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To 1. Edward Davey; 2. Secretary of State
From Will Gibson
Date 9 January 2012
“Chairman’s Letter” to Alice Perkins, Chairman of Post Office Ltd
Purpose
1. A“Chairman’s letter’ from the Secretary of State to Alice Perkins setting out her
objectives and how we, as shareholder, expect her to approach the main issues
facing Post Office Ltd as identified in the letter.
Recommendation
2. That the Secretary of State agree to send a Chairman’s letter to Alice Perkins. A
draft is attached at Annex A.
Timing
3. Routine, although it would be useful to send at the earliest opportunity as Alice
Perkins has been in post since September 2011.
Background
4. As shareholder, it is good practice for the Government to write to the Chairman of a
Government-owned business to set out the areas of that business’s activities that
the Government sees as important, and to make clear how the Government
expects the Chairman to approach them.
5. You wrote to the Chairman of Royal Mail in similar terms in September 2010.
6. Following the successful passage of the Postal Services Act 2011, which has made
possible the separation of Post Office Ltd from Royal Mail, Alice Perkins was
appointed Chairman of Post Office Ltd. She assumed her duties on 23 September
2011. Ms Perkins has quickly grasped the issues and challenges facing the
company, and now is an appropriate time for Government, as shareholder, to
outline its expectations.
7. The letter is comprehensive. It covers, inter alia: composition of the Board (you
wrote separately to Alice Perkins in October regarding ShEx representation on the
Board of a separated Post Office Ltd — copy attached at Annex B); Governance
issues; Separation from Royal Mail; the Commercial Strategy, including network
transformation, income from government services (the ‘Front Office for
Government’ concept), and financial services; Mutualisation; and Communication.
Alice Perkins will be expecting this letter (she has seen a draft), and the views
expressed have been raised with her by either Ministers or officials already.
However, it is important that these be on record going forwards.
Ce: PS/SoS; PS/Davey; PS/Willetts; PS/Perm Sec; PS/SPAD; Stephen Lovegrove;
Susannah Storey; Roger Lowe; Rachel James; Mike Whitehead; Jane Hoy; Peter Batten;
Katie Wake; Josh Coe
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Annex A
Draft Chairman’s Letter to Alice Perkins
Alice Perkins
Chair
Post Office Ltd
148 Old Street
London
EC1V 9HQ
January 2012
I am delighted you have taken on the role of the Chair of Post Office Ltd and I
enjoyed meeting you on 3 October last year to hear your initial impressions. I
believe, as I know you do, that the reforms of the Post Office and Royal Mail that we
are taking through offer an opportunity for us to develop a sustainable Post Office
network that, as a nation, we want and need.
As I mentioned in my letter to you of 25 October last year, I thought I should write to
explain how the Government will approach its role as ultimate shareholder of Post
Office Ltd over the next few years.
Backed by significant Government commitments, this is a period of unprecedented
opportunities for Post Office Ltd. Principal among these are:
e arefreshed Post Office Ltd Board operating under your leadership;
e separation from Royal Mail, allowing both companies to focus on their core
businesses;
e £1.34bn of Government funding to March 2015 to maintain the Post Office
network at around its current size and coverage, to finance network
transformation that will reduce its future reliance on subsidy from Government and
to support Post Office Ltd’s ambitious strategy to grow new revenues;
e the potential, in time, for ownership of Post Office Ltd to be converted to a mutual
structure, giving stakeholders a greater say in the business.
Board and Governance
The proposed separation of Post Office Ltd from Royal Mail Group is an important
part of the process outlined during the passage of the Postal Services Act and it
brings with it necessary governance changes. It is important that Post Office Ltd can
flourish under a strengthened Board, providing increased levels of oversight and
challenge to the company. Under your leadership as Chair, it is important that the
Board’s oversight of Post Office Ltd is strengthened through these changes.
