a new Group Finance Director was
following a better process, with which Government was
content. There were currently two front-runner candidates,
although others were also being explored:
* Richard Handover had agreed with Jane Newell that while
the future Group Finance Director would not be a pension
fund trustee or a formal member of the Trustee Board's
Investment Committee, the GFD would have full access to
both bodies when necessary. Jane Newell fully recognised
the importance of ensuring the trustees took the GFD's input,
but had not wanted the issue of the GFD's formal
membership of the Investment Committee, which could have
Proved controversial with some trustees, to have become an
unnecessary obstacle;
* the Committee would soon be considering candidates to
succeed Marisa Cassoni on the Trustee Board:
The Committee had also agreed the following nominations for
the Board's endorsement:
* Adam Crozier to be the Royal Mail Group shareholder
representative on the Camelot Board. If the Board approved
this nomination, it would then be subject to the approval of
the other Camelot shareholders;
* Carl-Gerald Mende, Director International, to be the Royal
Mail Group shareholder representative on the Board of G3
Worldwide Mail;
¢ the CWU had nominated Kevin Shaw for a further term as
trustee of the Royal Mail Pension Plan. The existing protocol
for trustee appointments was that the Company would accept
union nominations unless the Company had any over-riding
objections. The Committee had no objections to this re-
appointment, and had therefore agreed that Kevin Shaw be
re-appointed for a further three-year term as a union-
nominated director of Royal Mail Pensions Trustees Ltd, with
effect from 1 January 2006.
The Board agreed these appointments.
Remuneration Committee: David Fish reported that Government
approval to the LTIP, annual bonus arrangements for 2005/06
and executive directors’ pay review all still remained outstanding.
He had recently had a very unsatisfactory meeting with some
members of the Shareholder Executive and HM Treasury who
were new to the subject and not briefed on the matters
outstanding, leading to no progress being made. The Board
asked David Fish to pursue with Mark Higson this apparent
dilatory attitude on the part of the Shareholder Executive. If the
position did not soon get resolved, the Chairman would wish to
take up the matter with the Minister, as it was unacceptable that,
in particular, the bonus scheme remained unagreed with only
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two and half months of the financial year left to run;
Audit and Risk Committee: Bob Wigley reported that there had
been no business conducted by the Committee since the last
Board meeting. He was delighted that Helen Weir had agreed to
join the Committee, and looked forward to her membership of it;
Corporate Social Responsibility Governance Committee: Sir
Mike Hodgkinson reported that there had been no business
conducted by the Committee since the last Board meeting.
EXECUTIVE DIRECTORS’ REPORTS
The Board noted the reports from the executive directors;
Royal Mail Letters: Adam Crozier reported that letters quality of
service had continued its good performance, with nearly all
licence targets still on course to be achieved:
the financial outlook of the business had improved since the
period 8 report, supporting the concerns Adam Crozier had
raised at the previous meeting about the forecasts being unduly
pessimistic. While this improvement in performance was
pleasing, the Business clearly needed to improve its ability to
forecast accurately, and this was being pursued;
the Christmas pressure period had passed relatively smoothly,
although the forecast profile of postings over the period had
proved inaccurate. Service quality had improved significantly
compared with the previous year, although there remained a
number of improvement opportunities which were being followed
up, especially the service performance of mail posted to “distant”
areas;
the outcome of the Postwatch v Postcomm Judicial Review of
the application of the terms of the bulk mail compensation
scheme was a major concern to the Company, as the Judge’s
decision could potentially give rise to the Company needing to
make further compensation payments of up to some £40million.
The decision when received in full later in January would be
examined carefully with the intention of instigating an appeal.
Adam Crozier felt that the responsibility for the potentially serious
position in which the Company now found itself could be laid at
the door of Postcomm, to which he would be making
representations in the near future. The Chairman reminded the
Board that the Company had agreed to extend its credit terms as
part of the original agreement reached with Postcomm on the
application of the bulk mail compensation scheme: if the
Company was to lose this case, then that revision in credit terms
should also be re-considered;
Richard Handover queried whether the variations in sales
performance in various business sectors, as shown in the sales
report, were reflected in the overall revenue forecast of RML.
