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Sale of BHS: Winner Takes All in the Stakeholder Stakes

by Nigel Kendall

Sale of BHS (article image)

As another large retailer, British Home Stores (BHS) goes into administration, leaving a huge pension deficit, our latest ACG case study looks in-depth at the facts and the corporate governance of the organisation, in particular the owners, Philip Green and then Dominic Chappell, against our Golden Rules. 

This is a tale whose conclusion is yet to play out, but however it develops, there are lessons for corporate governance in the story to date, which are unlikely to be changed by the end-game. It relates to an old-established UK retailer which was sold by its privately-owned parent group to a start-up company for £1 and which went into administration just over a year later with a huge pension fund deficit.

It’s worth looking at the history of the company and the background of the participants to be able to get a perspective on events and behaviours. In this way one can form a measured view about the business pressures and motivations behind the corporate governance which resulted and draw some useful conclusions.

Story of BHS before it met Philip Green

British Home Stores (BHS) was founded in south London in 1928 by American entrepreneurs to try to repeat the success of F W Woolworth, which had opened its first store in the UK in 1909. Woolworths went public in the UK in 1931 and BHS followed in 1933. BHS opened many more stores both before and after the Second World War and by the early 1960s had nearly 100 branches. It expanded further in the 1970s, moving into some of the new out-of-town shopping malls, but ran into difficulties in the recession of the early 1980s. A revamp of stores attempted to get the business back on the front foot, and in 1986 BHS merged with the group comprising the 1960s furniture shop icon, Habitat and 1960s children’s specialist, Mothercare. The resulting group was named Storehouse. BHS retained its separate identity while updating its logo and general presentation. The 1990s started with another UK recession and proved an increasingly difficult time for Storehouse. In 1992, Storehouse sold Habitat but BHS and Mothercare were still having a hard time and in 1995 there was another relaunch of the BHS brand, but it wasn’t enough to reinvigorate the group. In 1996 Storehouse bought Childrens World from Boots and rebranded all its superstores Mothercare World Stores, but things were getting worse and in 2000 it sold BHS to Philip Green. Storehouse then became simply Mothercare.

Story of Philip Green before he met BHS

Philip Green was born in 1952 into a south London family which had various business interests including property. His father died when he was 12 and, despite leaving school with little in the way of academic qualification, he was running his father’s business with his mother by the age of 21. He went on to start a number of companies with his mother in the clothing business, none of which appears to have been very successful, until in 1985 he did a deal which made him wealthy.

Then in 1988 he took over a small, loss-making menswear company called Amber Day, with a personal minority stake. He built this up over the next few years through a number of deals and established a significant discount business, generating profits which, by the early 1990s were forecast at c£15m. This was a comparatively small business, but Philip Green was a flamboyant character who made himself into a well-known figure and gave the business a profile well beyond its modest size. However, when the recession of the early 1990s hit, Amber Day missed its profit forecast by a big margin and with the share price collapsing, Philip Green was forced to resign as chief executive in 1992.

He was scarred by his encounter with the City and the exposure that goes with public company status, but bounced back, taking control of a chain of discount stores in Scotland. Then, in 1999, with wealthy backers, he acquired Sears, a group with property and fashion interests. The subsequent reorganisation and selling off of property assets and the disposal of the womenswear fashion chains to a retail fashion group called Arcadia, made Philip Green very wealthy indeed. He then made an unsuccessful attempt to acquire the stalwart clothing retailer, Marks & Spencer, and when his early efforts were turned down, he bought BHS from Storehouse in 2000 for £200m and took the company into private hands.

Philip Green’s stewardship of BHS

In 2002, Philip Green acquired Arcadia, a group of high street retailers which included womenswear and menswear chains and which dated back to its foundation by Montagu Burton as a mens’ tailor in 1909. This made him the second largest retailer in the UK after Marks & Spencer. Three years later he bought Etam UK, a girls fashion chain, from its French owner and merged it into BHS, then bringing back the old brand name, British Home Stores. BHS was by now selling a range of products from lighting and homeware to furniture and household furnishings.