One of your immediate priorities will be the appointment of further non-executive
directors to bolster the Post Office Ltd Board. I very much welcome Neil
McCausland’s appointment as senior independent director. A further non-executive
appointment will need to be made swiftly. I understand that you are making progress
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in identifying candidates. As we have discussed, and as referred to in my letter of 25
October last year, I expect a Shareholder Executive official to take a position on the
Post Office Ltd Board from the point of operational separation from Royal Mail this
spring. You and Stephen Lovegrove are in touch to finalise how this change will be
implemented.
I understand that the company’s executive team has also undergone significant
change in recent months, with new appointments made recently to the positions of
Finance, Commercial, Human Resources and Financial Services director. It will be
important to ensure a continued mix of skills and experience on the Board and
executive which equips the business to meet the challenges it faces. As Post Office
Ltd separates from Royal Mail, it will inevitably need to increase its corporate
capacity, posing a greater leadership challenge to the executive team. Once you
have completed the establishment of the Post Office Ltd Board, you should meet with
the Shareholder Executive team to discuss your impressions of the current Board
and executive and what, if any, further action needs to be taken.
Board reviews should be conducted annually, with the review to be conducted by an
external consultant every other year. Shortly after completion, the results of each
year’s Board review (whether internal or external) should be shared and discussed
with the Shareholder Executive team.
Following operational separation from Royal Mail, it is also important that Post Office
Ltd’s corporate governance conforms to best practice, for example by establishing
appropriate remuneration and audit committees.
Separation
I am committed to the separation of Post Office Ltd from Royal Mail. This is not just
because it is the Government's policy to introduce private capital to Royal Mail. I
also believe that separation will allow each company to focus on its core business.
However, the two businesses are obviously natural commercial partners, and they
need to have a positive long-term relationship. It will be necessary to ensure the
correct protocols and behaviours are in place to buttress the commercial terms of that
partnership following separation. In working together during the run up to operational
separation at March 2012, it will be important to find a suitable modus operandi for
the two companies.
The commitments of Donald Brydon and Moya Greene that the longest legally
permissible distribution agreement would be put in place between the two businesses
were particularly important in securing Parliamentary support for the Postal Services
Act. The businesses must now deliver on those commitments.
The separation of the two businesses is inevitably involving detailed negotiations.
These are commercial negotiations and it is right that they have been conducted by
those who know each business best — their managements. The final commercial
agreements will therefore need to have been expressly approved by the Post Office
Ltd and Royal Mail Holdings plc Boards before they are finalised. As the only
shareholder in each business we are obviously keen to remain informed on the
progress of separation and you should continue to provide regular updates to the
Shareholder Executive team.
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The separation process should ensure operational autonomy for each business as
soon as possible and certainly by the implementation of the pension solution,
following state aid approval. I recognise that Post Office Ltd will need to build certain
capabilities so that it can function effectively as a standalone business. However, in
doing that it should also ensure that separation costs are minimised, and that one-off
costs are incurred only as and when necessary. This is particularly important given
that no provision was made for separation costs in Post Office Ltd’s October 2010
strategic plan, and any such costs will need to be absorbed by the business within
the funding envelope based on that plan. This may mean that moving to a “sister
company” structure, in which Government's ownership of Royal Mail and Post Office
Ltd is held through Royal Mail Holdings plc as a shared holding company, is likely to
be the most sensible initial step. There would then be a later full separation at the
point of any Royal Mail transaction or Post Office mutualisation.
Commercial Strategy
Over the course of the spending review period, Post Office Ltd is obliged to maintain
a network of at least 11,500 outlets, while continuing to meet the Government's
access criteria. Maintaining the Post Office network at around its current size
requires significant subsidy from Government. In 2010, Post Office Ltd presented to
Government an ambitious strategy to maintain the network while reducing reliance on
subsidy over the longer term. As part of the October 2010 spending review, the
Government committed £1.34bn to fund the delivery of that strategy to March 2015.
There are two major elements to the strategy: transforming the network and growing
new revenues.
Transforming the network
Post Office Limited is committed to delivering a roll-out of around 4,000 Main Post
Offices and around 2,000 Post Office Locals over the spending review period.
Piloting of these models is currently underway, with 139 Locals and 14 Mains already
up and running. The piloting process will yield important information on which
models best serve which community, and improvements that can be made to each.
