25th July 2016
Sir Philip Green’s management of BHS has been blamed for the failure of BHS and its pension fund in a damning indictment from two committees of MPs.
The MPs have also called for a revamp of company law and pension fund regulation.
The Work and Pensions and Business, Innovations and Skills Committees conclude that Sir Philip chose to rush through the offloading of a beleaguered high street institution, losing money and encumbered with a massive pension fund deficit, to a buyer. He was clearly aware that buyer was was “manifestly unsuitable”, with Sir Philip 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 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 Dominic Chappell.
The Committees say 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. Sir Philip 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. Sir Philip Green, Dominic Chappell and the respective directors, advisers and hangers-on who all got rich or richer are all culpable, with the only losers the ordinary employees and pensioners.
The Committees say 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 will now turn to those question in new inquiries.
The headline figures that Sir Philip 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 fail to make it succeed. Sir Philip 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 Tina 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 Sir Philip 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. Sir Philip 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 Sir Philip 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. Sir Philip’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 Sir Philip 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, Sir Philip cut costs, sold assets and paid substantial dividends offshore to the ultimate benefit of his wife.
The MPs say 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 Sir Philip had some affection for BHS – to an extent it created him. Now it could also bring him down.”
Sir Philip 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 Sir Philip 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 Sir Philip’s tenure and declined in the latter years. Sir Philip 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
The MPs say that Sir Philip’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 are publishing for the first time with this 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 Sir Philip making good his unwritten assurances.
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.
Sir Philip 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 Sir Philip 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, Dominic 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 Sir Philip Green’s experience seriously considered otherwise.
Collapse under incompetent and self-serving RAL
The report documents what it says are 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, Mr 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, Mr 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.
Rt Hon 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 sign-posted 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.”