The Work and Pensions Committee have called for new duty on company directors to have regard to pension schemes and for Insolvency Service reports to be published in the public interest.
On 28 April last year the Committee launched its joint inquiry into the collapse of British Home Stores (BHS) and the origins of its huge pension scheme deficit. BHS was a private company but the effects of its collapse spanned widely: not least to its thousands of employees and pensioners.
The three month inquiry examined corporate governance in Sir Philip Green’s companies, which are privately held and ultimately owned offshore by Lady Green. It found a near-complete absence of the constructive challenge that is the hallmark of good corporate governance. Green, a “dominant personality”, ran his companies as a personal empire with boards taking decisions with reference to a shared understanding of his wishes rather than the interests of each individual company.
An extraordinary and scandalous tale unfolded in which the greedy main players took lavish rewards at the expense of the employees and pensioners of the company. Inter-company loans and property deals, related-party transactions and the hurried disposal of BHS to a wholly unsuitable buyer all proceeded with woefully inadequate checks and balances. The poor corporate governance in Green’s companies was epitomised by the complacent performance of Lord Grabiner, a director of several of the Green empire subsidiaries.
In July last year, MPs catalogued a litany of failures culminating in an “at any cost” disposal of the company and pension deficit to a wholly unsuitable “chancer”. In their inquiry report about BHS, the Work and Pensions and Business and Innovations and Skills Committees concluded that Green chose to rush through the offloading of a beleaguered high street institution, which was losing money and encumbered with a massive pension fund deficit, to a buyer who he was clearly aware was “manifestly unsuitable”, with Green forced to finance the sale himself.
Though the ownership of Dominic Chappell and his associates was “incompetent and self-serving”, the ultimate fate of the company was sealed on the day it was sold. Advisers were paraded by both sides as an “expensive badge of legitimacy for people who would otherwise be bereft of credibility” while the Taveta group directors (owned by Green’s billionaire wife, Tina Green) failed to provide a semblance of independent oversight or challenge in a corporate group run as a personal fiefdom by a single dominant individual.
MPs heard hours of oral testimony and considered thousands of pages of written evidence in the inquiry, which began when BHS crashed into administration just 13 months after the ill-advised and under-funded sale to Chappell. The Committees said that the evidence at times resembled a “circular firing squad”, with a series of key witnesses appearing to believe they could absolve themselves of responsibility by blaming others. Green himself “adopted a scattergun approach”, liberally firing blame to all angles except his own.
The unacceptable face of capitalism
The report documents the systematic plunder of BHS at the cost of the 11,000 jobs and 20,000 people’s pensions now at risk. Green, Chappell and the respective directors, advisers and hangers-on who all got rich or richer are all culpable, with the losers being the ordinary employees and pensioners.
The Committees said this is “the unacceptable face of capitalism” and that the story of BHS begs much wider questions about the gaps in company law and pension regulation that must be addressed. The two Committees turned to those question in subsequent inquiry hearings.
The headline figures that Green bought BHS for £200 million and sold it 14 years later for £1 cannot disguise the true picture. He did not invest in the company and then “unfortunately” failed to make it succeed. Green systematically extracted hundreds of millions of pounds from BHS, paying very little tax and fantastically enriching himself and his family, leaving the company and its pension fund weakened to the point of the inevitable collapse of both. Lady Green is still being paid tens of millions of pounds of tax free repayments on the loan that was engineered to sell BHS from one Green family business to another, and will be for some years to come.
A moral duty to act on the pension schemes
- When Green bought BHS the pension schemes were in surplus. As these schemes declined into substantial and unsustainable deficit he and his directors repeatedly resisted requests from trustees for higher contributions. Such contributions were not charitable donations: they were the means of the employer meeting its obligations for deferred pay. Green had a responsibility to be aware of the growth of the deficit and he was aware of it. That there is a massive deficit is ultimately his responsibility.
- The Committees say Green must act now to find a resolution for the BHS pensioners, a “moral duty” which will undoubtedly require him to make a large financial contribution. Green’s failure until now to resolve the pension fund’s problems contributed substantially to the demise of BHS, along with chronic under-investment and the systematic extraction of hundreds of millions of pounds from the increasingly ailing company.