At this point, Philip Green felt able to pay a £1.2bn dividend out of Arcadia to his wife, resident in Monaco, in whose name the Arcadia ownership resided.

In 2006, he received a knighthood for services to the retail industry, but business was getting tougher so he looked at selling BHS, without success. And in 2007 he was said to be hoping to sell the chain and invest the proceeds in the successful TopShop Arcadia brand. This came to nothing and in 2009 BHS was absorbed into Arcadia. This process involved cost savings through amalgamation of administrative functions and putting certain Arcadia brands into BHS stores.

The next few years saw changes of top management at BHS and more logo changes and changes in store design and the introduction of an e-commerce website, but by 2015, following losses, Philip Green had decided selling BHS was now imperative.  In March 2015, it was announced that BHS had been sold for £1 to a company called Retail Acquisitions, owned by Dominic Chappell.

According to a report by the Financial Times, Philip Green is viewed by his peers as a very able cost cutter and efficiency specialist, but less good at building a retail business organically. The article points to turnover falling by a fifth and a reluctance to invest, evidenced by capital expenditure over the period being well below the cumulative depreciation charge, implying a progressive exhaustion of assets.

Apparently the management charges which the parent group, Arcadia, charged to BHS far exceeded the levels charged by its previous owner, Storehouse. The response is that the charges were on the same basis as to the other subsidiaries.

The Financial Times’s analysis arrives at a figure of £1.157bn as the total amount of money taken out of BHS (as a separate entity, i.e. not including the Arcadia dividend) by Philip Green, his family and their companies and it attempts to account as fairly as possible for where the money went. It divides his ownership into three phases.

In the first four years after he paid £200m for the business, BHS made good pre-tax profits of £314m and Philip Green drew £423m in dividends between 2002 and 2004, though the final year’s payout was £118m in excess of the profit for that year. BHS was also charged £144m in inter-company costs and fees. In the second phase, from 2005 to 2009, profits started falling and no dividends were taken, but inter-company charges of £178m represented an increase of nearly a quarter. Capital expenditure exceeded depreciation for three years as attempts were made to revitalise the business. But by the start of the third phase, from 2010 to 2014 they appear to have given up and capital expenditure once again fell below depreciation. But inter-company fees at £274m rose by over 50% compared with the previous period, and the result was a loss for the period of £246m.

Philip Green’s family interests also had bought several properties from BHS for £105m and these received rents of £138m over the whole period of ownership.

Even offsetting the acquisition cost and recharged operating costs the £1.157bn total looks disproportionate and inappropriate.

The story of the Pension Fund is also interesting. When Philip Green acquired BHS the pension fund had no deficit. By 2005 the deficit was standing at £75m and had reached £139m by 2014. The estimate to put the situation right is now £300m on an on-going basis and £571m if it were to be passed to an insurer.

Story of Dominic Chappell before he met BHS

Dominic Chappell has had a chequered career, having in his young days raced motor cars at the junior Formula 3000 level and competed at Le Mans. His business career is notable for his first being made bankrupt in 1992, according to the Sunday Times, at the age of 25, then becoming insolvent in 1996 at the age of 29 over a guarantee and bankrupt in 2005 at age 38 over an unpaid fee. Finally he went bankrupt again in 2009 when a property venture with his father went into liquidation owing £24m. He appears to have had no experience as a retailer but was introduced to Philip Green in early 2015 by a contact with whom he had been involved in business dealings. This introducer turned out to have been convicted for fraud in France. On learning of this, Philip Green insisted that this introducer had no further part in his dealings with Dominic Chappell. On being told of the potential approach to sell BHS, Dominic Chappell appears to have formed a company to handle the transaction, which was named Retail Acquisitions.

Stewardship by Retail Acquisitions

At the time of buying BHS in March 2015, Retail Acquisitions supposedly borrowed £5m from Allied Commercial Exporters (ACE) the family property company of the Dellal brothers (sons of entrepreneur “Black Jack” Dellal), taking BHS assets as security, a loan which was repaid in August. Shortly after the acquisition, Retail Acquisitions borrowed £8.4m from BHS, on top of which Dominic Chappell began drawing a £0.54m pa salary. In July 2015, through BHS, he raised a further £25m loan at 20% from the Dellal brothers, supposedly because of BHS’s lack of credit insurance, a loan which was repaid in September through a fund raising of £65m from a private equity group, Grovepoint.

