British Home Stores (BHS) was a large British depart store chain that sold household goods and clothing (Curwen 2016, para. 1). In the later years of the store operations, it also offered other goods and services such as entertainment, furniture, groceries, electronics, beauty products, and fragrance. Sir Philip Green purchased the store for £200 million in 2000 and became the sole owner of the company (Curwen 2016, para.1). However, the owner worked with the existing team though he dominated most of the company’s operations, especially in finance despite having poor corporate and leadership qualities.
The company’s financial performance deteriorated significantly from the time Mr. Green took over until 2015. The director later sold the store to Dominic Chappell of Retail Acquisition Ltd in 2015 for a nominal price of £1 (Curwen 2016, para.1). However, it continued to make losses as Chappell and his team was incompetent and inexperienced in financial management and leadership. The business continued to fail thus leading to rescue negotiations with Gordon Brothers, Mike Ashley and the Pension Protection Fund over BHS's £571 million pension deficit (Curwen 2016, para.1). However, it was liquidated late in 2016. The store had about 163 stores in various countries before its demise in 2016.
Purpose of the Study
The primary purpose of this study is to identify and critically analyse issues which led to the collapse of BHS. The findings will offer valuable insight not only for companies in the retail industry but also in other sectors. The collapse of BHS exhibits one of the major corporate governance scandals of recent times thereby gaining huge media and policy-makers attention. The collapse is attributed to various issues including greed and poor governance, Mr. Green’s dominant personality, lack of internal control, unethical conducts, and excessive remunerations among others (Curwen 2016, para. 2). Although the UK has set up clear corporate governance codes and best practices which companies should follow, some firms still face governance issues regardless of whether listed or unlisted. BHS’ scandal is a reflection of governance issues firms might experience as a result of financial difficulties or poor governance. The case also offers background information for those interested in assessing governance, shareholder capitalism, and economic issues which privately owned firms face.
Importance of Case
BHS is an example of a firm failing as a result of difficult economic times (Curwen 2016, para. 2. Remarkably, no firm regardless of its size, ownership, or industry in which it operates is shielded from economic challenges. BHS also portrays the failure of modern shareholder capitalism and profit maximisation at any cost. Understanding these issues is essential for shareholders, managers, and business owners to avoid similar mistakes in the future. The scandal also helps the UK government to understand the codes which work and ones that need to be strengthened to enhance corporate governance and prevent people from losing their money to self-interested business owners and directors.
Key Events that took Place
There are various notable events attributed to the collapse of BHS. First and foremost, Mr. Green misappropriated billions of the company’s funds after buying it and failed to reinvest in the company thereby leaving it in a huge debt. According to Edwards (2016, para. 3), Mr. Green awarded his family 307 million pounds in dividends from the company between 2002 and 2004 without the approval of the finance committee. The transfer made the company financially unstable in the subsequent years thereby making it unable to finance its pension schemes.
The position of the firm deteriorated further by 2015 and a pension plan was proposed to Mr. Green which would have addressed or improved the situation within 23 years (Edwards 2016, para. 4). However, Green rejected the proposal. Instead, the owner sold the store thus offloading the failed pension schemes into a new unsuspecting buyer, Retail Acquisition Limited (RAL). Although Mr. Green understood the condition of the company, he did not disclose it to RAL in order to facilitate a quick sale (Edwards 2016, para. 5).
Mr. Green was also aware that Dominic Chappell, the owner of RAL had been declared bankrupt three times (Edwards 2016, para. 5). In addition, Chappell was incompetent and had little or no experience in retail industry (Edwards 2016, para. 5). Therefore, the sale became materially harmful to the pension schemes. According to Edwards (2016, para. 5), the sale was made under an informal surety of security that later proved to be illusionary as BHS later collapse.
The status of the pension scheme began deteriorating quickly from 2007 to 2008 when the 2008/9 global financial crisis hit the markets and company never stabilised again (Edwards 2016, para. 6). Mr. Green failed to invest enough funds in the right pension scheme though he could afford to do it. The company’s deficit reached £166 million in 2009 and Green came up with a recovery plan which contributed only £6.5 million annually to the plan (Edwards 2016, para. 6). The contributions reached £10 million annually in 2012 but the deficit amounted to £233 million (Edwards 2016, para. 6). As a result, the company could not sustain its pension schemes forcing Mr. Green to sell it.
