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Department for Business
Innovation & Skills
BIS
The Rt Hon Vince Cable MP
Donald Brydon
Chairman
Royal Mail Holdings pice
100 Victoria Embankment
LONDON
-EC4Y OHQ 30 September 2010
I thought that I should write to explain how the Coalition Government will approach
our shareholder role in Royal Mail over the next few years.
I understand that my predecessor wrote to you in similar terms last November. This
letter supersedes that letter. That said, I note that Royal Mail still faces many of the
same challenges so I am sure this letter addresses much of the ground covered by
my predecessor. There are, of course, differences in the approach to how these
challenges should be tackled.
It remains important that the Board as a whole is focused on meeting the
shareholder's objectives for the business while fulfilling its legal responsibilities and I
look to you as Chair to ensure that the composition of the Board and the way it
operates achieve this on my behalf.
We have a common goal in securing the future of Royal Mail and through it the
universal postal service. I want us to work together to achieve this. While there
may be areas where our views differ, I can assure you that we will listen to your
views with an open mind and without prejudice. You will no doubt appreciate that
we must move quickly with the Postal Services Bill so that we can move forward with
implementing the Hooper package of reforms.
The immediate future
The Bill and a future transaction for Royal Mail together with a sustainable position
for the Post Office are very much in our minds but, before turning to them, I should
first set out what we wish to see from the Board on a “business as usual” basis.
It will be important that neither of us takes our eye off the ball by looking to the future
rather than concentrating on what is happening now in the business. The financial
performance for the current year clearly demonstrates the difficulties the company is
facing.
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We expect the Board to continue to drive shareholder value through the
implementation of the transformation plan, introduction of new products and focus on
meeting customer needs. ° .
I should make it clear, however, that we do not expect Royal Mail to make any cash
calls on Government. Our policy is to enable Royal Mail through legislation to have
access to private sector capital. In the meantime, Royal Mail would be competing
with other priorities and it would be difficult to justify further funding for the company
in this climate. Moreover, the funding package agreed in 2007 was for the
implementation of the company’s transformation plan and we expect the company to
deliver that transformation within that existing funding envelope.
Objectives for the Postal Services Bill and transaction process
As you will be aware, the Government's core objectives for Royal Mail and the postal
services sector are to: °
* secure the future of the universal postal service;
introduce private sector disciplines to Royal Mail, and the ability to raise
private finance, to enable its rapid modernisation free from the perception of
Government interference; and
© support a sustainable future for the national post office network.
These are supported by delivery objectives as set out at the end of this letter. In
addition, officials have already sent you some specific Board objectives for the Royal
Mail which Edward Davey and I agreed to help the Board in its work on this process.
For completeness these are also set out at the end of this letter.
The Bill
We are committed to taking forward the Postal Services Bill so that we can address
the issues raised in the 2008 Hooper report (which Richard Hooper has now
updated for me). We will publish a detailed policy document in the early autumn but
I would like to give you my views on specific areas so that you will know our thinking
and it will help your business planning and other activities (both with regard to the
Bill and business as usual). This legislation is not without its challenges, and I look
to you, the Board of the company in general to play a full part in bringing it to the
statue book.
Form and timing of transaction
As you know, we are not at this stage making a decision on the form or timing of any
transaction which best fits our objectives for the Letters business. We deliberately
want to keep ail options open to maintain flexibility to achieve the best outcome for
the taxpayer and I expect your stance to echo that. Our intention is to develop these
options in discussion with you. As we refine our views officials will of course
communicate those to you.
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Post Office Limited
lam clear that I want the post office network to be maintained at around its current
size. Doing so is presently uneconomic and requires significant subsidy from
Government. Given the current position of the public finances, it is vital that Post
Office Limited develops a viable commercial strategy delivered through a network of
that size at significantly lower ongoing cost to Government. Both funding new
revenue streams and implementing cost-cutting measures will obviously play a big
role in that process.
As you will be aware, we see Royal Mail and Post Office Limited as distinct
businesses and believe that they are best separated. Officials have communicated
to you our objectives for the Board in this regard. It is therefore important that no
action is taken prior to a Royal Mail transaction which could make the
implementation of that separation more complex or difficult. There should be no
move to further integrate the Post Office and Royal Mail.
The process of separating two such interlinked businesses will doubtless be
complex in any event. There will be areas where the commercial interests of the
Post Office come into tension with those of Royal Mail. It is your role as Chairman to
ensure that when this happens the Board gives full, and equal, consideration to the
interests of each business. I will expect you to discuss and agree any significant
decisions on the apportionment of value between the two businesses with officials in
the Shareholder Executive.
You will be aware that the Bill contains provisions which would permit a move in due
course to a mutual ownership model. I believe that, following separation, such a
move might in future be attractive as it could better align the interests of
subpostmasters with the commercial interests of the business. But I am clear too
that mutual ownership will not be possible unless the Post Office is commercially
self-sustaining.
Regulation
Our intention is that Ofcom will be the postal sector regulator as soon as practicable
after the Bill receives Royal Assent. We welcome the improved relationship
between the company and Postcomm but agree with Richard Hooper that postal
services should be regulated as part of the wider communications market. The
existing regulator has taken forward much of the work proposed in the Hooper report
in his original report and we intend to ensure that this work will not be lost in any
transition period so that Ofcom can put in place the new price control from April
2012. We are developing transitional arrangements in discussion with Postcomm
and Ofcom and will keep you informed of progress.
