You might think the £423m Philip Green made from British Home Stores, which is now under administration, is a one off. Unfortunately, it is not. It is just one of the outcomes of our shareholder value-driven economy that is backed by business “common sense” and required by company law.
Let me explain. Company law requires directors to act in the interests of shareholders – it doesn’t require directors to preserve the company for the benefit of employees, BHS or otherwise. In other words, the law requires Green as a director to act in the interests of himself and his wife, as two of the major shareholders.
But there are legal limits to what shareholders can claim. The law is clear that while shareholders own a right to revenue they don’t own the company’s assets – so in law they are not owners. And there are rules about paying dividends – the sum of money paid regularly by a company to its shareholders – from company assets. There are also rules about what counts as a “realised profit” for the purposes of distribution. But there are ways around this.
How to make shareholder value
The first step is to avoid the scrutiny applied to public companies by becoming a private company. After Green bought the shares in BHS plc from Storehouse plc in May 2000, one of his first acts as director was to re-register it as a private limited company. A 75% shareholder vote is all that is required to do this – which was easy enough given the Greens’ shareholdings.
Then there is a finessing around what counts as a “distributable profit” – in law, this is accumulated realised profit minus accumulated realised losses. But in practice it is fuzzier.
With BHS it went something like this. BHS shares cost Green £200m in 2000, which was considerably less than the net assets of £388,086,000 shown in its accounts up to March 1999. However BHS profits had been patchy and the company had an image problem so Green acquired it at a bargain price. This bargain for the buyer is called “negative goodwill” and is shown as an asset on the company balance sheet – although it can also be shown as profit on the profit-and-loss account.
Negative goodwill enhanced BHS’s profit by more than £103m, and to further boost short-term profits, Green sold BHS property worth £106m to Carmen Properties – whose shares were owned by Tina Green. These were then leased back to BHS. These profits were cashed in as dividends: £166,535,000 in 2002 and £256,000,000 in 2004. As a result, little money was used for the business or for pensions and the company was loaded with debt.
By 2004, BHS debts totalled £373,870,000 and net assets were just £5,358,000. For the remaining years of its existence, BHS languished in debt. No more dividends were declared for the Green family but they were repaid a £28,975,000 bond and their companies charged BHS an estimated £124,000,000 in rents.
Huge dividends were also declared in other parts of Green’s retail empire. Green purchased the shares in Arcadia Group, which owns Topshop, through a Jersey-based company, Taveta, for £866,395,000 – a sum which was mostly borrowed from HBOS. Green (as director) later transferred the shares to a newly formed company, Taveta Investments, for shares worth £2.3 billion, effectively revaluing the Arcadia shares – even though Taveta Investments was ultimately wholly owned by Taveta.
Taveta Investments then declared a dividend of £1.3 billion for its shareholders in 2005 – which ultimately went to the Greens as the shareholders of the parent company. By using Taveta Investments, Arcadia’s shares could then be revalued and owned by another company so that the increased value could be in some sense “realised” and qualify as dividends.
The revaluation obviously did not produce extra actual cash. But it did allow accountants PwC to approve the dividends, even though they were funded by loans. Green described it as “a technical move … approved by the courts, the Inland Revenue, our auditors Price Waterhouse Coopers, our lawyers Allen & Overy and our tax advisers, Deloitte”.
Squaring morality and the law
So was selling company assets and taking out loans to pay dividends wrong? While common sense screams yes – the law is not as clear and there is no suggestion that the Greens did anything illegal.
Private companies have much more freedom to transfer value to shareholders and need to disclose very little. Public companies that re-register as private companies are treated like small family concerns even where the business and the workforce are unchanged. In BHS’s case, the sale of assets and the taking of loans to fund dividends were a fatal drain on a business that employed more than 11,000 people.
On the other hand, negative goodwill does account for a bargain and a value for the company. The accounts were audited and they were signed off. Similarly, Arcadia’s shares had been revalued by a well-regarded firm – the accounts were upfront about these transactions and they were audited and signed off. And the directors successfully delivered returns for shareholders. Of course, they were the shareholders but that’s usual in private companies.
Green might have pushed the envelope a little – and how much he did will be key to establishing any possible liabilities or disqualification as a company director. However, what Green did for himself, company directors are doing for other shareholders all the time. Their remuneration and employability depends upon it. The pursuit of shareholder value destroys jobs, communities, innovation, investment and the long-term health of the economy, but as long it is a legal imperative, Green’s behaviour is just business as usual.