If the Postal Service were a private endeavor, it would rank eleventh on the Fortune 500 list of the largest corporations in the United States based on revenue (Exhibit 3-1). It is the second largest employer of Americans today, behind only Wal-Mart (Exhibit 6-2).

Exhibit 3-1

Source: Fortune Magazine, April 14, 2003.

Through its vast national delivery network, the Postal Service connects virtually every American home and business and is responsible for carrying out one of the most essential services the nation provides to its citizens. Given its importance to the country and the challenges to its future, the Postal Service should meet the highest standard of corporate leadership and should have a powerful, defining commitment to best execution in every aspect of its operations.

If the Postal Service is to adapt successfully to a changing postal market, overcome its significant fiscal challenges, and emerge an efficient and more businesslike institution, then it must be guided by a nimble and results-oriented management and corporate governance structure charged with applying the best business practices of the private sector to the public-spirited mission of delivering the nation’s mail.

Toward that end, the Commission envisions a strong, independent, and experienced Board of Directors that reflects the size, scope, and significance of the Postal Service’s work. While the proposed structure grants senior execu-tives more latitude in their management of the day-to-day endeavors of the institution (within the context of a focused Postal Service mission), by establishing a truly effective Board, management will be held accountable for performance.

By extracting itself from the micromanagement of postal operations, a corporate-style Board could fully dedicate itself, like its private-sector peers, to the big picture and to critical fiduciary responsibilities. In this capacity, the Board could focus its attention and experience on mission-critical oversight, exploring key issues like: strategies to increase productivity and reduce costs; holding management accountable for achieving stated performance and service quality goals; leading risk management efforts— particularly with regard to restoring the Service’s fiscal health; and, ensuring strategies are developed to address future challenges and opportunities.

Of course, a private corporate governance structure has one more check and balance: the intense public scrutiny demanded by shareholders and oversight by the Securities and Exchange Commission (SEC). To ensure that a management structure with greater latitude has appropriate oversight, the Commission strongly recommends that the Postal Service voluntarily comply with applicable SEC financial reporting requirements for public corporations and that the existing Postal Rate Commission be transformed into an independent Postal Regulatory Board with broad oversight authority (both proposals are discussed in detail in Chapter 4).

This combination of empowered, accountable managers; a strong, strategic Board of Directors; and enhanced oversight and financial transparency has the greatest capacity to deliver to the American people a healthy and efficient Postal Service that consistently operates at a high standard of excellence and delivers service quality, productivity and performance on a par with the nation’s leading corporations.

Good Corporate Governance Starts at the Top

The first essential ingredient of a strong corporate governance structure is a well-designed Board with outstanding and experienced directors of the highest integrity. Given the institution’s size and importance to the nation, the Board of Directors of the Postal Service should be one of the most capable and experienced Boards in the world.

Taking the Board to this level of excellence is about far more than the Postal Service attaining its rightful status. As is the case with corporate entities, the expectations, capabilities, and achievements of the Board in no small part determine the goals, strategies, and successes (or failures) of the institution it governs. Simply put, a world-class, business-oriented Postal Service requires a world-class, business-oriented Board.

Through a Board structured to ensure independence, attract the most qualified candidates, and discharge the same core responsibilities vested in leading private-sector boards, the Postal Service can bring substantial private-sector experience and capabilities to its leadership and, through it, the institution as a whole.

It Is Time to Revisit the Governance Structure

Like the Postal Service’s mission, its governance structure has not been substantially revised in more than 30 years. The structure established by the 1970 Act was appropriately responsive to the times. While many of the principles guiding the 1970 Act—ensuring the institution is self-financing, depoliticizing the Postal Service— remain important today, the legacy governance structure is increasingly at odds with the Service’s mission in the modern environment.

This structure consists of a Board of Governors with broad authority over the day-to-day operations of the Postal Service. While the 1970 Act vests ultimate mail rate and classification determinations with the Board of Governors, it strives to check this authority by requiring the Board to seek recommendations from the Postal Rate Commission that require lengthy public processes. This cumbersome procedure sometimes lasts up to 18 months and flatly undercuts Postal Service efforts to be more businesslike and responsive to changing economic conditions and mail trends.

A Corporate-Style Board of Directors

Postal Service leadership would be enhanced by the establishment of a corporate-style Board of Directors. Under such an approach, the Board would replace micromanagement of the day-to-day operations of the Postal Service with a high-level strategic focus on cost reduction and service quality, as well as minimizing the financial risk to taxpayers and restoring the fiscal health of the institution as a whole.