Pensions
The Bill will include provisions that will enable the Government to take on the bulk of
Royal Mail's historic pension deficit. But, like the previous Government, we will not
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tackle pensions in isolation. The pension solution has to be part of a wider
transaction in order to represent value for money for the taxpayer. The funding
settlement that you have reached with the Trustees for the next three years seems
to be a practical and sensible way forward given our commitment to take forward the
Bill and a transaction. The positioning of the Pension Regulator is difficult and we
will have to ensure that the company and officials liaise closely on this, as they are
already doing.
Employee Shares
The Government is committed to empioyee ownership in Royal Mail and there will
be a commitment to introduce an employee share scheme in the Bill. We are still
exploring and developing how this can be achieved: the Bill will not specify the detail
of the scheme although we now expect it will specify a headline figure available for-
employees. In this work, I wish to ensure that employees can share in the success _
of the business and that employee shares act as an incentive to the workforce,
driving value in the business for all shareholders, including the Government. Real
employee engagement will be needed to make shares a genuine incentive. You are
obviously well placed to offer advice on the design of the scheme and my officials
will work with you on the options.
Royal Mail Transformation
Throughout this process, you will need to continue to press forward with
modernisation and accelerate the process wherever possible particularly in the light
of increasing competition from the wider communications market. As shareholder,
we encourage you to take forward the modernisation as quickly as you can, within
your existing funding envelope.
This remains critical to the business and the Board must ensure that, while we look
to the future in terms of the Bill and a transaction, the current transformation of the
mails business is the central focus of the company. Taking forward “business as
usual” is critical and we must keep focussed on this.
The modernisation agreement reached with the CWU in March has the potential to
be a fundamental change in the way you and the union engage. Such agreements
have been reached in the past but still have failed to deliver real change in the
business, The successful implementation of the agreement is vital and I understand
that so far this is going well. We will continue to look to you and your colleagues to
demonstrate clearly that modernisation is proceeding to plan and that the targets
and metrics for the progress on modernisation are transparent and measurable.
Continued engagement with the CWU will be vital during this period and, where we
can, it will be important for both of us to put distance between the modernisation
agreement and the Bill so that the issues are not blurred.
Whilst recognising the constraints imposed by regulation in terms of lead times and
competitive information sharing, we share the Board’s desire to see Royal Mail
introduce new and innovative products faster than we have seen in recent times
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provided that they are possible to finance. There has to be a greater focus on
customers. Ina falling market, you will have to give them products that meet their
needs and compliment those being offered through other media.
I reiterate that the company must maintain quality of service throughout this
transformation process to ensure that the customer base remains satisfied with your
levels of service.
-Parcels/GLS
Parcels and packets remain a vital part of Royal Mail’s future. This is a highly
competitive market especially in e-fulfilment. The company has been developing
Royal Mail’s “packets and parcels strategy” for some time and no doubt the
company will be looking at the strategic importance of GLS and Parcelforce to the-
posta! business as a whole. It is important that the Shareholder Executive is fully _
sighted on your work in this area. I am pleased that you have already taken steps
to help recipients of parcels (who were not at home when the attempt to delivery the
parcel was made) to pick them up in the evenings by extending the opening hours of
deliveries. This type of initiative is important and directly addresses the concerns
consumers and their representatives have expressed.
Health and Safety
Health and safety is an important issue and I am looking to you and the Board to
ensure that Royal Mail improves its safety record and manages the business to the
highest environmental and safety standards.
The Board
Since you joined Royal Mail the main Board has been completely reshaped. I am
pleased that the new Board has the right mix of skills. We will need to make sure
we have regular reviews with you to ensure that this remains the case. It will of
course be important to secure a new Finance Director as quickly as possible.
I reiterate that the Board must have a clear understanding of the responsibility that it
hoids to the shareholder. The relationship needs to be one of mutual respect and
trust. But the underlying principle is that the Board should be focused on delivering
the shareholder's objectives as set out above. I would like to ensure that there are
regular sessions for all of the Board to meet my officials so that both teams can
deepen their understanding of the challenges we mutually face.
Board Remuneration
This remains a difficult issue. I welcome the fact that the salaries agreed for the
new CEO and MD of POL are lower than their predecessors and that the NED’s
average salaries will be lower. While recognising that the Board should be properly
incentivised and that there is a need to retain and recruit the right people, I expect
the downward trend in remuneration to continue, where possible, and for you to
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come forward with proposals that reflect that there is a need for restraint in the public
sector.
The large bonuses achieved under the last LTIP would be difficult to reconcile in the
current environment. Any future bonus arrangements, either annual or long term,
would have to be linked to performance, demonstrate achievement of objectives set
by the Remuneration Committee and continue to be transparent. In addition to
reflecting the performance of the company they should reflect a link to the
modernisation of the company which remains the priority for the business.
The day to day relationship between the shareholder and Royal Mail should be
conducted through the Shareholder Executive. Susannah Storey, who has worked
on Royal Mail issues for a number of years, is the company’s main point of contact.
Stephen Lovegrove, as you know, has overall responsibility for the Shareholder
Executive, including the Royal Mail. I would like all proposals from the company to _
be discussed with the Shareholder Executive prior to them being presented to
Ministers.
I would like to continue the arrangements to meet on a regular basis, to discuss
progress on the issues set out in this letter and other issues that will arise during
your term. I will ask my office to contact yours to put dates in our diaries. This does
not, of course, rule out us speaking between these meetings if appropriate as we
have discussed.
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