The sale and subsequent collapse of BHS and the revelations about the pension fund shortfall have focused attention on corporate governance. Trust in business remains low and here we have a case where, once again, it appears from press reports that the wealthy few have got wealthier and 11,000 workers and 22,000 pensioners are left in the lurch.
Frank Field MP, Chairman of the Work and Pensions Committee, has been outspoken in his condemnation of Sir Philip Green, but in truth much of the evidence with which the committees had to deal was contradictory. As the report concludes, 'The evidence we have received over the course of this inquiry has at times resembled a circular firing squad. Witnesses appeared to harbour the misconception that they could be absolved from responsibility by blaming others.'
The governance issues
But what are the corporate governance issues? For me, it boils
down to a number of quite specific questions:
- Did the owners of BHS take out more in dividends than the business could sustain?
- Were the directors of BHS wrong to recommend the payment of such dividends when the pension fund was in deficit?
- Should the sale of BHS have been permitted without a commitment to make significant payments to the pension fund?
- Did the board of BHS undertake sufficient due diligence about the buyer?
- To what degree did the board of BHS just do as Sir Philip Green told them?
- To what degree were the new owners culpable for the failure of BHS?
- To what degree should Sir Philip Green be held culpable for any or all of these issues?
- What can, or should, be done about it?
Distribution of profit
The report by the Work and Pensions and Business, Innovation and Skills Committees argues that when Green bought BHS in 2000, the business was profit making and the pension scheme was in surplus. The committees are critical of the dividends taken out of the business in the period 2002 to 2004 – some £423 million against £208 million income – but Green and at least one other witness told the committees that this was not unreasonable given trading conditions at the time.
Comparing BHS dividends with those of M&S and Primark across the same period, the levels of payment made by BHS are roughly double the percentage of net profits attributable in those years paid by the other two companies. Yet the decision as to the distribution of profit between investment in the business and payments to investors is primarily a matter of business judgement by the directors.
If the answer to that first question is 'not proven', that to the second is a very clear 'no'. Back in the period in which these dividends were being paid, the pension scheme was in surplus and, of course, few anticipated the financial crisis of 2008 which plunged it, and many other pension funds, into significant deficit. That said, it was in 2006 that the scheme first seems to have moved into deficit with the trustees expressing concern the previous year. To be fair, the committees were also told that Green had been writing to the trustees criticising their investment policies since 2002.
Sale of BHS
Questions relating to the sale of BHS are more complicated. A significant pension deficit is likely to be a material consideration for the buyer of a company and likely to make that company significantly less attractive as the buyer will, effectively, be picking up that liability. The committees' report discusses 'Project Thor' which appears to have been an attempt to make the pension fund liabilities more manageable at the cost to pensioners of a proportion of their benefits and examines in some detail the sale process. Much of this is likely to be examined in Court in due course, but there is some evidence that the pension trustees sought assurances about the future of the pension fund and that one or both sides of the deal were, whether through misunderstanding or design, less than completely open about the implications for the pension funds.
Perhaps the trustees or the Pensions Regulator (TPR) should have pressed harder for concrete information. However, the trustees will undoubtedly have been inhibited by the fact that this appears to have been the only buyer in the market and, moreover, one which seemed 'surprisingly' willing to take on the pension fund liabilities. TPR seems to have lacked urgency in dealing with the case. The report contains a strong element of 'he said, she said' with all parties unsurprisingly keen to put the best possible interpretation on their words and actions and so it is hard to know who is at fault. The report shares that blame quite widely and I suspect we have not heard the last of it.
To take the next two questions together, the report is damning about the degree of due diligence undertaken by the board, and their 'complacency' in approving the proposed transactions. s172 of the Companies Act 2006 sets out the statutory duty of a director as to 'act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.' A director is also required 'in doing so [to] have regard (amongst other matters) to ... the interests of the company's employees ...[and] ... the impact of the company's operations on the community and the environment.'
Sir Philip Green was, it would appear from the report, keen to sell BHS and certainly he and his team played a leading role in the negotiations with Retail Acquisitions Limited (RAL). There is a telling remark from Lord Grabiner, the Chairman of the Taveta group boards, to the committees that there was 'no basis on which we could properly have disregarded the views of the board of [the company's] sole shareholder and refused to ratify the sale'. That seems to me to run the risk of having insufficient regard to the interests of employees and the community. But, equally, the board will have recognised, as the pension trustees may have done, that they may be left with Hobson's choice – Mr Chappell and RAL or no one.
Too little, too late
Regardless of the circumstances of the sale, BHS seems by that point to have been a struggling business. There was a business plan which, according to Sir Philip Green, would have saved it although the report brands this as over-optimistic and suggests that it was too little, too late. Certainly, it would not have saved the pension scheme as it required restructuring; one which would have needed further funding from Green which he was, according to the report, 'not prepared to make' unless TPR ceased investigating his companies. BHS' difficulties seem to have been exacerbated by the failure of new management to follow that plan – although it may have been unachievable in any case – and by Mr Chappell and RAL taking significant fees and loans from the company. It may be that the directors will have to justify their compliance with their duties under s172.
Whether Sir Philip Green is guilty or not of the allegations made against him in the report, it cannot be denied that his reputation, both as an outstanding entrepreneur and as a responsible business owner, has suffered significantly through this debacle. He has described the committees' report as 'the predetermined and inaccurate output of a biased and unfair process' and, reading some of the report and subsequent comment from politicians, he may have a point. However, there are some significant issues that need to be addressed.
Responsibility to stakeholders
Good governance is just as important in private companies as in listed companies; and private companies are not absolved from responsibilities to their stakeholders. It has been argued that poor business decisions at BHS simply lost the Green family money. They did, but where private companies employ substantial numbers of people, there would seem to me to be a higher standard to which they should be held – that responsibility to stakeholders. The world has changed and business owners cannot any longer – if they ever could – be relied upon to behave with morality and ethics. I believe that there is an unanswerable case for all private companies large enough to require audit, to be required to have a company secretary with sufficient authority and kudos to be able to flag to the board where there are wider issues that they should consider and statutory protection where those issues are ignored.
For most of us, pension provision for our old age is an increasing concern. When I started work, pretty much everyone could expect to join a company pension scheme with a final salary pension. Now, for a wide variety of socio-economic reasons, it is a fortunate minority still in that position. The overwhelming majority of us are reliant on saving in a defined contribution scheme or a pension plan through a provider more likely to be focused on its own profit than on our secure financial future. In that environment, and with many pension funds in deficit, perhaps it is time to make the owners of companies more liable for the financial future of their employees. The difficult question is how to do that. One solution might be for pension trustees and TPR to have greater powers to block transactions where the interests of pensioners are impacted, but that may require greater expertise and prescience than it is practicable for them to have.
There have been suggestions that Sir Philip Green should put his hand in his own pocket, perhaps sell a luxury yacht or two, and put the BHS pension funds back into surplus. But those funds hold investments – one of the reasons for so many pension funds being in deficit was the poor performance of those investments during the financial crisis. What happens if the BHS fund gets into further difficulties or moves into surplus – would Sir Philip get his yacht back?
For more on the BHS pension fund shortfall read Tim Middleton's (Technical Consultant at the Pensions Management Institute) article.
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