Green’s prime issue was that The Pensions Regulator had realised the proposed recovery plan which was to take about 23 years was long and started investigating BHS. Therefore, Green suggested restructuring and nicknamed the company Project Thor, which he believed could contain the cost and provide more funds for the pensions (Edwards 2016, para. 7).
Green hid from the buyer, RAL the true condition of the pensions. According to Edwards (2016, para 8), Green told RAL that TPR had not raised any concerns about the pension plan thus RAL knew that Thor was acceptable to trustees and TPR and that the plan was to succeed but Mr. Green was aware that it was going to happen. The company was finally sold to Chappell and collapsed in less than two years later.
Structure of Case Study
The case study consists of two sections. The first part offers the background information related to the collapse and key issues which culminated in the demise of the company. The second part of the case study involves a critical analysis of the main issues. Some of the matters related to the collapse of BHS that are addressed in this section include corporate governance failings, accountability, internal control, and excessive remunerations. The findings will help to understand measures which should have been taken or what could have been done to avoid the collapse.
Part 2: Case Study Analysis
The Main Corporate Governance Issues
The collapse of BHS was attributed to some corporate governance issues. First thing, directors should facilitate appropriate dialogue among shareholders, organisation, and key stakeholders (Fang et al. 2017, p. 85). According to Zhong, Wang, and Yang (2017, p. 412), the UK corporate governance principle of relations with key stakeholders and shareholders require the board to respect the interest of shareholders and stakeholders. However, Mr. Green acted in selfish interest. That is, he did not involve these parties in the decision to sell BHS to EI and takeover by Dominic Chappell, who was bankrupt and inexperienced in the retail industry. As such, Chappell was unable to run the store.
The other issue was that Mr. Green authorised payment of dividends and sold the company at a low price implying that he was self-serving. Fang et al. (2017, p. 85) warn that fraudulent financial transactions such as payment of excess dividends might adversely affect corporate financial stability. Payment of dividends was fraudulent and misappropriation of corporate assets.
Good governance also requires integrity in reporting. According to the UK Corporate Governance Code (2016, p. 16), the director should ensure fair and balanced examination of the company’s financial position, its outlook, and provide a timely financial report. Mr. Green was aware that BHS was in a critical financial position but did not disclose it to shareholders, key stakeholders or even the buyer. Moreover, Mr. Green overlooked his legal duties and failed to foster and observe high ethical standards and culture. For instance, the director did not allow TPR to assess BHS before sale. Coordination with TPR would have put the company under Pension Protection Fund. Green was also not transparent because hid the truth from the buyer that BHS had issues with TPR. As such, the director was unethical (Oyewunmi 2017, p. 120). BHS directors failed to take such responsibilities thus exposing the company to continued insolvency and collapse.
Lack of Appropriate Leadership
Poor leadership motivated by personal greed also contributed to the failure of BHS. First, Mr. Green hurried the sale of the company by manipulating consultants in advance to conceal the status of the pension scheme. According to Curwen (2016, para.4), Mr. Green circumvented regulatory concerns and incentivised advisors to seal the deal. A competent leader should be consultative and take ideas from followers. However, Mr. Green offered prizes to influence the decisions of advisors. Mr. Green also lacked moral duty as a leader. As the pension schemes reduced into unsustainable deficit, the owner resisted requests from trustees for contributions (Curwen 2016, para.4). Employers have a duty to solicit financial help for the firms they lead (Hamidi and Gabrielsson 2017. p. 10). A leader should be aware of the issues facing the organisation under his/her leadership. Sir Philip was aware of BHS’ rising deficit thus he should have accepted contributions in an attempt to address the situation. On the other hand, Dominic Chappell and his partners were lured by attractive prizes on offer without following proper procedure or even taking personal risks.
Poor Internal Controls and Risk Management
BHS and RAL lacked internal control thus directors could make any decision without being questioned by other board members. The UK Corporate Governance Code (2016, p. 17) requires the corporate board to establish an audit committee comprising of at least two non-executive directors with at least one of the directors experienced in finance. The committee should be responsible for internal control by overseeing internal financial controls and approval of remunerations by taking into account the relevant regulatory requirements (Nawawi and Salin 2018, p. 130). However, BHS had poor or no internal control thus funds were withdrawn and transferred without any approval and regulatory considerations.
