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Trust or bust

22 August 2016 by Simon Osborne

Trust or bust - read more

Businesses need to wake up and smell the coffee, says Simon Osborne

Trust in business is yet again under the microscope. The UK government looks set to launch investigations into the corporate governance of private companies and their pension funds following the collapse of retailer BHS, which has left 11,000 workers facing the dole queue and 22,000 pensions in doubt.

With Prime Minister Theresa May promising to crack down on greedy businesses and a government spokesman confirming that the MPs’ report into BHS highlighted the need ‘to tackle corporate irresponsibility and reform capitalism’, surely it is time for businesses to wake up and smell the coffee.

David Gill, National Officer of the shopworkers’ union Usdaw, said: ‘The consequences of actions by a handful of people in the running of BHS are now being felt by the 11,000 hard-working, dedicated and loyal staff.’ Therein lies the rub. Businesses do not exist in a vacuum. When things go wrong, the ripples are felt further afield than the boardroom.

Imagine what would happen if Virgin Group, a family-owned business employing 71,000 people in 35 countries, went bust. It might be good news for Virgin’s competitors, but $24 billion in annual revenue would be wiped off the world’s markets, something that would cause a sizeable shock. Good governance is just as important in private companies as in listed companies; and private companies are not absolved from responsibilities to their stakeholders.

Iain Wright, Chair of the Business Select Committee, was scathing in his condemnation of the BHS board: ‘There was a complete failure of corporate governance, with Philip bulldozing the sale through, without proper oversight or challenge from his weak and impotent board.’ Allowing a twice-bankrupt ex-racing driver with no retail experience to run BHS was the equivalent of handing the keys of a sweet shop to a toddler.

Mr. Wright should, perhaps, have also drawn attention to the failure of the board to ensure that appropriate steps were being taken to fund the company’s pension liabilities, rather than paying dividends to the Green family. Although the statutory duty of directors set out in s172 of the Companies Act 2006 is to ‘act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole’ a director is also required to ‘have regard (amongst other matters) to … the interests of the company’s employees … [and] the impact of the company’s operations on the community and the environment.’

People deserve to know when they get up for work in the morning that there will not be foreclosure signs when they get there. Businesses require investment and proper management, not to be treated as personal cash points.

It is little wonder that the public’s trust in business has been severely dented recently. After the banking crisis and the resulting recession that forced 100-year old institutions like Woolworths to close, people no longer trust that their livelihoods will be safe if they choose to work for a stalwart of the high street. Add to this the workhouse conditions that have been exposed at Sports Direct and we should not be astonished that people’s faith in business has been shaken.

Private companies that employ a sizeable proportion of the population are not playthings. If their owners do not have the moral fibre to consider more than their own interests, the people who work for them or have pensions with them need to be protected, otherwise we will be back to the industrial age. It has been suggested that regulators should have the right to block deals that disadvantage pensioners. I believe they certainly should, but both the board and pension scheme trustees need to step up to the plate too. Clearly the BHS board and pension scheme trustees should have done more.

It will be interesting to see what proposals the UK Government comes up with, but businesses would do well to get their houses in order before legislation is foisted upon them. People are voting with their feet and scandals like that witnessed at Sports Direct do have an impact on the bottom line.

Our policy team is putting together its thoughts on the future of governance, some of which will be sent to the Prime Minister. Done well, governance can help companies to engender trust. Without trust, businesses are more likely to go bust.

Simon Osborne is CEO of ICSA: The Governance Institute

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