It is 24 years since the publication of the Cadbury Report, one of the most significant milestones in the history of Corporate Governance; and it is 43 years since Edward Heath referred to Tiny Rowland’s Lonrho as “the unpleasant and unacceptable face of capitalism”.
Yet, as we have seen recently with Sir Philip Green, Mike Ashley and Sir Martin Sorrell, there is still something rotten in the state of UK boardrooms.
It had felt as if we were making great strides in tidying up the acts of the UK’s listed companies with the UK Corporate Governance Code and its comply or explain regime. However, parliament’s inquiry into the collapse of BHS, in particular, has highlighted the problems that can arise when businesses are controlled by “larger than life” individuals such as Sir Philip Green.
Labour MP Frank Field, co-chair of the parliamentary select committee investigating the collapse of BHS, has echoed Edward Heath’s views of Tiny Rowland by calling Sir Philip, who was knighted in 2007 for “services to the retail industry”, “the unacceptable face of capitalism”.
Placing the blame for the demise of BHS, with the loss of 11,000 jobs and putting at risk the pensions of a further 20,000 ex-employees, firmly with Sir Philip, Frank Field has called for tougher rules to apply to privately owned companies to curtail the perceived excesses of majority shareholders such as Sir Philip, Mike Ashley and Sir Martin Sorrell.
Theresa May, the new prime minister, has set out proposals to crack down on boardroom excess, which include adding employee and consumer representatives to company boards and making shareholder votes on executive pay legally binding.
May also called for companies to be forced to disclose the ratio of a chief executive’s pay to the average worker’s pay, saying: “It is not anti-business to suggest that big business needs to change.”
Beauty, codes and legislation
The beauty of the UK Corporate Governance Code and what made it so innovative at the time is that it places the onus on shareholders to hold the boards of UK-listed companies to account, to either comply with the code or produce a good explanation for why they are not doing so. This means that unlike legislation, which is what the US has and what the EU would like to move towards, the code can evolve to reflect the challenges of corporate governance in the real world without needing to go through lengthy legislative processes.
As Frank Field and others have recognised, the code only works where there are shareholders who are prepared to take on the stewardship role to ensure that businesses are run with a view to a long-term sustainable future, taking into account the needs of all shareholders and not just investors.
As majority shareholders, Sir Philip Green, Mike Ashley and Sir Martin Sorrell can do what they like with their businesses and pay themselves as much as they feel like. As it is the shareholders who appoint the board of directors, then businesses wholly or mostly owned by one individual can appoint “yes” men and women who will not oppose them when it comes to setting strategy, dividend payments or executive pay.
There have been calls to engender a greater sense of responsibility in shareholders of listed companies, perhaps with the introduction of two tiers of shares: one for longer term investors who would take a greater interest in the running of the company, and the other for the “day traders” who simply buy and sell shares with little or no interest in how the company is run.
It is difficult to see how any such legislation would work in practice, as any moves to make share ownership more onerous would deter investors and reduce the liquidity of the markets.
So, Sir Philip Green, as the owner of BHS, can sell it for a pound to a three-times bankrupt, and seemingly walk away from a company he has allegedly stripped of assets over a 15-year period.
He was for those 15 years, however, also a director of BHS and whilst his duties as an owner may not be very stringent, his duties as a company director are clearly defined by the 2006 Companies Act. In particular, section 172 calls upon directors to act in the best interests of the company—in this case under his fiduciary responsibilities, Sir Philip is expected to have a higher duty of care than the owners of the business.
Currently the Serious Fraud Office and the Insolvency Service are investigating the collapse of BHS. Both of those authorities have the power to prosecute any or all of the BHS directors, including Sir Philip Green, with the possibility of significant fines and bans from being company directors.
One of the great hopes to rescue BHS was Mike Ashley, whose Sports Direct company has also just been investigated by the same parliamentary select committee—also with damning conclusions.
