Saturday, 10 October 2009

Is it time for a new business model for Royal Mail?

The latest strike vote by the CWU workers at the Royal Mail is sending a clear message that all is not well within that organisation.

Royal Mail is a business in trouble. It has some of the lowest staff morale, one of the highest strike rates, and one of the highest rates of staff turnover of any company in the country. The unions and workers appear to have no confidence or respect for the management, and given the damage these disputes do to Royal Mail in business terms, many of them seem to have very little sense of personal investment in Royal Mail either. Maybe that is part of the problem, and so should be seen as part of the solution?

The traditional solution for ailing nationalised industries is privatisation. However, there is a lingering worry that this would actually hasten the demise of the service the Royal Mail currently provides, not improve it. The universal service would be unlikely to survive the pressure to maximise corporate profits, and experience shows that any guarantees to the contrary given before flotation rarely survive the test of time, or a change of government.

Privatisation will also leave Royal Mail workers hopelessly exposed to the downward pressure on wages from the free market. Given the nature of its business, which will always involve large numbers of postmen and women delivering thousands of letters by hand each day, Royal Mail workers are always going to be amongst the lowest paid in the economy, and increasing deregulation and competition in the industry will continually reduce their collective bargaining power.

On the other hand, continued nationalisation leaves the Royal Mail umbilically tied to the current short-term political and financial interests of the Government. If history shows us anything it is that the Government is a bad owner of business. Its attention span is too short-term, and it is more interested in squeezing cash out of businesses to fund other services than allowing those businesses to invest for the future.

So, if nationalisation doesn’t work, and privatisation is a disaster-in-waiting, what third way is there?

It seems to me that all the problems at Royal Mail are indicative of an organisation where the workers feel undervalued, powerless, and marginalised. One way to change that would be to give the workers a greater sense of ownership of the company. The answer could be to turn the Royal Mail into a cooperative partnership along the same lines as the John Lewis Partnership (JLP).

The John Lewis Partnership is a cooperative venture that was set up in the interests of its workers (or partners) by its owner, John Spedan Lewis over an extended period from 1920 to 1950. The company is run by a tripartite system of company Chairman, Partnership Board and Partnership Council. The Council is directly elected by the workers based on constituencies. Each constituency is based around one store, or a group of stores, or part of the business, and returns one member. The Council then elects five members to the Partnership Board, with the Chairman nominating another five, and two external non-executives also being appointed. The Chairman and Board run the business, but are accountable to the Council, i.e. the workers.

As in most companies, the Chairman and Partnership Board take the day-to-day business decisions and decide what proportion of the annual profits should be reinvested in the business. But unlike PLCs, the rest of the profit is paid to the workers as bonuses in proportion to their salary and not to rentier shareholders. At the John Lewis Partnership these bonuses typically range from about 8% of salary in poor years, to over 25% of salary in good ones. For people on low incomes such large lump sums would be welcome windfalls and could provide enormous financial opportunities. In addition there are other corporate benefits such as pension provision and leisure discounts. The other major area where JLP differs from most private sector companies is in its commitment to social responsibility and local communities, a commitment that is enshrined in its constitution.

The positive consequences of this arrangement are that JLP has a much lower turnover of staff than most of its main competitors, better staff morale and good industrial relations. It is also renowned for its customer service and tends to be more resilient at weathering recession. And at a time when excessive executive pay is constantly in the headlines, JLP also rewards its senior managers less extravagantly in comparison to its shop floor workers than is the case for most of its competitors. In short, JLP has all the positive attributes that the Royal Mail currently lacks.

It seems to me that the business structure and employee demographic of JLP and the Royal Mail are very similar. So applying the business structure of JLP to the Royal Mail should be straight-forward, and should result in a new postal service without most of the problems that afflict the current one.

So why not turn the Royal Mail into a partnership, with each sorting office electing one member to its Partnership Council?

Under such a scenario the Royal Mail would become an independent company, but with no shareholders, only stakeholder workers. The management would be appointed by a board that is answerable to, and elected by, the workers. The benefits for the Royal Mail of this arrangement would be:

  • the company would be independent of government and so able to take its own long-term financial decisions.
  • It would give the workers a greater say over the way the organisation was managed and run, and a greater sense of ownership of any changes to working practices that need to be implemented.
  • The workers would reap the rewards that accrue from the sacrifices and compromises that they need to make. That would be a powerful incentive for workers to embrace business change, rather than continuing to resist it.
  • Industrial relations, service quality and reliability should all improve.

The benefit to the Government would be that it would no longer be responsible for the Royal Mail pension fund deficit, nor for overseeing the business. In return for the Government relinquishing its ownership rights, the Royal Mail could pay the Government a fixed annual dividend (let’s say 25% of the total staff bonus fund) but the Government would have no voting rights accompanying this dividend. The new Royal Mail constitution should commit the company to maintaining the current universal service and an external regulator should set the price of the standard second class stamp as this is the area in which the Royal Mail has the greatest monopoly. All other pricing should be left to the management of the Royal Mail.

The strategic position of Royal Mail means that most other businesses in this country are dependent upon it by using its services. Royal Mail is therefore critical to the economic prosperity of this country, and this means that the mail service that it provides must be reliable and adaptive to the needs of its customers.

The current policy of many on the Left including Compass is to keep the Royal Mail in public ownership. As I have also argued elsewhere, I do not believe this is viable in the long term, and sooner or later a Conservative government will pluck up the political courage to either privatise the Royal Mail through flotation, or sell it off completely to a competitor. The JLP solution has the added advantage that it would protect the Royal Mail from such a fate in perpetuity as well as leading to a better quality of service and better employment conditions for the workers.

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