Firm lacks sufficient checks and balances to scrutinise leaders
In an unusual move, the Institute of Directors (IoD) has singled out a specific company for having a ‘dysfunctional’ board, adding the business has insufficient checks to curb the power of its founder and majority share-owner.
The concerns centre on Sports Direct and its founder and executive director Mike Ashley, and follow recent revelations at the Scottish affairs select committee about senior level governance. At the evidence session, chairman Keith Hellawell admitted that he and most of the board, including non executive directors, were unaware of plans to put part of the group into administration until the day before it happened.
However, the firm’s chief executive Dave Forsey had been in talks with eventual administrator, Duff & Phelps, for nearly three months before around 200 workers at a Scottish warehouse lost their jobs in January.
Eighty of the 200 employees made redundant were compensated by the taxpayer, which paid the bill via the Insolvency Service. However, the remaining staff were agency workers and therefore were not entitled to redundancy pay.
Oliver Parry, senior adviser on corporate governance at the IoD, said: “The board needs to think about how it becomes more transparent and, from shareholders’ perspective, how it scrutinises decisions.”
He added: “This is not just reputational damage, but there are moral and ethical issues here. About 200 workers were laid off and the board was not aware until the day before. For a FTSE 100 firm that’s not acceptable. Boards need to hold management to account.”
Although it is unusual for the IoD to highlight specific firms this way, this is not the first time Sports Direct has come under scrutiny from the institute.
Last year it criticised the lack of control the board exercised in curbing Ashley’s controversial share bonus scheme. Parry called for Sports Direct's shareholders to use the company's AGM last September to "express their concerns" and consider a change of leadership.
Currently, Ashley owns 55 per cent of the retailer's shares, meaning that although the firm is publically traded, he is the de-facto controller of the business.
Last year the business also came under fire for employing around 75 per cent of its 19,000 staff on zero hours contracts.
According to Manifest, the shareholder voting research group, the bonus row proved board directors were not challenging management sufficiently.
The research group's business development manager Paul Hewitt said: “The question here is whether the internal control mechanisms are such that the chairman was aware of what was going on. If I were a shareholder in this company I would be concerned to hear a senior non-executive director saying he didn’t know something or that it is was not their job.”