Iain Wright, chairman of parliament’s business, innovation and skills select committee and co-author of the 60-page report into the BHS collapse, has produced a scathing 33-page account of the working conditions at Sports Direct. The report concludes that the founder and majority owner, Mike Ashley, was running the company like a Victorian workhouse and building his success on a business model that failed to pay workers the national minimum wage and treated them “without dignity or respect”.
Mike Ashley owns more than 60% of Sports Direct which, unlike BHS, is publicly listed on the London Stock Exchange, so he can be subject to shareholder pressure as happened last year when a shareholder revolt forced him to change his proposals on executive pay and bonuses.
Ashley is no stranger to controversy: Sports Direct, despite being a publicly listed company subject to the UK Corporate Governance code, has regularly placed multimillion-pound bets on the share performance of other companies such as HSBC, Debenhams and Tesco. Whilst this is not in itself illegal, it is a questionable financial strategy for a FTSE company.
Sports Direct is the UK’s largest sportswear retailer, with more than 400 stores including Lillywhites and 270 more shops in 19 European countries. It also owns a number of well-known sportswear brands such as Dunlop, Slazenger, Lonsdale and Karrimor—all of which have contributed to Ashley’s estimated £2.4bn fortune.
Since raising £929m in 2007 on the London stock market in exchange for a 45% stake in Sports Direct, whereupon the shares dramatically lost half their value, investors have complained about the way the company is run. This is despite the share price soaring and the business joining the FTSE 100 index of London’s biggest companies (earlier this year the share price fell again and Sports Direct has now been relegated to the FTSE 250, much like Mike Ashley’s other project Newcastle United, who were relegated to the Championship at the end of last season).
Leaders of the pay pack
When it comes to executive pay excesses, Sir Martin Sorrell, founder, majority shareholder and chief executive of advertising company WPP, is seen by many to be the leader of the pack with annual remuneration of £70m.
Earlier this year, Sir Martin was at the sharp end of an investor revolt when over 30% of shareholders refused to back his pay deal at the WPP AGM.
Sorrell, 71, who started WPP from scratch using borrowed money in 1985, said the idea from the start was that he would have a big stake in the company and run it as an owner. He has reinvested all his pay into WPP and only took money out to pay for his divorce in 2005.
“WPP should be looked at in a unique way,” he said after the meeting. “If there is something wrong with building a company from two people to 194,000 people where 600,000 people depend on WPP for their livelihoods then mea culpa.”
Either the advances in corporate governance over the last 24 years have been an illusion or any advances that have been made are unravelling before our eyes, or recent high-profile cases are the exception in an otherwise improving scene of growing professionalism on company boards and the application of effective corporate governance.
Certainly the larger-than-life characters from Tiny Rowland onwards have always been difficult to control.
Sir Martin Sorrell, as founder of a hugely successful business, is entitled to a significant share in its success—indeed his chief executives’ salary is £1.5m; the rest of the £70m package is his reward for building the business from scratch, taking the personal risks and making sacrifices along the way.
Mike Ashley’s fortune has been built on the back of a company which must be doing something right as far as the customers are concerned, yet it is at the expense of the satisfaction of his employees and investors—but he has created a sustainable business.
Sir Philip Green and other BHS directors have been accused of systematically plundering the business leaving a very large pensions deficit, which has negatively impacted on the lives of 30,000 current and previous employees.
I do not believe that there is a need for dramatically altering the corporate governance regime in the UK but I do think that it is time that the 2006 Companies Act was taken seriously, in particular section 172, which calls for company directors to act in the best interests of the company.
Sir Martin Sorrell is justifiably entitled to his remuneration package. Mike Ashley and Sports Direct need to be prosecuted if they are breaking employment laws and Sir Philip Green should have the book thrown at him and be stripped of his knighthood, just as happened to Fred Goodwin. Otherwise it makes a mockery of the whole honours system.
A report published by the Investment Association calling for greater transparency in executive pay is yet another reminder to the UK’s leading companies that they need to clean up their acts voluntarily before parliament decides that only legislation can bring about greater confidence in corporate governance.
David Doughty is a chief executive, non-executive director and growth accelerator coach.