First thing, Mr. Green awarded huge dividends and excess payment to his wife. On the other hand, two directors of RAL gave personal rewards to employees the day RAL bought BHS. Curwen (2016, para.5) notes that it would take many decades for many RAL employees to earn money equal to financial rewards they were given on the day RAL purchased BHS. Curwen’s (2016, para.5) report further indicates that Mr. Chappell took £2.6 million and also gave a loan of £1.5 million to his family. Lack of internal controls allowed wastage of company’s money. Most likely, Mr. Green and Chappell were aware that having the internal control committee could investigate and raise concerns about any possible misappropriation of funds thus they did not set up such committee.
The UK Corporate Governance Code (2016, p. 17) requires the directors to assess the risks facing the company including the one which might threaten its solvency and future performance and take into account the company’s current financial position. Mr. Green and Chappell demonstrated poor risks management skills because they continued misappropriating funds despite the company’s deteriorating financial position. Such weaknesses were evident in how they continuously withdrew funds from the company leading to its collapse.
Corporate Greed and Abuse of Power
The fall of BHS is also blamed on Mr. Green and Chappell’s greed and abuse of office. After buying the company, the new owner sold the assets of the company, reduced costs, and paid high dividends offshore to his family as reported by Parliament.uk (2016, para. 12). The report further indicates that the family of Mr. Green accrued incredible wealth from BHS during its initial profitable years. For example, Mr. Green’s family sold 10 BHS stores for 106 million pounds to Carmen Properties Limited in 2001 (Parliament.uk 2016, para. 12). Surprisingly, the company to which the stores were sold are owned by Lady Green through sale-and-leaseback arrangements. In turn, BHS Ltd paid rent of £153 million to Carmen for property use (Parliament.uk 2016, para. 12). The houses were then sold back to BHS as part of the sale to RAL for £70 million, the money that was paid to Lady Green as the owner. The transactions show an abuse of power and greed which drained the company funds leading to its write-off and eventual fall (Takacs Haynes, Campbell and Hitt 2017, p. 556).
An Ineffective Board, Lack of Oversight, Independence, Experience, Competence
Mr. Green sold BHS to Chappell and his team who were incompetent and inexperienced accounting and retail industry. Green agreed to sell the company to them yet, he knew that it will fail. The other things which showed RAL incompetence was the documents they presented to Taveta Investment Ltd Board two week after the sale. According to Curwen (2016, para.7), the balance sheet indicated cash for immediate liabilities, funds which went to RAL and never returned, and property deals which took several months to materialise. The entries show that the team was incompetent thereby signalling the failure of the newly acquired business (Rodrigues, Tejedo-Romero, and Craig 2017, p. 21).
Poor Accounting Controls
BHS under Mr. Green and Chappell tenure had poor accounting control and financial management. The UK financial reporting principles require annual and semi-annual preparations of financial statements and identify any misappropriations and uncertainties (The UK Corporate Governance Code 2016, p. 16). Agrawal and Cooper (2017, p. 64) also warn against misuse of firm funds for personal gains. Under Mr. Green and Chappell’s leadership, funds were withdrawn from BHS either for “dividend” payment, prizes, or rental payment and were never accounted. Although they were uncertain about the future solvency of the company, they did not come up with measures to address the conditions as suggested by Garsten and Bostrom (2008, p. 26). The UK corporate accounting principles also require corporate boards to have members committees competent in auditing or accounting or both (The UK Corporate Governance Code 2016, p. 18). However, BHS’ audit committee was inactive during Mr. Green tenure while RAL had incompetent accountants who did not even understand basic financial reporting. As such, funds were withdrawn from the company without auditor approval thereby leading losses.
