Sports Direct: investors now have to act or lose legitimacy

About a year ago, the group I'm involved in - Trade Union Share Owners (TUSO) - wrote out to major Sports Direct shareholders calling on them to challenge the company. Specifically we recommended that other shareholders join TUSO in signalling concerns about both corporate governance and workplace practices by voting against the chairman.

The background to this was that numerous cases of poor treatment of workers had been exposed by Unite whilst at the same time investors were concerned by various long-standing corporate governance issues. These issues were brought together vividly when Keith Hellawell gave evidence to the Scottish Affairs committee and admitted he had been in the dark about the collapse of Sports Direct subsidiary USC.

TUSO held a briefing for investors on precarious work last summer, at which Sports Direct had been featured as an example. Many large shareholders who were/are major Sports Direct investors attended. It is fair to say, then, that investors have been told the inside story about this company directly.

At the September AGM abut a third of the non-Ashley vote went against Keith Hellawell. In a normal company that would be getting close to fatal, but this is Sports Direct we're talking about. But perhaps what was more surprising was that two thirds of independent shareholders apparently thought Hellawell was doing a good job.

What's more, one of the company's major investors told the Telegraph (anonymously) that unions were basically thick and didn't get capitalism, that Sports Direct wasn't doing anything wrong, that corporate governance reforms were a waste of time, and that the board were under-paid. No, I'm not joking -

“Unions and capitalism are not a natural fit but it is important to remember that Sport Direct has not broken any laws... If you look at those companies who have impeccable corporate governance and have ticked all the boxes, they are also those who are the most cumbersome... Mike Ashley is a ferociously effective entrepreneur who, as a major shareholder, is aligned with the success of the company. You can chastise Sports Direct for all of its quirks but if you compare the board’s remuneration and its share performance to other listed companies, then Sports Direct’s team is under-remunerated.”

This was in September 2015, when Sports Direct was a FTSE100 company and its shares were worth about £8.

Not even a year later and the picture is very different. Sports Direct shares closed on Friday at £2.57 a pop, about a third of where they were at when Mr "unions are too thick to understand capitalism" was mouthing off in the Telegraph. The company is now in the FTSE250. Mike Ashley admitted in front of the BIS committee that the company had broken the law by paying less than the minimum wage in some cases, and an HMRC investigation is ongoing. Chief exec Dave Forsey is subject to an investigation into the collapse of USC. Sports Direct has been repeatedly in the news because of the continuing exposure of inhumane treatment of workers at its Shirebrook site. Unite's excellent campaigning has drawn the veil from the reality of precarious work in Britain in the 21st century, and it looks ugly.

This week the BIS committee reported on Sports Direct and knocked lumps out of it:

"Whistleblowers, parts of the media and a trade union shone a light on work practices at Sports Direct and what they revealed was extremely disturbing. The evidence we heard points to a business whose working practices are closer to that of a Victorian workhouse than that of a modern, reputable High Street retailer. For this to occur in the UK in 2016 is a serious indictment of the management at Sports Direct and Mike Ashley, as the face of Sports Direct, must be held accountable for these failings."    

The BIS committee report says Sports Direct needs to have an independent review of its corporate governance alongside making significant changes to its workplace practices.

Corporate governance is there to ensure that in running companies, boards balance the interests of the many different stakeholders, including the employees and workers. In a well-run company, widespread evidence of poor working practices would be detected at an early stage, reported to the board and properly addressed. This did not happen. We recommend that Mr Ashley should complement his working practices review with an independent review of his corporate governance arrangements. We believe that such a review would improve the running, and hence performance of his company, as well improving the reputation of Sports Direct amongst stakeholders and investors. (Paragraph 74)

There is no way any major shareholder in Sports Direct can have missed any of this, not even those that think unions don't understand the maverick entrepreneurial genius of turning £8 shares into £2.57 ones that Mike Ashley brings to the party.

Sports Direct's AGM takes place on 7th September, about 6 weeks away. Shareholders have various way that they can hold the board accountable, and make sure that the company fundamentally overhauls how it treats its staff, and its corporate governance. This company is the poster boy of poor practice, and it has cost asset managers' clients a lot of money to leave these problems unaddressed. Therefore it is vital that investors act, and are seen to do so.

Shareholders have been granted ever greater powers in the UK in order to enable them to facilitate effective oversight of companies. They have been repeatedly encouraged by governments of various stripes to actively engage with companies, particularly when performance is weak and there are practical steps investors could take to seek to address this. There is no better target than Sports Direct.

So investors really need to act quickly, to do so with real intent, and to do it in a way where there is a very clear signal to both the board and to Sports Direct workers that enough is enough and that real change is needed.

Otherwise we may have to count this as your sixth strike.