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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 27 April 2006
Present:
Allan Leighton
David Burden
Alan Cook
Adam Crozier
David Fish
lan Griffiths
Richard Handover
Sir Mike Hodgkinson
Tony McCarthy
John Neill
Baroness Prosser
Helen Weir
Bob Wigley
In attendance:
Jonathan Evans
Also present:
Rico Back
Frank Schinella
Phil O'Gorman
Jane Newell
Alex Smith
Martin Gafsen
Jeff Triggs
Richard Gillingwater
Mark Higson
Olly Robbins
Ric Francis
Peter Corbett
RMHO06/78
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RMHO6/79
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Chairman
Group Technology Director
Managing Director, Post Office Ltd
Group Chief Executive
Non-Executive Director
Managing Director, Royal Mail Letters
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
Vehicle Services Director, for RMHO6/79(d)
Chair, Royal Mail Pensions Trustees Ltd, for RMH06/85(a)-(d)
Group Strategy Director, for RMH06/85.
Group Investment Director, for RMH06/85
Slaughter and May, for RMHO6/85,
Chief Executive, Shareholder Executive, for RMH06/85(f)-(n)
Deputy Chief Executive, Shareholder Executive, for
RMHO06/85(f)-(n)
HM Treasury, for RMH06/85(f)-(n)
Operations Director, Post Office Ltd, for RMHO6/87
Finance Director, Post Office Ltd, for RMH06/87
MINUTES OF PREVIOUS MEETING RMH(06)4™
The minutes of the meeting held on 4 April 2006 were approved,
subject to the following amendments:
e RMHO06/66(c) — delete "and the Audit Committee”;
e RMH06/68(b) — replace “defined contribution” with “defined
benefit”.
MATTERS ARISING — RMH(06)48
The Board noted the status report;
Pension Fund volatility (RMH06/52(e)): Frank Schinella said that
a summary of the Company's plans for mitigating the volatility of
the pension fund would be presented to the Board in June.
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Royal Mail Way (RMHO06/60(b)): John Neill enquired whether
management's views about Unipart and Royal Mail Way, as
reported in the minutes of the March meeting, had changed in
the light of subsequent discussions. lan Griffiths replied that his
team had held a number of meetings with those working on
Royal Mail Way as a result of which there had been some
noticeable improvements. lan Griffiths undertook to give a full
progress report to the Board about Royal Mail Way within the
following few months;
Vehicle Replacement Programme (RMHO06/71(d)): the Board
noted the paper (RMH(06)60) from Phil O'Gorman which
addressed the issues raised in the discussion at the previous
meeting. Phil O'Gorman supplemented this with an overview of
the achievements of Vehicle Services over the previous few
years, in which time considerable reductions had been made in
the size of the fleet, and the costs of Operating and maintaining
it. In response to questions from the Board, Phil O'Gorman
expressed the view that further savings of some 3% should be
possible during the current year, but this depended less on the
activities of Vehicle Services than on operational management.
Frank Schinella confirmed that the balance between Purchasing
vehicles and leasing them was being appropriately assessed on
the basis of the marginal cost of capital. In conclusion, the
Board was satisfied with the responses to its questions raised at
the previous meeting, and therefore approved the proposal
sought in paper RMH(06)42: the Board
* approved the annual vehicle plan at a cost of £82.9m, of
which £20m had been drawn under advance authority; and
* devolved authority to the Investment Committee for £33.3m
for tranche 2 and £29.5m for tranche 3 of 2006/07 and £25m
for tranche 1 of 2007/08;
Budget 2006/07 (RMHO06/66(e)): Adam Crozier and lan Griffiths
informed the Board that a substantial revenue risk had come to
light in respect of Pricing in Proportion. An interrogation of the
Pricing model used to assess the revenue implications of the
pricing change had revealed that the previous estimate of the
impact of the change had been mis-stated. While it was not
possible to determine the impact with complete accuracy, as
revenues would in part be dependent on customer behaviours
following the change, it now appeared that there could be a risk
of up to some £58m in 2006/07, while for later years the shortfall
could be corrected. Work was currently urgently taking place to
understand why this modelling error had occurred, and to
determine the appropriate course of action. The Board was
concerned to be informed of this new risk: Adam Crozier
undertook for the Board to be given an explanation of why the
error had occurred, and any subsequent actions including how
management proposed to cover the risk in budgetary terms.