After the takeover, Dominic Chappell promoted Darren Topp, BHS Chief Operating Officer, to the CEO job in the hope that his retail experience and new freedom would take the business forward, and in September BHS had another rebrand and announced a programme of modernising stores. However, by early 2016 there had been a series of store closures and withdrawal from the city centres of a number of major cities.

In early 2016, Dominic Chappell transferred £1m due to BHS directly to Retail Acquisitions, later repaying £440K, and just a few days before BHS was put into administration he transferred £1.5m to a Swedish company, only returning it, less £50K fees when challenged.

BHS was burdened with expensive leases and, putting pressure on its landlords, it entered a CVA (company voluntary arrangement) in March 2016, challenging landlords to renegotiate the leases or face liquidation. The landlords apparently agreed but the CVA depended on raising £160m from sales of property and a yet further loan.

At the same time it announced a big deficit in its pension scheme and started the process of trying to transfer the scheme into the Pension Protection Fund.

The amounts raised in the CVA fell short and in April 2016 BHS was put into administration with debts of £1.3bn. Pension liabilities were put at £571m.

During its period of ownership, Retail Acquisitions apparently charged BHS £5m in management fees and salaries.

Chickens coming home to roost

There is a sense here of chickens coming home to roost and the interesting questions revolve around who will be embarrassed by their arrival. Let’s briefly look at the way the various parties appear to have behaved, based on the published information summarised above.

Philip Green and the Arcadia Board

Companies are created, grow and thrive, decline and die, all the time. What has brought the BHS situation into the spotlight has been the unfunded pension deficit, and that situation happened to start with the transfer of ownership to Philip Green’s family interests. So it is logical to start our review from that point, in 2000, when there was no pension deficit. But, of course, one can look further back and draw attention to the failings of earlier owners and management to adapt a fading business model to the changes of the late 20th century, and hence fail to secure the long-term future of the business and its employees. It fell to Philip Green to resurrect BHS and create a competitive business model for the 21st century and in that regard, he clearly failed. However, he cannot be blamed for not being able to turn round an ailing business.

What he can be challenged on is the way he approached his stewardship of the business. In broad terms, he appears to have applied his tried and tested cost-cutting, operating efficiency profit improvement methods to BHS which stabilised the profit generation process for a few years without putting the business on a growth track. Confident in the success of his approach, he invested less in the infrastructure of the business or in new products than was needed to build the business. When the turnover shrinkage started to threaten the business, he embarked on a capital investment programme to brighten up the stores. When that failed, the company started making serious losses and capital investment was curtailed. In effect, he had treated BHS as a “cash cow”, and eventually, it turned inevitably into a “dog”. At that point, he sold it for £1 with apparently little due diligence to a buyer with no retail experience and little depth of resources to take the business forward.

Looking at it from a stakeholder viewpoint, and considering the three key stakeholders, customers, employees (past and present) and owners, it is clear that he and his board at Arcadia prioritised the interests of the third group. Although, ultimately he had to write off his £200m purchase price, in the intervening years he had taken large sums out of the business which significantly exceeded the amounts he put in.

Customers made their own choices and progressively abandoned BHS for more attractive competitors.

By comparison, employees lost their jobs over the period, their job security and potentially significant pension rights. It can be argued that further investment in the business was good money after bad, but there can be no such excuses for not adequately addressing the pension fund deficit. Similarly, the sale of a business employing over 10,000 people to a buyer plainly ill-equipped to deal with a situation much more difficult than the one Philip Green inherited, looks irresponsible, to put it kindly. His recent acquisition of a third super-yacht is insensitive in its timing and reinforces his image as a self-interested numbers man.

Dominic Chappell and Retail Acquisitions

What can we say about Dominic Chappell? His record surely speaks volumes about his approach to running any business and he had never been responsible for anything of the size of BHS.

