by Professor Charlotte Villiers and Yefan Xu
The recent hearings of the Department for Business, Energy and Industrial Strategy Parliamentary Committee, taking oral evidence relating to Royal Mail on 17 January 2023, provide a case study of confrontational industrial relations brought about by corporate governance failure. A breakdown in trust between the boardroom and the company’s workforce is highlighted in the protracted and bitter industrial dispute involving strikes and stalemate in the negotiations around proposals to transform the business away from a universal service obligation of six days per week parcels and letters delivery and into ‘a more efficient parcels-focused operation’. Infrastructural changes have included increased automation and the introduction of ‘superhubs’ for parcels processing. The boardroom also seeks detrimental changes to the workers’ terms and conditions and working practices (redundancies, more flexible working, later shift times, some Sunday working) on the grounds that such changes will enable the company to compete in a ‘hyper-competitive market’ (Panel 1 Oral Evidence Transcript, and Panel 2 Oral Evidence Transcript).
The company is now running at a significant loss (allegedly £1 million per day) and is mired in industrial conflict, but in 2021-22 the shareholders enjoyed increased ‘special’ dividends and the CEO received a generous bonus on the back of seemingly healthy profits. This outcome might be explained not just by the challenges posed by the post-pandemic economic environment (with a reduced demand for letter delivery services and an increased demand for speedy and flexible parcel delivery) but also by the corporate governance framework within which the company has been operating; a group structure with diversified and disengaged shareholders, a dominant boardroom presiding over an ineffective remuneration committee, and stakeholder engagement that failed to take account of the competing interests of the different constituent groups, with little regard for the impact of the demands made of the company’s employees.
The corporate structure and its shareholders
Royal Mail Plc’s name changed in October 2022 to International Distributions Services Plc (IDC). IDC has a group structure consisting of two principal operations: the UK-based letter and parcel delivery operation includes Royal Mail and Parcelforce Worldwide (Royal Mail) and General Logistics Systems (GLS, a Dutch-based company) operates an international logistics and delivery service in approximately 40 locations globally. The recent change of name seeks to reflect the increasing importance of GLS to the group. Indeed, the profitable GLS appears currently to be subsidising the loss-making Royal Mail. The two companies each have their own CEOs – Simon Thompson as CEO of Royal Mail and Martin Seidenberg as CEO of GLS – the group’s Chair is Keith Williams, and the Chief Financial Officer, Mick Jeavons. The Group also has seven independent directors and its Board Committees include an Audit and Risk Committee, a Nominating Committee, a Remuneration Committee and an ESG Committee.
Roughly half the shares are held by institutional investors, and around 23% are held by venture capitalists and private equity firms. The group’s largest shareholder is Vesa Equity Investments, a firm controlled by Czech tycoon, Daniel Kretínsky. Vesa Equity’s holding has jumped significantly from 2020 when it held 11% of the shares, with incremental purchases since then, perhaps taking the opportunity of gambling on a relatively cheap price for the shares which at their peak were went beyond 630p after the flotation price of 330p. Vesa Equity Investments now holds approximately 23% of the group’s shares. Its prior 22% stake was investigated by the Department for Business Energy and Industrial Strategy for a potential threat to national security. The government decided in October 2022 that there was no need to take action, paving the way for Vesa Equity Investments to increase its holding above 25%, bringing the shareholder closer to triggering a mandatory offer for a full takeover under the UK’s Takeover Code. Some fear the shareholder could push for a break-up of the business, separating the profitable GLS from the unprofitable UK-Based operation, Royal Mail.
Since Royal Mail was privatised, the shareholders have received overall £1.9 billion in dividend payments. More recently, in line with its capital allocation policy and the decision to reduce the Group’s cash holdings, in November 2021, Royal Mail plc announced a £400 million return of capital to shareholders, via a share buyback, and the payment of a “special” dividend alongside an interim dividend in January 2022. The share buyback was completed in March 2022 (Annual Report 2021-22, p.5). In the face of this return to the shareholders, the company’s finances were already beginning to face a storm and yet the Board also recommended the payment of a final dividend in respect of 2021-22, which was paid in September 2022.