A further critical element of the transformation is Post Office Ltd’s commitment to
eradicating the losses sustained by the network of 373 Crown post offices, which
currently run at c.£60m a year.
A transformation programme of this scale is a significant undertaking. Post Office Ltd
has an impressive record at running such programmes efficiently to time and budget.
It is imperative that you and the Board ensure that this programme continues that
record and that this is demonstrated to Government. Prior to the large-scale rollout
of the plan, I expect the Post Office Board and management team to work with
Shareholder Executive officials to develop the most appropriate set of key
performance indicators by which the company’s progress in implementing the
transformation can be measured. This work should include the arrangements to be
put in place for engaging with customers and communities over any significant
change in their service provision.
Network transformation is critical to the success of the commercial strategy and it is
notable that on current forecasts there will still be a significant proportion of the
network operating on an outdated model by March 2015. I am pleased to note that
Post Office Ltd’s current financial performance is £38m favourable to budget and that
you intend to apply the proceeds of this outperformance towards the more rapid
implementation of the network strategy. I welcome this, and I am keen that any
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future out-performance continues to be applied prudently, after consultation with
Shareholder Executive officials, towards reducing the level of risk associated with
Post Office Ltd’s commercial strategy.
Growing new revenues
The Post Office Ltd strategy for the next few years sees a significant growth in new
Government services income. The strategy focuses the business on the opportunity
to become the Front Office for Government, by providing the face-to-face services
that will still be required to support a digital by default approach to service delivery on
behalf of Government. Opportunities identified to expand revenues focus on
application services (including “assisted digital” applications), identity verification, and
payment services. Post Office Ltd is looking to expand its offering in these areas
through working with both local and national Government.
The success of this element of Post Office Ltd’s strategy will depend greatly on its
ability to identify early the developing service requirements of relevant organisations,
working with them as necessary to tailor its offering and proactively sell into local and
national Government. It will be important to ensure that the team tasked with
delivering this work has the requisite skills and is sufficiently resourced. Ministers
and officials in BIS stand ready to assist you in this effort.
Given the tight fiscal environment, the savings that Post Office Ltd can deliver for
Government departments and local authorities by offering these services will be of
critical importance. Similarly, the requirements on public bodies to deliver value for
money to the taxpayer and to conduct competitive tenders mean that it is all the more
important for Post Office Ltd to manage its costs carefully, successfully implement
the network transformation plan and to submit the most competitive bids it can. To
do otherwise would hinder its ability to win this business.
Finally, any focus on opportunities to win new Government business should not
prevent Post Office Ltd from seeking to maximise profitable revenues in other areas
— for example through the provision of financial services. I am committed to
supporting the expansion of accessible financial services products at the Post Office,
and I am keen that Post Office Ltd builds on the good progress that has already been
made, for example through the recent introduction of Junior ISA accounts.
With the recent introduction of RBS (including Natwest), around 80% of people can
now access their current accounts at the Post Office and it is important that Post
Office Ltd progresses its discussions with HSBC and Santander with the aim that this
becomes 100% in the near future. I am aware that Post Office Ltd is currently
investigating how it might introduce its own branded transactional accounts in the
future. This could expand the business’s customer base and also ensure the
company is well positioned to offer access to benefit payments, as DWP further
develops its delivery plans for Universal Credit and Post Office Card Account
arrangements are replaced over time. I am also aware that Post Office Ltd is
currently negotiating amendments to the terms of its POFS joint venture with Bank of
Ireland and I support the company’s push to maximise its revenues from that
partnership. However, the duration of the joint venture should not be extended to
achieve this without significant changes to increase Post Office Ltd’s ongoing
flexibility in this area.
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Mutualisation
Provided that the commercial strategy is successful, I believe that the Post Office
could be well suited to a mutual model in due course. This would help to align the
interests of stakeholders like sub-postmasters, customers and staff better with those
of the business. Carefully implemented, mutual ownership could also enhance the
business’s commercial flexibility. As you are aware, on 19 September last year
Edward Davey launched a public consultation to develop further the mutualisation
options identified by Co-operatives UK in their report on the topic from May last year.
