Critically appraise the corporate governance, risk management and internal control weaknesses, which contributed to the failing of British Home Stores in 2016.

Introduction

The need for corporate governance began with the first limited company in 1856, which spilt the roles of ownership and control. A risk of financial irregularities arose from the separation of ownership and control because of threats introduced by dishonest or incompetent managers. (Stimpson and Taylor, 2013, p. 104) Because of this, there was a demand for a system which organisations could be directed and controlled on behalf of the stakeholders and shareholders. (Cadbury, 1992) Cadbury first defined corporate governance in the UK to create an emphasis on the relationship between managers and shareholders and create a system, which would manage an organisation in the best interests of shareholders in order for the organisation to reach its objectives. (Stimpson and Taylor, 2013, p. 104) The governance of an organisation is the responsibility of the board of directors who are appointed by shareholders. (Stimpson and Taylor, 2013, p.105)

Sir Philip Green bought British Home Stores (BHS), a company established since 1928, in 2000 for £200m. (Sky News, 2016) This aim of this essay is to assess the corporate governance issues and internal control weaknesses of BHS, whilst owned by Sir Phillip Green until March 2015 when he sold it to Dominic Chappell, a thrice bankruptee, for £1. (Rayner, 2016) By April 2016, just 13 months after the questionable sale to Dominic Chappell (Retail Acquisitions), BHS had collapsed in administration which left 11,000 employees facing redundancy. (Armstrong, 2016) At the time of the collapse, BHS had a £571 black hole in two of its pension schemes leaving 20,000 of its pensioners facing lower benefits. (Sky News, 2016) Poor corporate governance and internal control weaknesses were at the heart of the demise of BHS which will be discussed throughout this essay.

Objectives

• To critically analyse and explain the internal control and risk failings that led to the collapse of BHS.
• To critically appraise the corporate Governance Issues that led to the collapse of BHS and their future implications.
• To critically analyse the social and ethical issues that led to the collapse of BHS and their corporate social responsibility and its future implications
• To briefly discuss forensic accounting opportunities which could have been performed at the time of the collapse of BHS.

Corporate Governance issues and Future Implications

Stimpson and Taylor (2013, p.105) state that good governance of company ‘must act in the best interests of its stakeholders.’ However, throughout Sir Phillip Green’s reign of the company from 2000 to 2015, this was not the case. When Green bought the company in 2000 it had a £5m surplus in their pension fund, however by the time the company was sold in 2015 to Dominic Chappell this had dramatically changed to a £571 deficit. (Sky News, 2016) Pension regulators had repeatedly requested for the contribution to the pension scheme to be increased, however Arcadia’s (Parent company of BHS) Chief Operating Officer refused to increase contribution beyond £6.5m. (Armstrong, 2016) Other proposals were discussed with Green by Pension Regulators to rescue the pension fund black hole, for example in 2014, Project Thor, which was a £110m rescue scheme considered to help with the pension deficit, was suspended after Green decided the scheme was too expensive. Project Thor was created to ensure that BHS’s 20,000 pensioners would have had a better outcome in terms of pension benefits. (Armstrong, 2016)  According to the UK Corporate Governance Code (2018), in order for a company to be successful, sustainable and survive long term there must be a relationship between stakeholders and directors, which is based on respect, trust and mutual benefit. However, Green did not act in the best interests of 20,000 of stakeholders when Project Thor discussions was suspended.

Furthermore, Sir Adrian Cadbury (1992) identified the underpinned reasons for why several organisations have collapsed (Stimpson and Taylor, 2013), including the collapse of Carillion, in 2018. (Thomas, 2018) In the case of Carillion, which was a construction company employing 43,000 people globally, collapsed with a ‘£1.5 billion debt pile’. (Thomas, 2016) The collapse of Carillion was blamed on recklessness and greed, as they took on too many risky contracts, which turned out to be unprofitable. (Thomas, 2016) As well as this, Carillion were accounting for revenues early and accounting for costs late, which provided an unclear picture of their financial position. (Burgess, 2018) Stimpson and Taylor (2013) identified ‘unreliable financial reporting’ as one of the reasons which underpinned the collapse of organisations. In addition to, companies being run in the interests of executive directors, and not shareholders, as well as awarding themselves high remuneration packages. According to an article by Financial Times (2016), Carillion were signing off on ‘hefty pay packages and bonuses’ even though they had not met key performance targets. Referring to the collapse of BHS, Green declared £423 million in dividends between 2002 and 2004 most of which were given to Green and BHS parent company, Arcadia, which is owned by Greens family. (Martin, 2016) It is against the UK corporate code of governance (2018) for any director to be in a position where they are involved in deciding their own remuneration package. (Stimpson and Taylor, 2013)

Moreover, Cadbury’s corporate governance report (1992) explains a code of ‘best practice’ for companies using four key principles of  transparency, accountability, probity and equity (T.A.P.E), these key principles combined have become a ‘benchmark for good corporate governance’. (Stimpson and Taylor, 2013, p.109)