Changing Corporate Governance

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The fate of British Home Stores (BHS), its 11,000 employees, and its pension fund has been shocking. In a report on the BHS demise, MPs described Sir Philip Green as the "unacceptable face of capitalism".

BHS had continued to pay massive dividends to Sir Philip's wife despite a massive hole in the pension fund.

This is not the only lapse of governance in large companies. Recently, Sports Direct was questioned about holding warehouse staff while lengthy security checks were carried out. This effectively meant that employees were paid below the minimum wage.

A company is legally allowed to do anything a person can. However, they are not bound by the same rules of conscience and sociability as a human being. Their one steering principle is that they must act in the best interests of their shareholders.

This principle has been used to justify breaking the law by directors of large public limited companies. Where the maximum penalty is a fine, the directors of the corporation may decide that it is in the shareholders best interests to break the law and pay the fine, rather take an expensive action to prevent the illegal course of action.

This narrow view of morality that a company is encouraged to take can lead to the justification of decisions such as those taken by Sir Philip Green. He could argue that he was acting in the best interests of his shareholders by continuing to pay dividends despite the gaping hole in the pension fund.

So current corporate governance not only allows such injustices, it positively encourages them. 11,000 employees have been affected, losing their jobs and badly affecting their pensions.

So the problem is easy to identify, but a solution is harder to see.

Characteristics of the Solution

As we search for a solution, we need to test it against what we think a solution would look like.

The injustice shown in the BHS case was towards the employees and pensioners, two of the stakeholders in the BHS business. The directors of BHS were not fair to them, preferring to use cash generated to pay dividends rather than contribute to the pension fund to decrease or remove the hole in its funding. We want the governance to be fair to the stakeholders.

Companies compete in a global marketplace and are increasingly internationalised to some degree. They can pick their home country to avoid what the directors and shareholders consider excessive governance or taxation. This means we want our governance model to be as light touch as possible.

We need to be focuses on what will make a difference to the actual decisions, and to make the exploitative decisions illegal.

Who Are the Stakeholders?

A company has many stakeholders such as:

Shareholders Customers Suppliers Employees Government


Currently, looking after shareholders is the main responsibility of the company. They are its owners. They have invested money in making the business. Without looking after the shareholders, inward investment in companies would dwindle.


Free market economics would argue that customers are looked after by the fact that if a company exploits its customers, another company will be able to gain their custom by offering a better deal. There are areas however where this does not work:

Where there are large barriers to entry

If it is difficult to set up a new business in a particular industry, due to large investment requirements, then the ability for a game-changing company to break-in will be difficult. Therefore, existing companies can exploit their customers to the point where it would become economic for a new company to break-in.

Where customers are "locked in"

If there are barriers to a customer switching from one provider to another, this can allow a company to exploit its customers. Banks are an example of this - recent legislation has decreased the hassle of changing bank account, but this legislation is industry specific and does not cover investments, insurance and other products similar in nature.

Government Enforced Monopolies

Train companies are an example here. Each train company is awarded a franchise that lasts for a certain length of time. During this period, within a service agreement, the company is able to run its service in the way that it sees fit (currently in the best interests of its shareholders). The monopoly prevents other companies providing a better or cheaper service, the only threat is from alternative forms of transport.

Route to Market

Where the route to market is controlled by a few firms, such as supermarkets, this can affect the free market models.

So there is a case for considering customers in a new governance model, but the weight of this should be tempered with the forces already in place to counteract it, and perhaps only be in effect where there are reasons why the free market model is not working.


Usually, suppliers to companies are other companies. Only where there is a large difference in size would extra safeguards be needed, such as supermarkets and individual farmers. Again such consideration should be targeted.


In the case of BHS, it was the employees and the pensioners who lost the most. In this case, it was the pension fund not being properly funded when the company had money. In the Sports Direct issue, it was the abuse of employees' rights.

These two cases highlight that abuses can be made in very different areas. It could be argued that there is already legislation in place to prevent minimum wage abuse, but I doubt Sports Direct is the only offender.


Solutions are being put forward for this change. Here are a few...

Workers' Councils

In Germany, workers vote on a group to represent them on a workers' council. This council has real power and is part of the management of the firm.

This has the advantage that it has been seen to work very successfully.

Directors' and Senior Manager Punishments

Directors and senior managers - who make decisions to either break the law or to cause the law to be broken - could face a range of punishments depending on the severity of their transgression.

  • Directors Struck Off

A current punishment that Companies House record that someone cannot be a director, either for a limited time or in perpetuity.

  • Fines and Restitution

Directors, as well as the Company, make restitution and pay fines. Restitution can be public or personal apologies, paying for mending or completing works, essentially what would fix the issue for the victim.

  • Directors' Prison

A less strict prison, but the director has to pay for all costs whilst there. The inmate can work, but has to return to the prison at night.

  • Directors Collective Restitution

Where a director claims to have no money to pay to make restitution for their illegal actions, directors of all companies pay (in proportion to their directors' remuneration) towards a restitution fund. The perpetrators that caused the need for the restitution would be named on a public web site along with the amount required. This would always be paid in arrears and there would be limits.

The idea behind this is to prevent the elite club turning a blind eye to wrongdoing, as they will pay (a small amount) for the perpetrator's illegal actions.

There are legal issues with essentially punishing someone for another's crime and that is a principle we perhaps should not break. We could however, work the system in reverse. All directors and senior managers have to pay a tax which has a "good boy" rebate if there is no restitution to be made.

Director and Senior Management Training

The concept here is that prior to a director or senior manager being in post, they must have attended a certified course by a certified trainer and passed the examination on their role and responsibilities.Minor infringements may cause a director to need to take the course again.

Rewording the Company Directors' Responsibilities

The rewording would need to be simple enough to remember and apply. Some blanket basic level of protection for customers and employees would be the main aim, punished by restitution mainly.

Protecting Pension Funds

The BHS incident affected the pension fund badly. 11,000 honest, hard working employees will lose out on security in their old age due to one man's actions.

My view is that a company pension fund should be ring fenced, the company cannot borrow using the fund as collateral, the pension fund cannot buy shares in the company or in subsidiaries and, perhaps most radically, that if there is a "hole" in the pension funds finances, that the the dividend to the shareholders can only be as much as the contribution made to the pension fund.

Another possibility is that all companies are required to pay into a support fund for pensions that are underfunded.


There seems no doubt that corporate governance needs to change, but developing an unintrusive, new regime is complex. Too much change will make investors nervous, too little will allow abuses we have seen become more commonplace.

Further Reading

  • Other Business Analysis Articles

Business Analysis

  • Coverage on BHS

The Independent