New Government’s clear warning to Network Rail – Sunday May 30 2010
New Con-Lib Secretary of State for Transport Philip Hammond has put a clear warning shot across Network Rail’s bows – the question is this: will the company take any notice?
NR‘s problems are about its processes, not its people. There are lots of very good people in NR who all do an equally good job, despite the corporate problems. I talk to lots of people all over the railway and I hear the same thing time after time. That there’s a gulf between those in NR who slog away on the front line of running and looking after the railway and who strive to deliver a great railway – which is very different to the profligatel corporate beast which lies behind them, whose inefficiencies and wasteful ways are the real problem.
It’s NR’s governance, processes and top brass that I hear the rising tide of criticism about (and increasingly from TOCs, as well as contractors) - not the operational teams - which is interesting, given that the company is limbering up to announce its financial results. Which means it’s top brass bonus season once again. The annual irritation at NR paying its top execs huge bonuses from taxpayers cash (routinely shrugged off by its board) is amplified this year not only by the failure of NR Chairman Rick Haythornthwaite to achieve any meaningful change in the company’s much criticised governance, but also by the current dire economic circumstances.
Belt-tightening has reached the highest levels – one of new Prime Minister David Cameron’s first actions was to slash Cabinet salaries by 5%. So it’s no surprise that SoS Philip Hammond has decided to get Network Rail’s attention about bonuses – and can do so from the moral high ground of a man earning less than his predecessor. According to the Sunday Times (Business Section) today, Hammond has written to Haythornthwaite “urging restraint amid fears that the company will defy the economic climate to dole out huge sums to a handful of its senior executives.”
Just consider that statement - “amid fears that the company will defy the economic climate.” Think about it. A Secretary of State has felt it necessary to remind – formally - the Chairman of a supposedly independent company that times are really hard and that they need to set an example by not handing out big bonuses. You wouldn’t think it necessary to remind professional people that it’s not a good idea to dole out big bonuses funded by public funds in the midst of the worst recession in 60 years and an £800bn mountain of public debt - but the fact that Hammond does believe this warning is needed is, in itself, is an indication of the problem at NR.
It would be bad enough if a 100% Government-backed company were to be charged with being so thick, stupid and lacking in awareness and intelligence that it had to be told that we’re broke and struggling to stay solvent as a country, and that it might be a good idea not to throw bucketfuls of taxpayers cash at top executives in bonuses. But it’s that word ‘defy’ that’s the giveaway. There’s the clear implication that the DfT believes that it’s dealing with a supposedly independent company which is fully aware of these problems – yet is preparing to pay out big bonuses regardless. That's where the real damage lies.
If that isn’t a strong hint that Government regards Network Rail as arrogant, out of touch and in need of a ‘reality check’ from its paymaster, then I don’t know what is.
The DfT’s Hammond letter is said to have caused fury at the plush, lightly-populated NR offices at King’s Place, next to King’s Cross - but we’ll have to wait and see if the company board takes any notice of the Transport Secretary’s all-too-clear hint.
Last year, and despite intense criticism, NR's top execs rewarded themselves with £1.2m in bonuses, with directors collecting six-figure sums, although CEO Coucher gave up most his ‘entitlement.’ This year Hammond expects a very different and less-selfish approach which is more in tune with tough times.
“Decisions on remuneration for senior executives must display a sensitivity to the wider economic climate…they (senior executives) will need to bear in mind the potential for damage to the company’s reputation if senior management remuneration is widely perceived to be excessive,” Hammond told Haythornthwaite.
Strip away the diplomatic language and the message is clear. The same message has however been implicit and indeed made clear to NR every year, but it’s been resolutely ignored. Its management has always been bolstered by a confidence (indifference? Arrogance?) fuelled by what it believes is a bombproof, guaranteed income and a strong position in which it is effectively unaccountable to anyone in a position to inflict any real pain or penalty.
But NR was a creation of Labour. The new Government has no such sentiment, loyalty – or sympathy. NR is in a much weaker position than it was – and this week the Office of Rail Regulation will deliver its own verdict on NR’s performance, which the Whitehall grapevine says will be ‘mixed.’ In opposition, the Conservatives made clear that reform of NR would be a priority.
You do the math. But will NR ‘get the message’?
Imagine that you have a business that’s effectively bust financially because your enormous debt is increasing year by year, you aren’t getting efficient quickly enough and the return on the massive amount of bank money pouring into your business has been poor.
On top of all that, you pay yourself massive bonuses, you don’t delight your customers and despite an appalling economic outlook in which everyone else is suffering intense pain, you don’t seem to be making enough effort to reflect or share that pain. Eventually, the bank loses patience and writes to you, politely, urging restraint and no more big bonuses out of the torrent of cash it is ploughing into your supposedly independent company. And without which it could not continue.
a) Take the hint, not pay any bonuses and try and get your paymaster back on-side?
b) Partly take the hint, pay reduced bonuses in the hope you’ll get away with it?
c) Carry on as before in the belief you’re untouchable?
What would be the sensible, common sense and right course of action?
It’s going to be an interesting week.