Home > Is Mike Ashley right that UK governance rules are not fit for purpose?

Is Mike Ashley right that UK governance rules are not fit for purpose?

23rd March 2023


image of clothes on a clothes rail

On the face of it, there was nothing particularly unusual when Mike Ashley’s Frasers Group bought Studio Retail (SRG) out of administration in February.

After all, while Ashley is certainly one of the most colourful members of the retail community he is also one of the industry’s most acquisitive leaders and he has snapped up a variety of high street operators while expanding his department store and sports goods empire. In this case he laid out £26.8 million and in doing so saved almost 1,500 jobs after his company’s shareholding in the online specialist was wiped out.

But Ashley – whose publicly listed group includes Sports Direct, the House of Fraser department stores, Evans Cycles and the Flannels designer fashion chain – was decidedly unhappy and vocal about the process involved and decried the UK’s governance regulations as being unfit for purpose.

Frasers, which is controlled by Ashley, called on the government to urgently “increase the meaningful regulation of UK business”, claiming that the current corporate governance regime is inadequate.

In a long statement to the stock market, the company questioned the speed with which SRG went from a viable concern to administration and said: “Frasers is of the view that a UK corporate governance regime that countenances sudden and unaccountable failure of businesses, viable one week, and irredeemably broken the next, entirely without sanction or censure of those involved, is clearly unfit for purpose and in need of urgent reform.”

So why the strongly worded missive and does Ashley have a point?

Studio Retail: A governance failure?

Studio Retail sells a mix of value-driven own-brand products, from clothing and furnishings to gifts and cards, and offers shoppers an account where they can choose to spread their payments over a period of many months.

The group, formerly known as Findel, called in the administrator to its publicly listed holding company on February 24, in the process wiping out the value held by its shareholders led by Fraser Group, which had close to a 30% stake in the business.

That came after shares in the group, which had a market value of about £100 million, were suspended on February 14 when the group said a request for a £25 million loan had been turned down by its bank, HSBC.

Just two weeks before that Studio Retail had revealed a double profits warning and a hole in its working capital, announcing its anticipated adjusted pre-tax profits to £28-£30 million for the financial year to the end of March – a huge cut that came less than 10 weeks after it slashed its original forecast of £42-£45 million to £35-£40 million.

With a fully-drawn revolving credit facility of £50 million it remained “well within” its key gearing covenant of 1.75x and Studio Retail’s chief executive Paul Kendrick sought to reassure shareholders, emphasising positive performance over Christmas.

Indeed, SRG had enjoyed strong pandemic trading and its problems had largely been caused by global supply chain issues. Yet its attempts to overcome these did not work and it ended up with stock arriving too late for Christmas and instead available just as consumers typically tighten their belts after the festive season. However, its financial backers were not prepared to make fresh capital available.

Sudden collapse of Studio Retail

In making its acquisition, Frasers declared that how the situation unfolded was “another example of a business which has buried its head in the sand whilst the world around it changed. Furthermore, it is clear that the fundamentals of its business were, at best, inadequately scrutinised by its board and/or advisers to the business, or at worst, deliberately concealed as the business entered its death spiral.”

“In this particular case, short-term problems at SRG appear to have caught a previously successful business in something of a perfect storm,” says Bridgehouse director Ibi Eso. “However, Mike Ashley makes a thought-provoking point about the broader issues around financial reporting. It is crucial for any board to be transparent about its financial situation, never more so than when it is facing challenging conditions.”

Considering the more general scenario regarding company financial reporting, Ibi points out that the role of a strong company secretary and the position of non-executive directors are particularly important in ensuring that all the appropriate procedures are compliant and are being followed and that financial information available to the Board is clear, on-time and understandable by the non-executive directors.

She adds of how the company secretary should see their role: “The company secretary is there to ensure that all due processes are being carried out correctly and in full compliance with financial requirements. But also to uphold the moral obligations and ethical practices of any business or organisation. The non-execs are in place to challenge the board and to ensure that the highest levels of corporate governance, in order to avoid the sudden collapse of what may appear to shareholders to be a relatively healthy, or at least solvent, business.”

Frasers calls for governance reform

Frasers, which has previously lost out after investing in the Debenhams and Goals businesses before SRG, said such failures of listed public companies “should not be seen as isolated incidents but rather as manifestations of systematic governance failures and a lack of corporate and individual accountability.”

It has called on government to urgently prioritise “the meaningful regulation of UK business, including by fully investigating the collapse of all listed businesses, and imposing fines and/or criminal penalties on any individuals found to have been complicit in or responsible for any wrongdoing which contributed to their failure.”