Adam Crozier confirmed that this was the case;
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Parcelforce: Adam Crozier reported that Parcelforce had had a
good Christmas, although a concern was that Quality of service
may be suffering as a result of the sustained cost reduction
being pursued by the business unit;
the Packet Strategy work was now well-advanced, and the
results would be brought to the Board within the following two
months;
GLS: Rico Back updated the Board on current events in GLS.
The full-year profit forecast remained at €140.8m, some €26.4m
higher than budget, with some further upside potential which
would be shown in the next forecast;
Post Office Ltd: Adam Crozier reported that Dave Miller was
standing in as acting MD until Alan Cook arrived in March. The
major issue for POL over the previous month had been the
decision by the Department for Work and Pensions to phase out
the Post Office Card Account, which contributed some 15-20% of
POL’s revenues. On top of this, POL was re-forecasting
downwards the revenues from its financial services products.
The impact of this on POL's strategic plan and funding
arrangements was urgently being reviewed, and a special
meeting of the POL Board was being held later that week. David
Fish reminded the Board of his view expressed on several
previous occasions that POL needed to do more work to
understand fully the nature of its USP: this was now of even
greater importance as POL was having to revisit its business
strategy:
TS&l: David Burden reported that the HWDC plant had
performed weil over the Christmas pressure period, with few
technical failures;
P&OD: Tony McCarthy reported that the Christmas resourcing
operation had gone well, with 105,000 applications for casual
working being handled. The criminal vetting arrangements had
proved effective, with over 700 applications being rejected
following vetting. Bob Wigley asked the Board to note the
impressive scale of the activity undertaken by P&OD in this and
other areas;
the Chairman asked for Tony McCarthy's future reports to the
Board to include a regular analysis of Employment Tribunals in
which the Company was engaged.
FINANCE DIRECTOR’S REPORT
The Board noted the financial reporting pack, and Frank
Schinella’s presentation, The Board further noted:
the Company had had a good period 9, with stamp sales
particularly high over the Christmas period. The cumulative
position as at period 9 showed Group operating profit before
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exceptional items at £279m, which was £20m adverse to budget
and £109m favourable to prior year. The full-year forecast was
now for a profit performance of between £330-360m, compared
with the target of £308m and the stretch target to meet the Share
in Success trigger point of £334m;
Adam Crozier pointed out that while this latest forecast was
encouraging, the presentation of it, if it translated into the year's
actual result, would need careful handling to ensure that the
wider and longer-term threats to the Company were not
obscured by undue optimism from the year's results. In this
regard the Board noted that the main source of the good
performance in the Group as a whole was GLS, with the UK
position fairly flat;
Richard Handover asked the Board to note what he considered
to be an excellent performance over the Christmas period, for
which management deserved credit.
GOVERNMENT FUNDING — RMH(06)02 AND 03
Adam Crozier opened the discussion by summarising for the
Board the path of the numerous discussions with the
Government over the previous 18 months about various ways in
which the future funding of the Company, including the pension
scheme, could be secured. The course of events had inevitably
been influenced by changes in the political climate over the
period, resulting in the Government now taking a considerably
more cautious approach to structural and funding options for the
Company;
if sufficient Government support in terms of funding and
structural change were not to be forthcoming, the Company
would be unable to meet its ambitions to be a world-class postal
company, and would then probably enter a period of inexorable
managed decline. As that would be an unacceptable scenario
for the current Board, the implication was that the Board needed
to pursue options which could lead to the Company having a
successful future but which did not rely so much on Government
support. These options would require a combination of an even
more aggressive attack on productivity, the separation for
funding purposes of POL from the rest of the Group, the release
of value from the sale of assets, or a partnership of some form
with a major third party.
