Following its AGM on January 10, 2019 Debenhams plc announced quite the bombshell: board chair Sir Ian Cheshire and CEO Sergio Bucher had received majority against votes of 56.62% & 55.85%, respectively – enough to kick them off the board. While these two proposals were the main targets of shareholder ire, there was opposition throughout the agenda. The authority to shorten the notice period for EGMs received a 24.13% vote against and all other proposals on average received a 12.28% vote against – by contrast, last year the average vote against was ~2%, even including 15% opposition to shortened notice period.
Following several years of poor performance and a series of profit warnings, the company underwent significant changes in terms of its executive management team and in April 2017 announced a new strategy, “Debenhams Redesigned”, which aimed to establish its stores as a destination for “social shopping”; differentiate its brands; and simplify its operating model. Nevertheless, the retailer continued to struggle and, once a cornerstone of the FTSE 250, has seen its market capitalisation crumble to a paltry £59 million, resulting in an exit from the index.
While the company attempted to reinvent itself, the share ownership register was undergoing its own metamorphosis. After holding just 4.6% of Debenhams as of December 2016, by this year’s AGM Sports Direct International plc, itself a publicly traded retailer, had built up its stake to just below 30 per cent. Sports Direct, along with its founder and controlling shareholder, Mike Ashley, are no strangers to shareholder discontent, having earned six citations on the public register since 2017. Nor are the company and its leadership strangers to corporate governance controversies – be it working conditions, questions surrounding its own board chair or bonus payouts for Mr. Ashley’s brother. As part of its efforts to respond to these troubles, Sports Direct became one of the first companies in the United Kingdom to appoint an employee representative. This has been a hotly debated issue in the UK for the past few years and while the first representative Alex Balacki was not a formal director and only attended board meetings, his successor Cally Price has been made a non-executive workforce director.
Perhaps unsurprisingly given their chequered governance past, the board has been reluctant to embrace Mr. Ashley and Sports Direct as partners. Late in 2018, after “the worst November for retailers in living memory”, it rejected a £40 million interest free loan from Mr. Ashley. This prompted Mr. Ashley to send a letter to CEO Sergio Bucher, which he then made public, asking him to reconsider the offer and stating “that the company currently has a zero chance of survival” without his help. After Mr. Ashley deemed Debenhams’ response inadequate, Sports Direct utilised its significant stake to vote against the reappointment of Sir Ian Cheshire and Sergio Bucher to the board of director. It was aided by Milestone Resources, an investment vehicle of the Indian billionaire Micky Jagtiani, which holds a 7% stake.
As a consequence of his failure to secure re-election, Sir Ian Cheshire, who also serves on the board of Barclays plc and as chair of their ringfenced UK bank, resigned as Debenhams’ board chair effective immediately. Meanwhile, Sergio Bucher has stepped down from the board but will continue to serve as CEO. Debenhams now begins the search for a new board chair while senior independent director Terry Duddy takes up the role in the interim.
As for what Mr. Ashley’s increased influence at Debenhams might lead to, it’s worth looking his recent acquisition, House of Fraser (“HOF”). HOF is a high street department store that was in a similar situation to Debenhams, only a few steps further down the path. In August 2018 Sports Direct acquired HOF out of administration and arguably prevented the closure of all HOF stores, which would have led to massive layoffs.
Not everyone kept their job: Sports Direct then fired the entire senior management of HOF and is renegotiating all of HOF’s rental contracts, which Sports Direct sees as the main reason for HOF’s woes. With Debenhams itself trying to avoid administration, it’s an instructive example – and may explain why the board and management of Debenhams is less than enthusiastic about Ashley’s support.
Paul is an analyst covering the UK market.