**REMARKS OF S. DAVID FINEMAN**

**CHAIRMAN, BOARD OF GOVERNORS, U.S. POSTAL SERVICE**

**BEFORE THE PRESIDENTIAL COMMISSION**

**ON THE U.S. POSTAL SERVICE**

**FEBRUARY 20, 2003**

Thank you very much for inviting me to speak to the Commission on behalf
of the Board of Governors, about corporate governance in the Postal
Service and the role of the Board.

In the 1970 postal reorganization, Congress achieved a quantum leap in
updating the postal system to address America\'s needs for the latter
part of the 20^th^ Century. More than 30 years later, another quantum
leap is needed to modernize the Postal Service to address the needs of
today. The Board greatly appreciates the work you are doing to help
inform and lead that effort.

Before 1970 the governance of the postal system followed the
Presidential election returns. This prevented continuity of management
and limited the coherence of focus needed for the postal system to be
productive and successful in the modern world. Vital ingredients, such
as financing, technology, labor relations, and, ultimately, service, all
suffered and essentially broke down.

The 1970 reorganization act fixed the immediate problems with a much
more businesslike approach, while also preserving the universal service
mission and public policy direction of the mail system. The cabinet
department model of governance was changed to approach a corporate board
of directors model, but without shareholders. Nine Governors are
appointed to the Board by the President, explicitly \"to serve the
public interest.\" Terms overlap, no more than five Governors are
allowed from any one party, and political considerations in appointments
within the Postal Service are prohibited. The current model provides a
level of insulation and independence from partisan concerns. It has
achieved a bipartisan approach to governance of what is essentially a
government service enterprise.

The Governors select the Postmaster General to serve as CEO of the
Postal Service and with him select the Deputy Postmaster General. These
two officers complete the Board. The Board meets monthly, generally in
two-day sessions. The Board sees its job, in brief, as directing the
Postal Service though the approval of major policies and initiatives and
through ongoing oversight of performance.

Through its bylaws, the Board has reserved to itself the authority to
make or approve major financial decisions. We select and oversee the
independent outside auditor and the Inspector General. We approve the
annual budget and financing plans; a five-year capital plan, and each
individual capital project valued at over \$10 million; the compensation
of officers; and all rate, classification, and service filings with the
Postal Rate Commission. By statute, the nine Governors, without the
other two Board members, have the final decision on recommended
decisions received from the Commission in rate and classification cases.

The bylaws also reserve to the Board the responsibility to approve or
review other major policy and planning decisions. We approve the
five-year strategic plan, annual performance plan and report required by
law, and significant legislative policy changes and major litigation
positions. We require current information about, and review, all new,
innovative, or otherwise noteworthy services, policies, and strategies
proposed by management.

To provide the oversight needed in all of these areas, the Board has
three permanent committees, covering Audit and Finance, Capital
Projects, and Strategic Planning.

From time to time, the Board tries to benchmark its procedures against
what other boards are doing, in order to keep up with developments in
best practice. For example, last year we retained a noted academic
expert to evaluate our Audit and Finance Committee practices, and
received a favorable report. I have asked three of our Governors with
recent experience on private boards to begin taking a fresh look at our
bylaws, to see if they can identify any improvements that can be made.

I believe that the governance model adopted in the 1970 reorganization
deserves much credit for the significant improvements that the Postal
Service has achieved over the course of the last three decades. The
successful elimination of large explicit and implicit taxpayer
subsidies, the modernization of mail-handling technology, enhanced
sensitivity to customer requirements, and dramatically improved delivery
performance even in congested urban areas \-- all have required a
single-minded, corporate focus on performing the fundamental postal
mission for the American people. An independent, businesslike operation,
outside the government\'s annual budget and appropriations cycle and the
changing policy agenda of successive Presidential Administrations, has
been a tremendous benefit.

But the current structure still has significant room for improvement. I
am concerned that it is not yet focused enough, or nimble enough, to
enable us to manage growing challenges in the dynamic, competitive,
technology-driven environment that we face today.

Over the years, two areas have proved persistently troublesome to
manage, not just for the Board but for the larger postal community. One
is an unresolved tension between social policy expectations and business
requirements. The other is the ratemaking system.