David Fish suggested that the assumptions within the pricing
model in respect of changes to product mix be thoroughly tested.
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OTHER MINUTES
The Board noted the minutes of the meetings of
+ the Audit and Risk Committee of 14 March 2006
* the GLS Supervisory Board of 15 March 2006
* the Corporate Risk Management Committee of 2 February
2006;
in respect of CRMC06/02(e), which referred to an action seeking
confirmation of the Company's ability to insure against fines and
compensation payments, Bob Wigley asked that the Board be
informed of the outcome.
CHAIRMAN’S BUSINESS
The Chairman had no business other than that on the agenda.
REPORTS FROM CHAIRS OF BOARD COMMITTEES
Nomination Committee: Richard Handover updated the Board
on progress with finding a new Group Finance Director. There
were two clear front-runners, and the aim was to conclude
interviews by the end of the month;
good progress continued to be made in the search for a General
Counsel. The front-runner candidate had been endorsed by the
Committee and Bob Wigley;
Remuneration Committee: David Fish reported that the position
on the LTIP was looking more positive following further
discussions with shareholder fepresentatives. There was
however some important detail yet to be resolved, including
agreement to the annual ROTA targets;
Audit and Risk Committee: Bob Wigley reported that the
Committee had met informally on 19 April to be updated on the
issues surrounding the Company's position as a going concern,
in readiness for the next full meeting of the Committee on 8 May.
EXECUTIVE DIRECTORS’ REPORTS
The Board noted the reports from the executive directors,
including the good Quality of Service outturn results in Royal
Mail Letters, and the commendable profit performance of
Parcelforce. The Board noted further:
Post Office Ltd: Alan Cook reported that he and his team were
continuing to develop the five-year strategy for Post Office Ltd, in
readiness for a discussion at the Board's July awayday.
Meanwhile it had been encouraging that new product sales had
ended the year on a high, with the target to secure 845,000 new
customers being hit. The launch of the instant Savings account
had gone well, with it attracting deposits well ahead of plan;
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the loss-making directly managed branches were a big challenge
to POL, with their adverse mix of staff and property costs,
combined with mediocre sales performance. In the Chairman’s
opinion a root cause of the poor performance of these branches
was the lack of engagement of the branch managers: he had
encouraged Alan Cook to hold workshop meetings with all the
branch managers, which were now being arranged. The
Chairman saw parallels with how the performance of RM delivery
offices had been improved by the greater involvement of the
managers. The Chairman added that he did not want POL to
incur any further industrial action over franchising as it was clear
that POL was not currently best equipped to respond to
opposition to the DMB conversion programme, and wanted more
attention to be given to the management of the branches;
People and organisational development: Tony McCarthy
updated the Board on a number of people issues. Work had
been progressing on refining proposals for an employee share
scheme, and changes to the levels of pensions provision:
Proposals would be brought to the June Board meeting;
the scheme to encourage staff not to take sick leave by
incentivising good attendance was Proving successful: 56,000
people had had no absence within the previous 12 months, and
86,000 within the previous six months. It was estimated that the
resultant reduction in absence was worth some £40m a year;
on pay matters there was a mixed picture. The Parcelforce pay
offer had been accepted, including a large vote in favour of
Moving to monthly pay; while in Royal Mail Letters, the CWU had
rejected a 2.9% offer as it “did not meet expectations”. Similarly
2.4% offers in POL and Cash in Transit had been rejected by
CWU. Discussions continued on changes to London Weighting
payments, but the CWU had unachievably high expectations.
CWU were embarking on a membership consultation exercise in
advance of their annual conference in late May to test the level
of backing the union leadership had for its eight-point “vision”,
which included higher pay, shorter working hours, greater job
security, and opposition to a share scheme. The Chairman was
Planning to write to all staff within the near future to explain the
Current position of the Company, to foreshadow the annual
results and heighten expectations of a Share in Success
Payment, as well raising the profile of the rationale for an
employee share scheme. On the latter point Margaret Prosser
stressed the need to conduct a major PR campaign targeted at
persuading MPs of the benefits of employee shares — she was
very conscious of the extent of opposition to the plan, but felt that
the opposition was not well informed;
the number of employment tribunal cases settled before they
reached court raised some concern amongst directors, as it was
a potential encouragement for People to pursue their alleged
grievances through to a tribunal in expectation of receiving a
payoff. Tony McCarthy was reviewing the practice to ensure that
as far as was sensible all tribunal cases were defended;
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GLS: Rico Back informed the Board of current developments in
GLS. The profit outturn for the year was showing a £1.6m
improvement on the previous forecast. He cautioned the Board
that the coming year was expected to be much tougher, in view
of the significant attack on prices from competitor companies that
GLS was experiencing, particularly in Germany.