For these reasons, the Commission strongly recommends that the design, composition, and responsibilities of the Board be changed. At its heart, the legacy structure in place today is a distinctly public-sector leadership hierarchy and web of authorities, producing results that—intended or not—too often slow down needed adaptations and overemphasize micromanagement of day-to-day postal operations. The new fiscal realities of the Postal Service require aggressive leadership that identifies and pursues new strategies to control costs and boost productivity and efficiency in what many analysts believe will be an era of declining First-Class Mail volumes. Overcoming these challenges to ensure that universal service can continue without imposing an excessive new burden on ratepayers or taxpayers will require the focus and commitment of the nation’s leading business minds, something the Commission’s recommended structure would make possible.

Core Responsibilities of A Corporate-Style Board of Directors

Both the Postal Service and its customers would benefit greatly from a corporate-style Board of Directors. This Board would reflect the best practices of the business world and would attract members with the talent and skills necessary to transform it into a leading-edge institution. Under this approach, the Board would be less engaged in the Postal Service’s day-to-day business and more focused on actively monitoring the overall effectiveness of management policies and decisions. In terms of the specific challenges facing the Postal Service today, this broad vision translates into a laser-like focus on two pivotal areas: cost reduction/quality of service and financial viability/protection of taxpayer interests.

ensuring management remains on track in meeting its cost reduction and quality of service targets and other established business goals (such as human resource development and management).

Financial Viability and Protection of the Taxpayer

The Board would also be responsible for ensuring that Congress and the American people are advised promptly of any significant adverse financial developments (such as expanding liabilities or lack of capacity to borrow sums adequate to cover short-falls) that might make rate increases or taxpayer subsidies necessary to sustain postal services. These warnings should be accompanied by an adequate level of explanation, so all interested parties understand the trends that threaten the Service’s ability to perform its vital functions. Specifically, the Board should continually monitor the Postal Service’s pension and health care obligations and its ability to repay its debt. Here, especially, ratepayers should have a fundamental “right to know.”

Applying Corporate Best Practices to the Postal Service

In order to pursue these two guiding priorities most effectively, the Commission recommends sweeping changes to the Board’s structure, as well as to the scope of both its general responsibilities and specific duties, in order to apply the high standards and practices of the world’s most successful companies to this unique public venture. With its vast reach, large employee base, and service-oriented nature, the Postal Service can benefit greatly from a strong institution-wide commitment to corporate best practices. In the post-Enron world, this business discipline has rightly garnered a great deal of attention. The following recommendations reflect the Commission’s attempt to apply corporate best practices to this unique public institution.

General Board Responsibilities

In a prominent survey of best-practice standards for Boards of Directors, seven key areas were identified as either vital to success or worthy of greater effort to ensure future success. [1] The Commission recommends that the Postal Service’s Board of Directors assume the same general responsibilities as leading private-sector boards:

• Determining the institution’s vision and mission (within the boundaries set by statute and the Postal Regulatory Board) to guide and set the pace of operations and future development;
• Considering the legitimate interests of customers, partners, and other interested parties who have the capacity to affect the Postal Service’s attainment of its objectives;
• Reviewing and evaluating present and future opportunities, threats, and risks in the external environment;
• Determining corporate and financial strategic direction and identifying resources, contingency plans, and the means to support them;
• Communicating senior management’s successes and failures to them, and ensuring appropriate rewards, sanctions, and training are provided;
• Ensuring that internal control procedures provide valid and reliable information for monitoring operations and performance; and
• Ensuring that the Postal Service’s organizational structure and capability are appropriate for implementing its chosen strategies.

Specific Board Duties

The following tasks were identified by the Commission as essential to the successful direction of the Postal Service. Some are already part of the Board of Governors’ scope of work. Others steer the Board away from micromanagement. Still other duties are newly assigned and are consistent with the duties of a corporate board.

The specific tasks identified by the Commission as appropriate to the forward-looking efforts of a modern, corporate-styled Postal Service Board of Directors are as follows:

• Hiring, monitoring, compensating and, when necessary, replacing the Postmaster General;
• Ensuring that an adequate succession plan is in place at all times for top management positions;
• Approving an annual report on the Postal Service’s financial viability;
• Approving rate adjustments within the limits imposed by the new Postal Regulatory Board (see Chapter 4) and, if necessary, requesting that the regulatory board increase these limits;
• Ensuring Postal Service compliance with informational requests of the Postal Regulatory Board;
• Approving new products and services within the core mission;
• Approving the disposition of post offices (while ensuring that “low-activity” post offices are maintained if necessary to universal service);
• Approving the Postal Service’s recommendations to the Postal Network Optimization Commission (see Chapter 5);
• Approving policies and procedures on the management of Postal Service real estate holdings;
• Approving Postal Service annual budgets and required strategic plans;
• Approving capital projects of a truly substantial nature;
• Approving risk management plans;
• Hiring, monitoring, compensating, and replacing, when necessary, internal auditors and an independent public accounting firm;
• Setting compensation and evaluating Postal Service executives and officers against clearly defined benchmarks; and
• Evaluating Board performance and nominating new members, as necessary.

