This article is from the source 'guardian' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.

You can find the current article at its original source at http://www.theguardian.com/commentisfree/2016/apr/25/bhs-shareholder-greed-high-street-retailer-divident

The article has changed 2 times. There is an RSS feed of changes available.

Version 0 Version 1
BHS is a victim of shareholder greed BHS is a victim of shareholder greed
(4 months later)
UK company law has actively aided the demise of BHS. The retailer’s £1.3bn debt and the consequences for employee pensions are rightly the immediate focus of attention. But the downfall of BHS also tells us another story – about the failure of the UK’s shareholder-dominated corporate governance model. It reminds us once again that the interests of employees, suppliers, taxpayers and local communities are being sacrificed on the altar of shareholders.UK company law has actively aided the demise of BHS. The retailer’s £1.3bn debt and the consequences for employee pensions are rightly the immediate focus of attention. But the downfall of BHS also tells us another story – about the failure of the UK’s shareholder-dominated corporate governance model. It reminds us once again that the interests of employees, suppliers, taxpayers and local communities are being sacrificed on the altar of shareholders.
A key reason for BHS’s problems is obvious – lack of cash, but this is largely self-inflicted. The seeds of BHS’s demise were sown between the years 2000 and 2015, a period that coincided with control and ownership of BHS by Philip Green. In 2010 Green was appointed an adviser to the government on bureaucratic waste, with a promise to save £6bn annually.A key reason for BHS’s problems is obvious – lack of cash, but this is largely self-inflicted. The seeds of BHS’s demise were sown between the years 2000 and 2015, a period that coincided with control and ownership of BHS by Philip Green. In 2010 Green was appointed an adviser to the government on bureaucratic waste, with a promise to save £6bn annually.
Related: If BHS can fold, then how safe are M&S and John Lewis? | Mary Dejevsky
Green’s business empire operated through a labyrinth of companies, including companies based in the offshore tax haven of Jersey, which makes any quick analysis very difficult. No doubt, administrators will look closely at the complex financial transactions and structures. Given the scale of job losses at stake here, a government inquiry would help to shed light on the circumstances.Green’s business empire operated through a labyrinth of companies, including companies based in the offshore tax haven of Jersey, which makes any quick analysis very difficult. No doubt, administrators will look closely at the complex financial transactions and structures. Given the scale of job losses at stake here, a government inquiry would help to shed light on the circumstances.
What we do know is that Green, a very successful entrepreneur, bought the BHS business for around £200m in 2000 but soon recovered that investment. He is estimated to have received around £400m in dividends by 2004. For many years, BHS formed part of a holding company called Taveta Investments Limited. In 2005, Taveta Investments paid a dividend of £1.3bn, although the group’s annual profit was only £253m. This dividend was mainly financed by increasing debts by nearly £1bn. The legal requirements are that companies can only pay dividends when profits are almost certain in cash or cash-equivalent terms. The company’s auditors, PricewaterhouseCoopers, gave the accounts a clean bill of health, indicating that the appropriate legal requirements had been met.What we do know is that Green, a very successful entrepreneur, bought the BHS business for around £200m in 2000 but soon recovered that investment. He is estimated to have received around £400m in dividends by 2004. For many years, BHS formed part of a holding company called Taveta Investments Limited. In 2005, Taveta Investments paid a dividend of £1.3bn, although the group’s annual profit was only £253m. This dividend was mainly financed by increasing debts by nearly £1bn. The legal requirements are that companies can only pay dividends when profits are almost certain in cash or cash-equivalent terms. The company’s auditors, PricewaterhouseCoopers, gave the accounts a clean bill of health, indicating that the appropriate legal requirements had been met.
The payment of the huge dividend to Green’s Monaco-resident wife attracted much comment. But there was little discussion about the impact of additional borrowing on the volatile fashion business. Taveta’s last set of audited accounts, for the year to 30 August 2014, were filed at Companies House on 8 June 2015. They show that during the period 2005 to 2014 the group did not pay any further dividends, possibly because its financial strength had been sapped by the huge 2005 payout, combined with competition and numerous reorganisations.The payment of the huge dividend to Green’s Monaco-resident wife attracted much comment. But there was little discussion about the impact of additional borrowing on the volatile fashion business. Taveta’s last set of audited accounts, for the year to 30 August 2014, were filed at Companies House on 8 June 2015. They show that during the period 2005 to 2014 the group did not pay any further dividends, possibly because its financial strength had been sapped by the huge 2005 payout, combined with competition and numerous reorganisations.
