Blame and shame
UK slaps capitalism in its ‘unacceptable’ face
The post-referendum shift in how Britons view business is gathering pace. UK lawmakers on July 25 unveiled a blistering report on the collapse of BHS, a retailer that went into administration in April. It pushes UK corporate life further into interesting — and potentially painful — moral areas.
Lawmakers concluded that billionaire Philip Green, BHS’s owner since 2000, had last year rushed through the sale of a loss-making business with a 345 million pound pension deficit to an unsuitable buyer, Dominic Chappell. The ensuing implosion threatens 11,000 jobs and 20,000 current and future pension-holders. Goldman Sachs may have only advised Green on an unofficial basis but it “added lustre to an otherwise questionable process” — as did other consultants. When Theresa May inveighed against “anything goes” business culture in a speech shortly before she became the UK’s prime minister, she was presumably thinking of fiascos like BHS.
The real issue is less whether Green broke rules, but whether the affair will spawn new ones. The weakness of the non-executives that oversaw Taveta, the Green family entity that controlled BHS, has prompted politicians to wonder out loud if existing company law and corporate governance regulations are strong enough to deal with large private companies, whose transparency requirements are less exacting than those of their public peers. They are also pondering tougher regulation to stop companies with historic defined benefit pension liabilities from dumping them sales this year, according to Citi. As revenue growth slows across the luxury sector, even a giant with 72 billion euros of market capitalisation like LVMH needs to run a tighter ship. Reported revenue growth at the group’s fashion division was flat in the first quarter of 2016, down from 13 per cent in the same period last year.
Marc Jacobs, another U.S. straggler brand at LVMH, could be next in the line of fire. At rival luxury conglomerate Richemont, Alfred Dunhill and Lancel are a distraction as the Cartier owner grapples with a downturn in demand for its expensive watches and jewellery. Kering, which runs Gucci, sold lossmaking luxury footwear brand Sergio Rossi late last year to private equity firm Investindustrial. on the company-funded Protection Fund (PPF).
What might these reforms be? May has already suggested that companies have workers on their boards. Outgoing PPF chair Barbara Judge on July 3 suggested regulators should have the right to block corporate deals that might disadvantage pensioners. Disclosure requirements could be tightened. Those envisaging a post-Brexit slashing of red tape would be sorely disappointed.
In open and shut cases like BHS, tighter regulations would be welcome. But both City and business will want to know whether the assertion that business has “a moral responsibility to operate within a framework that enjoys the confidence of the nation” is just bluster, or something that May’s government enthusiastically endorses. If the latter, UK and international investors will worry about what might happen if UK politics becomes any more populist. Pension
Donna Karan’s new owner G-III already has Calvin Klein, Tommy Hilfiger and Ivanka Trump’s brand under its belt. And the group is good at selling all-American fashion labels — G-III expects full-year revenue growth in the region of 9 per cent. Donna Karan suits G-III’s links to department stores, while LVMH has spent the past decade focusing on standalone stores for its brands.
Smaller luxury groups may prove better stewards of struggling fashion houses. Mayhoola, the Qatari group which bought French label Balmain in June, snapped up troubled Valentino in 2012. Sales increased 9 per cent in the first three months of this year, and there are plans to float the Italian brand in the near future. Snaffling LVMH’s B-list brands may turn out to be a good move.