114.Corporate governance is commonly understood as the rules and practices by which a company is run and balances the interests of its many different stakeholders, including management, employees, customers, creditors, pensioners and the community. In investigating the sale of BHS we encountered a pattern of transactions between Green family companies which brought into question their corporate governance and the role of their directors.
115.The complex structure of the Taveta and Arcadia family of companies is illustrated in Figure 4. Taveta Investments Limited is the parent company of Taveta Investments (No. 2) Limited and, determines the group’s retail and commercial strategy. Taveta 2 is the parent company of the Arcadia Group and was, until its sale, parent of the BHS Group. Taveta Investments Ltd is controlled by Taveta Ltd, the ultimate parent company. That is registered in Jersey and Lady Green is the ultimate beneficial owner.
116.There are several other companies owned by Lady Green or companies within the Green family group that had connections with BHS or were involved in its sale. We have already noted that Carmen Properties—incorporated in Jersey and with Lady Green as the ultimate beneficiary—bought and leased back to BHS ten properties in 2001 and was transferred to BHS as part of the deal. BHS made another sale-and-leaseback deal, with Mildenhall Holdings Ltd (“Mildenhall”)—another Jersey-registered company whose ultimate beneficiary was Lady Green—for a property in Leeds. Between 2005 and 2012, BHS paid £2.7 million in rent to Mildenhall. As with the Carmen Properties deal, this would have seen the rent received as income in Jersey by Mildenhall and allowed BHS to register it as a cost and adjust its UK tax liability accordingly. Another company, the British Virgin Islands-based Wilton Equity Ltd, owns the freehold of Marylebone House, BHS’s head office.Wilton was owned by GH One Ltd, also registered in the BVI and owned by Lady Green. Wilton was sold to Arcadia in July 2015 at a profit of nearly £22 million in less than two years, a transaction we consider later in this Chapter.
117.BHS’s transactions with other Green family-owned companies were not limited to property. In 2001, BHS issued a bond of £19.5 million carrying 8 per cent interest per annum to Tacomer Ltd, a Jersey-registered company whose ultimate owner is Lady Green. The bond was ultimately redeemed in 2006 for £28,975,000, giving Tacomer Ltd, and Lady Green, a return of £9,475,000. As with the property transactions, this would have had tax advantages and, again, would have allowed BHS to reduce its taxable profits.
118.In addition, there are three Global Textiles companies, all controlled by Lady Green and registered in either Jersey or the British Virgin Islands, which loaned Taveta 2 £200 million in 2009 for it to purchase BHS. The annual interest on this is 8 per cent, earning Lady Green £8.3 million in 2015,on top of the £20 million per year loan repayments. All these companies are private, and therefore not subject to the same requirements as public companies in respect of share transactions or publication of information. Those registered offshore are subject to far less demanding tax and transparency requirements. Consequently, it is not possible to obtain a clear picture of the ownership and capital flows in the Green family business empire in order to assess better the significance and implications of the sale of BHS. There is a complex web of companies, many registered offshore. BHS was involved in a number of transactions with a number of these companies. Whether BHS benefited financially from these transactions is far from clear. What is clear is that the Green family did.
119.Sir Philip was vague when asked about his choice of Monaco as a place of residence, referring to the need to put his children in school somewhere. When asked about the reasons for the choice of registration of the Green family companies, Lady Green wrote:
“My understanding is that jurisdictions such as Jersey and the British Virgin Islands are commonly preferred for their strong regulatory regimes and well-respected regulators and the size and competence of their professional communities”.
Sir Philip was more ready to acknowledge the tax benefits of offshore registrations but denied there was any lack of transparency or that tracking funding between companies was at all difficult. He described the corporate structure as “very see through” and insisted that tax was properly paid on all UK earnings. He argued that some competitor companies were set up more aggressively in terms of tax avoidance and, in any case, the country benefitted from the presence of non-UK based investors. The moral case for companies trading largely in the UK and their parent companies to be registered and pay tax here was evidently not a consideration for Sir Philip. His attitude was that he was trading legally, like other companies based offshore, therefore he did not see any problem with the group structure.