This consultation closed on 12 December last yearand I expect us to publish our
response in the spring.
A suitable mutualisation proposal must achieve the balance of sufficiently engaging
the population of members, while allowing management the space to get on with
running the business without undue burden or cost. Any change of ownership
structure will also bring with it a range of operational issues that will need to be
carefully considered. Your assistance in advising this Department on the practical
implications of potential mutual models will be extremely important.
Given the need for commercial sustainability and significantly reduced subsidy, a
formal transfer of ownership to a mutual model may be some years away. A
successful transition to a mutual will also require the continued building of strong,
two-way, stakeholder relationships between the business and, among others, its
staff, subpostmasters and customers. This is a process which can and indeed must
be advanced prior to any formal transfer of ownership if a mutual Post Office is to
flourish. I would appreciate it if you could reflect on this and discuss the options with
the Edward Davey and Shareholder Executive early this year in advance of the
publication of the Government's response to the consultation.
Communication
The day to day relationship between the shareholder and Post Office Ltd will be
conducted through the Shareholder Executive. Susannah Storey, as you know, is
responsible for the Royal Mail and Post Office team and Will Gibson is the company’s
main point of contact. Stephen Lovegrove, of course, has overall responsibility for the
Shareholder Executive. As now, I would like all proposals from the company to be
discussed with the Shareholder Executive prior to them being presented to Ministers.
You and Edward Davey should 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
understand that you and he had a very constructive initial meeting on 19 October last
year and that his office will contact yours to put further dates in your diaries. This
does not, of course, rule out your speaking with us between these meetings as
appropriate.
Finally, on a personal note, I would like to wish you well on your stewardship of one
of our most important and well loved national assets during this critical period in its
development.
Etc., etc..
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Annex B
Copy of letter sent to Alice Perkins regarding ShEx representation on POL
Board
Department for Business
Innovation & Skills
BIS
‘The Rt Hon Vince Cable MP
Alice Perkins
Chair
Post Office Limited
148 Old Street
London -~ 2 October 2011
Post Office Limited Board Composition
It was a pleasure to meet you on 3 October and to hear your thoughts about
your new role as Chair of Post Office Ltd. As you rightly pointed out at that
meeting, much progress is already being made but there continue to be major
issues for the business to focus upon over coming months. Separation from
Royal Mail, building up the Front Office for Government offering and rolling out
the network transformation programme are perhaps just the three most
prominent.
I am therefore very pleased that the Post Office senior team have you to
support them in those endeavours. To the same end I am also delighted at
the swift progress you have been making in making further appointments to
the board. From our discussions I could tell that you have clearly hit the
ground running over your first few weeks and I would like to thank you for it.
At our meeting you raised the issue of whether it was best for an official from
the Shareholder Executive to join the Post Office board from the point of
separation from Royal Mail next spring. Since then I have reflected further on
your views but I have concluded that I should confirm to you my initial
decision. This practice embeds constructive, candid and open relationships
between the Shareholder Executive and the boards of its portfolio businesses,
and the vast majority of portfolio businesses now have a Shareholder
Executive board representative. I firmly believe that the already extremely
positive relationship that exists between Post Office management and the
Shareholder Executive team would therefore be further enhanced by this
move. Importantly, such an appointment would also ensure necessary
Government accountability for the investment it is making in the business over
the spending review period.
1 Victoria Street, London SW1H OET
www.bis.gov.uk
Enquiries Contact us www.bis.gov.uk/contact-us
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I would also like to reassure you that any Shareholder Executive appointee
would be subject to the full range of legal duties applicable to other directors.
So there would be no risk that such an appointment would lead to any
diminution of the arm's length relationship between Government and the
business.
I will write to you in more detail in a few weeks’ time to set out in more detail
my objectives for the Post Office over the next few years. However, given its
relevance to your ongoing work to form the Post Office board, I thought you
would appreciate clarity on this one issue at an early stage. Stephen
Lovegrove will be discussing with you the identity of the individual the
department nominates in the coming days.
VINCE CABLE