Sports Direct and Corporate Governance
Hugh Willmott, Professor of Management at Cass Business School looks at Sports Direct and how the company's corporate governance model has put the retailer at risk.
Last week, Sports Direct lost 11% of its stock market value on Thursday, resulting in £400m being wiped off its market value. That was not just bad news for Mike Ashley, the company’s billionaire owner who lost about £237m. The Guardian investigation revealed how Sports Direct conductslengthy and rigorous searches of employees and also imposes harsh penalties for comparatively minor misdemeanours, such as wearing one of the 802 clothing brands Sports Direct bans from the workplace. These offences can lead to dismissal and non-renewal of probationary contracts. 80% of staff in Shirebrook, Derbyshire are on zero hours contracts. The searches and related practices contribute to staff being paid an effective rate of about £6.50 an hour against the statutory rate of £6.70.
What, then, of the responses to the Guardian’s revelations? A Transline spokesperson said, predictably enough, that the practices at Sports Direct were simple standard procedure, are constantly under review, and are “conducted in accordance with employment contracts and are completed as quickly as possible.” Likewise, a Sports Direct spokesperson said that casual workers were an integral component of the workforce but that this was not a problem, because “all have contracted hours with the agencies.” and that “In retail, casual workers find the flexibility offered by these arrangements very useful.”
What these responses fail to address is the business model at Sports Direct. The model which is driven by immediate profit-seeking to maintain the share price is not a “one-off” or particularly exceptional. A leading Sports Direct shareholder, who did not want to be named, is reported to have said: “Sadly we have come to expect this sort of problem at the company.” Indeed. So why have such leading but conspicuously ‘unnamed’ shareholders not taken up the ‘stewardship role’ that is emphatically asked of them by the UK Corporate Governance Code and the Stewardship Code? Why do investors only become restless when the stench of malpractices, such as those emitted by Sports Direct, becomes public?
One answer is that the use of oppressive measures – such as extensive internal security measures and surveillance, casualization of labour, reduction of workplace democracy, consistent downward pressure on wages, emptying of contract protections, extensive metric control, the flouting of labour regulations and the routine exploitation of any loophole available are the direct result of a very narrowly conceived notion of corporate governance. The result is that “FTSE 100 firms earn millions of pounds a year at the expense of some of the poorest workers in the UK.” The regressive employment relations and working conditions at Sports Direct form an integral part of a corporate governance model in which quarterly results, shareholder interests, and lining the pockets of the executive managers and board members is made possible by primitive and demeaning employment relations, even in companies that have the resources to adopt progressive corporate governance practices.
A business model based upon short-term shareholder value maximization has become widely accepted. This model has placed many millions of pounds into the pockets of Mike Ashley and the Sports Direct shareholders by appropriating the wages of its employees. Simon Walker, speaking for the IoD, acknowledges that such practices are a ‘scar on British business’ but claims that “Sports Direct is categorically not a representative of British business”. Such condemnations are welcome, but they ring rather hollow. As long as investors continue to support companies that apply a narrow corporate governance model that distributes rewards so unevenly, most firms are obliged to contempate the adoption of the same kinds of practices exposed by the Guardian’s investigation of Sports Direct.
If major parties in this debate, such as the IoD and institutional shareholders react to uneven distributions and oppressive employment practices only when they are publicly embarrassed or when it directly hurts their wallets, their protestations will have little credibility and will fail to restore public trust in business. As long as the narrowing and degradation of corporate governance theory and practice over the past forty years is not openly acknowledged and directly addressed, well-meaning pleas for reform, or calls for HRMC to investigate “allegations of non-payment of the national minimum wage”, will make no significant difference as they simply invite the placing of sticking plasters over a running wound.
To restore the trust and respect of taxpayers, consumers, and employees, a reform of corporate governance theory and practice is needed. It must ensure that the claims of the stakeholders who create the assets and reputation of companies are taken seriously. Had Mike Ashley given a moment’s thought to who made him his millions, he might today be many millions better off, as well as being respected rather than castigated.