120.Sir Philip Green himself is a director of Taveta Investments, was a director of Taveta Investments (No.2) Ltd until March 2015, and was a director of the Arcadia Group until December 2015. He is not a director of Taveta Ltd, the parent company controlled by his wife. In evidence, he distanced himself from the companies under her ultimate control, telling us that, in respect of the Green family accounts “They are not my accounts. I don’t have any control over them”. At one point, he denied signing off the accounts for companies for which he was a director even though this is a legal duty in that role. For a businessman of his stature Sir Philip sought to demonstrate an unfeasible degree of unfamiliarity with the financial affairs of some of his businesses or closely related family companies. By contrast, his renowned attention to detail was very apparent in other cases. In spite of our efforts to gain an understanding of the wider context of the sale of BHS, we were not provided with full information about the relationship between various Green family companies and the flow of money between them. Nonetheless, we have seen that the family has used private companies and offshore registrations. These arrangements were designed to reduce tax bills. They have also had the effect of reducing levels of corporate transparency.
121.The Taveta group is characterised by closely related companies, whose boards comprised overlapping memberships, largely of trusted partners and family members, as indicated in Table 5 below. This personnel set-up makes it all the more important that each company has strong corporate governance to ensure directors make decisions in the interests of the company concerned, as they are required to do. Indeed, Sir Philip asserted that good corporate governance was a priority in his companies.
122.The main duties of directors are set out in the Companies Act 2006. These apply equally to directors of private and public sector companies and equally to both executive and non-executive directors. A director is required to act “in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.” In doing so they are required to have regard (amongst other matters) to:
These high level requirements are not clarified by further regulatory requirements, although the common law may apply in any cases brought before the courts. These are relatively rare, in part because of the difficulty in pursuing prosecutions based on the motivations of directors.
Source: Companies House
123.Directors have a duty to exercise reasonable care, skill and diligence when carrying out their duties. When it becomes apparent that a company may not survive, their duties shift and are then owed to the general body of creditors. At that stage, they must take every reasonable step either to avoid insolvent liquidation, or to minimise the losses to creditors. If the directors neglect these duties, they leave themselves open to claims for misfeasance, breach of duty or wrongful trading.
124.The legal position in respect of the Chairman and other members of the Board is that it is permissible for a director to delegate certain functions to other persons. However, if a director allows himself to be dominated, or manipulated by one of their number, he may have gone beyond the boundaries of what is proper. He could be found to be in breach of duty and subject to disqualification.
125.The non-statutory UK Corporate Governance Code, produced by the FRC, provides further guidance for directors and chairmen as to their duties. It sets out the duties of the board to set the values and standards of the company and its strategic aims. It holds that the chairman is responsible for leadership of the board and ensuring its effectiveness on all aspects of its role. It describes the role of non-executive directors to scrutinise the performance of management and provide constructive challenge. The duties apply only to listed companies and only on a ‘comply or explain’ basis; they are not enforceable by the FRC. They do not apply to private companies, as was pointed out to us by the non-executive chair of Taveta and Taveta 2, Lord Grabiner. Nonetheless, these are well understood principles of good corporate governance and provide useful guidance for the interpretation of the legal duties that apply to all directors. Many of BHS’s competitors are public companies and therefore subject to the FRC code.
126.Concerns about corporate governance arose repeatedly during our questioning of the Chairman, Lord Grabiner, and other members of the boards of Green family companies. We were surprised, for example, when Lord Grabiner told us in evidence that he was “not aware of what the reasons were” for having separate Taveta companies but that “[w]hatever structure they had adopted, no doubt there were good reason for it.” He subsequently told us that the “structure arose from a corporate re-organisation effected on an earlier re-financing of the business”, which shed little further light.
127.We also considered checks and balances on related party transactions within the group. One prominent such deal, the Ealing property sale by BHS shortly before the sale to RAL, took place without board approval and without a pre-sale valuation being obtained. Brett Palos, Sir Philip’s step-son, was a director of both the parent company of BHS and the purchasing company, Thackeray Estates. The property was resold within four months for a profit of £3m. We consider another related-party transaction, the purchase of Marylebone House by Arcadia, in Box 2.