Excessive Remuneration
Payment of unaffordable dividends further weakened the financial status of BHS. The UK principle of remuneration requires payments correspond to individual performance and the company avoids paying more than necessary as recommended by The UK Corporate Governance Code (2016, p. 20). For example, Mr. Green paid more than £414 million in dividends in four years (Curwen 2016, para.4). More than £400 million of the dividends were paid to Mr. Green and his family as BHS owners. The UK remuneration principle requires shareholder approval of major remunerations before payment as outlined under the UK Corporate Governance Code (2016, p. 20). Moreover, Mr. Green and Chappell never involved shareholders before releasing payments. According to Curwen (2016, para. 5), the company paid £220 million in 2004 alone. Such amount it exceeded the company’s pre-tax profit by £118 million. Curwen (2016, para 5) reported that the payment wiped out about £147.7 million of the company’s reserves at a time when its pension fund had declined to a large deficit. Additional £60 million of the company’s reserves and profits were used to pay dividends during the first years of Green’s ownership. According to Curwen, (2016, para. 6), the overall dividends payments reduced shareholder funds in BHS from £335.20 million to £86 million from 2000 to 2004. Such payments were excess since they drained the company funds leaving it in debts.
The other excessive remunerations included rent. Green purchased BHS in early 2000 and sold 12 stores to Carmen properties Ltd for £105.90 million in 2001 (Curwen 2016 para. 3). The company then rented them back for nearly £12 million annually. The UK remuneration procedure requires that no director should decide his/her remuneration. Paying £12 million merely for rent was unaffordable for the firm. Such payments left the company in initial deficit. The rental payment for the next 11 years was £141 million, which was excess compared to the market rate at the time (Curwen 2016 para. 4). Such payments led to the deterioration of the company’s financial status and eventual failure.
Dominant Personality of Mr. Green
Individuals with dominant personality tend to overstep authority because they prefer to be in charge. Mr. Green overstepped the authority of accountants, financial managers, and procurement personnel in BHS and rented company stores at inflated prices and also transferred money to his family disguised as payment for dividends. The business owner should have allowed those involved in calculating dividends and procurement to carry out their duties independently. The directors’ dominant personality made him make decisions without consultations or seeking approval.
Unethical Business Practices
In most cases, urge to create sustainable value for a company and promote long-term strategy push directors to have short-term perspectives (Sigurdsonon 2018, para. 1). However, others develop such short-term mindset due to personal greed. Mr. Greed sold 12 BHS stores within one year after buying the company. The owner also paid huge sums of money in form of dividends. In both cases, BHS owner was drawn to make such short-term decisions by greed. According to Sigurdsonon (2018, para. 2), short-term decisions tend to be costly and involves a lot of mistakes. Short-termism also undermines responsibility and leadership as evident in the case of BHS (Sigurdsonon 2018, para. 1).
Lack of Accountability and Transparency
Mr. Green lacked accountability and transparency. The UK’s transparency and accountability standards require corporate boards to present fair, understandable, and balanced assessment of the firm’s position and prospects (The UK Corporate Governance Code 2016, p. 5). The directors are also accountable for assessing the nature of the key risks the company is willing to take in order to attain its strategic objectives. BHS lacked active risks management as well as internal control systems. Therefore, the director could make decisions that served his interests taking into account without considering the company’s financial stability.
Directors should also be transparent and accountable. Mr. Green intentionally failed to disclose the issues facing BHS to regulators and RAL before sale. Directors should ensure transparency in relation to company’s performance. Disclosing the actual state of the company’s pension funds would have helped to get contributions from investors, shareholders, or the government (Gibbs 2017, p. 23). Lack of transparency and accountability contributed significantly to the fall of the company.
Theoretical Literature
The issues that faced BHS can best be understood from stakeholder and managerial hegemony theories. Stakeholder theory states that a company is responsible to its stakeholders, not just shareholders (Miles 2017, p. 439). Miles (2017, p. 439) defines a stakeholder as any group or person who can be affected by actions taken by a given company including customers, community, taxpayers, employees, and regulators. Sikka (2016, para. 1) attribute the issue of BHS to sacrifice of employees, taxpayers, local communities, and suppliers’ interest in shareholder interests.
BHS collapse led to the loss of more than 11,000 jobs (Davidson and Dakers 2016, para. 1). In addition, close to 20,000 members had invested in the company’s pension scheme. These and other potential losses made the Pension Protection Fund consider giving £571 million to the rescue of the company (Davidson and Dakers 2016, para. 3). Notably, this is taxpayers’ money which could be used in other productive projects.
Engaging stakeholders the corporate governance could help to respond to the interests of the entire society as suggested by Ismail and Saleh (2017, p. 42). The theory requires the board to negotiate and reach a compromise with stakeholder in the corporate interests (Pigé 2017, p. 14). Mr. Green did not involve employees and pension scheme members in financial decisions as well as the sale of the company.