FINANCE DIRECTOR’S REPORT
The Board noted the results for period 12, and the full year
results which showed a Group operating profit before exceptional
items of £355m, which was £53m favourable to the prior year;
Going concern (RMH(06)50): the Board noted Frank Schinella’s
paper, the analysis within which had been prepared to enable
the Board to determine whether it would be appropriate to sign
the annual accounts on a going concern basis;
the Board noted that detailed analysis prepared by Group
Finance, with appropriate external review by Ernst and Young’s
audit and insolvency teams, together with Slaughter and May,
had demonstrated that the Group as a whole and its subsidiaries
were going concerns. This analysis had been considered at a
special briefing meeting of the Audit and Risk Committee on 19
April;
this analysis had also concluded that POL's Statutory accounts
should include an “emphasis of matter” statement and
appropriate note disclosure with respect to the long-term funding
for POL and the fact that directors had placed reliance on the
Government's “route map” for determining the future strategy
and funding of POL;
the analysis further showed that in the unlikely circumstances of
POL being forced into a radical closure programme similar, there
were sufficient management actions available to cover the
financial impact on RMG;
the analysis also showed that the existing financial covenants of
the Company were unlikely to be breached:
taking all these factors into account, the Board was satisfied that
in the scenario of the Government supporting the Company's
commercial case with proposed levels of funding, the Group
accounts could be prepared on a going concer basis. In the
scenario of Government funding not being forthcoming, while it
appeared that there would be sufficient management actions to
ensure that the Group could remain a going concern, some
directors asked for a more detailed analysis of these actions and
their impacts to show this beyond doubt. Frank Schinella
undertook to produce this further analysis, which would be made
available to the Audit and Risk Committee, and the Board’s
accounts sub-committee. The Board delegated to these
committees the final confirmation in respect of going concern, in
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the light of the further analysis;
IAS 19 Pension disclosure (RMH(06)51): the Board noted Frank
Schinella’s paper which asked the Board to approve the key
assumptions supporting the calculations of the [AS19 pension
disclosure for the Group’s pension schemes in the statutory
accounts. The Board noted that the choice of assumptions had
been based on advice from the Company's independent actuary,
Watson Wyatt, and the approach to the derivation of the
assumptions had broadly followed the practice of previous years,
with the exceptions of a strengthening in mortality and inflation.
After some discussion, the Board endorsed the use of the
assumptions proposed in the paper;
Draft 2005/06 accounts (RMH(06)49): the Board noted Frank
Schinella's paper which provided the Board with the draft
accounts for 2005/06. An earlier version of the accounts had
been provided to the Board at its previous meeting, and a later
version had also been considered by the Audit and Risk
Committee. Directors were asked to submit any further
comments or suggested drafting changes as soon as possible.
The Board was informed that the intended timetable for
publication — still to be confirmed in the light of the continuing
discussions with Government about the funding package ~ was
18 May, with the Audit and Risk Committee meeting on 8 May to
clear the accounts;
the Board authorised the accounts sub-committee to give the
final approval to the Group accounts on the Board's behalf,
including the Chairman's and CEO's statements, and any related
press release. The Board agreed that the sub-committee would
comprise Allan Leighton, Adam Crozier and Bob Wigley.
