Continued corporate governance failings at Sports Direct

Sports Direct has been slammed again for its poor corporate governance and unacceptable working practices, with fund managers calling for heads to roll.

Continued corporate governance failings at Sports Direct

Hermes and Royal London are the latest to question what is happening at Sports Direct, citing serious concerns about the business up to board level.

Hermes EOS said it has engaged intensively with the Sports Direct board and management team regarding the company’s corporate governance since 2007.  The specific focus of this has been on the ability of the board to exercise independent oversight of management, including founder Mike Ashley, and adequately represent the interests of the company’s minority shareholders.

However, further cause for serious concern with Sports Direct has arisen off the back of the treatment of employees by the business. The Business, Innovation and Skills Committee’s recent inquiry into employment practices was unequivocal in its criticism of working conditions, pay and contract terms at Sports Direct. It also revealed failings in management oversight of these issues.

As a result of the deep concerns regarding Sports Direct’s corporate governance and its response to date to allegations concerning poor working practices, Hermes EOS has recommended its clients vote against the re-election of chairman Keith Hellawell; two non-executive directors, Simon Bentley and Dave Singleton; and two executives, CEO Dave Forsey and interim CFO Matt Pearson.

Further to this, Hermes EOS has also recommended support for Unite’s shareholder proposal which calls for the board to commission an independent review of the company’s human capital management strategy, reporting to shareholders on the outcome.

Leon Kamhi, head of responsibility at Hermes Investment Management, said: “We welcome the move towards an independent review on working practices initiated by the company and look forward to a set of practical, time-bound recommendations to comprehensively address improvements required in the company’s labour relations.

“However, we share BIS’ assessment that ‘corporate governance goes to the heart of the issues that have been raised’. We strongly support the call for the company to undertake an independent review of its corporate governance including the composition of the board and its oversight of key strategic decisions, such as investments made in other companies.

“The chairman, Keith Hellawell, together with independent directors Simon Bentley and David Singleton, have lost the confidence of many of Sports Direct’s minority shareholders and should step down from the board. An external, independent successor to the chair role should be appointed as soon as possible, followed by additional independent directors.

“Moreover, it is our view that a CEO and permanent CFO with robust credentials who can build the trust of shareholders are appointed.”

Royal London said that since the 2015 AGM, despite slight increases in revenues and gross profits, the company’s share price has fallen 60% following scandal after scandal, a clear sign of the impact which severe corporate governance issues can have on investors’ long term outlook for a company. Even some sell-side firms have lost some of their optimism, with research recommendations of two of Sports Direct’s corporate brokers downgrading their rating from ‘Buy’ to ‘Neutral’ during the past year.

“At the risk of sounding like a broken record, we are astonished at the lack of improvement in corporate governance matters at Sports Direct, despite repeated attempts by ourselves and other investors to push for positive changes at the firm,” said Ashley Hamilton Claxton, corporate governance manager at Royal London Asset Management.

“We agree with other investors that the chairman should resign, with a new chairman to be appointed within the next six months. We are voting against the non-executive directors yet again, to express our frustration that governance has not improved. It is also unacceptable for a FTSE listed firm to operate for nearly three years without a permanent finance director in place and we would like to see this position filled.

“Sports Direct continues to be reckless with shareholders’ money and we are glad to see other investors join us in speaking out about poor governance within the company and across the industry, a clear sign of the growing influence of corporate governance amongst UK investors, following a spring of discontent at a number of major AGMs. Despite our relatively low passive holdings in Sports Direct, we believe that good governance is key for any company in which we invest, regardless of our stake.”


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