On the other hand, management hegemony theory refers to situations when the corporate governance boards serve just as “rubber stamp” and its decisions made by professional managers (Saravanan, Srikanth, and Avabruth 2017, p. 530). In the context of BHS, Mr. Green should not have been involved making all the company’s strategic decisions including financial decisions and sale of the company. Ismail and Saleh (2017, p. 41) recommend that directors should not be involved in strategic decisions unless during a crisis. The statement is reiterated by Kourula, Pisani, and Kolk (2017, p. 16) who argue that the boards mostly make effective performance assessment only during the crisis. BHS and RAL should have involved professional managers to run the companies thus avoiding the losses incurred.
Literature Review
KPMG (2016, para. 1) is concerned that most private firms tend to be reluctant to adhere to the set governance and leadership standards thus exposed to frequent governance issues. As such, the institution calls for constant fine-tuning and improvement of governance models applicable to private companies. KPMG (2016, para. 1) also raises an important question on whether or not owners of private companies and their management crews share the right information with the advisors and members of the board about the full range of the companies’ operational and financial risks. In the context of BHS, Mr. Green failed to disclose information related to the rising deficit of the company’s pension scheme to TPR and RAL. Similarly, Mr. Chappell gave incentives to his team and advisors to influence agree to his decisions. The directors knew that the firms headed towards the wrong direction. However, they never shared such information.
KPMG (2016, para. 1) acknowledges the need for putting in place effective internal controls and governance processes to realise financial expectations of the business. For example, there is no evidence of audit committees presenting annual financial reports. Consequently, the company’s financial risks reached unsustainable levels and the company collapsed less than two decades after Mr. BHS took over.
EcoDa (2010, p. 8) suggests firms establish independent boards such as a committee of auditors and give it necessary support to oversee company’s performance in various areas including finance. BHS lacked independent board thus Mr. Green made selfish decisions on the use of the company funds and left it in huge debt and deficit. Steptoe and Johnson (2011, para. 3) emphasise the importance of good corporate governance practices for all firms not just listed ones.
Steptoe and Johnson (2011, para. 6) concur with EcoDa (2010, para. 9) that business owners and directors should balance their interests in their families with the corporate success. According to Steptoe and Johnson (2011, para. 7), business owners should attract external contributions and investments for the long-term success of the companies. Mr. Green valued family interests over those of the business and turned away requests for contributions which could improve the financial position of the store. According to Steptoe and Johnson (2011, para. 8), the board is not only responsible for risk oversight but should also ensure that remunerations attract, motivate, and retain both executives and non-executives of the quality needed to run the firm successfully.
Institute of Directors (2010, para. 3) argues from a different perspective that no regulations and laws that fit for all the boards. In this regard, the institute urges unlisted and listed companies to enhance the efficiency of their boards by implementing voluntary standards which they think can help the company but consistent with the government’s (Institute of Directors 2010, para.3). Mr. Green and Chappell lacked goodwill to voluntarily implement financial management and leadership standards which could ensure the short-term and long-term success of BHS.
Actions Taken and Possible Responses
Although MPs vowed to hold Mr. Green accountable for the demise of BHS and losses incurred, nothing has yet been done on the issue. One of the responses should have been holding the director accountable and retrieve all the funds found to have been misappropriated. Such action will deter others from engaging in such actions. Although the UK has clearly outlined governance and accountability standards for listed and unlisted firms, these are not sufficient to deal with the issue.
The case of BHS occurred when the standards were still operational (Tuczek, Castka, and Wakolbinger 2018, p. 401). The UK corporate governance committee should increase its vigilance in financial reporting by making it mandatory for all businesses to disclose their financial information semi-annually or even quarterly. Such information will help the financial reporting committee to identify companies with questionable financial practices and allow people to identify right firms in which to invest.
Organisations should also involve professional managers to assess the risks facing the company and suggest the way forward to rescue the company as recommended by the UK Corporate Governance Code (2016, p. 5). From hegemony management theory perspective, business owners should not be involved in all the strategic decisions of the company. Mr. Green should have included professional managers on the company’s board to advise him and hire independent auditors to examine the firm’s financial status and make recommendations.