In discussion, the Board noted:
the recent decision of the Department for Work and Pensions to
phase out the Post Office Card Account had considerably
weakened the position of Post Office Ltd. The prospects of POL
being able to re-establish itself as a viable commercial company
without substantial Government support were now remote: the
future of POL and the size of the network, over and above the
3,500 to 4,000 outlets needed by Royal Mail to satisfy the licence
requirements for the Universal Service Obligation, were
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becoming essentially political issues, and should not be allowed
to complicate the funding of Royal Mail Letters. The Board
however recognised that even if POL could be ring-fenced to a
greater degree, there would continue to be sizeable cross-
business trading between POL and Royal Mail, on which POL
would be heavily reliant;
directors had varying views on whether Royal Mail needed to
have aspirations to be a worldwide, as opposed to a world class,
company. All directors wanted the. Company to become world
class — indeed for many this had been the motivation for their
joining the Company — while others saw world class as inevitably
implying a worldwide presence. In practical terms, this issue
would have relevance to the decision to sell or retain GLS. The
Board had decided at its previous meeting not to pursue a sale
at this stage, but directors acknowledged that a sale may be a
necessary means of raising funds depending on Government's
intentions;
directors agreed that under any scenario, the need to make a
step-change improvement in productivity was paramount. This
implied not only effecting a radical culture change to create
greater workforce flexibility, but also a more stringent and
efficient use of capital focussed on Productivity gains. David
Fish outlined his idea of gaining advantage from relocating mail
centres on to greenfield sites, creating both a new platform for
radically different working practices, as well as releasing value
from property disposals;
for reasons of achieving a widespread and sustained culture
change, some form of share scheme remained essential to gain
a greater level of engagement between the Company and its
people. Were the Government to find an actual disposal of
shares impossible politically, then some form of phantom
scheme would be acceptable Providing it was seen as a staging
Post to a full share scheme. It was in any case necessary to
introduce a new scheme of some form to replace Share in
Success, as the expectations for continued payments from it had
become unaffordable;
the option of establishing some form of partnership with a third
party was potentially timely, in view of the current early stage of
opening of the postal market in the UK. Once third parties had
established themselves as serious operators in the UK market,
the competition authorities would find it more difficult to sanction
a link-up with Royal Mail. This therefore gave impetus to explore
the option further in the near future;
in consideration of the points raised in discussion and in the
Papers tabled, the Board agreed the following course of action:
the POL strategy should continue to be evaluated in the light
of the DWP's decision to withdraw the Post Office Card
Account;
the consequent change in the financial position of POL should
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@ be brought urgently to the attention of Government more
widely, in the context of the current funding negotiations;
while the Board supported in principle the proposals for
altering the internal structure of the Group ("Project Eagle” —
RMH(06)02), the detailed proposals should first be conside
and approved by the Audit and Risk Committee. Frank
ACTION Schinella and Rico Back would discuss further the proposal
Frank Schinella/ contained in the paper for GLS to pay dividends to Royal Mail
Rico Back to ensure that the position of GLS was not sub-optimised:
discussions with the Trustee of the Royal Mail Pension Plan
should be conducted as proposed (in “Approach to funding the
pension deficit” — part of RMH(06)02). In addition analysis
ACTION should be made of the financial consequences on the
Frank Schinella Company of different funding scenarios: of a10 year deficit
repayment period, and of the mortality assumptions causing a
£2bn additional funding requirement;
experience had shown that reliance could not necessarily be
placed on Government delivering the support the Company
© needed: while the current negotiations with Government
should continue to be conducted with vigour, the Company
should also be seriously pursuing alternative options, including
discussions with potential third parties which the Chairman
and the Chief Executive would progress;
Gj) the Board finally turned to the matter of the terms of appointment
of four of the non-executive directors which had expired on 31
December 2005. The directors had been informed that the
Secretary of State, as an interim measure while the future
funding of the Company was being resolved, had given his
consent for their appointments to be extended by up to six
months, until 30 June 2006. In view of the continuing uncertainty
about Government's intentions for the Company, the four
directors had expressed reluctance to agree to this extension in
full, but confirmed their agreement to continue their directorships
until at least the date of the February board meeting, when the
@ position would be reviewed again.
RMHO6/10 INDUSTRIAL RELATIONS PLAN
(a) Tony McCarthy and Jon Millidge presented to the Board their
proposais for forthcoming negotiations with the CWU. These
would constitute a first phase to cover the 1 April 2006 pay
review, and help lead towards a second phase of wider changes
outlined to the Board at its previous meeting as the “Big Deal”.