He may have had the interests of the business at heart, as he says, but his actions belie this. His clear priority appears to have been himself and his own interests judging by the financial transactions for which he was responsible. An outside observer would say that he should never have embarked on buying BHS and taking on the responsibility for a major turnround for which he was so ill-equipped and under-resourced. His appointment of a retail professional from inside the company was a very limited step towards addressing the issues, particularly when he simultaneously extracted what little spare capital BHS still had. His attempt just before the end to extract £1.5m for a private venture needs no comment.

Retail Acquisitions and its directors seem to have been a totally unsuitable owner of BHS, particularly given the very demanding requirements of the business at that stage.

Role of BHS Pension Trustees and the Role of the Pension Regulator

The pensioners expect their interests to be looked after by the Trustees of the fund with the backstop of the government appointed Pension industry Regulator.

Very little has come into the public domain regarding the actions of the trustees over the fifteen years since the BHS Pension Fund last showed a positive surplus. A parliamentary enquiry is questioning the regulator but it appears that in 2013 BHS submitted a 23 year recovery plan to sort out the deficit, which the regulator was considering at the time of the sale to Retail Acquisitions.

One wonders about the balance of power which allows the owner of a business to watch a forecast pension deficit grow to over a quarter of a billion pounds while extracting similar sums as dividends. This then being compounded by the owner thinking it could get regulatory agreement to a 23 year work-out for a rapidly declining business followed by passing the responsibility to a new (and entirely unsuitable) owner.

Conclusions from ACG’s viewpoint

Golden RulesLet us look at the corporate governance performance of the two owner/managers, Philip Green and Dominic Chappell over their period of control according to our Five Golden Rules of Good Corporate Governance.


Philip Green has been accused personally at times of sourcing his clothes in Asian sweatshops and the reputation of Dominic Chappell would not attract the description ethical. Moreover, personally, the behaviour of these men can be questioned in extracting large amounts of cash from the business when it clearly was draining a resource in short supply. However, the business of BHS itself has never been challenged as being in any sense unethical.

Common goal

For a business to survive and thrive, the interests of the key stakeholders must be aligned. Here, surely, is where the problem lies. The customers were drifting away and had been for years. Steps taken to bring them back were ineffective, meaning that the business was doomed unless this could be sorted before it became terminal. The employees appeared to stay loyal and it would be interesting to have figures for staff turnover to see if they reflected a progressive “switching off” by customer facing employees, which would in turn adversely affect the business. But the major disjunction is clearly the attitude of the owners. Their priority seems to have been to themselves rather than to the business, whatever they may have said to the contrary. The Companies Act duty of directors to look to the long-term health of the business surely calls into question the paying of huge dividends to Philip Green’s interests from a declining business with a massive deficit building up in the pension scheme, and the extraction of what little spare cash that was left by Dominic Chappell to fund his private interests seems inexcusable.

Strategic management

One could question the strategic judgement of Philip Green, but no-one has described the business as not being professionally managed under his direction. The same, unfortunately, cannot be said about Dominic Chappell, though his tenure was so short that the business was still being professionally run under Darren Topp though he was starved of funds.

Organisation resourced to deliver

As we said earlier in this article, businesses grow and they die and sometimes the business model becomes obsolete. This arguably applies to BHS, but one would have to say that, given the perception that Philip Green eventually decided to run it as a cash cow, it was always going to be progressively under-resourced. And eventually it ran out of money.

Accountability and transparency

As a result of Philip Green taking BHS into private hands through absorbing it into Arcadia, the company owned by his wife, much less information would have been made public than would otherwise be the case. However, a private company is just that and the question would be whether the other stakeholders were kept as well informed about the company’s business and well-being as they would have wished. As far as we can tell from the information available this wasn’t seen as a secretive organisation and, apart from Dominic Chappell’s latter-day financial dealings, everything appears to have been in the public domain which should have been.


So, summing it all up, we would say that the clear failing from the ACG point of view was the lack of a common goal. The last two owners prioritised their own interests to the detriment of the long-term interests of the business and the customers progressively walked away. The end was surely predictable and inevitable.

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