- The Arcadia board cited a variety of explanations for pausing Project Thor, ranging from Christmas to the Scottish independence referendum and instability in Ukraine. In fact, the primary reason was Green’s resistance to TPR’s moral hazard requests. He did not wish to respond to requests for information regarding historic dividends, management charges, sale and leaseback arrangements, inter-company loans and the use of BHS shares or assets as collateral for company purchases. At best this demonstrated a lack of willingness to act to secure the pension fund’s future.
Incredible wealth followed by retail demise
- In his early years of ownership, Green cut costs, sold assets and paid substantial dividends offshore to the ultimate benefit of his wife. The so-called “King of the High Street” failed to invest sufficiently in stores or reinvent the business to beat the prevailing high street competition. The Committees found “little to support the reputation for retail business acumen for which he received his knighthood” and say “we don’t doubt that Green had some affection for BHS – to an extent it created him. Now it could also bring him down”
- Green’s family accrued incredible wealth during the early, profitable years of BHS ownership. Over the duration of their tenure, significantly more money left the company than was invested in it. There is no evidence of improved turnover, market share, or major increase in investment that might be expected from a leading retailer. BHS was involved in a number of transactions with a complex web of companies, many registered offshore: whether BHS benefited financially from these transactions is far from clear. What is clear is that the Green family did.
- The report documents the ways Green was able to boost BHS’s profitability in the short-term while ultimately fatally undermining its ability to survive. The early years improvement in BHS’s profitability appears to have been achieved primarily through cost-cutting measures and squeezing suppliers. Crucially, BHS’s turnover remained flat through much of Green’s tenure and declined in the latter years. Green initially cut costs but he did not grow the business.
- One mechanism of (tax-lite) cash extraction to other Green family companies was through the sale of property: in 2001, BHS Group sold ten BHS stores for £106 million to Carmen Properties Ltd – a Jersey-registered company owned ultimately owned by Lady Green – as part of a sale-and-leaseback arrangement. BHS Ltd then paid rent to Carmen for the use of these properties. They were ultimately sold back to BHS as part of the sale to RAL for only £70m (with the proceeds of the sale going to Lady Green as the sole beneficial owner) but, over the lifetime of the sale-and-leaseback arrangement, rent of £153 million was paid by BHS to Carmen.
Egregious failures of corporate governance
- Green’s rush to drive through the sale of BHS – “a chain that had become a financial millstone and threatened his reputation” – was the culmination of a sorry litany of failures of corporate governance and greed. Regulatory concerns were circumvented, advisers were heavily incentivised to progress the deal. Dominic Chappell, his friends and associates were enticed by the personal rewards on offer without taking any personal risks. The Committees published for the first time with their report the Due Diligence reports produced by Olswang (and associated RAL Board minutes), which show their advice against the purchase and express concern that RAL were reliant on Green making good his unwritten assurances. (RAL= Retail Acquisitions Ltd.)
- The complacent performance of Lord Grabiner as the non-executive Chairman of the Taveta group boards represented the apogee of weak corporate governance. It was his responsibility to provide independent challenge and oversight. Instead he was content to provide a veneer of establishment credibility to the group while happily disengaging from the key decisions he had a responsibility to scrutinise. For this deplorable performance he received a considerable salary. It is permissible in law for a director to delegate certain functions to other persons, but if a director allows himself to be dominated, or manipulated by one of their number, he may have gone beyond the boundaries of what is proper. He could be found to be in breach of duty and subject to disqualification. All directors of Taveta and RAL have serious questions to answer about their performance in those roles.
- Green faced a considerable challenge in finding a credible buyer for a business that was consistently losing money and had a pension scheme with a large and growing deficit. It was clear that Chappell’s team were out of their depth, woefully short of the requisite experience and expertise, notably lacking the credible senior retailer Green once insisted on. They brought no new money to the deal, took no personal risk, could offer no equity and had no means of raising funds on a sustainable basis. Ultimately, Chappell and RAL failed all of Sir Philip’s nominal tests for a buyer. They were manifestly unsuitable owners of BHS. It is inconceivable that someone with Green’s experience seriously considered otherwise.