Board Structure, Make-Up and Governance

To ensure the Board is capable of fulfilling its general responsibilities and specific duties, the Commission recommends a new structure, modeled after the most successful corporate boards in America. This design would ensure the Board operates in the most efficient and productive manner possible, is more removed from undue political influence, and has the depth and diversity of skills necessary to guide the Postal Service to a higher level of operations and a stronger long-term outlook.

Composition

More and more, corporate boards in America are placing a premium on independence. It has become quite common, in fact, for the Chief Executive Officer (in the case of the Postal Service, the Postmaster General) to be the only management representative on the Board. Generally, leading Boards feature a substantial majority comprised of outside, independent directors, who lack family, business and other material relationships to the institution or its senior managers.

The Commission recommends that the Board be comprised of 12 individuals–eight independent members, three Presidential appointees, and the Postmaster General (who is selected by the other 11 members). Consistent with corporate best practices, this composition is small enough to allow each member to participate fully, yet large enough to ensure that the varied expertise of its membership can combine to deliver the necessary breadth of experience and skills.

As mentioned earlier, this model would be a significant shift away from the politically charged nature of the Board nomination process today. Currently, all nine Governors who serve (with the Postmaster General and the Deputy Postmaster General) on the 11-member Board of Governors are appointed by the President and confirmed by the United States Senate. Under this model, the Commission proposes that a super-majority be independent, one of the most essential ingredients of a successful Board.

Exhibit 3-2

Appointments and Nominations

As Exhibit 3-2 indicates, the Commission recommends that the President appoint three members of the Board. Initially, these three appointees would select the first eight independent Board members whose selection would be dependent on the concurrence of the Secretary of the Treasury.

Thereafter, independent members would be selected by the Board as a whole, based on recommendations made by a newly created Nominating and Corporate Governance Committee (discussed below) and with the concurrence of the Secretary of the Treasury. In developing this proposal, the Commission has been mindful of the fact that the Constitution strictly regulates the appointment of officials exercising significant governmental power under the laws of the United States. The proposed appointment process, including the requirement of ultimate concurrence by the President or the Secretary of the Treasury, is intended to achieve a Postal Service Board of Directors that enjoys the maximum level of political independence consistent with the Constitution. The Commission feels strongly that an independent, depoliticized Board is crucial to the future success of the Postal Service.

Like the board of a public corporation, the essential responsibility of the new corporate-style Postal Service Board will be to manage as efficiently as possible the assets entrusted to it by the owners of the enterprise – in this case, the American people.

Under the Commission’s proposal, the Postal Regulatory Board (see chapter 4) will assume responsibility for defining and refining most of the critical governmental policies associated with the postal system including the extent of the postal monopoly, limits on rates for non-competitive products, the particulars of the universal service obligation, the scope of the Postal Service’s charter, and the comparability of wages with the private sector. It should be noted, however, that today top officials of the Postal Service also perform several other secondary but distinctly governmental functions—such as law enforcement, adjudication of mailability issues, and oversight of Postal Service operations through the inspector general’s office. In order to achieve the independent Board envisioned by the Commission, it may be necessary to adjust the manner in which the offices and tasks of these officials are legally defined. The Commission therefore recommends a careful review of the appropriate provisions of the 1970 Act in order to ensure the objective sought: a new independent, corporate-style Board that can, without any trace of constitutional doubt, provide the Postal Service the highest standard of managerial leadership.

Qualifications

The Commission recommends a structure that ultimately delivers a well-rounded Board with a diversity of backgrounds and skills that can have a positive impact on the Postal Service. Members should have significant financial and business expertise and experience managing major corporate enterprises and other large organizations. While certain criteria should disqualify a Board candidate (such as equity ownership or employment with a competitor, a significant user, or major supplier of the Postal Service), selection criteria should remain sufficiently flexible and dynamic as to ensure that each new member enhances the overall complement of Board skills.

