Bosses like Philip Green plunder companies and make workers bear the cost
Today’s report on the collapse of BHS, written by the House of Commons Work and Pensions and Business, Innovation and Skills Committees, is a damning indictment of everyone involved with the company.
BHS directors and shareholders enriched themselves at the expense of employees who have lost their jobs, and also stand to lose a substantial part of their pension entitlements. As always, taxpayers will pick-up the tab.
The fiction of UK company law is that somehow shareholders can hold directors to account. In the case of BHS, shareholders and directors were the same people.
They extracted cash not only through high dividends but also through a series of intragroup transactions, carried out with companies registered in opaque tax havens of Jersey and the British Virgin Islands, all under the control of the Green family.
BHS’s £125,000-a-year non-executive chairman Lord Grabiner was supposed to provide an independent check on the main board, but that too failed.
The report notes that Lord Grabiner could not even explain the reasons behind the structure of the companies associated with BHS, or knowledge of some of key transactions.
The pension scheme trustees also lacked the requisite independence, because many were also directors of many of the companies controlled by the Green family, though some had pressed Sir Philip Green and his fellow directors to eliminate the pension scheme deficit. They were unsuccessful.
BHS was technically insolvent for many years and had made substantial losses. Its ultimate parent company Taveta Investments Limited promised financial support in writing, but it was not forthcoming. Despite this, BHS auditors failed to raise any red flags.
For a number of years, BHS had reported losses and large deficiencies in its pension scheme but this did not force the Pension Regulator to act.
There is a pressing need for urgent reforms, because many other BHS’s are in the making.
In June 2016, a report published by investment advisors AJ Bell showed that 54 of the FTSE100 companies with a pension scheme deficit paid £48bn in dividends in 2014 and in 2015 and are likely to exceed that in 2016.
In 2014, the same companies had £52bn deficit on their pension schemes. The dividends paid by 35 of the FTSE100 companies were bigger than their pension scheme deficits.
In 2014, Royal Dutch Shell had a pension scheme deficit of £6.7 billion, but paid out dividends of £7.5 billion and £8 billion in 2014 and 2015.
AstraZeneca had a deficit of £1.87 billion in 2014, but paid dividend of £2.2 billion and £2.4 billion in 2014 and 2015. British American Tobacco had a deficit of £628 million, but paid £2.8 billion and £2.9 billion as dividends in 2014 and 2015.
Vodafone had a deficit of £549 million but paid dividends of £3 billion and £3.04 billion for 2014 and 2015. Directors personally benefit from neglect of pension obligations because they hold shares and share options. Higher dividends increase the value of share options.
Companies are clearly prioritising executive remuneration and shareholder returns above the interests of employees. One might look to the government to compel corporations to honour their pension obligations, but that is not so. Tata Steel is trying to sell its UK business.
Potential buyers are concerned about the £700 million pension scheme deficit. So the government is proposing to introduce legislation to dilute pension scheme members’ rights which will hit thousands of past and present employees.
This is an invitation to directors to plunder companies and leave employees to bear the cost.
So what should be done?
1. We urgently need mechanisms to ensure that directors and shareholders do not treat companies as their back-pockets. Their power to extract cash must be checked and someone must be able to say No.
The best way of doing that is though a two-tier board structure. Under this, one-tier, the Executive Board manages the business. The second tier, the Supervisory Board, entirely elected by stakeholders, including employees, supervises the Executive Board.
Its duties would include approval of major financial transactions, dividends, loans, executive remuneration and corporate strategy.
2. Directors have to pay various creditors in order to carry on the business. The same should apply to the obligations to employees. Companies should not be permitted to pay dividends until deficiencies on pension scheme have been made good.
3. There must be a complete separation of pension trustees from the company boards.
4. The pension scheme trustees must have the right to demand a separate independent audit of the company accounts so that they have a better idea of the risks associated with the company’s ability to address the pension scheme deficits.
5. All companies with deficits on their pension scheme should be required to submit a plan to the Pension Regulator explaining how they will eliminate the deficits.
The Regulator will need to approve such plans. The documents should be publicly filed so that all present and past pension scheme members become aware of the promises and risks.
6. BHS is in liquidation and its pension scheme stands as an unsecured creditor, i.e. it will only receive something after the secured creditors (e.g. banks) have been paid in full.
The reality is that the pension scheme will not receive anything. So the law needs to be changed to ensure that the pension scheme is treated as a preferential creditor, i.e. paid before any creditor.
Prem Sikka is Professor of Accounting at Essex Business School’s Centre for Global Accountability
See: Brexit demands a new economic vision, not Osborne’s corporate tax cuts
To reach hundreds of thousands of new readers and to make the biggest impact we can in the next general election, we need to grow our donor base substantially.
That's why in 2024, we are seeking to generate 150 additional regular donors to support Left Foot Forward's work.
We still need another 124 people to donate to hit the target. You can help. Donate today.
7 Responses to “BHS scandal: Six urgent reforms to save BHS clones in the making”
Prem Sikka
@Peter Crowley: What is the role of the remuneration committee and why is that so? Whatever BHS, banks and others had did not work because the non-execs, often directors’ buddies, sip from the same trough. Employees on company boards is the only effective answer and those elected representatives would surely have objected to cash extraction through dubious transactions.
If company directors are also trustees that encourages conflict of interests, as is evident from the BHS report.
The Pension Regulator does not have any powers to prevent payment of inappropriate dividends though in principle, under the moral hazard rules, can go back six years. Besides, most of the cash was sucked out of BHS through intragroup transactions (see the link to my earlier article). When did BHS problems start? More than six years ago – 2003, 2005, 2009? If so, that may limit the regulator’s power to clawback anything. The BHS report notes that the recovery plan offered by Green was flawed. This plan was not a public document and neither was the Regulator’s approval or otherwise. Green sold the company with the pension scheme deficit and thus did not have to deliver or implement any revised plan. Further details of this are in the testimony given by the Pensions Regulator.
David Crowther
One simple change would make a difference. if companies were not allowed to pay any dividends until pension fund deficits had been eliminated then this would solve this problem. At the moment those dividends are effectively theft from pensions