KYRAN FITZGERALD: BHS scandal puts focus on the great and the good
MPs have been scathing of the management at the UK retail chain once owned by Philip Green. The affair shows that corporate governance remains weak, says Kyran Fitzgerald.
Philip Green, owner of Arcadia Group, has been slammed in a hard-hitting report into the collapse of British Home Stores. The report was issued by a committee of British parliamentarians. The BHS saga is a sorry one.
The 80-year-old business collapsed into administration, last April, putting at risk the futures of 164 stores, 11,000 employees and 20,000 pensioners. The stores have nearly all closed, leaving an emptiness on UK high streets last witnessed following the collapse of the Woolworths chain, in 2009.
There was something fishy about last year’s transaction, which resulted in the sale of BHS to Dominic Chappell, a bankrupt without meaningful retail experience. Fifteen years earlier, Green had acquired BHS, which was then a publicly listed company, before taking it private. At the time, the retailer had two defined-benefit pension schemes with a combined surplus of £43m, but by 2006 — before the financial crash — the schemes were in deficit. By 2014, they were under water, with a £350m shortfall. The deficit today is £571m.
The report’s authors concluded that, as a result of a lack of investment, BHS’s tangible fixed-asset base dropped in value from £430m at the time of the Green takeover to £183m. Put simply: “Sir Philip did not invest enough to maintain the value of the company.”
In the early years of his ownership, Green withdrew large sums out of BHS in the form of dividend payouts. The Guardian newspaper recently estimated that £422m was withdrawn by way of dividend payouts, with £151m in rental payments to Green-controlled companies on properties formerly owned by the BHS Group. These became the subject of sale and leaseback agreements.
Green and his family control Arcadia Group, which boasts marquee names, including Top Shop, Dorothy Perkins, and Miss Selfridge. He was born in 1952, into a middle-class family in Croydon, south London.
His father died young and he set up in business at the age of 21 with a £20,000 family loan. In 1979, he bought up, at rock-bottom prices, the stock of 10 designer-label clothes sellers which had gone bust.
The flamboyant retailer cultivated links, social and business, with figures such as Kate Moss, a fellow native of Croydon. In 2004, he launched a hostile takeover bid for Marks & Spencer, which was ultimately fought off.
While known as the king of retailing, there are doubts about the durability of his business model, at a time of unprecedented transformation in the UK high street. The family’s worth has been estimated at £3.2bn in the latest rich lists, but such lists do not always capture what is happening on the other side of the ledger.
Green has promised to make good much of the deficit in the BHS funds. To ensure that pensioners are not forced onto the so-called pensions lifeboat operated by the UK government, thereby suffering a big hit to their incomes, Green will have to come up with several hundred million pounds. Does he have that sort of cash? One wonders.
The parliamentarians have not pulled their punches in their assessment of his behaviour and that of Mr Chappell, the purchaser of BHS in 2015. But what is of particular interest is how the MPs have treated Lord Grabiner, QC, the former company chairman, and chair of the Arcadia holding company, Taveta. Mr Grabiner was made a peer by former PM, Tony Blair.
He resigned the Labour whip in the Lords, following the election of Jeremy Corbyn as party leader. Mr Grabiner, now 70, was the head of a leading set of commercial chambers of barristers at the Temple, the legal district in London. A bencher since 1989, he has also served as a deputy High Court judge. Between 1998 and 2007, he served as chair of the board of governors of the London School of Economics, being succeeded by the former EU competition commissioner and attorney general, Peter Sutherland.
The parliamentary committee referred to an “egregious failure of corporate governance” on the part of the board. It described Lord Grabiner’s performance as “complacent”. He had “provided a veneer of establishment credibility… while happily disengaging from the key decisions he was supposed to be scrutinising”.
If Green is held to blame for the demise of BHS, there will be collateral damage to the reputations of the non-executive directors and the army of professional advisers. Among those in the firing line: Goldman Sachs, which was an unpaid adviser to Arcadia, and accountants Grant Thornton, who acted for Retail Acquisitions, the group that acquired BHS from Arcadia-Taveta Investments.
The sorry tale has led to calls for another big clean-up of the stables. We have been here before, following Robert Maxwell’s pillaging of the Mirror group pension funds, at the end of the 1980s, and the Guinness saga, involving former CEO, Ernest Saunders, and financiers who were put on trial. In the US, we had Enron and Worldcom, not to mention the savings-and-loans scandal, all leading to the passing into law of the Sarbanes-Oxley Act, in 2002.
In Ireland, the courts are still dealing with the detritus from Anglo Irish Bank. The staff of Clerys has yet to receive restitution. We are told that corporate governance is high on the agenda in companies.
The word on the ground is that it is hard to get experienced people to act as non-executive directors. Many fear exposure to legal action, or involvement in a lengthy legal process down the line. The cure is worse than the disease.
The BHS affair is a reminder that private companies have public responsibilities and that they cannot be treated as play things in a Monopoly game. As Oliver Parry, the head of corporate governance at the Institute of Directors, put it: “Just because a company is not publicly listed does not mean there is no public interest in how it is run.”
The report into BHS comes hot on the heels of an inquiry into Sports Direct’s treatment of its staff. The Mike Ashley-owned retail outfit has a growing footprint in Ireland. A spokesman for the new UK prime minister, Theresa May, said she had already outlined her desire to tackle corporate irresponsibility. Good luck with that.
A 1970s predecessor, Ted Heath, one referred to the “unacceptable face of capitalism” after revelations of dodgy practices in the City of London. Set up a trough and you attract pigs with snouts.