With regard to appointing independent Board members, a new Nominating and Corporate Governance Committee would have significant responsibility (see p. 47). Attributes the committee should consider include: unquestioned integrity, expertise relating to Board activities (corporate governance, corporate finance, performance management, audit and accounting), and experience specifically relevant to the Postal Service (management of a labor-intensive service business, automated processing and distribution systems, vehicle fleet management, network integration and facility consolidation, real estate management, and technology applications).

To give the committee adequate flexibility, the Commission recommends that these criteria be incorporated in the Board’s bylaws or governance guidelines, rather than into statute. This approach would grant the Board adequate flexibility should changes to its qualifications criteria prove necessary over time.

Board Member Independence

The Commission recommends that no individual (other than the Postmaster General) should qualify as a Board member if he or she has a material relationship to the Postal Service or its management team, whether directly or as a partner, shareholder or officer of a related entity. Specifically, the Commission recommends that the following persons should not qualify as a member of the Board:

• Officers or employees of the Postal Service (other than the Postmaster General);

• Officers, employees, or affiliates of the Postal Service’s independent public accounting firm;

• Officers, employees, or affiliates of substantial suppliers of the Postal Service (for example, a supplier who derives more than 2% or $1 million of gross revenue from the Postal Service, whichever is greater);

• Officers, employees, or affiliates of a company that depends on the Postal Service to distribute a substantial portion of its products or to carry out a significant amount of its business; and

• Immediate family members of any person who would not qualify as a Board member.

Selection and Role of the Chair

The Commission recommends that the Chair be selected by the entire Board and have responsibility to:

• Provide Board leadership;

• Convene and chair Board meetings;

• Establish Board meeting agendas;

• Ensure Board members receive sufficient information to carry out their duties;

• Facilitate the contribution of all Board members; and

• Serve as the primary link between management and the Board.

Term Limits

The current nine-year terms are far too long, particularly as many corporate boards restructure to achieve shorter terms and allow for a more dynamic Board composition that is responsive to the changing needs of the venture. A careful balance must be struck between terms that are so long that members lose interest and terms that are so short they restrict members’ ability to learn the business and offer meaningful oversight. For Presidential nominees, the potential difficulty of the appointment process is a further burden for consideration. Given these factors, the Commission recommends three-year terms for all Presidential appointees and independent Board members, subject to the staggering mechanism described below. The Commission further recommends that the Board of Directors establish a maximum number of terms that a Board member may serve and that members be required to retire at age 70.

Staggered Terms

In order to mitigate potential conflicts of interest in the nomination process, the Commission recommends that the terms of independent Board members should be divided and staggered into three classes. Initially, two members should be appointed to one-year terms; three members should be appointed to two-year terms; and the remaining three members to a full three-year term.

Removal of Board Members

The Commission recommends that the Board continue to have authority to remove the Postmaster General for any reason. The Commission also recommends that the President have the authority to remove any Presidentially-appointed Board member and that the Secretary of the Treasury have the authority to remove any independent Board member. These powers are intended to mirror most corporate models, which permit shareholders to vote on the removal of Board members for any reason. In the past, Board members could only be removed “for cause,” a term of art that narrowly covers only the most severe conflicts of interest and criminal behavior. Somewhat broader latitude is granted in this design in order to ensure a corrective mechanism exists, should this largely self-perpetuating Board begin building a tradition of mediocrity rather than excellence.

Committee Structure and Procedures

The Board should continue to utilize a committee structure that enables individual members to fulfill clearly defined responsibilities that are more efficiently and effectively carried out by a component group rather than the Board as a whole. Today, the Board has three standing committees: Audit and Finance, Capital Projects, and Strategic Planning. The Commission recommends that the Board eliminate the Capital Projects committee and have the Board as a whole approve only the most substantial capital investments. The current $10 million threshold for Board consideration of capital projects is far too low.

The Commission also recommends the elimination of the Strategic Planning committee and instead suggests that the entire Board address issues, such as the Postal Service’s product and service offerings, that have traditionally fallen within this committee’s purview. In addition, the Commission recommends that the Board establish two new standing committees as it assumes a more corporate fiduciary role:

• Nominating and Corporate Governance Committee: Because the Commission recommends that the Board be largely self-perpetuating, selecting 8 of its 11 members, a Nominating and Corporate Governance committee is necessary. This committee should have primary responsibility for ensuring the Board includes at all times a healthy mix of leaders and skill sets that combine to form one of the world’s most capable and experienced Boards. The Postmaster General should not be permitted to serve on this committee, which also should be charged with on-going evaluation of the Board’s performance and needs and ensuring all Board members receive the information and training necessary to fulfill their duties.