Lessons learned
Various lessons can be learned from the demise of BHS. First and foremost, firms regardless of whether private or public should carefully assess their corporate governance. The board of directors in all the firms should ensure checks and balances. In other words, they should prevent implementations of decisions on which compromise has not been reached between shareholder and stakeholder interests. The UK Corporate Governance Code (2016, p. 5) recommends companies increase the role of non-executive directors in questioning unusual transactions and directors’ decision-making process.
Good governance is also essential to the success of any company. Directors who lack leadership qualities often fail the firms. The other lesson is that even companies which seem to have been doing well are still exposed to various forms of risks including operational and financial risks. Notably, BHS was financially stable and had no governance issues before it was sold to Mr. Green. As such, it is important to companies to assess the risks frequently before reaching critical stages. Directors should also be ethical in disclosing information about the company’s status (Fuente, García-Sánchez, and Lozano 2017, p. 740). Unethical conducts lead to wrong decisions such as investing in wrong firms.
The UK government should have funded BHS to prevent its demise. First thing, the company employed more than 11,000 people and pensions for more than 800 people. As such, bailing out the company would have saved the society a lot by preventing loss of jobs and pensions. Moreover, the Pensions Protect would have used the tax-payers money for the benefits of those affected. Moreover, the government did not need to inject money into BHS. Instead, it could underwrite loans which banks will have given BHS. Doing so will have protected many jobs. Moreover, the government was prepared to bail out companies such as Tata’s British Company and protect 11,000 jobs (Hills 2016, para. 1). Similarly, it should have bailed BHS.
New Code
The increasing scandals involving private firms are likely to force the government to introduce a new code for unlisted companies. The possible key points for the new code should include:
i. Verifiable skills in professional management for all corporate directors. The directors should also undergo mandatory training to update their skills annually as suggested by Kishore (2017, p. 27).
ii. Penalties for those caught in unethical conducts. The code will prevent or minimise cases of misappropriation of funds as witnessed in BHS.
Summary
Discussion Questions
BHS demised as a result of various governance issues including poor leadership, poor risk management skills and lack of internal control, inexperience, and lack of competence, as well as poor accounting controls. Other governance issues include unethical conducts and excessive remuneration. Mr. Green overlooked the interests of stakeholders as suggested in the theory of stakeholder management. There is a consensus among scholars that good governance is key to the success of any firm. Governance issues facing BHS were not addressed thus similar incident might occur again. The current corporate governance and accountability system is not clear about which codes apply to private companies and ones directed to listed firms. Nonetheless, any organisation can face such issues thus the government should have bailed BHS.
Conclusions
Summary of Case Study
The case study involves BHS, a retail company which operated in the retail industry in the UK. Mr. Green bought the company in 2000 and not only withdrew huge sums of funds from the company for personal gains but also failed to invest in the firm. The company experienced continued governance issues under Mr. Green leadership including lack of internal control, lack of accountability and transparency, unethical conducts, and personality dominance issues leading to misappropriation of funds. The firm was sold to Chappell and his team in 2015, who lacked experience and competence in retail industry thereby leading to its demise in 2016.
Summary of Key Findings and their Implications for Corporate Governance
BHS’ scandal was broadly associated with poor leadership from Mr. Green and Chappell. The duo made decisions without involving stakeholders for selfish gains. The company also lacked independent non-executive directors who would have assessed the risks facing the company and advice the way forward. Other issues include incompetence, lack of oversight, poor accounting controls, excessive payments, poor leadership, and lack of internal control. As such, there is a need for the formation of independent non-executive directors for overseeing the operations of companies.
The current system of corporate governance and accountability in the UK is not sufficient to address these issues because it is still not clear which standards apply to listed and ones for unlisted firms. The main placation is that a new code is needed including mandatory training of directors. The main lessons learned in the BHS case is that any company regardless of whether listed or unlisted can face governance issues. Companies should also strengthen their investigations on unethical and governance issues facing them and address them on time. In addition, Mr. Green and Chappell lacked leadership qualities implying the need for companies to strengthen their risks assessment, establish strict ethical codes, and enhance their governance.
Bibliography
Agrawal, A. and Cooper, T., 2017. Corporate governance consequences of accounting scandals: Evidence from top management, CFO and auditor turnover. Quarterly Journal of Fina