In March 2020 the share price fell as the pandemic forced lockdowns which hit the economy. The share price recovered during the Covid19 lockdowns as online orders increased. Indeed, reports suggest that between November 2020 to January 2021, share prices increased by 76%, and between April 2020 and March 2021, they rose by 225% (Crush). In March 2021 the company declared a £700 million operating profit. This favourable tailwind did not last and by the time the company was publishing its 2021-2022 Annual Report, the company was feeling the chill of a headwind. The share price fell again in October 2022 when the board issued a profit warning that the group would suffer losses of £219 million in the first half of 2023 and a full year loss of £350 million. The board’s statement blamed three days of strike action for £70 million of the losses forecasted. This led to analysts making sell recommendations, causing the share price to slide by 12% within a week (Lyall, 2022).
As noted above, in March 2021 Royal Mail announced a £700 million operating profit and declared for the workers a dividend payment of 10p per share. The company also agreed then a pay rise of 1% and a reduction to the working week of one hour introduced from April 2021. Yet by 2022 the annual financial report was far less positive and the workers were being asked to agree to changes to their working conditions that would obliterate the benefits of the earlier pay rise. Moreover, just as the workers were being asked to accept sacrificial changes, the shareholders were receiving their dividends and the share buybacks were being completed. Even if the Board could justify these shareholder rewards based on the prior financial performance, the timing looks nothing short of tin-eared and insensitive to the company’s workers.
There is little evidence from the company’s website to suggest that the shareholders have been especially engaged with the boardroom in determining the company’s strategies. Indeed, the most recent AGM Transcript, from 22 July 2022 reveals that the shareholders asked no questions that focused on the company’s strategic changes but there were a few (from employee shareholders) that showed some concern about changes to the workers’ conditions. Other questions were focused on less contentious matters (in the circumstances) such as workforce diversity, use of drones for parcel delivery and increasing use of railways in preference to using flights for delivery transport. There were no responses to the news from the Board that the company was estimated to be losing around £1 million per day. In fact, all resolutions put to the shareholders were approved with a vote in favour of at least 97%. The impression given is that of a docile group of shareholders, though some disquiet was muttered by those union-connected employee shareholders in attendance.
The Directors’ Remuneration Report received a 99.44% vote for approval. The Report disclosed that the CEO, Simon Thompson, would receive a salary of £540k and a £140K bonus from the short-term incentive plan. Mick Jeavons, the Chief Financial Officer, was granted a salary of £420 alongside a short term incentive bonus of £306 and a long term incentive plan award of £541, and Martin Seidenberg, the CEO of GLS, received a salary of £493, a short term incentive bonus of £703 and a long term incentive plan award of £393. The performance criteria for the long term incentive plan awards were also changed in September 2022 to the effect that they were based on relative total shareholder return, rather than on the companies’ revenues, profits and service level delivery. This was picked up by the Parliamentary Committee. The Chair commented to Thompson: “According to the organisation, it could not accurately measure your performance on revenue and profits because of the state of affairs at Royal Mail. Therefore, it only looked at shareholder value”(Oral Evidence, at Q.30). The Chair understood the implications of that measurement of performance: “you are incentivised, as the CEO of Royal Mail, purely by delivering value for shareholders. It does not really matter how you get that. Ideally, you would get shareholder value because you run a profitable, happy and successful business. If you cut costs, cut investments, cut the workforce and still deliver a large dividend, you do well out of that too, do you not?” (Oral Evidence, at Q.31). Of course, generally we might be concerned that ‘shareholder value’ is a vague concept that could be viewed as a long term or a short-term measure, narrowly as a financial measure or more broadly in the enlightened shareholder value sense by which the directors’ duty in section 172 of the Companies Act 2006 is generally understood. Royal Mail’s story would indicate that financial returns for the shareholders will be sufficient to justify generous bonuses for the directors, even if they are not meeting their other targets or are not satisfying other stakeholders. Interestingly, in previous years, Royal Mail’s shareholders have expressed anger at directors’ pay awards. In 2018 for example, there was a 70% vote against the award given to the then new CEO of the company. As the vote on the reward could only be advisory under the ‘say on pay’ regulations the pay arrangement was still awarded.