• Compensation Committee: One of the most important roles of a corporate board is to ensure that management performance is aligned with clearly defined institutional objectives. One of the most powerful tools at the Board’s disposal is compensation. Because the Commission recommends that the Postal Service have greater flexibility over the compensation of its senior executives (for example, pay-for-performance incentives), this committee is necessary to develop expertise in this area, including tools for evaluating executive performance. It will assume responsibilities relating to executive compensation that are currently discharged by the Strategic Planning committee. To avoid a conflict of interest, the Postmaster General should not be allowed to serve on the Compensation committee or vote on its recommendations. This committee should be free to determine the factors contributing to executive compensation decisions and have complete authority to set compensation levels to attract and retain the very best managers. (Specific recommendations relating to this authority are discussed in detail in Chapter 6.)

While the Board would have the authority to create additional committees, this configuration anticipates that work relating to postal rates, new products and services, facility closures, and real estate management would continue to be handled by the pre-existing committees or the Board as a whole. The Audit and Finance committee would also continue to play an increasingly vital role in ensuring the Postal Service’s fiscal health, risk management, and financial transparency.

As is the case under current practice, each committee would operate under a charter adopted by the full Board. These charters should outline the purpose, authority and duties of each committee. They should also be available to the public and posted on the Postal Service’s website.

Initially, the Board as a whole should select the members and chair of the Nominating and Corporate Governance committee. Once in place, that committee should be responsible for recommending the chairs of the other committees for approval by the Board.

The Commission believes that the current monthly meeting schedule of the Board of Governors is excessive and invites micromanagement rather than high-level oversight and governance. For these reasons, the Commission recommends that the Board convene six regular meetings each year. In addition to the regular meetings, the Board should have the flexibility to call additional meetings when deemed necessary by the Chair or by established process.

Compensation

In order to attract the caliber of candidates equal in capability and stature to those serving on comparable corporate boards, the Commission recommends that compensation be made competitive with that of Board members of large publicly traded companies.

Voting Procedures

Under current law, most Board decisions require a simple majority, with six members present for quorum (proxies are not allowed). However, there are exceptions. For example, an absolute majority of Governors is required to appoint or remove the Postmaster General. With regard to rate-setting, the following exceptions also apply:

• Approval, allowance under protest, or rejection of a PRC recommended rate or classification decision: The Board may act on a majority vote of the Governors present, but five of the six members required for quorum must be Governors; and

• Modification of a PRC recommended rate or classification decision: The Board may act only on the unanimous written vote of all Governors.

The Commission recommends that similar voting rules continue, until the Postal Regulatory Board has established the new rate ceiling mechanism (discussed in detail in Chapter 4). Once the new mechanism is in place, rates can be adjusted within the limitations set by the Postal Regulatory Board on a majority vote of those Board members present (with quorum). However, a super-majority should be required to request that the Postal Regulatory Board consider approving rates in excess of the established limits.

Limitations on Outside Activities and Ethics

Conclusion

Given the challenges before the Postal Service and the essential role this large and complex institution plays at the center of American commerce and society, the Postal Service both needs and deserves one of the most capable boards in America. Such a Board could provide the Postal Service leadership with a wealth of sophisticated skills and experience that, appropriately applied, can reinvigorate this vital 225-year-old institution.

Supported by a governance structure that emphasizes corporate best practices, ensures a truly independent spirit, seeks out only the most qualified candidates, and focuses the Board on oversight, management accountability and “big-ticket items,” such as cost reduction, quality of service and restored fiscal health, this Board would be capable of driving the changes most needed at the Postal Service today. These advances include: greater efficiency, more strategic focus, strong financial leadership, greater accountability and transparency, service and capabilities on a par with leading private-sector entities and, overall, a more businesslike approach to the delivery of the nation’s mail.

In partnership with a newly empowered Postal Service leadership, this Board would shape and define the fundamental change needed at the Postal Service. However, if the Board and postal managers are to be granted more responsibility and latitude to “steer a ship” that has monopoly powers, then appropriate oversight and accountability mechanisms must be in place, not to impede the journey, but to ensure it is appropriately undertaken.

Endnotes

1. The Conference Board, “Determining Board Effectiveness: A Handbook for Directors and Officers,” Special Report 99-1, Nov. 4, 1998, p. 13.

Forward • Executive Summary
Chapter 1 • Chapter 2 • Chapter 3 • Chapter 4 • Chapter 6
Conclusion