But company law enabled directors, who were also shareholders, to regard the company as their private fiefdom. Employees, creditors and local communities are helpless as the law permits shareholders to extract as much cash as possible.But company law enabled directors, who were also shareholders, to regard the company as their private fiefdom. Employees, creditors and local communities are helpless as the law permits shareholders to extract as much cash as possible.
If other stakeholders had been represented on company boards they surely would have objected to the large-scale extraction of cash and asked for a rethink. If the employees, many of whom were on close to the minimum wage, had been asked to approve the huge dividend, I think we know what they would have said.If other stakeholders had been represented on company boards they surely would have objected to the large-scale extraction of cash and asked for a rethink. If the employees, many of whom were on close to the minimum wage, had been asked to approve the huge dividend, I think we know what they would have said.
BHS may eventually survive in some shape or form but a large part of the cost would be borne by supply-chain creditors, employees, pension scheme members, local communities and taxpayers, who had no say in deciding how BHS was run.BHS may eventually survive in some shape or form but a large part of the cost would be borne by supply-chain creditors, employees, pension scheme members, local communities and taxpayers, who had no say in deciding how BHS was run.
Related: Sir Philip Green must sort out the BHS pension mess
This case should trigger a much needed debate about the control and direction of major companies. They should not be treated entirely as private enterprises, given the far-reaching public impact of their conduct.This case should trigger a much needed debate about the control and direction of major companies. They should not be treated entirely as private enterprises, given the far-reaching public impact of their conduct.
UK company law needs to be modernised. Companies are not the private property of shareholders. Rather they should be seen as public institutions that help to advance common interests, and create and distribute wealth. Directors should be seen as trustees of stakeholders rather than as agents of shareholders advancing sectional interests. The overriding message from Section 172(1) of the Companies Act 2006 is that companies ought to be run primarily for the benefit of shareholders. This encourages practices that might enrich shareholders while potentially impoverishing and disenfranchising employees and other stakeholders.UK company law needs to be modernised. Companies are not the private property of shareholders. Rather they should be seen as public institutions that help to advance common interests, and create and distribute wealth. Directors should be seen as trustees of stakeholders rather than as agents of shareholders advancing sectional interests. The overriding message from Section 172(1) of the Companies Act 2006 is that companies ought to be run primarily for the benefit of shareholders. This encourages practices that might enrich shareholders while potentially impoverishing and disenfranchising employees and other stakeholders.
The current model of corporate governance needs to be swept away and replaced by stakeholder representation on the boards of major companies. Calls for a rethink on corporate governance have already come from a parliamentary committee. The 2013 report of the UK Parliamentary Commission on Banking Standards urged the government “to remove shareholder primacy in respect of banks”. The government, predictably, failed to heed that call, under pressure from the corporate lobby. One can only hope that the Labour party, indignant at the plight of 11,000 BHS employees, will now push the pace for a meaningful rethink.The current model of corporate governance needs to be swept away and replaced by stakeholder representation on the boards of major companies. Calls for a rethink on corporate governance have already come from a parliamentary committee. The 2013 report of the UK Parliamentary Commission on Banking Standards urged the government “to remove shareholder primacy in respect of banks”. The government, predictably, failed to heed that call, under pressure from the corporate lobby. One can only hope that the Labour party, indignant at the plight of 11,000 BHS employees, will now push the pace for a meaningful rethink.