Box 2: Case study: Marylebone House
Under proposed terms of the sale of BHS to RAL, RAL was to purchase Marylebone House from Wilton Equity Limited, a Green family company registered in the British Virgin Islands, and sell it on for £45 million. We were informed that Marylebone House was not in the event sold as planned because a higher offer had been received. On 16 July 2015 Arcadia bought Wilton (in effect, Marylebone House) for £53 million, a profit of £21.85 million to Lady Green since the property was bought for £31.15 million in August 2013. for £35 million
This decision, a related party transaction, was taken at a board meeting at which only executive directors were present. Though Arcadia’s accounts state that the transaction proceeded after “advice received from a third party valuer”, a claim reiterated by Sir Philip Green in oral evidence, it is apparent that no third party valuation was received to support the purchase price. The board minute notes that “the Property team of the Company has received offers for the Target in the range of £50m to £55m over the past six months”. These offers were not circulated to the board. It is also perhaps telling that offers were received by Arcadia for a company unrelated except for its ultimate ownership by Lady Green. Chris Harris, Arcadia Property Director, noted “We worked very closely as a tight-knit team”.
It is not clear that the decision to purchase Marylebone House was a bad one for Arcadia. It was, however, taken without adequate checks for a large related-party transaction, especially given Arcadia has many thousands of employees and a large pension deficit.
128.The evidence we took did nothing to dispel the impression that serving the interests of the Green family was the over-arching objective of the directors of the companies in his business empire. Yet these branches have different interests: some have employees and pension funds in deficit; others, registered offshore, do not. The directors’ duties are to serve the interests of the company but they are also required to have regard for proper process, insofar as the interests of stakeholders and the reputation of the company may be affected. Related party transactions such as the sale of Marylebone House and the Ealing property should have been subject to rigorous due process. They were not. What is more, rather than being an exception, these examples are symptomatic of what we have learnt about Taveta group governance over the course of this inquiry.
129.The most worrying insight into the exercise of corporate governance was obtained in examining the decision to sell BHS itself, in which the Chairman of the selling company, Lord Grabiner, played no effective part. On 29 January 2015, the board appointed a sub-group from Arcadia to oversee the possibility of disposing of BHS, comprised of directors with relevant knowledge. However, this group was given no parameters within which to work by the board and no requirement to report back with a recommendation, as one might expect a board to stipulate when delegating a significant function such as the sale of a major company.
130.In Lord Grabiner’s view, the delegated powers of the sub-group were understood “implicitly” and, he said, it should not be “remotely surprising” that the non-executive Chairman “played no hands-on role in the sale transaction”.The Chairman and board as a whole took no steps to challenge the work of the sub-group, nor did this group keep any minutes of meetings detailing its discussions. The full board was only informed of the fact that discussions were taking place, but not the identity of potential buyers or the scope of a potential deal. Incredibly, Lord Grabiner told us that, whilst aware of ongoing negotiations, he never heard the name Dominic Chappell and only learned of the buyer’s previous bankruptcy from the press after the completion of the transaction.
131.The decision to approve the sale of BHS to RAL was taken, after a long day of negotiation on its terms, by a hastily convened meeting of four members of the Taveta Board. The Chairman was not invited to the meeting nor made aware that it was taking place. The only non-executive director present was Brett Palos, step-son of Sir Philip, whose stated brief was to look after the interests of the majority shareholder, Lady Green. While Chris Harris told us that “in an ideal world, we would have invited Lord Grabiner to the meeting”, neither Sir Philip nor Lord Grabiner had any such concerns about the sub-group taking this decision without the consideration of the full board. Lord Grabiner asserted that the presence of all the non-executive directors would not have made any difference to the decision as he “would not be in a position to second guess the views of the negotiators”. Had he been there, he said, he may have asked whether the buyer had a credible business plan to implement a turnaround of BHS and he would have been satisfied by the answer.
132.This is a remarkably docile attitude for a Chairman of the board, particularly one whose long experience of mergers and acquisitions and legal expertise were presumably a strong factor in his £125,000 per year employment in that role. Had he been present, he may also have asked what the criteria were for finding a buyer; why these criteria were ignored; what evidence underpinned the belief in a successful business plan; what safeguards were in place for the creditors and pension scheme members; and what was the background of the buyer? Regardless of what he might have contributed, it is difficult for the Chairman to demonstrate leadership of the board when he is unaware of what is going on in its name.
