BHS

Iain Wright Excerpts

Thursday 20th October 2016 Commons Chamber

[Mr Iain Wright (Hartlepool) (Lab)]

It is a genuine pleasure to follow the hon. Member for Bedford (Richard Fuller), who played such an important part not only in the BHS inquiry but in all other inquiries carried out by the Business, Innovation and Skills Committee. I am really proud of the work carried out by the members of my Committee and the Work and Pensions Committee. We came together extremely well to work forensically and diligently on the hundreds of hours of oral evidence and to consider thousands of pages of written evidence. It is significant that the final report was agreed unanimously, without a single vote being required. Such work was made possible only because of the professionalism and hard work not only of the members of the Committees but of their Clerks. I am very proud of the report and stand by every single word.

What came out of the evidence was a story of massive contrasts and of huge inequality—of tens of thousands of low-paid workers, and those trying to get by in retirement on a small pension, losing out because of the greed of a very small number of people who enriched themselves and gorged on BHS to the tune of millions of pounds.

BHS folded this year, a year after Sir Philip Green sold it to Dominic Chappell, but its demise was on the cards a lot earlier than that. In the three-year period between 2002 and 2004, BHS Group paid dividends of £423 million, even though operating profit for that period was significantly less than that amount, at £325 million. In 2004, BHS Group had dividends of £199.5 million, which exceeded the group’s operating profit of £137 million for that year. The dividends of £199.5 million also coincided with a long-term loan of £200 million being taken out that year.

That dividend policy is revealing, and it set the scene for the eventual demise of the company. The payout to shareholders—predominantly the Green family—did not reflect a corporate turnaround and good transformation in business. BHS did not have the cash flow or the profits to fund the dividend. It denuded the company’s reserves and, in the case of that final dividend in 2004, had to be funded by a long-term loan.

Sir Philip could say, quite reasonably, as he did to the Committee, that he received dividends for only a short period of time early on in his period of ownership. It was a long time ago, that is true, but the dividend policy is crucial to understanding the whole sorry business of BHS and the wider lessons that we need to learn.

Green was to enrich himself, his family and his friends at the expense of long-term and sustainable growth for the company. Certainly profits were made, but they were more akin to a short-term sugar boost than a nutritious diet that aided the long-term health and strength of the business. Upon taking over the company, he was able to cut costs—an achievement that should not be easily dismissed—but he was never able to boost turnover throughout his ownership of BHS. So much for the king of retail.

It is true that Sir Philip Green owned the company for a total of nearly 15 years, and that he retained ownership a full decade after taking the last dividends. In that regard, he cannot be described as a short-term corporate raider. But raid the company he did, and his ability to do so meant that he was then in a financial position to obtain the debt to acquire Arcadia and, through the same modus operandi that he operated at BHS, pay his family the biggest corporate dividend in British history. He took the rings from BHS’s fingers, beat it black and blue, starved it of food and water and put it on life support, and then he wanted credit for keeping it alive.

BHS’s balance sheet was made considerably weaker during Sir Philip Green’s tenure of the company. His extraction of value early on in his ownership made the company less able to innovate, to retain a market share or to have a competitive place in the retail market that would allow the firm to generate profits and be in a better position to survive the growing pension deficit. That drip-drip decline provided the backdrop to Sir Philip’s wish to sell the business.

It would be difficult to come up with a more unlikely or incredible knight in shining armour than Dominic Chappell. He was a former bankrupt, with no experience either in retail or in running a company of any sort of comparable size to BHS. He was introduced to the deal by a convicted fraudster for whom he was carrying out driving duties. He boasted that he had senior retail figures on board for key roles in the new business, when that was not the case. He stated that he would be investing his own money in the deal and that he had £120 million of working capital available, when that was not true. His own investment bankers walked away when they discovered that he had lied about the nature of the deal.

Yet the due diligence carried out by the myriad advisers on the transaction did nothing to stop or even pause the deal. There was a remarkable amount of group-think among the supposedly independent advisers. Grant Thornton received four times the fee that it normally receives from similar transactions. Retail Acquisitions Ltd did not have the means to pay advisers for their services unless the deal with BHS went through. The fact that RAL did not have the cash to pay the invoices, let alone to provide the working capital for a loss-making £600 million business with a half-a-billion-pound pension deficit, should have rung alarm bells up and down the City as to whether the engagement should have been taken on. The fact that it did not clearly gives rise to questions about whether impartial advice was provided, or whether blind eyes were turned to ensure that the fees would be paid through a successful transaction, regardless of whether the company toppled over soon after that.

Goldman Sachs provided Sir Philip with “preliminary observations” and was not paid. The lack of any clear letter of engagement showed appalling levels of informality, given that tens of thousands of jobs were at stake. As the hon. Member for Bedford said, the fact that Dominic Chappell was able to say that Goldman Sachs was on board gave his bid credibility. There is a certain irony in the fact that the firm that was not paid, that had an ambiguous role in the transaction and that claimed that it was merely providing preliminary observations was the only one that really expressed concern about the transaction, noting that

“there were risks attached to the proposal in light of the lack of retail experience, the bankruptcy and the highly preliminary nature of the proposals and so on and so forth”.

Goldman Sachs’ attitude to document management seemed to be on a par with that of a dodgy and ramshackle cowboy operation, rather than that of supposedly the world’s premier consulting firm. If that approach was deliberate, in the belief that an informal approach to the transaction would exonerate it of any involvement, it was wrong. Although it was ultimately not responsible for the decisions taken—that was the responsibility of Sir Philip Green—its involvement mattered. It was up to its neck in it, even to the extent of offering a £40 million credit facility.