Collapse under incompetent and self-serving RAL
- The report documents the true numbers behind the sale. The board of Taveta Investments Ltd was presented, two weeks after the event, with a rosy picture, while the reality was very different. The balance sheet included cash for immediate liabilities, property deals that took many months to materialise, funds that went to RAL never to return and equity that was a loan on punitive terms. It was patently obvious that there was not enough cash in BHS to give it a realistic chance of even medium term survival.
- RAL’s failures include some blame for the pension scheme, which they accepted responsibility for with a “negligent and cavalier disregard for the risks and potential consequences”, negligence which “continued into their incompetent and self-serving ownership of the company”. In putting his “home team” first, Chappell and his fellow directors were personally enriched as BHS failed around them. Two directors jumped ship on the day that RAL acquired the business with personal financial rewards that it would take many BHS employees decades to earn. The others continued to profit handsomely from their positions without fulfilling their requisite responsibilities.
- In effect, Chappell “had his hands in the till”. His description of £2.6 million that he personally took, in addition to an outstanding £1.5 million family loan, as a “drip” in the ocean is an insult to the employees and pensioners of BHS that he let down.
Frank Field MP, Chair of the Work and Pensions Committee, said:
“One person, and one person alone, is really responsible for the BHS disaster. While Sir Philip Green signposted blame to every known player, the final responsibility for up to 11,000 job losses and a gigantic pension fund hole is his. His reputation as the king of retail lies in the ruins of BHS. His family took out of BHS and Arcadia a fortune beyond the dreams of avarice, and he’s still to make good his boast of ‘fixing’ the pension fund. What kind of man is it who can count his fortune in billions but does not know what decent behaviour is?”
Iain Wright MP, Chair of the Business, Innovation and Skills Committee, said:
“BHS’s demise has created many losers, particularly the 11,000 staff facing the loss of their jobs and the 20,000 pensioners facing significant reductions to their pensions. The actions of people in this sorry and tragic saga have left a stain on the reputation of business which reputable and honourable people in enterprise and commerce will find appalling. The sale of BHS in March 2015 is crucial to its eventual collapse a year later. The sale of BHS to a consortium led by a twice-bankrupt chancer with no retail experience should never have gone ahead; and this was obvious at the time. The reason it did, however, was Sir Philip Green. He was determined to get the deal done, no matter that the buyer could not deliver what BHS needed. There was a complete failure of corporate governance, with Sir Philip bulldozing the sale through, without proper oversight or challenge from his weak and impotent board.
While BHS staff face uncertain job prospects and pensioners worry about their future entitlements, it’s clear that a large cast of directors, advisers, and hangers-on enriched themselves off the back of BHS, including Dominic Chappell and his fellow RAL directors. Chappell took no risk and put no money into the venture and yet gained huge rewards as BHS crumbled around him. His failure is bad enough but that he effectively had his hands in the till is an insult to the employees and pensioners of BHS that he let down so badly.”
In response to the Government’s consultation on corporate reform, the Work and Pensions Committee’s most recent report says that the corporate governance and reporting requirements for public listed companies should be extended to private companies that have an important social impact: large private companies and those with over 5,000 defined benefit pension scheme members.
It also says that company directors should have a new duty to pension fund trustees, as the representatives of pension scheme members, in addition to those stakeholders they are already obliged to have regard to. Allied to the more substantial recommendations on pension law and regulation in its December 2016 Report, the Committee concluded these changes would reduce the chance of another company collapsing in the manner of BHS.
The key themes that emerged during the inquiry included:
- lamentable corporate governance in what was a large private company
- a paucity of publicly available information about the state of the company and its pension fund
- the absence of a voice in the running of the company for those who relied on its success for the security of their pension saving.