Engagement with the workforce
These pay arrangements raise questions about the effectiveness of the Remuneration Committee, especially with regard to its claims that it takes into account workforce pay levels when deciding on the executive directors’ awards. Royal Mail does not have worker representation in its boardroom but it does have a designated Non-Executive Director for engagement with the workforce, which is in line with one of the options encouraged in Provision 5 of the UK Corporate Governance Code 2018. Yet in the Annual Report 2021-22, (p.113) the account of workforce engagement in considering executive pay and how it relates to wider workforce remuneration indicates a rather tokenistic approach making use of an ‘annual trust survey’, the findings of which are fed back to the Executive Board and ESG Committee, and the designated non-executive director can also offer her ‘insights’ to be fed to the Remuneration Committee’s discussion. Beyond the Remuneration Committee, it seems that the designated non-executive director holds regular ‘employee voice forums’ with colleagues from operational and central functions, including delivery, fleet and engineering, property and facility solutions and the Parcelforce business. These lead to a ‘periodic written report to the Board covering key observations and themes arising from her discussions’ (p. 90). In addition, the management meets regularly with union representatives and the CEO and CFO meet ‘regularly with senior union leaders’ (p. 26).
Given the current industrial conflict, one might ask if more effective workforce engagement is required. In the Parliamentary Committee’s Oral Evidence Hearing, Thompson, the CEO, sung the virtues of the company’s information platform, “Workplace”: ‘Around 50,000 of our team are on Workplace. It is great that they now have a voice. We put on that platform really key information about the changes we need. It is always good to get their reaction. I will always explain the changes that we need. I understand that is not always welcome, but it is really important that we have an open dialogue with the workforce’ (Oral Evidence, Q.27). Does “Workplace” really offer a genuine opportunity for workers, with their union representatives, to express their opinions, let alone any express dissent to proposals or decisions made by the company’s management?
What is clear from this Parliamentary Committee oral evidence concerning Royal Mail is that workers are central to the corporation. It is therefore necessary for managers and directors to engage fully with those workers and their representatives when making organisational and operational changes affecting their working conditions. The emphasis on shareholder value as the key performance indicator is a poor measure for rewards granted to the directors. If that leads to generous rewards whilst at the same time the workers feel aggrieved at detrimental changes to their working conditions – threats to their working hours, threats to their sick pay protection, and threat of fire and replacement by agency workers – this makes for protracted disputes and confrontational industrial relations which will be highly detrimental to the business and its long-term financial performance. This is likely to force defeat for Royal Mail in the long term, in the face of high competition, resulting in reduced shareholder value, reduced profits and risk of complete demise. Reference to shareholder value risks being self-defeating. The better way may be to engage fully and fairly with those doing the work to generate the profits.
The Parliamentary Committee’s Chair was highly critical of Mr Thompson’s oral evidence and said: ‘I have not been very pleased with your answers today. I know this is a difficult job for you, but it is really important that you answer questions clearly and, might I say, as honestly as possible. Your performance gives us grave concern, really, about the narrative that you have provided on many of my questions today, including when there is clear evidence to the contrary’ (Oral Evidence, Q.88). This indictment is justified not only in response to a CEO offering slippery answers to the questions put to him, but it is also a reflection on a board that has not earned trust, a shareholder body content to accept their financial returns without holding the board to account for fundamental failings and a workforce that is being treated with contempt. Moreover it sheds light on a liberal regulatory corporate governance framework which still, in practice, ensures that shareholder value is the guiding force and the workforce is given little more than tokenistic respect.