It is also a clear example of the fundamental failure of modern shareholder capitalism. This is a model that has allowed shareholders to prioritise a set of narrow interests – namely profit maximisation at any cost – rather than ensure a stable and sustainable model of business that takes into account the interest of its workers, suppliers, environment and wider society.
So what were the steps that led BHS to financial collapse – and are being repeated again and again elsewhere?
- Shareholders taking money that isn’t there
The beginning of BHS’s woes can be traced back to 2000, when Sir Philip Green bought the company for an estimated £200 million. Green has since pocketed over £586m from BHS in dividends, rental charges and interest payments.
Special scrutiny should be given to the huge £1.2 billion dividend pay-out from the holding company Taveta Investments Ltd in 2005. Of this, about £400m can be traced from BHS activity – an amount larger than the group’s profits of £250m that year.
This money was not available to be taken from company reserves and could have only ever been legal if the future profits of the business were near enough certain – now clearly not the case.
Huge questions remain around how PricewaterhouseCooper, their auditor, could legally sign-off this payment – the numbers simply don’t add up – and why more of it wasn’t reinvested into the company instead.
- Big company buy-outs, financed by debt
Recent stories have highlighted how big companies – like Boots or Manchester United Football Club – were financed by borrowing huge amounts in the company’s name.
Financing a buy-out in this way can essentially cripple a company, placing the burden of meeting high debt repayments onto the company itself, rather than the buyer.
In 2005 at BHS, in order to pay out a huge dividend, Taveta Investments Ltd was saddled with over £1bn of debt. This made a recovery of the retailer even harder: BHS needed to generate profit not just to re-structure and modernise, but also to meet debt interest payments.
This could be one of the main reasons why BHS never paid out another dividend beyond 2005.
- Passing on the protection of workers
The state of BHS’s pension fund is now one of the main concerns facing the company’s employees, past and present.
During Green’s time in charge, a pension fund in surplus of £5m was transformed into one with a black hole of £571m – something he will have to explain to MPs on the Work and Pensions Committee.
The near 20,000 members of BHS’s two retirement schemes will now likely enter the Pension Protection Fund (PPF) – a government-backed lifeboat for failed pension schemes.
Taxpayers would only be directly paying for these pensions if the PPF ran out of money completely and needed propping up – which is unlikely – but this still effectively passes on the payment of pensions away from BHS and onto other smaller businesses. Not to mention it’ll see many workers’ entitlements cut by at least 10 per cent.
- Profit over public interest: corporate governance isn’t suitable
Company law still allows directors – who are also one of numerous shareholders – to treat companies as their own and do with them as they please. Although directors are encouraged to take other stakeholders into account, ‘employees, creditors and local communities are helpless as the law permits shareholders to extract as much cash as possible’.
It is worth considering that, in the case of BHS, if other stakeholders had been consulted, this situation could have been avoided.
Rather than the huge extraction of profits and the pilling of debt on the company, more money might have been reinvested into the business or the pension pot might have stayed healthy.
How can the government stop this happening again?
The UK government has had its say on BHS, and is investigating the pensions crisis, but unless it makes some structural changes this same thing is likely to happen elsewhere. It should:
- Limit the ability to pay dividends: stop companies from paying dividends by getting into additional debt or paying out more than their net profit or cash reserves.
- Stop conflicts of interest in financial management: by banning the financial auditors of a company from selling it consultancy. There should also be a mandatory change in auditor every five years.
- Reform the tax system: so that debt is no longer favoured, by making debt repayments deductible from tax. This should encourage other forms of investment that do not place huge repayment burdens on the company.
- Modernise UK law: so that companies are seen as entities designed to act in the interests of the communities, organisations and environment they effect, as well as their shareholders.
A buyer may well be found for BHS, and some, or even all, may be saved, but even if so it’s essential that we recognise this is part of a wider problem.