GOVERNMENT FUNDING — RMH(06)54
The Chairman welcomed Jane Newell to the meeting, and
invited her to give her perceptions of the discussions taking
place on agreeing a memorandum of understanding in respect of
the future funding of the Royal Mail Pension Plan;
Jane Newell reported that while the discussions with the
Company to agree the MOU had been constructive, the Trustee
had become frustrated by the continuing delay in bringing the
MOU to a conclusion. It was clear that this was due to
interventions by the shareholder, and she found their inability to
meet deadlines, and to change their position, intensely
disappointing. She explained that she had kept closely in touch
with The Pensions Regulator throughout the period of discussion
about the MOU, and TPR had proved to be a very strong source
of guidance. While it would not be necessary for TPR to be
involved formally in agreeing the MOU, assuming that the
Trustee and the Company would finally be able to reach
agreement, TPR’s influence was substantial, and she had made
shareholder representatives fully aware of this;
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Jane Newell feit that in view of the continuing sequence of “drop
dead dates” to agree the MOU which had come and gone, she
had a duty to write to the Government to inform them at first
hand that the continuing delay was causing considerable anxiety
amongst the hundreds of thousands of members of the scheme;
on behalf of the Board, the Chairman endorsed the action Jane
Newell was taking, and thanked her for her professionalism and
patience in dealing with this difficult matter.
Jane Newell then left the meeting.
Adam Crozier updated the Board on the current state of
discussions with the Government about the funding package.
The DTI had made a formal recommendation to the Chancellor
of the Exchequer that the Company's strategic plan was value-
enhancing, and that it should be supported. The DTI had yet to
make a recommendation about an employee share scheme: this
was partly because the Company had only recently tabled a
formal proposal, but more because the Secretary of State had
yet to make up his mind on his stance to the issue. Adam
Crozier considered that in the discussion with Government
representatives which was to follow, it would be important to
gauge the extent of Ministerial commitment to the commercial
case, including the proposed employee share scheme, and the
likelihood of the funding discussions reaching a conclusion in
time for the publication of the Company's accounts on 18 May.
Richard Gillingwater, Mark Higson and Olly Robbins joined the
meeting.
The Chairman invited the Government representatives to update
the Board on their current understanding of progress towards
finalising agreement to the Company's commercial case;
Mark Higson said that Government had been working vigorously
towards providing a satisfactory outcome to the funding
discussions in time for the Company's announcement of its
annual results on 18 May;
the letter of comfort for the POL directors had been discussed at
length between the Company and the Government, and Mark
Higson handed over at the meeting a signed copy of it. He
stressed that one of the letter's conditions was that the existence
of the letter should remain confidential to the parties. The
Chairman said that the letter would be checked with the
Company's legal advisers, and the Royal Mail Group and
Holdings directors would need to be reassured that the proposed
level of confidentiality would not fetter their fiduciary duties;
on progress with the employee share scheme, Mark Higson said
that the Secretary of State was sympathetic towards the
Company's wish to introduce such a scheme, but there were a
number of important details still to be resolved. At present it was
not settled Government policy to support an employee share
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scheme. Work was continuing on the terms of a statement
which could be made about this on 18 May:
Olly Robbins, on behaif of HM Treasury, reaffirmed that the
Company's commercial plan had been put forward to the
Chancellor as value-enhancing. The matter was currently with
the Chancellor who was fully engaged with the issues involved,
In response to a question from the Chairman, Olly Robbins
explained that the Chancellor was fully aware that an employee
share scheme formed an integral part of the Company’s plan, but
no formal proposal had yet been made to him about this.
Margaret Prosser stressed to the Government representatives
the importance of ensuring that the decision-makers in
Government heard a balance of stakeholders’ views about
introducing a share scheme, rather than just listening to those
against the scheme who "shouted loudest”.
the Chairman mentioned the subpostmasters, who could be a
powerful lobby group in favour of a share scheme. Mark Higson
recognised this, but pointed out that it was not yet agreed
Government policy that, should a share scheme go ahead,
subpostmasters would be included in it;
the discussion turned to the planned consultation arrangements
in respect of the future of POL. Mark Higson said he wanted the
Process for this to be clear by September 2006, but considered it
to be important that by then there was a clear and consistent
view across Government about the desired future state of POL.
He would be working towards this aim;
Helen Weir referred to the frustration caused by the succession
of missed deadlines to secure a conclusion to the discussions on
the Company's commercial case. Mark Higson repeated that all
efforts were now being made to work towards the 18 May, also
recognising the importance of the Audit and Risk Committee
meeting on 8 May;
in conclusion the Chairman thanked the Government
representatives for attending the meeting, and for the efforts they
were making to bring matters to a conclusion. He re-
emphasised the importance of being able to make an
announcement on 18 May.
