British Home Store Scandal

British Home Store Scandal

Introduction

In the corporate world, financial time scandals are said to be as old as the financial industries themselves. In 2018, the most popular corporate downfall was as a result of auditing problems, which has placed the accounting issue firmly in attention. For example, according to Jensen (1993), the failure of British Home Stores and other well-known corporations have highlighted the problems that are now under thorough investigation in the form of market authority’s study and market competition. The paper focuses on the downfall of the BHS in 2018. It will reveal what happened in the scandal, governance issues that led to failure, and also how the corporate governance mechanism could prevent such a scandal in the future.

What Happened Around the Scandal?

The British Home Store is a department store chain collapsed as a result of corporate management failure, and an inability to drive further revenue in competing with other departmental stores. The BHS (departmental store) collapsed after 88 years of history. Primarily, the BHS was selling clothing and household items. Later, the BHS extended to groceries, electronics, and cosmetics products. In 2000, a British businessman (Sir Philip Green) acquired the BHS, where he runs it for fourteen years. Later, the company experienced difficulties in raising its profits margin (Hudson 2016). In 2015, Sir Philip Green sold the BHS for a nominal £1 to Dominic Chappell’s RAL. At the time of its sale, the company had debt worth £1.3 billion and pension liabilities worth £571 million (Sikka, 2018). It means that the value of its liabilities was more than the cost of its financial assets. More than 11000 people were put at risk of losing their jobs, and more than 19000 pensions were left unpaid. Sir Philip said that it was not his fault for the collapse of the BHS.

According to reports filed at Companies House in 2013, the British Home Store made a loss worthy of £70 million per year. The new management claimed that the collapse of the BHS was a result of poor trading, and it was not able to raise its capital from the existing financial assets. Furthermore, the current boss, Dominic Chappell, said that they were unable to turnaround BHS fortunes, and therefore no one should be blamed for its collapse.

Leadership issues that Led to the BHS Failure.

Deficits are common in companies and banks, especially when the interest rate decreases consciously due to economic crises. In the BHS case, the sponsoring business had gone in the bust, and it could not accumulate more money to reduce the deficits. Sir Philip, a BHS 15years boss,  boosted BHS’s profitability in the short-term while, in the end, undermined its ability to survive. In the early years, the BHS profit improvement appeared to have been achieved through supplier’s compression and also cutting off the costs of good sold. The department’s turnover remained constant through Sir Philip  Green’s era and eventually decreased as the years went by. The BHS’s growth, however, remained constant.

The government Pension Regulator did not comment on it but commented on the contribution by the BHS in the economy. On the paper, Sir Philip sold a pension worthy of £200 million £1, which was a massive loss to the BHS. There was a claim that, while Sir Philip’s wife Trina was receiving more than £400 million in dividends from the company, there was no payment of the UK income tax on those dividends. Later in 2012, BHS boss (Sir Philip), together with pension fund trustees, decided to close the pension find deficit for more than 23years. So many people claimed that there was no enough reason for that decision. Some said that letting the BHS pension deficit become so bloated is a mistake by the pension Regulator.

House of Commons committee reported that Retail Acquisition could not access a lending lifetime from Gordon Brothers as Sir Philip denied to give up on the terms of the loan charges he had over the BHS’s assets.  Consequently, the Retail Acquisition sealed the firm’s fate and prompted the fateful call for the administrators, but Sir Philip accused them of running out of time and money.

Capitalism

Despite that, the collapse of the BHS cost 11000 jobs loss, and more than 20,000 pensions left at risk, Sir Philip, Chappell, and their board of directors got rich off the back of BHS. According to the house of commons committee, this is the unacceptable face of capitalism. According to Safari and Gelter (2019), the moral responsibilities on the pension schemes and poor corporate governance was another factor that contributed to the collapse of the BHS. For example, Sir Philip’s rush to sell the British Home store was abundant evidence of greed and ineffective corporate governance. For the progress of the deal, there was a provision of incentives to the advisers. They also avoided the government pension regulatory concerns. The Committees published the reports by Olswang (Due Diligence report), which show their advice against the purchase and express concern that RAL were reliant on Sir Philip making proper his unwritten assurances. The incident of astonishing wealth followed by retail demise is evidence during the early year of Sir Philip’s leadership. However, he reduced the costs, sold financial assets, and paid dividends offshore in favor of his wife. Sir Philip also failed to invest enough in stores to beat the prevailing completion in the street. As a result, the BHS experienced deficit, which caused financial crises in the department.

How to prevent a future financial scandal?

In

avoiding such kind of scandal in the future, effective corporate governance is required. Effective corporate governance consists of an internal and external mechanism.

Internal mechanism

According to Florackis (2005), the internal mechanism keeps track of the progression of all activities of any company or organization. It also takes corrective measures to incase an organization goes off track. In the case of BHS, the internal mechanism could monitor the performance of the department. Even if there were cost-cutting cases to increase profit,  this mechanism would make an effort to ensure the growth increases too. These internal mechanisms include the organization of the management board into the levels of accountability. It also provides segregation of control and independent internal audits.

External mechanism

The external mechanism is a mechanism imposed by outside stakeholders on the company in the form of union contracts and regulatory guidelines (Huyghebeart and Wang 2012). It serves the objectives of entities like trade unions, government, and financial institutions. Firms are encouraged to adopt an independent external audit of a corporate financial statement. The audit serves all stakeholders (both internal and external stakeholders) at the same time. An audited financial statement, together with the report from the auditor, helps employees, stakeholders, and investors to identify the corporation’s economic performance.  In the case of the BHS, the external mechanism could enhance Retail Acquisition access a lending lifetime from Gordon Brothers as Sir Philip could not deny to give up on the terms of the loan charges he had over the BHS’s assets.  Besides, the Retail Acquisition could not seal the firm’s fate to prompted the fateful call for the administrators.

Efforts by the government.

The United Kingdom government has proposed to combine policies, control, and guidelines that will help in driving the organizations toward their objectives. It has a set of reforms that help in strengthening the voice of employees. Although the changes by the government are moral, it should also provide a measure for employees to claim their rights. Failure to which those measures are likely to have little effect in practice. However, to safeguard the interest of the workers of any company or any corporation, directive claims should be broadened. Besides, the measures for dealing with derivative claims should be extended to the representatives of the employees.

Additionally, the government must ensure a smooth running of the pension regulator so that the company owners will not sell their firms and still force taxpayers to stump up for the pension bill. The company trustees should ensure that all employers discuss the employer’s covenant, and the member benefits security. As a result, it will regulate the number of inconveniences brought by business sale or takeover.

Conclusion

The collapse of the British Home store has created so many losses. Over 11000 jobs were lost, and around 20000 pensioners faced a significant reduction in their pensions with £577 million pension deficit. People’s actions in the BHS scandal have left a scar on the name of the business. In 2015, the sale of the British Home Store was crucial to its eventual collapse a year later. The sale and purchase of BHS could not go ahead if it were not led by the twice-bankrupt chaser who had no idea about the retail. Sir Philip Green pushes the sale of BHS to go through without proper consultation from his weak board of directors. It shows complete poor corporate governance. While thousands of employees were fearing job loss and 20000 pensioners worrying about their future entitlements, Sir. Philip, together with his directors and advisers, Chappell and his RAL directors, enriched themselves off the back of the British Home Store.  To avoid such a saga in the future, the UK government has a set of reforms concerning corporate governance to strengthen the voice of the employees. It has also proposed to combine policies, control, and guidelines that will help in driving the organizations toward their objectives.