The risk to their reputation should have made those advisers think again. Much store is placed on the high-quality advice given by such advisers—certainly, in the case of BHS, the use of such prestigious names gave parties credibility and legitimacy when they should have had none.

This was all made possible by weak and incompetent corporate governance. We on the Committee saw opaque structures, overlapping board membership of a complex web of companies and ineffective leadership at board level. Lord Grabiner, chairman of the ultimate selling company, played no effective part. He was not present at, or even invited to, a meeting of the Taveta board that took the ultimate decision to approve the sale of BHS to Chappell. Lord Grabiner showed no curiosity in the deal. He was docile and demonstrated no effective scrutiny, challenge or leadership. That was indicative of a culture, common in corporate governance scandals, in which a domineering, overbearing and bullying individual was able to get away with things with little, if any, challenge.

That is a key reason for the Select Committee’s decision to undertake an inquiry into corporate governance. Given our experience with BHS, we want to look at whether company law is sufficiently clear on the role of executive and non-executive directors and whether their duties are the right ones. We are examining how the interests of shareholders and other stakeholders are balanced, and how decisions of boards could be better scrutinised and open to challenge. Given BHS’s status as a private, non-listed company, how should we align the corporate governance arrangements and requirements between listed and private companies more clearly, so that it is not in the interests of chief executives or directors to take firms private to hide them from effective scrutiny and transparency?

It may be argued that the Green family, as ultimate shareholders, could do whatever they wanted with BHS, and they did. But a company with tens of thousands of workers and former employees dependent on its long-term viability cannot be run as a personal fiefdom or a massive piggybank—even though BHS was run in that way—and corporate governance rules and regulations should, no doubt, be adapted to reflect that.

The duties of directors are somewhat vaguely defined. Section 172 of the Companies Act 2006 states that a director of a company must promote the success of that company in such a way as to have regard for

“the likely consequences of any decision in the long term…the interests of the company’s employees…the need to foster the company’s business relationships with suppliers, customers and others”

and

“the desirability of the company maintaining a reputation for high standards of business conduct”.

[Mr Sheerman]

The BHS employees who lost their jobs in towns such as Huddersfield say to me, “Why is it that the advisers, consultants and auditors who did not do their job in the banking crisis are, all this time later, still not doing their job as auditors and professional people?”

[Mr Wright]

As the hon. Member for Bedford mentioned, we need to look at more than just reputational risk. A lot of deals go through simply because such advisers are involved. Is that good enough?

To return to my point about directors, can anybody look at BHS and say that the spirit and the intention of section 172 of the 2006 Act were being enforced? In companies legislation, directors are equal in status, but in the corporate governance code, chairs and leadership are given much more priority. Given the shocking absence of leadership or challenge from Lord Grabiner, who was truly hopeless, and the weak and impotent corporate governance operating here, there is a strong case for enshrining the requirements of the code in legislation.

As the hon. Member for Bedford said, Sir Philip received his knighthood for services to retail. During our inquiry, however, it became increasingly evident that he was not particularly good at retail at all. True, he was able, in the early days, to sniff out a corporate bargain and cut costs to boost profit. There is nothing wrong with that; that is not a criticism. But during his ownership, he did not boost BHS’s turnover, he lost market share to more nimble and even to not-so-nimble competitors and he failed to anticipate the online retail revolution. By failing to innovate and invest in the brand, he made BHS—an important anchor in the high street—look like a remnant of the 1970s and 1980s in a cut-throat, competitive sector, where grabbing the customer’s attention and retaining their loyalty are paramount.

Sir Philip lacked the success, the ingenuity and the business acumen of the likes of Charlie Mayfield, whose John Lewis group responded well to the internet and whose employee ownership model genuinely motivates staff. He could not match the virtues of Zara, which has increased market share through its superfast turnaround from design to manufacture and shop, which is based on the use of customer data and local suppliers, the rapid turnover of stock and an innovative online platform. Based on company performance, people such as Charlie Mayfield and the founder of Zara, Amancio Ortega, should, it seems to me, be classed as the true kings of modern retail—not Sir Philip Green.

BHS is one of the biggest corporate scandals of modern times. I am sure that the whole House has sympathy for the thousands of workers and pensioners who have lost their jobs and seen their pension benefits reduced as a result of greed, incompetence and hubris. The reputation of business has been tarnished as a result of that greed. The vast majority of businesses are not run and managed in such a way. It would be wrong to tar all businesses with the same brush, but it is vital that this mess is sorted.

[Mr George Howarth (Knowsley) (Lab)]

I am grateful to my hon. Friend for the cogent way in which he has presented his argument. I have no difficulty in supporting the motion, which is in his name and the name of my right hon. Friend the Member for Birkenhead (Frank Field) and others. In principle, I agree with the amendment in the name of the hon. Member for Bedford (Richard Fuller) and others. My only question—my hon. Friend may be able to help me with this—is whether now is the right time to accept the amendment, or whether it should be left in abeyance until some of the other issues have been sorted out.

[Mr Wright]

Parliament will have its view on the knighthood. There is an urgent need to make sure that the pension problem is sorted. Sir Philip Green appeared before us on 15 June and said that he would sort it, but we are now four months beyond that. He is meant to be the consummate deal maker, who can buy and sell companies worth billions of pounds in a couple of days. If he is intent on sorting this, why has it not been done already? Regardless of what Parliament decides today, and regardless of the route taken by the honours forfeiture committee in respect of the knighthood, he has got a duty to sort this. Even at this late stage, Sir Philip should make amends for this whole sorry story and put right the wrongs that he engineered.

[Several hon. Members rose—]