Tuesday 20 September 2016

Sports Direct shifts again

Just a quick update, the process of reform at Sports Direct has obviously just started, but some welcome news today. The company has committed to a fully independent review of the business, including employment practices. Whilst it had previously said that it would use its existing legal adviser RPC, now it has agreed to take a genuinely independent approach.

As a reminder, the Trade Union Share Owners resolution called for an independent review of employment practices. TUSO also argued in communication with shareholders before the AGM that RPC should not undertake any review as it was not independent of the company.

Full statement below -

20 September 2016 

SPORTS DIRECT INTERNATIONAL PLC ("Sports Direct" or "the Company")
Independent Review and Workers' Representative update 
Having given careful consideration to concerns raised by independent shareholders, facilitated by the Investor Forum, Sports Direct today announces that the forthcoming '360-degree' review of working practices and corporate governance which was announced on 6 September 2016 and which was to be led by RPC will now be led by an independent party other than RPC.
The Board has made this decision after listening to shareholder feedback at the recent AGM/Open Day and during subsequent consultation with a number of the Company's long-standing shareholders via the Investor Forum. 
The Board will continue constructive dialogue with the Company's independent shareholders in order to reach agreement regarding the specific nature and timing of the review. 
RPC will continue to be a valued legal advisor to Sports Direct, and the Board would like to thank RPC for its work on the existing Working Practices Report, which was compiled to the highest standards. 
The Company today further announces that the selection process for the Workers' Representative on the Board of Sports Direct (as also announced on 6 September 2016) shall be via democratic staff elections, in which it is anticipated that all staff directly engaged or employed by Sports Direct may vote, further details of which will be announced at a later date.

Sunday 11 September 2016

Sports Direct: time for change

As you may have noticed, Sports Direct had its AGM this week, and meeting was totally dominated by how the board intends to overhaul its workforce practices. The treatment of the workforce at Sports Direct's Shirebrook warehouse has become a national story, and the company has come under pressure from the press (led by The Guardian), politicians (the BIS committee) and investors.

It was a very pleasing AGM for those of us who work on capital strategies in the UK. A resolution filed by Trade Union Share Owners (TUSO) received a majority (52%) of the vote of independent shareholders, despite the board recommending opposition. This is the first time a shareholder resolution filed by unions in the UK has received a majority of the non-insider vote. This has put TUSO on the map, and we hope this is just the start.

A majority of independent shareholders also voted against the chairman Keith Hellawell (something TUSO had called for at last year's AGM), which means that he will face re-election within 90 days. This increases pressure on him to meet the demands of investors, otherwise he could face another embarrassingly large vote against.

The Investor Forum's role has been important here. After a prolonged period of engaging behind the scenes, the Forum decided to go public with its concerns about governance and working practices. It has disclosed that it organised a meeting between the full board and major institutional investors after the AGM. The Forum has also made clear that it wants a genuinely independent review of the company's practices, rather than relying on law firm RPC. So the board is under significant ongoing pressure for real change.

It's important to restate how central trade unions have been to the Sports Direct story. If Unite were not working with the largely temporary workforce at Shirebrook then none of what has subsequently come to light would be known. We also hope that TUSO has played a useful role in making sure that these employment practices have been a central issue in engagement between the board and shareholders.

Therefore it's important that the trade union's understanding of the company is both part of the review that is undertaken, and that Unite's recommendations for change are given proper attention. For example, the abuses that Unite was able to expose are directly related to the nature of employment at Shirebrook. The vast majority of the 4,000-ish workers are on temporary contracts and employed via two agencies, rather than being direct employees. This, plus the now infamous "Six Strikes" policy makes workers much more reluctant to challenge bad behaviour.

Businesses need some flexibility, but even allowing for seasonal changes in demand the size of the workforce at Shirebrook does not seem to change that much, so there is no functional reason why Sports Direct needs to have some many temporary workers. Instead it means that Sports Direct uses precarious work to keep costs down and workers feel reluctant to speak as a result. Therefore any lasting solution to the problems at Shirebrook must involve shifting a large proportion of these workers from temporary to permanent contracts. Sports Direct should sit down with Unite and discuss how to achieve this as a matter of urgency.  

We had a great result this week. Investor pressure, political intervention and serious media scrutiny have given the company a real jolt, and a record result. Now it's important that this translates into real change.

Monday 5 September 2016

For short-termism in pay and against shareholder empowerment

Everyone knows we should tie executive remuneration to long-term metrics and give shareholders more powers to oversee pay policies, right?

Yeah, except that if we make execs wait for rewards they sharply discount them (if some really put much value on them at all) so we have to pay even more money, so says this guy. I would go further, the implicit psychological model in incentive schemes is behaviourism. If you want more of Behaviour X - profits, share price appreciation whatever - you need to reinforce that behaviour to encourage execs to repeat it, and incentives are the reinforcer. Only, behaviourists seem to think that for it to work effectively you need to apply the reinforcer close to the behaviour you want to be repeated. Making awards literally years after the behaviour that is being rewarded this seems to fall way short. So actually long-term incentive schemes face two big challenges on their own terms, even ignoring the intrinsic/extrinsic motivation debate.

OK, but we all agree that greater shareholder powers to tackle pay are a good idea, right? Well, no actually. What the ICSA say here is spot on - we've tried tooling up shareholders several times in the past 15 years or so. But most shareholders don't really seem that arsed about using them to challenge companies. So why would we expect another round of the same thing to deliver any different results?

“Since 2002 the UK has been pursuing a regulatory approach based on a combination of transparency and voting rights. Despite both elements of the approach having being strengthened since then, it has done little or nothing to prevent an escalation of directors’ fees and bonuses.
“The issue is not that shareholders lack the rights that would enable them to hold companies properly to account, but that they are often reluctant to use them. Looking at the five largest shareholder revolts this AGM season, it is striking that the average vote against the report was 54 per cent but the average vote against the chair of the remuneration committee was less than 1.5 per cent. Unless investors become more willing to use the powers they already have, it may be necessary to consider different – and possibly more radical – reforms.”  

I've said it before, but there isn't any road left for the 1990s vintage corporate governance model. This means both abandoning the fool's errand of redesigning exec incentive schemes, and accepting the reality that most shareholders (asset managers in the main) think most exec pay schemes are OK most of the time - so giving them even more powers won't make any difference. Genuinely new thinking is required.   

Friday 2 September 2016

Sports Direct AGM on Wednesday 7th September

Next Wednesday see the AGM of Sports Direct take place. Since I last blogged about this it has become clear that a major investor revolt is underway.

The company has been publicly criticised by the Investor Forum (a first), which has called for a thorough overhaul of corporate governance and employment practises, plus related party transactions and so on. The Forum is very mainstream so a public statement of this nature is pretty serious, and an sign of exasperation.

A number of investors and investor advisers have publicly announced their voting intentions, including their support for the Trade Union Share Owners resolution. Amongst those that we know are supporting, or recommending supporting, are Legal & General, LAPFF, Aberdeen, ISS, CalPERS, CalSTRS and Ontario Teachers and PIRC.

These are just the publicly-known voting positions on the resolution, it is very likely that other shareholders are also supportive of the resolution.

If the TUSO resolution gets a strong vote at the AGM this will put serious pressure on the company to undertaken a proper, independent review of its workforce practices. If it can be shown that even major institutional investors believe this is required then the position of Sports Direct workers and their representatives will be enormously strengthened.

So this is a last shout out to union members who are pension fund trustees or have any other role overseeing capital, if you have shares in Sports Direct Please Vote FOR Resolution 19.