OPERATIONAL STAFF VOLUNTARY REDUNDANCY
PROGRAMME 2006 ~ RMH(06)52
The Board noted lan Griffiths’ Paper, which sought approval for
the 2006 operational staff headcount voluntary redundancy
Programme to support structural change and deliver efficiency
Savings in Royal Mail Letters. The Board noted in discussion:
the full impact of the programme on pension costs had been
included in the costing of the programme;
management intended to pursue changes to the level of
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voluntary redundancy terms applicable to operational colleagues
at a later date. This programme would be the first large-scale
exercise to offer voluntary redundancy to operational staff, and at
this stage a lessening of the terms would be inappropriate.
In conclusion the Board:
agreed voluntary redundancy costs of up to £120m to allow the
exit of some 3500 operational staff;
noted that 40% of the £88m estimated annual savings from
salaries, bonus, national insurance and pension contributions
and benefits expected from the investment would be paid back to
employees as a consolidated annual increase to pensionable
Pay, in line with the pay deal Previously agreed with CWU;
noted that voluntary redundancies provided an enabler for
efficiency savings anticipated as part of the 2006 national
productivity pay agreement between Royal Mail and the CWU.
HORIZON: NEXT GENERATION — RMH(06)53
The Board noted Alan Cook's Paper, and Ric Francis’ further
explanation of the business case for the replacement of Post
Office Ltd’s Horizon electronic point-of-sale system. The Board
noted further in discussion:
the proposed deal with Fujitsu offered a replacement system at a
significantly lower cost than any of the other available options.
For a total investment of £127m, the proposed deal would deliver
an incremental post-tax NPV of some £90m compared with
continuing with the current system and contract until 2015.
Richard Handover pointed out that while this scale of cost
reduction was commendable, in his experience of dealing with
Fujitsu, cost reduction could also be accompanied by service
degradation. Ric Francis noted this;
David Fish expressed some Surprise at the 10-year length of the
Proposed contract, which in his view was high for an IT contract.
Ric Francis responded by pointing out that the proposal was
based on a multi-contract approach, making it simpler to exit
from various elements should that be necessary.
After further discussion the Board:
* expressed its support for the business case set out in the
Paper
* authorised release of up to £25m of Capital, in addition to
£10m already approved, to enable the continued
development of the Horizon replacement system
* approved POL’s concluding detailed contract negotiations
with Fujitsu Services as Proposed, in line with the parameters
of the business case. This was Subject to POL resolving its
funding issues currently being discussed with Government,
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and to the Investment Committee authorising the signing of
the contract.
COMPETITOR INTELLIGENCE QUARTERLY REPORT —
RMH(06)55
The Board noted the report.
QUARTERLY DIVERSITY REPORT — RMH(06)56
The Board noted Tony McCarthy's paper which identified key
areas of achievement and concern in connection with Diversity
and Inclusion, based on the analysis of data available from five
key sources during 1 December 2005 to 28 February 2006;
the Board noted further the achievements and concerns
highlighted in the report. Of particular concern was from a total
of 65 recommendations for Conduct Code action made during
the quarter in respect of bullying and harassment cases, only 14
had been applied. This followed a similar trend in previous
quarters. The Board endorsed the action being taken to
communicate a clear message to managers that appropriate use
should be made of the conduct code, in line with the Business’
Stated values of zero tolerance of bullying and harassment.
YEAR-END INVESTMENT REPORT — RMH(06)57
The Board noted the report. The Board noted further that the
Transport Review post-implementation review showed a large
difference between the authorised business case and outturn,
and requested an explanation of the disparity.
REGULATION REPORT — RMH(06)58
The Board noted the report. Adam Crozier reported that Mike
Prince was taking over from Stephen Agar as Group Regulation
Director. With Luke March, Mike Prince was putting in place
Procedures to ensure that information flows between Royal Mail
and Postcomm/Postwatch were properly controlled, with
appropriate sign-offs being given.
COMPANY SECRETARY’S REPORT — RMH(06)59
The Board noted the report.
CLOSE
In the absence of any further business, the Chairman closed the
meeting. The next meeting was scheduled for 6 June 2006 at
148 Old Street, London. _
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