Holding company directors to account
- Public listed companies are required to comply with the Financial Reporting Council Corporate Governance Code and its reporting requirements or publicly explain why they are not. This is a proportionate approach for companies of social importance. Transparency about governance arrangements, performance and risk can better equip stakeholders to hold company directors to account. Wider awareness of the state of the BHS pension schemes may have pressured Sir Philip Green into taking more reparative action, sooner.
Large companies should be subject to the Financial Reporting Council Corporate Governance Code
- Private companies that are large, as defined by Government, or have over 5,000 defined benefit pension scheme members, should be made subject to the the Financial Reporting Council (FRC) Corporate Governance Code on a comply or explain basis. The report includes a table of the top 30 largest private companies in the UK, with many household names like John Lewis, Clarks, Matalan, Virgin Atlantic, River Island, Pret a Manger – and the Arcadia Group – that would fall under the parameters of this recommendation. Many well-governed large private companies already follow best practice on transparency.
Include pension scheme trustees in section 172 of Companies Act
- Pension scheme trustees should be added to section 172(1) of the Companies Act 2006. The list of stakeholders company directors must have regard to – and report on the exercise of their duties to – does not include defined benefit pension scheme beneficiaries or the trustees who must act in their interests. Incomes of pensioners in retirement are reliant on the sustained success of the sponsoring company but they are at particular risk of being neglected in corporate decision making as no one makes the case for former employees. The inclusion of pension scheme trustees in section 172 might increase the chances both that directors would take into account the interests of current and future pensioners in carrying out their duties, and that those who have failed to do so will be held accountable in the courts.
Publication of Insolvency Service investigation reports
- Last week the Committee published an update on the progress of the Insolvency Service’s investigation into the affairs of BHS. There is a legitimate public interest in the complete story of the failure of BHS being laid bare, and the Committee welcomes Government’s indication that the BHS report will be published. Future IS reports should be published whenever there is significant public interest.
Publication of correspondence with Arcadia
The Committee publishes with the report a series of correspondence with Ian Grabiner, Arcadia Chief Executive, and the Arcadia Group pension trust, charting its efforts to get information about the group’s pension schemes into the public domain. Arcadia’s pension schemes are over £200 million in deficit, but all parties have refused to provide information regarding the 2013 valuation and recovery plan, or the levels of employer contributions.
Frank Field MP, Chair of the Committee, said:
“For a company with a big social and economic footprint like BHS it is simply not enough to be accountable to shareholders – particularly when one shareholder owns most of the stock. The sorry tale of its sale and collapse, putting 11,000 people out of work and leaving a pension fund £571million in the red, with 20,000 pensioners facing an uncertain financial future, was a result of gross failures of corporate governance. Would the story have played out the same way if its directors had to be open about the financial decisions they were making for its future? The finances and leadership of a company with so many people depending on it should be open to scrutiny.
We have already expressed our grave concerns about corporate governance in the Green empire, and we know the Arcadia pension fund is also now in substantial deficit. We have been pressing Arcadia’s directors and pension trustees for detailed information on their schemes but very little is published and neither the company nor the trustees – who unlike the BHS schemes do not have an independent Chair – will tell us. Does Sir Philip not want us to know that he was being relatively generous to the Arcadia schemes while the BHS schemes floundered and the company headed inexorably for insolvency? Was he neglecting both? It can’t be right that basic information like the schedule of employer contributions and the length of the recovery plan is not in the public domain. If it goes under then levy-payers and pensioners foot the bill.”
You can read the full consultation response on corporate governance reform from the Work and Pensions Committee here.
You can watch Philip Green present evidence on the collapse of BHS to the Business, Innovation and Skills Committee and Work and Pensions Committee, Wednesday 15 June 2016 here: https://goo.gl/eeUggP
In 2010, UK Uncut’s spokesman, Daniel Garvin, said: “Philip Green is a tax avoider, and yet is regarded by David Cameron as an appropriate man to advise the government on austerity. His missing millions need to be reclaimed and invested into public services not into his wife’s bank account.” See: Philip Green to be target of corporate tax avoidance protest – The Guardian.
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