Work was still continuing on developing the second phase, in
response to the Board's previous comments: however there was
a need to progress matters with the CWU quickly, in order to
address the substantial cost challenge facing Royal Mail Letters
in 2006/07, and that was the purpose of the first phase;
(bd) the basic proposal was to implement a number of cost-saving
initiatives in Operational areas, and to incentivise these by
introducing a savings-sharing element into front-line pay. These
e Savings-related payments would then be used, in negotiation, to
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offset the need for a “cost of living” pay increase, due at 1 April
2006;
there was a trade-off to make between the size of ongoing
consolidated pay increase, and the proportion of the cost savings
shared. The proposal was for a 50% sharing ratio, with a
corresponding consolidated pay increase of 2%:
the operational changes would result in headcount reductions of
up to 11,000. It was the intention to facilitate this by means of a
voluntary redundancy programme;
some of the proposed operational changes were likely to be
controversial, and some resistance from the CWU — possibly
resulting in industrial action — was likely. However the savings-
sharing element of the proposed deal would act as a part
counter-balance to this, as people would need to weigh up the
value of gaining directly from the introduction of change rather
than opposing it.
In discussion the Board noted:
the changes were designed not to impair service levels. It was
pointed out that the withdrawal of some night working in delivery
offices would result in some deliveries being made later than
currently, but the revised times would still be within Royal Mail's
published delivery specification;
the Chairman thought the time to be right to send a letter from
him to all front-line people to thank them for their efforts over
Christmas, and to tell them that their Share in Success payments
were currently on track. This would be useful background to the
next few months were the changes to prove controversial;
some directors challenged the proposal to share 50% of the cost
savings with employees, on the grounds that this would set a
benchmark level for the future, which could turn out to be
unaffordable. A level of one third savings was considered to be
more appropriate with a higher ongoing pay increase;
Bob Wigley felt that the proposal should be self-funding,
excluding the one-off costs of redundancies. He was concerned
that the costings of the proposal apparently did not include all the
pension costs associated with the increased pay levels.
In conclusion the Board:
endorsed the two phase approach to the negotiations and the
proposal to tackle a number of operational efficiency
improvements in phase one;
agreed that the negotiations with the CWU could begin;
requested that the views expressed in the discussion about
the desirability of a smaller savings share be considered
further in order not to create an unhelpful precedent;
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* requested that the costing of the proposed deal, which should
be self-funding, include all incremental additional pension
costs;
* noted that then proposal for the second phase of the
negotiations would be presented to the Board in February.
ROYAL MAIL LETTERS TARIFFS
The Board noted a presentation from Alex Batchelor and Lorna
Clarkson, and noted in particular:
the start of the three month consultation period for April price
increases should have been at the beginning of January, but in
view of the delay to the publishing of the final proposals on Price
Control, Postcomm had agreed to allow Royal Mail to delay the
date for publishing its prices until mid-January. Postcomm had
also agreed to a deferral of the auditing of the price changes and
to reducing the normal customer notice period to ten weeks;
the weighted average of the proposed price increases, to be
introduced with effect from 3 April 2006, was 4.9% across all
services, with 1° class and 2™ class Stamp prices each
increasing by 2p. 1°‘ class meter and account prices would
continue to be 1p lower than stamp prices, with a similar
reduction introduced for 2" class. There would also be a new
business price line, and a simplified bulk products pricing
structure;
the impact of the proposed increases was some £30-40million
below the permitted maximum within the price control, and
further work was being undertaken to develop the proposals to
reduce this gap;
it was further proposed to introduce zonal pricing — a mechanism
to charge business customers according to delivery point density
— as a key pricing lever to respond to competition. The timing of
its introduction was a key issue, with introduction before 3 April
advantageous to avoid the issue being caught by the new price
control. However early introduction May prove controversial with
Postcomm. The merits of early introduction were still being
assessed;
work was also progressing on a methodology for contract pricing
~ ie the giving of a discount against standard pricing for
customers who commit business to Royal Mail for a given
contractual period. The issue was being reviewed by Postcomm.
Again the approach to this issue was being assessed further.
The Board:
endorsed the Royal Mail Letters tariff proposals to be
implemented on 3 April 2006;
noted the proposed plans for the deployment of zonal and
contract pricing;
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devolved authority to Adam Crozier to agree the final detail of the
tariff proposals, together with the timing and manner of
introduction of the zonal and contract pricing proposals;
noted the proposed timing of the Pricing in Proportion changes,
scheduled for 21 August 2006.
FLATS AUTOMATION — RMH(06)04
The Board noted David Burden’s paper. The Board noted further
in discussion:
in David Fish’s opinion, the financial return from the project was
disappointing, with a seven-year payback and an IRR of 19%
being unacceptable for this type of major investment project.
