The damning parliamentary report into the demise of BHS could have far-reaching consequences for the personalities involved and for British business.
The BHS scandal has been described by MPs as the “unacceptable face of capitalism”, with Sir Philip Green accused of extracting hundreds of millions of pounds from the department store chain. Dominic Chappell, the businessman who bought BHS from Green, was described as “incompetent and self-serving” in the MPs’ report.
The fallout from the scandal could lead to a knighthood being removed, criminal proceedings and changes to how companies and pension schemes are regulated.
Around 11,000 jobs are at risk after BHS collapsed into administration, with all its 164 stores scheduled to close by the end of August.
Green controlled BHS for 15 years until March 2015, when he sold it for £1 to Chappell, a serial bankrupt with no experience of the retail industry. Green and other shareholders extracted £586m in dividends, rent and management fees during his tenure at BHS, while Chappell and his associates banked at least £17m.
Pensions
BHS has been left with a pension deficit of £571m based on the most pessimistic valuation. Green told MPs that problems facing the pension scheme, which has more than 20,000 members, is “resolvable and sortable”. He added: “We will sort it, we will find a solution.”
However, Frank Field, the chairman of the work and pensions committee, has lost patience with Green’s promises. “His family took out of BHS and Arcadia a fortune beyond the dreams of avarice, and he’s still to make good his boast of ‘fixing’ the pension fund,” he said.
The Pensions Regulator, which could force Green to pay funds into the pension scheme, met the tycoon at the end of last month. A spokesperson said: “We met with Sir Philip and his advisers at the end of June. Our discussions are ongoing and we will not be making any further comment.”
However, it is understood that a formal proposal is yet to be made to the Pensions Regulator, with Britain’s vote to leave the EU complicating matters. The prospect of Brexit has led to yields on government bonds tumbling, potentially adding £100m to the BHS pension deficit. This is because pension funds hold gilts in their investment portfolios.
If Green and the regulator cannot agree a deal the pension scheme will enter the Pension Protection Fund (PPF), with thousands of other schemes around the country footing the bill through a levy they pay into the PPF.
Sir Philip Green’s knighthood
The report by the work and pensions committee and the business, innovation and skills committee does not make a specific recommendation about the future of Green’s knighthood, but it drops hints.
Green was knighted in 2006 by Tony Blair’s government for services to the retail industry. However, the MPs found “little to support the reputation for retail business acumen for which he received his knighthood”. Field also added: “What kind of man is it who can count his fortune in billions but does not know what decent behaviour is?”
The Cabinet Office has confirmed it is reviewing Green’s knighthood, with MPs from all parties calling for the tycoon to be stripped of his title. Ultimately, it is the honours forfeiture committee that will consider the case. The committee will then make a recommendation to the prime minister, who will pass it on to the Queen.
The future of Green’s knighthood is now likely to hinge on whether he bails out the pension fund. As Field has put it, the billionaire needs to write a “very large cheque”.
Disqualification of directors
The collapse of BHS is already being investigated by the Insolvency Service, the Financial Reporting Council and the Serious Fraud Office, which will read the MPs’ report with interest.
Chappell is accused of having his “hands in the till” at BHS and enjoying lavish rewards as the company collapsed. The other directors of his consortium, Retail Acquisitions, are also accused of exploiting the retailer for their personal gain. The corporate governance of Retail Acquisitions, the owner of BHS, is described as outrageous.
This provides the grounds for the Insolvency Service to examine whether Chappell and his associates breached their duties as company directors. A spokesman for the Insolvency Service confirmed that they are examining whether there is grounds to disqualify people as company directors as part of their BHS investigation.
Directors in Green’s retail empire could also be disqualified. The MPs were particularly critical of Lord Grabiner, the chairman of Green’s holding company Taveta, whom they accused of happily providing a “veneer of establishment credibility to the group while happily disengaging from the key decisions he had a responsibility to scrutinise”. The performance of Grabiner, who earned £125,000 for his role, was also described as “deplorable” and the “apogee of weak corporate governance”.
The future of BHS
No buyer has been found for BHS or its stores, despite talks with Sports Direct and a Portuguese-backed consortium. The administrators plan to close all the company’s 164 stores by 20 August, with around 50 already having shut.
BHS still has debts of more than £1.1bn, including the pension deficit, meaning landlords, employees and suppliers will be left out of pocket. The taxpayer also faces a bill of up to £36m from lost VAT, corporation tax, and redundancy pay.
Overhaul of business regulation
Theresa May wants to reform capitalism and stamp out irresponsible corporate behaviour in the wake of the BHS scandal, according to the prime minister’s official spokeswoman.
This is an ambitious target, but company bosses and the Institute of Directors (IoD) are also keen for change. The IoD, a lobby group for business leaders, says the demise of BHS “casts a long shadow over British business”. It wants the government to look into how large privately owned companies are run and launch a full review of corporate governance in the UK. MPs on the business, innovation and skills committee will follow up their BHS investigation by exploring this topic themselves.
Britain’s pension system also needs to be reviewed. The BHS scandal has highlighted problems with existing regulations, such as the fact that a struggling company with a pension deficit can be sold without regulatory approval. Given that UK companies have a combined pension deficit of more than £900bn, according to consultancy firm Hymans Robertson, these regulations will become increasingly important.
Graham Vidler, director of external affairs at the Pensions and Lifetime Savings Association, said: “These schemes are operating in a very challenging environment and even the most supportive sponsoring employers find themselves making very difficult choices about how best to balance the interests of their scheme and the wider business.”
Criminal proceedings
The Serious Fraud Office is still to announce whether it will launch a formal investigation into BHS. However, the different parties involved in the scandal are threatening to launch proceedings against each other. Green, for example, believes he has grounds to sue Chappell and his advisers for false representation and misuse of company funds.
