In response to the Government’s consultation on corporate reform, the Work and Pensions Committee says the corporate governance and reporting requirements for public listed companies should be extended to private companies that have an important social impact: large private companies and those with over 5,000 defined benefit pension scheme members.
It also says company directors should have a new duty to pension fund trustees, as the representatives of pension scheme members, in addition to those stakeholders they are already obliged to have regard to. Allied to the more substantial recommendations on pension law and regulation in its December 2016 Report, the Committee concluded these changes would reduce the chance of another company collapsing in the manner of BHS.
Report background: the collapse of BHS
On 28 April last year the Committee launched its joint inquiry into the collapse of BHS and the origins of its huge pension scheme deficit. BHS was a private company but the effects of its collapse spanned widely: not least to its thousands of employees and pensioners.
The three month inquiry examined corporate governance in Sir Philip Green’s companies, which are privately held and ultimately owned offshore by Lady Green. It found a near-complete absence of the constructive challenge that is the hallmark of good corporate governance. Sir Philip, a dominant personality, ran his companies as a personal empire with boards taking decisions with reference to a shared understanding of his wishes rather than the interests of each individual company.
An extraordinary tale unfolded in which the main players took lavish rewards at the expense of the employees and pensioners of the company. Inter-company loans and property deals, related-party transactions and the hurried disposal of BHS to a wholly unsuitable buyer all proceeded with woefully inadequate checks and balances. The poor corporate governance in Sir Philip’s companies was epitomised by the complacent performance of Lord Grabiner, a director of several of the Green empire subsidiaries.
BHS inquiry key findings
The key themes that emerged included:
- lamentable corporate governance in what was a large private company
- a paucity of publicly available information about the state of the company and its pension fund
- the absence of a voice in the running of the company for those who relied on its success for the security of their pension saving.
Holding company directors to account
- Public listed companies are required to comply with the Financial Reporting Council Corporate Governance Code and its reporting requirements or publicly explain why they are not. This is a proportionate approach for companies of social importance. Transparency about governance arrangements, performance and risk can better equip stakeholders to hold company directors to account. Wider awareness of the state of the BHS pension schemes may have pressured Sir Philip Green into taking more reparative action, sooner.
Large companies should be subject to FRC Corporate Governance Code
- Private companies that are large, as defined by Government, or have over 5,000 defined benefit pension scheme members, should be made subject to the FRC Corporate Governance Code on a comply or explain basis. The report includes a table of the top 30 largest private companies in the UK, with many household names like John Lewis, Clarks, Matalan, Virgin Atlantic, River Island, Pret a Manger – and the Arcadia Group - that would fall under the parameters of this recommendation. Many well-governed large private companies already follow best practice on transparency.
Include pension scheme trustees in section 172 of Companies Act
- Pension scheme trustees should be added to section 172(1) of the Companies Act 2006. The list of stakeholders company directors must have regard to - and report on the exercise of their duties to - does not include defined benefit pension scheme beneficiaries or the trustees who must act in their interests. Incomes of pensioners in retirement are reliant on the sustained success of the sponsoring company but they are at particular risk of being neglected in corporate decision making as no one makes the case for former employees. The inclusion of pension scheme trustees in section 172 might increase the chances both that directors would take into account the interests of current and future pensioners in carrying out their duties, and that those who have failed to do so will be held accountable in the courts.
Publication of Insolvency Service investigation reports
Publication of correspondence with Arcadia
The Committee publishes with the report a series of correspondence with Ian Grabiner, Arcadia Chief Executive, and the Arcadia Group pension trust, charting its efforts to get information about the group’s pension schemes into the public domain. Arcadia’s pension schemes are over £200 million in deficit, but all parties have refused to provide information regarding the 2013 valuation and recovery plan, or the levels of employer contributions.
Frank Field MP, Chair of the Committee, said:
"For a company with a big social and economic footprint like BHS it is simply not enough to be accountable to shareholders – particularly when one shareholder owns most of the stock. The sorry tale of its sale and collapse, putting 11,000 people out of work and leaving a pension fund £571million in the red, with 20,000 pensioners facing an uncertain financial future, was a result of gross failures of corporate governance. Would the story have played out the same way if its directors had to be open about the financial decisions they were making for its future? The finances and leadership of a company with so many people depending on it should be open to scrutiny.
We have already expressed our grave concerns about corporate governance in the Green empire, and we know the Arcadia pension fund is also now in substantial deficit. We have been pressing Arcadia’s directors and pension trustees for detailed information on their schemes but very little is published and neither the company nor the trustees – who unlike the BHS schemes do not have an independent Chair - will tell us. Does Sir Philip not want us to know that he was being relatively generous to the Arcadia schemes while the BHS schemes floundered and the company headed inexorably for insolvency? Was he neglecting both? It can’t be right that basic information like the schedule of employer contributions and the length of the recovery plan is not in the public domain. If it goes under then levy-payers and pensioners foot the bill."