While the performance of and return from an individual flats
machine looked to be acceptable, the project as a whole,
possibly because of the phasing of the cash-flows, was not;
David Burden considered that the main reason for the relatively
poor investment return was, as explained in the paper, that the
business case claimed low savings in people costs, and in
particular the new flats machines were showing a poorer return
than the existing machines in operation. While he accepted that
this issue needed to be revisited, he was anxious not to miss the
Opportunity of securing favourable terms with the supplier:
Martin Gafsen expressed the opinion that the returns were not
necessarily below those expected from a project of this sort. In
Helen Weir's view, the returns were low, but the key point, which
she was not aware had been addressed, was how this project —
with a commitment for nearly £100m of capital expenditure —
ranked amongst other possible investment cases. She felt the
Board ought to understand whether it would be committing its
limited capital resources to the right projects;
summing up, the Chairman concluded that while the Board was
supportive of the introduction of more flats sorting machines, it
had difficulty with the project as presented to it. The Chairman
invited David Burden, Frank Schinella and Martin Gafsen to
consider the points made in the discussion about relevant
financial benchmarks and capital expenditure priorities, and
return to the Board with a revised proposal - not only for this
Project but also for appropriate hurdle rates and prioritisation
criteria for the capital expenditure programme. In the meantime
the negotiations with the supplier of the flats automation
machines could continue, but could not be concluded until the
Board had considered the case again.
MAILS INTEGRITY — RMH(06)05
The Board noted Adam Crozier’s paper, which outlined the
action plan that had been assembled to address issues raised in
various recent reviews of mails integrity, staff vetting and other
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security arrangements in Royal Mail. The plan also covered
actions in response to the introduction of a new Postcomm code
of practice on mails integrity;
the Board agreed that the action plan should be considered in
further detail by the Audit and Risk Committee. Bob Wigley said
that he would want in particular to understand the reasons for the
rejection of certain recommendations made by CRG consultants
in the review of security procedures.
SECURITY REVIEW — RMH(06)06
The Board noted Andrew Wilson's report;
the Chairman pointed to the marked increase in reported theft by
employees, and questioned what actions were being taken to
address this. Andrew Wilson explained that to an extent the
increase in reported theft reflected the incidence of investigation
work — the more emphasis that was placed on this, the greater
the number of offenders that would be identified. However he
had some concerns that whilst in the previous year the main
category of offenders had been casual workers, the incidence of
crime amongst permanent staff was now higher despite the
implementation of criminal record checks. Andrew Wilson
undertook to review the available data on this further with Tony
McCarthy;
Neil Henderson explained how the adherence to security
procedures was being given a higher prominence by operational
teams. The approach followed the successful methodology
adopted to improve quality of service in Royal Mail Letters over
the past year: compliance with security procedures would be
measured and reported regularly at unit, area and national level,
with the results becoming a key focus of performance
management reviews. Through this approach and an
accompanying internal communications drive, operational line
managers would be left in no doubt as to the importance to the
Business of the need for consistent compliance with security
procedures.
REGULATION REPORT — RMH(06)07
The Board noted report.
RMPP QUARTERLY FUNDING REPORT — RMH(06)08
The Board noted report.
HORIZON: NEXT GENERATION — RMH(06)09
The Board noted the paper. The Board questioned whether the
specification for future Horizon capability took into account the
need for the likely flexibility resulting from the recently reported
intention of the Government to withdraw the Post Office Card
Account. Sir Mike Hodgkinson confirmed that this issue would
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feature amongst others in the POL Board’s special meeting to be
convened later that week to consider the response to the Card
Account's withdrawal.
COMPANY SECRETARY'S REPORT - RMH(06)10
The Board noted the report:
the Board noted further with some concern the report on the
attacks made on Jimmy Tachadach. Jonathan Evans undertook
to establish why there had been so many attacks on this person,
and what was being done to help him.
OTHER BUSINESS
Richard Handover suggested that occasionally the Board should
meet before meetings to have dinner with a small number of
potentially high-flying younger managers. Jonathan Evans
undertook to arrange this in conjunction with Tony McCarthy.
CLOSE
In the absence of any further business, the Chairman closed the
meeting. The next meeting was scheduled for 7 February 2006
at 148 Old Street, London.
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