There is an unacceptable view in the financial community that as long as earnings are on the rise, dividends paid and share prices rising that governance doesn’t matter.
Dozens of scandals dating back to the Lonrho in the 1970s and Robert Maxwell in the 1990s illustrate how wrong this is and why governance codes and company law moved on.
Alison Levitt QC’s devastating indictment of executive and governance shortfalls at fast fashion Boohoo Group rams home the requirement for better stewardship.
Reports of problems in Leicester clothes factories date began in 2015, but Boohoo’s board, dominated by executive chairman Mahmud Kamani (pictured), never confronted the issues
Her 234-page independent review of the appalling conditions in Boohoo’s Leicester supply chain is a remarkable piece of work.
Levitt embarked on the probe on July 5 when much of the economy was still in lockdown.
She managed to produce a credible assessment of the shortcomings and come up with ideas for fundamental changes in monitoring the supply chain and shaking up board structures in just three months.
There are big lessons here for City regulators. More than a year after Neil Woodford’s investment empire collapsed, his wounded investors, many of whom saw life savings destroyed, are still awaiting information on how this could happen.
The Financial Reporting Council disclosed this week that it had completed its investigation into auditor KPMG’s role at construction group Carillion, which collapsed early in 2018.
But it declined to release the report which has been passed back to the auditors for comment. The delays will ensure that by the time the findings are released, the train will have long ago left the station.
Boohoo may breathe a sigh of relief that no criminal laws were found to have been breached in the supply chain. But what Levitt found is still shocking.
A series of alerts to problems in the Leicester sweat-shop factories date back to a University of Leicester report in 2015, and a subsequent series of media reports on abuse.
However, a Boohoo board, dominated by powerful executive chairman Mahmud Kamani, never confronted the issues.
Levitt found that, far from being media exaggerations as Boohoo claimed to the investment community, ‘charges of poor working conditions and low rates of pay in many Leicester factories are not merely well-founded but substantially true’.
The QC argues that Boohoo was so focused on its commercial success and its own employees that it felt very little responsibility for the Leicester factory workers ‘because they were largely invisible to them’.
Truth is that Kamani and his fellow directors should have known.
As the report notes, Kamani ‘covertly owns or controls many of the factories [in Leicester] through a complex web of directorships.
Further, the chairman has a social and family relationship with Witness 98 and their family, who own Morefray Limited and Revolution Clothing Co Limited, the two companies at the centre of the media allegations in early July 2020′.
Indeed, anyone reading the report and could not be unaware of rickety governance. Inter-company transactions, such as the purchase of his son’s firm Pretty Little Thing in May 2020 and post-event adjustment to profit and loss to recognise such transactions, have been commonplace.
Levitt is unforgiving on governance mistakes, noting that the company’s risk management systems are ‘significantly undeveloped’ and that commercial concerns such as growth and profit were prioritised ‘in a way that risks were almost invisible at the senior level’.
In its response, Boohoo accentuates the positive but offers no apology to the Leicester factory workers who, for many years, have worked for pay way below the minimum wage and in ghastly conditions.
It is promising change, including the appointment of an experienced and respected individual to police supply chain improvements. It also proposes the appointment of two non-executive directors so there is a majority of independents on the board.
There are huge lessons in the Boohoo report for City advisers and the London Stock Exchange.
Many of the criticisms of Boohoo’s governance and over-powering chairman, interwoven company and personal interests and placing performance ahead of governance could apply to the recent float of online beauty and lifestyle group The Hut. Profits and immediate riches always triumph over governance with horrendous outcomes.
When will they ever learn?