133.The failure of these basic questions to be asked, never mind answered, was indicative of a prevailing culture in which a dominant personality at the top of a private limited company was able to get his way with little if any internal challenge. When asked, board members failed to articulate any convincing examples of instances in which Sir Philip was successfully overridden by the rest of the board or indeed challenged at all. In a lengthy oral evidence session, we saw and experienced for ourselves the aggressive reaction of Sir Philip to courteous and reasonable challenge. We do not underestimate the difficulties that a board of trusted directors might have when questioning his decisions. But absolute power, in business as in politics, is a dangerous thing, and is the reason why the law requires certain minimum standards of governance.
134.The sale was only approved by the full board after it had been agreed with the buyer. Following the agreement of the board on 10 March and completion of the transaction the next day, the Taveta 2 board met on 16 March to “ratify” the transaction. Paul Budge chaired this meeting and Lord Grabiner was the only other attendee. It is not clear what legal effect any decision not to ratify the decision would have had, but as Lord Grabiner explained, there was “no basis on which we could properly have disregarded the views of the board of TI2L’s sole shareholder and refused to ratify the sale”. A company can hardly be unsold. The terms of the sale were only reported to the full board of Taveta on 25 March, two weeks after the completion of the transaction. Again, this demonstrates a remarkably relaxed attitude to formal decision making, particularly in respect of the sale of a major company with 11,000 employees and 20,000 pension scheme members.
135.Sir Philip chose to run these companies as his own personal empire, with boards taking decisions with reference to a shared understanding of his wishes rather than the interests of each individual company. Boards had overlapping memberships and independent non-executive directors did not participate in key decisions. We saw meagre evidence of the type of constructive challenge that a good board should provide. These weak governance arrangements allowed the overarching interests of the Green family to prevail and facilitated the flow of money off shore to the ultimate beneficial owner of the parent company, Lady Green.
136.The complacent performance of Lord Grabiner as the non-executive Chairman of the Taveta group boards represented the apogee of weak corporate governance. In that position it was his responsibility to provide independent challenge and oversight. Instead he was content to provide a veneer of establishment credibility to the group while happily disengaging from the key decisions he had a responsibility to scrutinise. For this deplorable performance he received a considerable salary.
137.These weaknesses in corporate governance contributed substantially to the ultimate demise of BHS including: the failure to address the pension deficit; the failure to challenge effectively RAL’s proposal to buy BHS; the hurried agreement of the deal in the absence of the Chair; and its subsequent rubber stamp ratification. All members of Taveta group boards have serious questions to answer about their performance as directors in allowing Sir Philip Green to sell BHS.
256 Lady Green told us that “The shares are held by nominee companies pursuant to a declaration of trust in my favour.”
257 See chapter 4 for further details
259 Land Registry records. On sale to Arcadia the freehold of the property was combined with the head lease.
260 , which states that “I can confirm that Taveta Investments (No 2) Limited raised acquisition finance for the purchase of BHS by issuing £200m 10-year reducing balance subordinated unsecured fixed rate loan notes with an 8 per cent coupon which were listed on the Channel Islands Stock Exchange on 20 July 2009.”
261 For Jersey registered companies, for example, the ultimate beneficial owner of shares need not be publicly disclosed, accounts need not be audited and are not publicly available, and the transfer of ownership between companies is less open to scrutiny. Corporation and other taxes compare favourably with other jurisdictions. The BVI offers similar advantages, particularly around confidentiality and low corporate governance requirements.
264 ; Lady Green still resides in Monaco; Sir Philip does not.
272 and see the common law cases.
276 See Re Westmid Packing Services Ltd  2 BCLC 646 and Lexi Holdings v Luqman  2 BCLC 1. In law, non-executive directors are not entitled to place “unquestioning reliance upon others to do their job “. It is the role of the Chairman to “preserve order, and to take care that the proceedings are conducted in a proper manner”. The Chairman is “responsible to a greater extent than any other director for the performance of the board as a whole and each member of it. The chairman has the primary responsibility of selecting matters and documents to be brought to the board’s attention, for formulating the policy of the board and promoting the position of the company”. Equitable Life Assurance Society v Bowley  1 BCLC 180 at  and National Dwellings Society v Sykes  2 Ch 159; AWA Ltd v Daniels (1992) 7 ACSR 759.
283 (Mark Tasker);
284Land Registry records. On sale to Arcadia the freehold of the property was combined with the head lease.
293 Membership was Sir Philip Green, Paul Budge, Chris Harris and Gillian Hague.
22 July 2016