A business manages to its bottom line. The Postal Service does too, but
at the same time it has a wide range of other, often conflicting public
responsibilities. Businesses do not pursue child pornography offenders,
give price breaks for editorial over advertising content, or provide
free home delivery because that\'s the way it has traditionally been
done. When a business decides between air and ground transportation
modes, considers relocating an administrative office, looks at an
outsourcing opportunity, or evaluates declining customer traffic at a
particular location, Members of Congress, the press, and the public may
express interest in the company\'s decision. But the accountability is
to the company\'s shareholders.

The Postal Service is different, and it should be different. We are a
public institution with public responsibilities. We must have public
accountability and public oversight. Many of the public policies we are
assigned to serve are appropriate and should be continued.

But I am concerned that accountability to the overall interests of the
Nation as a whole is sacrificed when we try to do too much \-- when what
we collectively expect the postal system to achieve is left as mixed, as
diffuse, and, I would argue, as fundamentally unresolved as it is now. A
successful operation, dependent on selling its service in the modern
economy, has to be able to make tough choices.

Let me illustrate with the problem of moving resources to where they are
needed the most. America is a dynamic country. Our population is
continuously moving, changing, and growing. Living patterns, working
patterns, and shopping patterns change. To keep up with its customers\'
needs, the Postal Service has to be agile enough to move and to adjust.

But the system we have now is substantially biased against moving
facilities or jobs or services from an existing location to a new one.
Any change is properly the subject of public debate. That debate is not
just about, often not even primarily about, relative demand or the
bottom line. Under the current model, public expectations and oversight
systems tend to what people have grown accustomed to under the status
quo, over the rights of others who need change. Take a look at the
relative number of postal facilities in the fastest growing areas of the
country, and you will see what I mean. In a tight budgetary environment,
it is very hard for the Postal Service to divert as many resources as
are needed to provide such communities the level of attention found in
older communities.

In a sense this is a universal service problem, in the reverse of how
people have usually thought about that issue. Universal service is at
the core of the definition of what the Postal Service is all about, and
should continue to be about. We serve the entire Nation. Our job is to
connect everyone to the system. We need to provide the best services and
most convenient access we can for everyone, while keeping services
affordable. Our fundamental governance and oversight model makes this
more challenging than it needs to be.

The 1970 postal reorganization made a difference, but in my view we now
need to move the ball further. From a governance standpoint, the
direction, in my opinion, should be toward a more commercial,
businesslike structure.

One step in the right direction would be to change the current
break-even financial target to one based on building retained earnings.
This would give everyone a more concrete measurement against which the
Postal Service\'s performance can be held accountable. As a Nation, if
we can agree that we want to preserve and build a financially sound
postal system, and once we have a better understood, quantitative
measure of its progress, perhaps the difficult choices that have to be
made and the priorities that have to be set will be more achievable,
even in a public environment. This change could enable us to develop
pay-for-performance systems and perhaps address the current pay cap with
enhanced public credibility. The combination of executive pay limits and
the federal retirement system causes the Postal Service to lose some of
its most valuable executives when an individual\'s pension vests at age
55. Retained earnings could also help promote a longer-term focus on
maintaining the system as a going concern. We could eliminate the
perverse tendency of the break-even requirement to force the Governors
to approve rate increases at the very worst time, in periods when the
economy is slow and demand is soft.

The current ratemaking system has benefits in giving all interested
parties the opportunity to vigorously assert their interests in the
formative stage, before rate changes take effect. The process imposes
substantial costs, however. It effectively denies the Postal Service
anything near the prompt, flexible pricing opportunities that are vital
to the marketing and financial objectives of private firms, even
regulated utilities. From a governance standpoint, greater flexibility
and control of pricing is an essential ingredient that any Board would
need to deliver on its accountability for the successful operation of
the business.

We recognize that, with the postal monopoly, the Postal Service should
continue to have a system of price regulation for its monopoly products
that protects the public interest. Many examples from the private
sector, including rate-of-return regulation and indexing or price-cap
systems, are able to protect the public interest while providing
management more rapid access to price changes and more flexibility in
pricing choices than the Postal Service currently has. Changing the
Postal Service from a break-even system to one that seeks to build
equity through a reasonable earnings expectation would be consistent
with a range of private sector models. In recent years, the postal
community has struggled with the need to update the ratemaking model,
without reaching consensus. We look forward to the Commission\'s
recommendations on how this impasse might best be resolved, in the
interests of the American people.

Thank you for your attention and for the public-spirited gift of your
time and talents to help shape the future direction of the postal
system.