Governance Watch – September 2020

Royal Mail’s 2020 annual general meeting (AGM) on 8 September takes place against a backdrop of management changes and ongoing business challenges that have been heighted by the coronavirus pandemic.

In May the group announced that Rico Back had agreed to step down as chief executive and from the board with immediate effect, before leaving Royal Mail on 15 August 2020. Back was appointed as CEO in June 2018 and had been with the company since 1989. Finance director Stuart Simpson has been appointed as interim CEO, and chairman Keith Williams will assume the role of executive chairman on an interim basis while a search for a permanent successor is undertaken.

Back’s departure came after the coronavirus pandemic added to the company’s ongoing challenges with a troubled turnaround plan and disagreements with employees and trade unions. During the year, Royal Mail’s share price also fell to its lowest value since the company’s 2013 privatisation, and the coronavirus materially impacted the group’s revenues and the number of letters being delivered by the business.

In the directorate change announcement, Royal Mail also said that no bonuses will be paid to executive directors for the 2019/20 financial year and that around £25m had been set aside for cash awards for frontline staff, in recognition of their role during the pandemic. This announcement followed criticism from shareholders after the board declared in April that it would not be recommending a final dividend for the year without announcing any cuts to executive pay. The board has since said no dividend is expected for the 2020/21 year either. At the same time, CEO Back faced criticism after it was revealed he was running the company from his home in Switzerland while the UK was under lockdown, with the company facing increased operational challenges and employees placing their health on the frontline delivering mail. The company also faced criticism from employees over inadequate protective equipment.

These issues highlight that managing expectations during this time of uncertainty is critical for companies. While the board did eventually announce cuts to executive bonuses, the lack of timely communication caused reputational damage. There is an expectation from institutional investors that the executive experience is commensurate with that of shareholders, employees and other stakeholders. In particular, where dividend payments are suspended or cancelled, shareholders expect boards to consider how this should be reflected in their approach to executive pay.

Back’s two-year stint had been hit with prior remuneration controversy. In 2018 over 70% of shareholders voted down the remuneration report over concerns with a €6.6m buyout award granted to Back for the termination of his contract of employment with European subsidiary General Logistics Systems.

Royal Mail reported a ‘single figure’ of pay of £868,000 in Back’s final year, up from £647,000, and on departure Back will receive nine equal monthly payments in lieu of notice totalling £480,000. Interim CEO Simpson will receive a temporary allowance of £75,000 per annum in addition to his £450,000 salary to refl ect his expanded responsibilities. This increase is not pensionable and will not be included when determining incentive opportunities. At the AGM, shareholders will need to be satisfied with the board’s response to executive pay given the wider circumstances.

Thomas Bolger is stewardship team leader at Manifest-Minerva