Sports Direct takes action to respond to criticisms of working practices and corporate governance

Major institutional investors were among those criticising retailer Sports Direct at its AGM this week and showed their disquiet about the company through their votes. The majority of independent shareholders voted against the re-election of the chairman Keith Hellawell and in favour of a shareholder resolution put forward by the Trade Union Share Owners (TUSO) group and Islington Council calling for an independent investigation into how the company treats its workers.

Standard Life Investments, Hermes Investment Management and Legal & General Investment Management were among the institutional investors which voted against the election of Hellawell. Standard Life and L&G said they had voted against all the non-executive directors. Hermes EOS – which provides stewardship services for investors – had recommended its clients vote against the re-election of Chairman Keith Hellawell; two non-executive directors, Simon Bentley and Dave Singleton; and two executives, the chief executive Dave Forsey and interim chief financial officer Matt Pearson. Hermes EOS had also recommended support for TUSO’s shareholder proposal which received the support of 53% of independent shareholders at the company.

Such public comment and condemnation by institutional investors are still relatively rare but indicates the level of frustration felt by investors. All three investment firms indicated that they had been attempting to engage with Sports Direct over several years trying to change its corporate governance but had not made progress.  They backed an independent inquiry into corporate governance at Sports Direct as requested in August by the Investor Forum, which facilitates collective engagement by institutional investors.

Since the AGM the Investor Forum said it had it had chaired a constructive meeting between major shareholders and the board of Sports Direct. Andy Griffiths, executive director of the Investor Forum said, “Independent shareholders have sent a clear message to the Board of Sports Direct through their votes at the AGM and in their public statements.”

The company had been under fire for its poor corporate governance and its employment practices uncovered through a trade union campaign and an undercover investigation by the Guardian newspaper. This led to an inquiry by the Business, Innovation and Skills select committee of MPs which published its report in June criticising the company. Mike Ashley, company founder, executive deputy chairman and majority shareholder with around a 55% stake, had responded to the MPs by asking Sports Direct’s lawyers, RPC, to investigate working practices but he resisted demands for an inquiry into the company’s wider corporate governance.

However, following the publication of RPC’s report, a day before the AGM, the company said it had requested the law firm to lead a further review of working practices using the first report as a benchmark to identify what further action was required and to monitor steps already undertaken. This review will also include examining the company’s corporate governance, and as part of this process, the board said it would engage with shareholders to obtain their views. The result of this more detailed review will be presented to shareholders in 2017. Prior to the AGM the board of the company also agreed to include an employee representative in future.

Hellawell offered to resign over the weekend in light of issues highlighted by RPC but the board asked him to continue. Following the results of the AGM which showed 53% of independent shareholders opposed his re-election Hellawell said, “I take this clear message from our independent shareholders seriously, and I will do my best to address their concerns and earn their confidence over the next year. I have confirmed today that should I not receive the support of a majority of our independent shareholders at next year’s AGM, I will step down at that time with immediate effect.”

Euan Stirling, head of stewardship and environmental, social and governance investment at Standard Life Investments said, “The responses to our enquiries have been either unconvincing or non-existent. In that context, yesterday’s RPC report into working practices represents a positive step forward. By contrast, we do appreciate the scale and the market position of the business and its long-term value creation potential. That is why we remain fully-engaged shareholders. In order to achieve that potential, we increasingly believe that a structural change in the way that the company is governed is now required.”

Griffiths said, “We are encouraged by Sports Direct’s recent open approach, publishing the working practices report and hosting an open day. These, however, are only the first steps in a long journey towards rebuilding trust and shareholder value. “Our focus in the coming weeks will be on identifying key milestones to achieve this goal and, in particular, reaching agreement regarding the specific nature, remit and timing of the 360 and governance reviews. Facilitating a constructive dialogue on this will take on heightened importance over the next three months before the general meeting required to re-elect the chairman.”

Prior to the AGM Sports Direct announced changes to improve its working practices following the publication of the RPC report. The inquiry found that workers had been paid under the minimum wage but the company said it was unintentional. As the Guardian had revealed  a compulsory system of security checks caused delays as workers queued to clock in to work while RPC also found that the IT system used to clock in workers could deduct 15 minutes off somebody’s start time even if they were in fact only a minute late and this would then lead to pay being deducted. Wages have now been increased and the calculations on the IT system changed so that the docking of pay is less draconian and the minimum wage is always paid. The company has also retrospectively paid workers to ensure they have now received the minimum wage. Meanwhile security checks are now made on a random basis. RPC said that such checks are needed because of the high level of theft and that senior management are checked as well as ordinary workers.

RPC’s inquiry found there was also a demarcation at the company’s Shirebrook warehouse between the permanent employees and the majority of the workforce employed through agencies in respect of the support that staff received and the way they were treated . This was most notable in the “six strikes and you are out” policy that was implemented for agency staff – which meant that if staff committed six strikes within six months they would lose their job. The agencies have now agreed to stop using this policy which was heavily criticised by MPs.

While some agency staff are employed on permanent contracts others are employed through 336 ‘contracts for services’  which are in fact a form of zero hours contract because once 336 hours have been worked there is no guarantee of further employment. One of the agencies, Best Connection, has said it will offer normal contracts of employment for new employees. RPC in its report said it would engage with both agencies during a planned 360 degree review on the contract models used for Sports Direct premises.

Sports Direct was employing its retail staff on a zero hours contract but it has announced that these employees will now be allowed to choose between  a ‘zero hours’ term of engagement or a permanent contract which would guarantee them at least 12 hours work a week. The company is also considering running a test scheme aiming to transfer 10 picking staff a month from the agencies to SD which compares with the current level of around two  people per month across all areas which are transferred from the agencies. However, the announcement has been criticised as still making too slow a progress.

The Unite Union which has campaigned for better treatment of staff at Sports Direct commented on RPC’s report saying that, “”While the report marks significant progress, not least the eradication of zero hour contracts in the stores and the six strikes and you are out system, Unite will be asking the board to go further and faster in a number areas when we engage with the company. Unite still has concerns over the use of the two employment agencies, The Best Connection and Transline, which supply over 3,400 workers to the Sports Direct Shirebrook warehouse. For Unite it has been their behaviour and the lack of oversight that has been the cause of so many of the abuses at Shirebrook.

“We therefore call on Sports Direct to reconsider its proposal to only move 10 agency workers a month onto direct, permanent contracts. At that rate it will take over 340 months or 28 years for the whole of the agency workforce at Shirebrook to be moved on to secure, direct contracts. Unite believes the board can be bolder in the coming months and put in place a framework agreement to move bigger numbers of agency workers into direct employment, as well as eradicating the use of short hour contracts such as the annualised 336 hours contract currently in use at Shirebrook.”

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