Sports Direct has had a turbulent year. sports-direct-750x500Since listing in 2007, the company, and its share price, had grown consistently; however its share price is now roughly the same as it was at IPO after falling by more than 50% since January, causing the company to drop out of the blue-chip FTSE 100 index. These losses are largely attributable to the reputational damage caused by a series of exposés and investigations conducted in 2015, namely those carried out by Channel 4, the BBC and the Guardian newspaper, which highlighted serious issues regarding working conditions and practices at the Company’s main production facility.

The outcomes of these investigations prompted significant public outrage, with the Institute of Directors going so far as to brand the company a “scar on British business”. In response, the board labelled media reports as “an unfair portrayal of the Company’s employment practices”, but provided assurances that founder, executive deputy chairman and controlling shareholder Mike Ashley would “personally oversee” a review of the terms and conditions of employment for all agency workers (it’s unclear just how reassuring investors found Mr. Ashley’s personal involvement in the review).

Subsequently, in January 2016, members of the UK parliament launched an inquiry into the company through the Business, Innovation and Skills Select Committee (“BIS”). The inquiry was protracted over six months, largely due to Mr. Ashley’s refusal to answer a parliamentary invitation, appearing only after the threat of contempt hearings were issued by committee chairman Iain Wright. During questioning, Mr. Ashley maintained that the issues highlighted by the investigations were largely unknown to him despite his self-acknowledged frequent visits to the facility; however, he did concede that mandatory security checks may have caused workers to be paid less than minimum wage, pro-rata. When questioned on the internal review that he was personally overseeing, Mr. Ashley stated that he was not in a position to share any of its findings as the review was ongoing.

The BIS issued a report in July 2016 which found that the company had “working practices [that] are closer to that of a Victorian workhouse than that of a modern, reputable high street retailer”. The outcome of the BIS inquiry is perhaps the most damning indictment of Mr. Ashley’s complicity in the poor employment practices uncovered by the aforementioned investigations, and calls into question the governance practices of a board that maintains its executives had no knowledge of same. Indeed, in giving evidence to the BIS inquiry, Mr. Ashley himself admitted that the company had potentially “outgrown” him, likening Sports Direct to a rubber dinghy that had turned into an oil tanker. In its concluding statement, the BIS opines that “[Mr. Ashley] must be held accountable for some appalling working practices at both the Sports Direct shops and warehouses, either for not knowing about them, or for turning a blind eye to such practices in the interests of maximising the revenue of Sports Direct.”

To date, the company has attempted to ameliorate some of the aforementioned issues by commissioning an independent ‘Working Practices Report’, engaging with the UNITE trade union and, most notably, raising the wage of its lowest paid workers to the UK’s new living wage which came into effect in April 2016.

These actions have done little to assuage shareholder disquiet, however, and concern at Sports Direct’s management and governance practices are manifesting in numerous ways. Shareholders representing trade unions have proposed a resolution at the forthcoming AGM that would require the company to complete a human capital strategy report, and the Investors Forum, a group representing major asset managers, has called for an independent review of governance and employment. Some major shareholders appear to be considering more direct action, with rumblings of a protest vote against chairman Keith Hellawell. In recent weeks, with the spotlight trained firmly on Sports Direct, other discrepancies and inconsistencies are coming to light including potentially unreported transactions with a delivery company owned by Mr. Ashley’s brother.

It’s not the first time Sports Direct has made headlines over governance. Mike Ashley is a self-proclaimed outsider to the City of London, and this has shown through in the company’s approach to oversight and investor relations. When Mr. Hellawell, the UK’s former “drug czar”, was appointed non-executive chairman in 2009, the post had been vacant for over two years, leading to concerns about board oversight and Mr. Ashley’s level of influence. In 2012, the board hastily withdrew a proposed “super stretch bonus” that would have delivered over 8 million shares to Mr. Ashley from the AGM agenda after it became clear that it would not receive the required approval of 75% of disinterested shareholders. In 2014 it proposed a similar scheme, but lowered the approval requirement to a majority of disinterested shareholders, before again withdrawing the proposal in the face of shareholder opposition.

The company has weathered these storms primarily due to its strong performance and investor returns. With its stellar post-listing run now broken, the potential for shareholder revolt is tangible in the lead-up to the AGM on September 7th. Just how shareholders’ discontent will manifest itself — and whether it will have an impact on the company’s governance and reputation — remains to be seen; however absent turnarounds in oversight, performance and perception, the cut-price sportswear retailer is at risk of becoming a cut-price stock.